Understanding Market Economy: Functions, Value, and Competition
Basic Functions of the Market Economy
In a society like ours, the Public Sector is assigned the following functions:
- Fiscal: The state is the only entity that can impose taxes and decide where to spend what is collected. Establishing and collecting taxes is a fundamental function of the state.
- Regulatory: Legislative behavioral rules in the form of laws, prohibitions, etc., are regulated. Examples include minimum wage, labor legislation, and pollution control.
- Redistribution: Compensating for the unequal distribution of wealth between different people and different areas. Certain types of taxes and social spending are used for these purposes. Spending priorities are set, giving certain areas greater support and making those who have more pay more taxes.
- Economic Control: Planning and carrying out actions in several areas, such as housing, measures against unemployment, industrialization of depressed areas, and price controls.
Use Value and Exchange Value
Use value is a function of the utility that a good provides. The more necessary an asset is in everyday life, the higher the payment one would require for it. Thus, the use value of a coat is its ability to protect from the cold. It’s helpful in a cold climate and of little use in a hot climate. The use value of a sledgehammer is seen by its flavor and nutritional value.
Exchange value, or price, is the amount of money one must pay in a market to obtain something. It usually has a different value due to its usefulness. In general, the exchange value will be based on the cost of production, which will be corrected by the abundance or scarcity of the goods produced, determining its value.
Value and Price
In general, we can say that price is the manifestation of the value of something. Deciding what elements determine the value or price of goods has been and is the subject of ongoing debate among economists. Generally, the value attributed to assets was related to the work required to produce them. The price of products must cover the cost of production plus an expected profit.
Market prices vary widely depending on the scarcity or abundance of the product and the demand that exists, provided that the market is one of perfect operation or perfect competition.
Theories of Value
Over time, theories explaining the valuation of goods or the market price have changed.
The French Physiocrats (18th Century): The first economists considered agriculture the main economic sector. They believed that nature is the only factor that can generate value, as from a seed, a crop appears.
Marxist Theory: This theory states that only work can add value to a commodity. The remaining costs of raw materials, machinery, brokers, taxes, etc., are money that is transferred and destroyed during production. Work is the only element capable of creating value.
It was David Ricardo who formulated the labor theory of value, explaining that the value of production was due to the shortage of goods produced and the amount of work required to produce them. Only labor creates value; capital is accumulated work, stolen by capitalists from workers. Marx would define value as the part of the fruit of an employee’s labor that is taken by the capitalist, forming the basis of capitalist accumulation: workers produce more than they are paid, and the difference is not kept by the producers but by the capitalist owners.
Monopoly
When a company has a monopoly on a certain activity, it has no competition, as it is the only bidder. Until a few years ago in Spain, there were some monopolies controlled by the state, such as Renfe (train service), Telefonica (telephone cable), Tabacalera (tobacco distribution), and Repsol (petroleum). Some of these monopolies have been liberalized, with the majority participation in their capital stock being opened to other private groups.
Oligopoly
This is a market structure involving a few producers who may produce a homogeneous good (e.g., records) or one differentiated by brands (e.g., motor vehicles, airlines). The key features of these markets are mutual interdependence and price wars. There is a possibility that they may decide to cooperate rather than compete, reaching an agreement on prices and production quotas, thus forming a cartel.
A holding is a group of companies forming a financial group, organized around a company’s capital that controls the others through participation in its capital.