Resting on the pillars of private property, freedom of enterprise, the profit motive, and competition, the primary economic institution of the essentially free, decentralized economic systems is the market. A market is a place where buyer and seller transact business. But it is not necessarily, or even usually, a single physical location. Indeed, the distinguished British economist Alfred Marshall stated that, “A market is an area within which buyers and sellers are in such close communication with each other that price tends to be the same throughout the area.” One could in fact, take this approach to the meaning of the term even further and simply say that the market is a method or system permitting buyers and sellers to deal with each other, either directly or through intermediaries. In a market economy every good or service can be regarded as having a market, in which certain quantities of the good are bought and sold. In a market economy private persons and businesses, freely exchanging goods and services chiefly through the medium of money, largely determine by their actions what goods are produced by the nation, how those goods are produced, who gets them, and how much will be produced in total – both now and in the future. However, the governments of all market economies in the real world regulate, modify, and supplement the workings of markets in order to achieve particular social objectives, such as the military defense of the nation, the preservation of natural resources, the provision of common facilities such as highways and schools. But the marketplace remains the primary economic institution of a free, decentralized economy.
One of the major discoveries made by early economists, including Adam Smith, the noted eighteenth-century British economist,was the way that markets work in a free enterprise economy to allocate resources efficiently and spur national production and the growth of income. Adam Smith was so impressed by the way free markets worked to solve human problems that he said it was as though the economy were guided by an “invisible hand.”
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