What is a Mixed Economic System?

A mixed economic system is a system that combines aspects 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 required for efficiency in free markets, such as equal information and rational market participants, cannot be achieved in practical application.

Key Takeaways

  • A mixed economy is an economy organized with some free market elements and some socialistic elements, which lies on a continuum somewhere between pure capitalism and pure socialism.
  • Mixed economies typically maintain private ownership and control of most of the means of production, but often under government regulation.
  • Mixed economies socialize select industries that are deemed essential or that produce public goods.
  • All known historical and modern economies are examples of mixed economies, though some economists have critiqued the economic effects of various forms of mixed economy.
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Mixed Economic System

Understanding Mixed Economic Systems

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 regulate business and may nationalize industries that provide a public good. For example, the United States is a mixed economy, as it leaves ownership of the means of production in mostly private hands but incorporates elements such as subsidies for agriculture, regulation on manufacturing, and partial or full public ownership of some industries like letter delivery and national defense. In fact, all known historical and modern economies fall somewhere on the continuum of mixed economies. Both pure socialism and pure free markets represent theoretical constructs only.

What Is the Difference Between a Mixed Economy and 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 unavoidably generate economic distortions, but are instruments to achieve specific goals that may succeed despite their distortionary effect.

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 East Asian countries in the 20th century development strategy known as Export Led Growth, 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 common or centralized 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 nationalization of all industry and the expropriation of privately owned capital goods, lands, and natural resources. 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.

Such measures can include price controls, income redistribution, and intense regulation of production and trade. Virtually universally this also includes the socialization of specific industries, known as public goods, that are considered essential and that economists believe the free market might not supply adequately, such as public utilities, military and police forces, and environmental protection. Unlike pure socialism, however, mixed economies usually otherwise maintain private ownership and control of the means of production.

History and Criticism of the Mixed Economy

The term mixed economy gained prominence in the United Kingdom after World War II, even though many of the policies associated with it at the time were first proposed in the 1930s. Many of the supporters were associated with the British Labour Party.

Critics argued that there could be no middle ground between economic planning and a market economy, and many — even today — question its validity when they believe it to be a combination of socialism and capitalism. Those who believe the two concepts don’t belong together say either market logic or economic planning must be prevalent in an economy.

Classical and Marxist theorists say that either the law of value or the accumulation of capital is what drives the economy, or that non-monetary forms of valuation (i.e. transactions without cash) are what ultimately propel the economy. These theorists believe that Western economies are still primarily based on capitalism because of the continued cycle of accumulation of capital.

Austrian economists starting with Ludwig von Mises have argued that a mixed economy is not sustainable because the unintended consequences of government intervention into the economy, such as the shortages that routinely result from price controls, will consistently lead to further calls for ever increasing intervention to offset their effects. This suggests that the mixed economy is inherently unstable and will always tend toward a more socialistic state over time.

Beginning in the mid 20th century, economists of the Public Choice school have described how the interaction of government policy makers, economic interest groups, and markets can guide policy in a mixed economy away from the public interest. Economic policy in the mixed economy unavoidably diverts the flow of economic activity, trade, and income away from some individuals, firms, industries, and regions and toward others. Not only can this create harmful distortions in the economy by itself, but it always creates winners and losers. This sets up powerful incentives for interested parties to take some resources away from productive activities to use instead for the purpose of lobbying or otherwise seeking to influence economic policy in their own favor. This non-productive activity is known as rent-seeking.