A mixed economy is a type of society’s economic organization that incorporates elements of a market economy as well as a command economy. The bulk of today’s economies are mixed economies.
You need to understand what a market economy and a command economy are to understand a mixed economy. A market economy is a type of economic organization in which economic decisions are the job of an onlooker who simply ensures that no one violates the rules through the interplay of demand and supply and the role of the government.
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On the other hand, the government is all in a command economy, i.e., the manufacturer of all commodities, the owner of all means of production (land and capital), the employer of all citizens, and the CEO of all businesses.
To preserve their advantages and escape their disadvantages, a hybrid economy combines the characteristics of a market economy and a command economy.
The success of mixed economies derives from the fact that it is proven that both pure market economies and pure command economies are economic systems that are doomed.
For example, lack of government regulation in a laissez-faire economy may mean severe environmental destruction, rampant abuse of workers, excessive overproduction, very poor coordination, etc.
Similarly, a pure command economy is a bureaucratic monolith that lacks all incentives for technological advancement, resulting in inflation, infringements on the liberty of citizens, concentrating power in the hands of very few, etc.
A clear example of a mixed economy is the United States. On the one side, full private property rights, such as patents, copyrights, etc., are permitted and enforced. On the other side, in order to ensure a fair playing field, the environment, social security, and anti-trust laws are important.
Advantages and Disadvantages
Since a mixed economy combines both a market economy and a command economy with good features, it is the most common 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 the negative externalities of their decisions thereby saving 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 the 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.
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Despite the considerable flexibility in a mixed economy for both private companies and government, some drawbacks are creeping in, such as:
- The government’s attempt to redress the economic imbalances may result in excessive debt and unsustainable budget deficits.
- If the taxes are too 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 the 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
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