In a market economy, the cost of goods is driven by market dynamics such as supply and demand rather than by the decisions of government policymakers. Most of the nations in the Western world such as the United States, Canada and Germany have a market economy and these types of economies are not uncommon in other parts of the world including Asia and Africa. Other nations tend to have mixed economies although planned economies exist in certain countries.
The concept of a market economy evolved centuries ago when people began to barter for goods such as wheat, gold and wool. In many areas, peasants were able to negotiate prices for these goods with one another and this freedom to negotiate the cost of commodities is at the heart of the modern day market economy. The cost of certain goods was once controlled by monarchs or feudal chiefs but during the 18th and 19th centuries, such rules were relaxed in many areas and societies around the world transitioned to market economies.
During the 20th century, totalitarian communist regimes in Eastern Europe, Asia and parts of Africa came to believe that market economics favored the wealthy and that the average citizen would benefit from a planned economy. In countries including the Soviet Union, China and Albania, government agencies assumed the responsibility for pricing products and commodities. Additionally, wage controls were brought in which often meant that skilled and unskilled workers were paid the same wage. Theoretically, everyone would have the same opportunity to buy the goods since wages and prices were the same across the entire nation.
In the latter part of the 20th century, civil unrest erupted in many of the nations that had planned economies. The authorities in some of these countries such as Hungary, Poland and Romania decided to abolish price controls and adopt western style market economics. Due to logistical considerations and ideological beliefs, the governments in some other nations decided to retain control of some aspects of the economy but to allow market forces to drive the prices of certain goods and services. Such nations are said to have a mixed economy.
Theoretically, governments in nations with a market economy have a laissez-faire attitude which means that the politicians do not attempt to manipulate the direction of the economy. Nevertheless, during times of recession government agencies in many western nations have taken steps to influence price movements. These measures include government agencies insuring mortgages so as to encourage lenders to write loans with the end result that house prices will remain steady or rise. Critics of such action say that governments should not take such measures in nations with true market economies while supporters of such moves argue that these steps are occasionally necessary in order to prevent recessions turning into economic depressions.