What is a liberal market economy? Markets exist in all economies, they are a necessary part of society as they foster the occurrence of various economic activities. In their bid to compare and explain the different forms of capitalism, David Soskice and Peter A. Hall conceptualized liberal market economy (LME) and coordinated market economy (CME) as the two types of political economies. A liberal market economy is closely related to a free market economy, this is because it relies on voluntary and mutually agreed upon contracts for economic transactions to occur. In this article, we shall discuss what a liberal market economy is and also look at some countries where this type of economy exists.
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What is a liberal market economy?
A liberal market economy refers to an economic system where businesses interact with other businesses, their suppliers, customers, and employees in whatever way they prefer but within the confines of the broad regulations implemented by the government. It is considered a form of a mixed economy as it shares some characteristics of both socialist and free enterprise systems. The liberal market economy is characterized by significant freedoms in how business is conducted.
Liberal market economies have decentralized systems of industrial relations, this means that collective bargaining takes place directly at the workplace between employers and employees. With employees negotiating their salaries and working conditions in most instances. Relations between economic actors are relatively short-term and adversarial as each company strives to gain a comparative advantage over other companies within the same industry. Trade unions rarely exist in this market but where they are present, they are kept at arm’s length by companies; with the relation between companies and trade unions being often adversarial, focused mainly on distributive wage bargaining.
The production of goods and services in a liberal market is mainly carried out to meet the demands of consumers. Hence, consumers vote to keep companies in business with their dollar through the purchases they make. Consumer choices are therefore a major market driver. Companies are thus rewarded by sales based on how well the products or services they provide meet the needs of consumers. As a result of this, wealth is often a by-product of providing an economically valuable good or service in a liberal market economy.
Most successful companies or individuals in an LME are those who have been able to combine their talent, knowledge, skill, resources, and effort into meeting the needs of others through making products, providing services, or working for companies who make products or provide services. LMEs are sometimes referred to as capitalist economies or free market economies. The freedom individuals have in choosing their line of work means that labor choices drive the labor market and wages.
A free pricing system prevails in liberal economies as producers are free to set the prices for the products and services they offer based on the cost of goods sold, operational expenses, and demand. The free pricing system lets companies negotiate competitive rates with their supplier in order for them to produce goods and services at costs that are affordable to their customers and that bring increases to the company’s bottom line. Economic transactions in an LME are based on mutually beneficial arrangements, hence a liberal market economy is usually self-regulating with limited government influence.
The main role of the government is to prevent the rise of cartels or monopolies and to ensure that certain industry standards are maintained especially in sectors that are a vital part of society and citizens’ existence. When the government interferes in pricing, they usually do so to prevent monopolies and encourage competition among the manufacturers.
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Examples of liberal market economies
- United States of America (USA)
- New Zealand
- United Kingdom (UK)
The prime example of a liberal market economy is the United States, but countries such as Australia, Canada, New Zealand, the United Kingdom, and Ireland are also considered liberal economies.
United States of America (USA)
The United States of America is one of the world’s wealthiest and most diversified economies, led by a highly productive services sector, advanced manufacturing, and world-class research and development. All thanks to the liberal market economy it operates. It has a resilient financial sector which is one of the world’s most developed and competitive. Private property rights, secured interests, and contracts are protected and enforced. The US judiciary is independent and reliable, although the judicial appointment process has become increasingly politicized over the years.
The country has been shaped by centuries of immigration and comprises a diversity of cultures and ethnicities. The USA ranks high in international measures of human rights, education, quality of life, economic competitiveness, income, and wealth. It is the world’s largest economy by gross domestic product (GDP), the world’s second-largest exporter and largest importer. The US tax cuts and jobs act of 2017 brought a significant boost to the already existing business and labor freedom that was prevalent in this liberal economy.
The US is a founding member of several organizations such as the World Bank, International Monetary Fund (IMF), United Nations (UN), etc. As a permanent member of the United Nations Security Council, it is a foremost military power in the world. Thus, it is a leading scientific, political and cultural power.
Officially referred to as the Commonwealth of Australia, this country is an example of a liberal market economy and is one of the wealthiest countries in the Asia-Pacific region. Australia has recorded economic expansion of over two decades that was interrupted by the pandemic of 2019/2020. It is a highly developed nation with a high-income rate. It was the world’s 14th largest economy as of 2022 and the 9th highest based on per capita income. The judicial system operates impartially and independently and the government enforces laws against bribery and corruption effectively. Hence, the level of corruption is very low.
The stable political environment supports a highly-established and transparent independent bureaucracy, political processes, and competent governance. The strong legal system and legal frameworks protect private property rights and expropriation rarely occurs. Enforcement of contracts is reliable. Australia ranks among the highest in the world in terms of health, democracy, civil liberties, quality of life, education, safety, education, political rights, and economic freedom. Its major cities have exceptional scores in global comparative livability surveys.
Australia is blessed with diverse and abundant natural resources such as renewable energy sources, uranium, iron, coal, gold, natural gas, and copper. This has attracted high levels of foreign investment and exportation of most of these natural resources. Hence, establishing it as a liberal market economy.
An example of a liberal market economy is Canada, this country is the world’s 2nd largest by land mass. Its economy ranked 8th largest in the world in 2022 with a nominal gross domestic product of US$2.221 trillion. Canada is one of the world’s largest trading countries with a highly globalized economy. Property rights are well protected by law and expropriation rarely occurs. The country’s judiciary is independent with courts being transparent, fair, reliable, and procedurally competent. Hence, it is one of the least corrupt nations in the world.
The liberal market economy it operates relies chiefly on its well-developed international trade networks and abundant natural resources. Leading sectors include petroleum, minerals, automotive, forest products, and other manufacturing-based industries. As one of the world’s largest suppliers of agricultural products, its prairies are one of the most important global producers of grains such as wheat and canola. Canada’s flourishing economy was further boosted by the US-Mexico-Canada Agreement (USMCA) which became effective in 2020. This is because approximately three-quarters of the country’s exports are to the US.
Part of the freedoms enjoyed by individuals is the ease and efficient application of business registration and permit application. Canada is part of several major intergovernmental and international institutions such as the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), the Organization of American States, the Commonwealth of Nations, etc.
The liberal economy of New Zealand makes it one of the most prosperous countries in the Asia-Pacific region; backed by the deregulation and privatization of its economy. It is the 6th largest nation by land mass as it covers approximately 268,021 square kilometers. The country’s property law became more simplified and modernized with its 2017 Land Transfer Act. Historically, extractive industries have contributed strongly to the economy, focusing at different times on gold, sealing, kauri gum, whaling, flax, and native timber.
Top business sectors in New Zealand include tourism, geothermal energy, manufacturing, and agriculture. The country’s first shipment of refrigerated meat on the Duned in 1882 led to the establishment of dairy and meat exports to Britain. These sectors contribute greatly to the economic growth of New Zealand, thus sustaining its liberal market. It ranks highly in international comparisons of national performance such as protection of civil liberties, economic freedom, quality of life, government transparency, and education. The country was the first to give women the right to vote and to introduce a minimum wage.
New Zealand’s openness to global trade and investment is firmly institutionalized thus adding to the overall liberal market. It has an effective and independent judiciary. The government has high integrity due to the stiff penalties meted on government officials who have been found to be corrupt.
United Kingdom (UK)
The United Kingdom of Great Britain and Northern Ireland commonly referred to as the United Kingdom (UK) or Britain has the world’s 5th largest economy by nominal gross domestic product and the 8th largest by purchasing power parity. The industrial revolution and the uprising of factories began in this part of the world. Hence, it has always had some form of liberal market economy right from time. There has been steady growth in the economy with sectors such as insurance, business, banking, manufacturing, and technology contributing significantly to this growth.
Although the country used to have large reserves of crude oil and natural gas, they have been declining with exploration and use over the years. The UK performs well in international rankings of life expectancy, education, human development, and healthcare. The judiciary is independent, competent, and efficient with judicial proceedings being fair and reliable. Based on this well-established rule of law, London has become an international hub for dispute resolution. Property rights and secured interests are well enforced.
All these have contributed to the striving liberal market economy as individuals enjoy a high level of business freedom. The well-developed financial sector further strengthens business growth and supports the efficient investment framework that is present in the UK. The exponential growth of the technology industry has left a skills gap as the educational system tries to keep up.
Ireland is a country in the Europe region, the economy is largely dependent on trade hence it has a robust export sector that is dominated by foreign multinational companies. Some of the products exported include pharmaceuticals, machinery and equipment, foodstuffs, computers, medical devices, chemicals, and animal products. It is the only English-speaking country in the European Union. It has a dynamic labor market, cooperative labor relations, and a stable banking sector that has aided its liberal market economy.
Although financial and labor freedoms are a bit restricted, property rights are well protected and expropriation rarely occurs. Ireland’s judicial system is independent and the liberal business environment encourages competition as both domestic and foreign companies are treated equally under the law. Its low cooperate tax rate further strengthens business growth and development. Its advantageous geographical location; being an island country has supported trade with other countries for years. When countries in the European Union underwent a financial crisis in 2008, Ireland was the first country to recover. Corruption in the public sector is rare with known cases being investigated and prosecuted.
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The liberal market economy is often considered a mixed economy that draws on the characteristics of free markets and socialist economies. This means that although the economy enjoys a high level of freedom, the government also plays a role in the economy. The role of government is often in the prevention of monopolies and the establishment of legislation that aids business transactions and keeps certain standards in place. Liberal economies are often associated with rapid technological advancements, business and labor freedoms, and a high level of economic growth.
Liberal market economies are often associated with a high level of, and capacity for innovation. This makes companies in these economies to have a comparative advantage over similar companies that exist in other kinds of economies. The high level of innovation leads to the creation of new products and the emergence of new industries. LMEs are known to have thriving science-based industries such as pharmaceuticals, communication and information technology, biotechnology, etc.
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