A market economy is a system driven by self-interest in which economic decisions (investment, production, and distribution) are guided by the pricing of goods and services. These price signals are determined by individual citizens and businesses.
Market economies rely on the forces of supply and demand to determine the appropriate prices and quantities to produce for most goods and services. Competition also drives market economies by optimizing innovation and efficiency.
The six characteristics of a market economy are:
- Private property
- Freedom of choice
- Motive of self-interest
- System of markets and prices
- Limited government
Capitalism requires a market economy to set prices and distribute goods and services, while socialism and communism need a command economy to guide economic decisions. Most developed countries in the world today have elements of all three economies, making them [mixed economies](https://www.thebalance.com/mixed-economy-definition-pros-cons-examples-3305594.
In a free market economy, the central government has little intervention or central planning. Most economists agree that more market-oriented economies have better outcomes, but struggle to determine the best balance of free markets and central planning that provides the fundamental legal and institutional structure that provides stability, equity, and long-term benefits.
Countries with Market Economies
There are currently no purely free market economies in the world. Most economies are mixed market economies because they have some portion of the means of production under control. Some economies, however, are freer than others.
According to the Fraser Institute’s Economic Freedom of the World Rankings, the five countries with the most economic freedom are Hong Kong, Singapore, New Zealand, Switzerland, and the United States. This report ranks countries based on these cornerstones of economic freedom: personal choice rather than collective choice, voluntary exchange coordinated by markets, freedom to enter and compete in markets, and protection of persons and their property.
Based on the Fraser Institute’s report, the 25 most economically free countries in the world are:
- Hong Kong
- New Zealand
- United States
- United Kingdom
- Czech Republic