What are market forces? Definition and meaning
Market forces are the factors that influence the price and availability of goods and services in a market economy, i.e. an economy with the minimum of government involvement.
Market forces push prices up when supply declines and demand rises, and drive them down when supply grows or demand contracts. When demand equals supply for a product or service, the market is said to have reached equilibrium.
Adam’s Smith’s ‘invisible hand’ referred to market forces.
British moral philosopher and pioneer of political economy, Adam Smith (1723-1790), cited by many as the father of modern economics, wrote in his books about the ‘invisible hand’ that determined levels of supply, demand, the prices of goods and services, as well as wealth creation and distribution.
The prices of goods and services are driven by market forces.
This ‘invisible hand’ represented market forces – supply and demand – and how if left to its own devices, an economy could thrive.
Mr. Smith’s influence spread across the world and is often quoted by economists who support the market economy.
Mr. Smith wrote:
“Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
In other words, the invisible hand is essentially a natural phenomenon that drives free markets through competition and scarce resources.
Market forces can push and pull either upwards and downwards or forwards and backwards. Prices are regulated according to the push/pull forces on demand and supply. In this context, backwards means the same as downwards, while forwards equals upwards.
Examples of market forces
When Florida is hit by a cold snap, the price of orange juice across supermarkets in the United States rises. When the weather turns sunny and warm in Canada and the northern states of the US, the price of hotel rooms in Cancun and the rest of the Caribbean declines.
When major wars break out in the Middle East, the price of gasoline across the world rises, while the sale of large gas-guzzling SUVs drops.
What do all these events have in common? They all show how market forces affects supply, demand, and ultimately the price of goods and services.
Market forces determine how much of each good is produced, and at what price they go on the market.
If anybody wants to know how an event or policy will affect the economy, they must think first about how it might affect supply and demand.
Market vs. command economies
In so-called market economies, governments try not to intervene and allow market forces allocate resources. Prices bring supply and demand into equilibrium, and they guide decisions of producers and consumers.
In centralized economies (command economies), such as those today of Cuba and North Korea, and the Soviet Union when it had a communist system, the government tries to supplant these decentralized decisions with its own. In command economies, prices are not set by the market.
George Soros, a Hungarian-born American business magnate, investor, author, and philanthropist, said:
“If we care about universal principles such as freedom, democracy, and the rule of law, we cannot leave them to the care of market forces; we must establish some other institutions to safeguard them.”