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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 such as equal information and rational market participants cannot be achieved in practical application.

BREAKING DOWN 'Mixed Economic System'

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 through trade restrictions and subsidies. This makes the United States a mixed economy by definition.

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 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.

History and Criticism of the Mixed Economy

The term mixed economy gained prominence in the United Kingdom after the war, even though many of the policies associated with it were first propelled 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. Meanwhile, 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. 

Advantages and Disadvantages of a Mixed Economy

Many of the advantages of a mixed economy are found in a market economy. Goods and services are distributed where they are most needed, while allowing prices to measure supply and demand. Secondly, it rewards the producers who are the most efficient with the biggest profits, meaning consumers get the most value for their dollar. A mixed economy promotes innovation and improvement, and gives capital to those producers who are most efficient. 

But if the market has too much freedom and liberty, it can make the environment less competitive sans support from the government. Furthermore, the country could accumulate more debt by creating government-subsidized industries — like defense or military — slowing down the economy. 

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