A mixed economy is a type of economic organization of society which combines elements of both a market economy and a command economy. Most of the economies today are mixed economies.
To understand a mixed economy, you need to what a market economy and a command economy are. A market economy is a method economic organization in which economic decisions through the interplay of demand and supply and the government’s role is that of an onlooker who just ensures no one breaks the rules. On the other hand, in a command economy, the government is everything i.e. the producer of all goods, the owner of all means of production (land and capital), the employer of all people and the CEO of all enterprises.
A mixed economy blends the features of a market economy and a command economy to keep their benefits and avoid their pitfalls. The popularity of the mixed economies come from the fact that both pure market economies and pure command economies are proven to be doomed economic structures. For example, in a laissez-faire economy, lack of government oversight may mean severe environmental degradation, rampant employee exploitation, excessive overproduction, very poor coordination, etc. Similarly, a pure command economy is a bureaucratic monolith which kills all incentives for technological innovation resulting in stagnation, trespasses on people’s liberty, concentrates power in hands of the very few, etc.
United States is a good example of a mixed economy. On the one hand, it allows and enforces full private property rights i.e. patents, copyrights, etc. On the other hand, it is the necessary environment, social security and anti-trust legislation to ensure a level playing field.
Advantages and Disadvantages
Since a mixed economy blends the good features of both a market economy and a command economy, it is the most popular because:
- It lets the market forces determine the question of allocation of resources for the most part without letting anyone too big to be able to exploit the consumers or employees.
- It enables the government to enact legislation and promulgate regulations to make the companies pay for negative externalities of their decisions thereby saving the mankind from ecological disaster and other negative implications.
- It gives the government tooth and nail (in the form of anti-trust laws) to stop companies from monopolizing industries; and in some cases, even break up companies to encourage competition.
- It entitles governments to use tariffs and economic sanctions to encourage global well-being i.e. by punishing regimes/countries who have child labor, poor anti-money laundering and anti-terror financing frameworks, etc.
- It obligates governments to protect basic human rights of its citizens, i.e. their liberty, privacy, etc.
- It allows governments to raise taxes and adopt other policy measures to create a safety net for the economically-vulnerable and in a way redeem the income and wealth disparity.
- The mixed economy allows the government to use fiscal policy and monetary policy as a tool to dampen economic cycles.
Despite the significant flexibility allowed to both the private enterprises and government in a mixed economy, some disadvantages do creep in, for example:
- The government’s attempt to redress the economic imbalances may result in excessive debt and unsustainable budget deficits.
- If the taxes are two high, it may result in a flight of capital from the country to countries with low taxes or to tax havens which in the long-run hurts the country’s economy by reducing production and employment levels.
- Significant discretion on part of government may encourage lobbying by different segments of the society to tilt the policies in their favor.
- Interventions by the government to avoid systematic crises may result in a too-big-to-fail syndrome where companies take excessive risks knowing they will be bailed out.
Written by Obaidullah Jan, ACA, CFA and last revised on