Basics on Social Democracy - Friedrich-Ebert-Stiftung, Ghana Office

Market and State
4. Market and State
Since the end of the cold war, nearly all of the world's countries have
established 'market economic systems'. In such systems, neither the amount
of production nor the prices of the goods produced are centrally planned by
the state ('planned economy' was the economic system of the former East
European States), but determined by the market forces of supply and
demand. In order to convince the customer, companies compete against
each other by in terms of quality and price. In the context of this competition,
the price of a given good is the indicator of the relationship between the
extent of the good's supply and the market's demand for it. As far as the
theory goes, if the price of a product (e.g. crude oil) increases, this indicates
that either the supply of it has decreased or that demand for it has increased.
Market economies are usually good in reacting to such supply/demand
changes and therefore production is usually quickly aligned to the needs of
customers.
In a lot of literature the market economy (or 'market') is put in opposition to
the state. While 'market' describes the whole economic sphere, 'state'
stands for the political sphere. According to the basic liberal economic
theorists (e.g. Adam Smith, 1723 – 1790), the state should be completely
separate from the market. The thinking that the economic and the political
sphere should be clearly dissociated still dominates the thinking of some
market economy theorists, but reality has shown that a complete separation
is neither desirable nor possible.
'Economic policy' describes the action that a state (more explicitly: the
government) takes in the economic sphere. Its action can be quite diverse
and can range from it operating as a customer, who buys products (e.g.
asphalt for new streets), through redistributing wealth through the
collection of taxes, to completely subsidizing industrial sectors. If some
authors speak of 'free markets' they do not refer to an absolute separation
of state and economy, but use this term in a relative sense.
“The common
approach is to
seek a balance
between
liberalizing
markets as
much as
possible, whilst
allowing for as
much state
intervention as
is needed.”
As mentioned above, nearly the entire world's countries have some sort of
market economic system and it is broadly accepted that 'free markets' are
the right mechanism to produce and distribute goods. The common
approach is to seek a balance between liberalizing markets as much
as possible, whilst allowing for as much state intervention as is
needed. The exact balance is subject to constant negotiations between the
relevant actors.
Since the end of the 80s/beginning of the 90s worldwide market
liberalization has led to an ongoing decrease in the level of state
intervention. After the financial crises in 2008 and 2011, however, the public
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