An economy in which scarce resources are all (or nearly all) allocated by the interplay of supply and demand in free markets, largely unhampered by government rationing, price-fixing or other coercive interference. In classifying real historical economies, the level of "marketization" is not primarily an either/or issue but rather a matter of degree. The greater the proportion of the goods and services produced in the society that are allocated by market processes (rather than by government edict or the operation of unchangeable custom), the more meaningful it is to refer to its economy as a market economy -- and the more useful is the abstract economic theory of the operation of markets likely to be for understanding and even predicting economic behavior within that society.

Probably the most critical single distinction between "basically market" and "basically non-market" (socialist, feudal, hunter-gatherer, etc.) economies is whether or not the determinations of what is to be produced and of the corresponding allocation of producers' goods (land, raw materials, machinery, and other "capital," as well as the services of labor) are accomplished primarily through free markets rather than primarily through government command or unalterable custom.

The concept of a market presupposes the existence of certain sorts of property relations in the society involved. At least some goods and services must be legally or socially regarded as alienable property -- that is, there must be ascertainable individuals (or group representatives) who are recognized as having not just the right to use particular scarce economic resources for their own purposes but also the discretionary authority permanently to transfer such rights of use to someone else in exchange for some mutually agreeable quid pro quo, such as money or other goods or services. Not all human societies have recognized any such rights to transfer ownership, and most historical human societies have forbidden or placed stringent limits on the transferability of at least certain kinds of recognized property rights. In many societies (including most of Europe during the Middle Ages), individual or family rights to the perpetual use of particular plots of land were well established and protected by law -- but such rights only rarely could legally be sold to someone else because the land was socially regarded as fundamentally the inalienable property of either the local community as a whole or of the tribe or clan or church or perhaps of the reigning royal family. And even in the USA since 1865, while each person's ownership of his or her own body is well established, the law will still not allow you to make a binding contract to sell yourself into slavery or even to auction off your spare bodily organs for purposes of a surgical transplant.)

It is worth noting for clarity's sake that the concept of a market does not logically presuppose the existence of "private property in the means of production" in the sense that private individuals or family households are the owners of land and capital and thus the recipients of profits, interest, rent etc. One may at least theoretically conceive of an economy of market socialism, in which workers' collectives, consumers' cooperatives, village communes or even autonomous state agencies leased from the state or held actual title to land, mines, factories, machinery and so forth -- so long as the socialist production organizations were free to buy and sell their output and and the use of their assigned land or capital assets to each other at freely negotiated prices responsive to conditions of supply and demand (assuming, of course, they are allowed to keep effective control of the bulk of the proceeds). There are, of course, both theoretical and practical problems with market socialism, and the costs and benefits of capitalist markets cannot be uncritically attributed to such a system. The larger point is that socialist economies have historically included varying proportions of "remnant" market elements in their make-up, and the theoretical possibilities for additional "hybrid" forms are numerous.

[See also: market, property rights, factors of production, contract, microeconomics, transaction costs, competition, capitalism, socialist]