Definition – A mixed economy means that part of the economy is left to the free market, and part of it is managed by the government.
Mixed economies start from the basis of allowing private enterprise to run most businesses.
Then the governments intervene in certain areas of the economy, such as providing public services (health, education, waste management) and the regulation or private business (e.g. legal right to private property, and abuse of monopoly power)
In reality, most economies are mixed, with varying degrees of state intervention.
Features of mixed economies
Individuals are able to set up business and make a profit. However, usually progressive taxes and means-tested benefits to reduce inequality and provide a safety net.
Prices are determined by market forces ‘invisible hand’. But, the government may regulate some goods. For example, placing a higher tax on cigarettes to discourage use.
Most businesses are privately owned. However, the government may own or be involved in regulating natural monopolies, e.g. tap water, electricity, gas.
Businesses are free to decide what to produce and price to pay, but there are government regulations on the environment, labour markets and abuse of monopoly power – limiting pollution
An economy largely driven by private investment and enterprise, but government can intervene to reduce fluctuations in the economic cycle. For example, reduce inflation or boost economic growth (fiscal policy)
All the above economies are mixed. The government manages a section of the economy, and private firms and individuals operate the rest.
There are different degrees of state intervention. European economies such as Sweden and France have a generous level of social security spending; in western Europe, education and healthcare are free at the point of use. However, in the US, government spending as a share of GDP is lower, but health care has to be paid for.
As economies develop, the government often take a higher share of total spending. Developed countries, such as in Western Europe, often choose to provide state welfare support, and greater government regulation of business and the environment. Developing economies, such as Cameroon and Uganda have government sector which spends less than 20% of GDP
Advantages of mixed economies
Incentives to be efficient. Most business and industry can be managed by private firms. Private firms tend to be more efficient than government-controlled firms because they have a profit incentive to cut costs and be innovative.
Limits government interference. Mixed economies can reduce the amount of government regulation and intervention prevalent in a command economy.
Reduces market failure. Mixed economies can enable some government regulation in areas where there is market failure. This can include:
Regulation on the abuse of monopoly power, e.g. prevent mergers, prevent excessively high prices.
Taxation and regulation of goods with negative externalities, e.g. pollution,
Subsidy or state support for goods and services which tend to be under-consumed in a free market. This can include public goods, like police and national defence, and merit goods like education and healthcare.
A degree of equality. A mixed economy can create greater equality and provide a ‘safety net’ to prevent people from living in absolute poverty. At the same time, a mixed economy can enable people to enjoy the financial rewards of hard work and entrepreneurship.
Macroeconomic stability. Governments can pursue policies to provide macroeconomic stability, e.g. expansionary fiscal policy in times of a recession.
Even libertarians who dislike government intervention believe there needs to be legal support for private property and government provision of law and order.
Disadvantages of mixed economies
How much should the government intervene? Can be difficult to know how much governments should intervene, e.g. discretionary fiscal policy may create alternative problems such as government borrowing.
Too much inequality? Mixed economies are criticised by socialists for allowing too much market forces, leading to inequality and an inefficient allocation of resources.
Government failure. Mixed economies are criticised by free-market economists for allowing too much government intervention. Libertarians argue that governments make very poor managers of the economy, invariably being influenced by political and short-term factors.
Conclusion
In reality, it depends on how a mixed economy is managed. Even the most ardent free-market economists will agree we need a degree of government intervention – if only to protect private property. For example, Adam Smith in ‘Wealth of Nations’ argued governments needed to prevent the exploitation of monopoly power.
Very few economists would argue that the government should try and intervene in all areas of the economy. Private business and financial incentives play an important role in a well-functioning economy – even if the desire is to promote greater redistribution.
