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What is a 'Mixed Economic System'

A mixed economic system is an economic system that features characteristics of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. According to neoclassical theory, mixed economies are less efficient than pure free markets, but proponents of government interventions argue that the base conditions such as equal information and rational market participants cannot be achieved in practical application.

!--break--Most modern economies feature a synthesis of two or more economic systems, with economies falling at some point along a continuum. The public sector works alongside the private sector, but may compete for the same limited resources. Mixed economic systems do not block the private sector from profit-seeking, but do monitor profit levels and may nationalize companies that are deemed impediments to the public good. The United States is mostly a free market economy, but it incorporates elements such as protection for agriculture and manufacturing by through trade restrictions and subsidies. This makes the United States a mixed economy by definition.

Difference from Free Markets

Mixed economic systems are not laissez-faire systems, because the government is involved in planning the use of some resources and can exert control over businesses in the private sector. Governments may seek to redistribute wealth by taxing the private sector, and using funds from taxes to promote social objectives. Trade protection, subsidies, targeted tax credits, fiscal stimulus and public-private partnerships are common examples of government intervention in mixed economies. These usually do not generate massive economic distortions, but instead are instruments to achieve specific goals.

Countries often interfere in markets to promote target industries by creating agglomerations and reducing barriers to entry in an attempt to achieve comparative advantage. This was common among different East Asian countries in the 20th century, and the region has turned into a global manufacturing center for a variety of industries. Some nations have come to specialize in textiles, while others are known for machinery, and others are hubs for electronic components. These sectors rose to prominence after governments protected young companies as they achieved competitive scale and promoted adjacent services such as shipping.

Difference from Socialism

Socialism entails more social ownership of the means of production. Proponents of socialism believe that central planning can achieve greater good for a larger number of people. They do not trust that free market outcomes will achieve the efficiency and optimization posited by classical economists, so socialists advocate measures that can include price fixing, income redistribution and intense trade restriction. Mixed economies rarely go to this extreme, instead identifying only select instances in which intervention could achieve outcomes unlikely to be achieved in free markets.

BREAKING DOWN 'Mixed Economic System'

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