Economic system

What are the common characteristics of a mixed economic system?

A mixed economy is defined by the coexistence of a public sector and a private sector. However, the specific mix between public and private can vary considerably from one mixed economy to another. By their respective natures, the private sector is subservient to the public sector. Private exchange can only take place where the government has not banned it or has already assumed this role.

Mixed economies lie between free markets and command economies. The free market is most closely associated with pure capitalism. A command economy is more closely associated with socialism. Mixed economies, with state-controlled markets, are most closely related to fascism (in the economic sense) and have several common characteristics.

Resource Ownership

In a command economy, all resources are owned and controlled by the state. In a mixed system, individuals are allowed to own and control some (if not most) of the factors of production. Market economies allow individuals to voluntarily own and exchange all economic resources.

State intervention

Government intervention and personal political interest play a key role in a mixed economy. This intervention can take several forms, including subsidies, tariffs, prohibitions and redistribution policy. Some of the most universally applied mixed economic policies include legal tender laws, monetary control by a central bank, road and public infrastructure projects, tariffs on foreign goods in international trade, and programs of rights.

Change economic policy

An important and underestimated characteristic of a mixed economy is its tendency towards reactionary and deliberate changes in economic policy. Unlike a command economy (where economic policy is very often directly controlled by the state) or a market economy (market norms emerge only by spontaneous order), mixed economies can experience dramatic changes in “rules of the game”. speak.

This is due to changing political pressures in most mixed economies. An example of this can be seen in the aftermath of the Great Recession when most governments moved to tightly regulate financial markets and central banks lowered interest rates.

Advantages of a mixed economic system

Allows capitalism and socialism to coexist: A mixed economic system allows capitalism and socialism to coexist and operate by separating the roles of government and the private sector. Capitalism sets prices by a balance between supply and demand for private goods, while socialism sets prices by planning where the private sector fails or is unwilling to produce certain goods, such as public transport, healthcare universal health and education. The government plays a crucial role in enacting and enforcing laws and ensuring fair competition and business practices.

Allows the government to internalize positive and negative externalities: The production of certain goods and the use of resources by the private sector can be at the cost of their underproduction or their overexploitation. For example, paper mills and mining companies are known to use too much water or pollute it during the production process, generating a negative externality for the general population who drink this water. A mixed economic system ensures that the government can intervene and correct the negative effect of the externality by prohibiting harmful activities or taxing them heavily.

Corrects income inequalities: Capitalism is known to generate income inequality through the concentration of capital. A mixed economic system can correct such a phenomenon by taxing and redistributing wealth to households at the bottom of the income distribution.

Disadvantages of a mixed economic system

Spontaneous order and price system: The concept of spontaneous market order was born from Adam Smith’s vision of the “invisible hand”. This theory holds that market information is imperfect and costly, and that the future is uncertain and unpredictable. As information is imperfect, an information coordination system is needed to facilitate trade and voluntary cooperation. For Ludwig von Mises and FA Hayek, by far the most effective information signals are market prices. Their term for this process is ‘catalaxia’, which Hayek defines as ‘the order brought about by the mutual adjustment of many individual economies in a market’.

Whenever the government intervenes in market prices, catallaxis is skewed, leading to misallocation of resources and deadweight losses. Despite their best intentions, mixed economies strain the price mechanism.

Government Market Failure: Public choice theory applies the principles of economic analysis to government. The main proponents of public choice theory argue that governments necessarily create more market failures than they prevent and that mixed economies rationally produce inefficient outcomes. American economist James Buchanan has shown that special interest groups rationally dominate in democratic societies because government activities tend to provide benefits directly to a concentrated and organized group at the expense of an uninformed and disorganized tax base. .

Milton Friedman showed that government-caused market failures tended to lead to increased failures. For example, poor public schools create low-productivity workers, who are then squeezed out of the market by minimum wage laws (or other artificial workplace spending) and must then turn to welfare or crime to survive.

Regime uncertainty: Economic historian Robert Higgs has noted that mixed economies tend to have ever-changing trade regulations or rules. This is especially true in Western democracies, like the United States, with opposing political parties.