What is a Mixed Economic System?
The mixed economic system is defined as an economic system that combines the elements of a market economy and the elements of a planned economy. It is a synthesis of socialism and capitalism, which contains both private enterprises and public enterprises. Most modern economies implement a mixed economic system.
A mixed economic system brings the advantages of free markets and also government intervention. However, there are also concerns about the sustainability and efficiency of a mixed economic system.
- A mixed economic system synthesizes the elements of a market economy and the elements of a command economy.
- In a mixed economic system, free markets co-exist with government intervention, and private enterprises co-exist with public enterprises.
- The advantages of a mixed economy include efficient production and allocation of resources, as well as improvement of social welfare.
How Does the Mixed Economic System Work
A mixed economic system takes on both the characteristics of a market economy and a planned economy. In the market economy, private enterprises are free to set up businesses and make profits. The market (supply and demand) determines the prices of goods and services, as well as the allocation of resources.
In a command economy, on the other side, the government regulates the market or owns the key industries. Production and sales of goods are determined by the government. Cuba and North Korea are some of the few countries with a command economy.
In a mixed economic system, the private sector and public sector co-exist. There is a certain level of economic freedom so that the private sector can decide the use of capital and seek profits. It simultaneously allows the government to intervene in some economic activities and industries. Through providing public goods and collecting taxes, the government can create more social welfare.
The United States follows a mixed economic system. Most of the industries in the U.S. are dominated by private enterprises with a certain level of government intervention, such as agricultural subsidies and financial regulations.
Some essential industries, such as national defense, public transportation, and package delivery, are partially publicly owned. The mixed economic system is the most common and practical system in modern society. A pure command economy or market economy only exists theoretically.
Benefits of a Mixed Economic System
Combining the features of a market economy and a command economy, a mixed economic system carries advantages from both sides
1. Efficient allocation of resources
Resources are allocated efficiently to where they are needed the most in the private sector. Hence, customers’ needs can be better met.
2. Incentives for innovation and production efficiency
In a free market with competition, the enterprises that can produce more efficiently are rewarded with higher profits. Companies are thus motivated to allocate capital to achieve innovation and efficiency of production. Customers can receive the best value for what they paid for.
3. Government support
The public sector in a mixed economy alleviates the disadvantages of a free market. Private companies might neglect some industries that are essential or bring social welfare because of their low profitability. In a mixed economy, government intervention can support these key industries, such as education, defense, and aerospace, through subsidies or ownership.
The government also takes care of the less competitive companies and disadvantaged individuals. For example, tax is an effective tool to reduce inequality by redistributing incomes. The government can also implement health care, retirement, and other programs to improve the welfare of the general society.
Drawbacks of a Mixed Economic System
It is difficult to determine what elements of free markets and government intervention a mixed economic system should contain. It varies among different societies at different periods without a fixed standard.
1. Lack of government support
If the economy is given too much freedom, disadvantaged groups will not receive sufficient support from the government. If the economy sees excessive government intervention, enterprises will be disincentivized to produce efficiently. It is crucial for a mixed economy to find a balance.
2. Undue influence from private enterprises
As private enterprises and government intervention are combined in the same system, large corporations may seek to lobby the government. They may influence legislation or activities to benefit themselves.
Government intervention also leads to moral hazards. Private enterprises, especially the large ones, might take more risks since they know they are too big to fail. The government will bail them out if they fall into economic crises.
Criticisms of the Mixed Economic System
There are many criticisms of mixed economic systems. The Austrian school of economics questions the sustainability of a mixed economy. It states that any government intervention will lead to unintended consequences that require further intervention.
For example, price controls can cause shortages in supply, and the government needs to take extra actions to stimulate production. Therefore, a mixed economy is unstable and tends toward socialism.
Another criticism is from the Public Choice economists. They suggest that the interaction of the markets, government policymakers, and economic interest groups will drive the policy away from the public interest. The interested groups will take away some resources from productive activities and use them to influence economic policy for their own benefits.
CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: