Businesses under Mixed Economic Systems

Mixed Economies

A Mixed Economy exhibits characteristics of both market and planned economies, with private and state sectors providing direction.

Learning Objectives

Outline the plan behind and what governments provide in a mixed economy

Key Takeaways

Key Points

  • The term Mixed Economy is very broadly defined and has been used to describe economies as diverse as the United States and Cuba.
  • The means of production are privately owned, and markets remain the dominant form of economic coordination. However, governments wield significant influence over the economy through monetary and fiscal policy and regulation.
  • Characteristics of mixed economies include welfare systems, employment standards, environmental protection, publicly owned enterprises, and antitrust policies.
  • Keynesian economics advocates the presence of a mixed economy. This line of thought subsided between 1970 and 2000, but has regained considerable popularity after the financial crisis of 2008.

Key Terms

  • Keynesian Economics: The group of macroeconomic schools of thought based on the ideas of 20th-century economist John Maynard Keynes. Advocates of Keynesian economics argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes that require active policy responses by the public sector, particularly monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.
  • welfare state: A social system in which the state takes overall responsibility for the welfare of its citizens, providing health care, education, unemployment compensation and social security.
  • mixed economy: An economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies.
  • mixed economies: a system in which both the state and private sector direct the way goods and services are bought and sold

Mixed Economies

What is a Mixed Economy?

A mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety of government-sponsored aspects.

image

A mail truck: Restrictions are sometimes placed on private mail systems by mixed economy governments. For example, in the United States, the USPS enjoys a government monopoly on nonurgent letter mail as described in the Private Express Statutes.

While there is not one single definition for a mixed economy, the definitions always involve a degree of private economic freedom mixed with a degree of government regulation of markets.

The Plan Behind a Mixed Economy

The basic plan of the mixed economy is that:

  • The means of production are mainly under private ownership;
  • Markets remain the dominant form of economic coordination; and
  • Profit-seeking enterprises and the accumulation of capital would remain the fundamental driving force behind economic activity. However, the government would wield considerable indirect influence over the economy through fiscal and monetary policies designed to counteract economic downturns and capitalism’s tendency toward financial crises and unemployment, along with playing a role in interventions that promote social welfare. Subsequently, some mixed economies have expanded in scope to include a role for indicative economic planning and/or large public enterprise sectors.

The relative strength or weakness of each component in the national economy can vary greatly between countries. Economies ranging from the United States to Cuba have been termed mixed economies. The term is also used to describe the economies of countries which are referred to as welfare states, such as Norway and Sweden.

What do Governments Provide?

Governments in mixed economies often provide:

  • Environmental protection,
  • Maintenance of employment standards,
  • A standardized welfare system,
  • Maintenance of competition.

Who Supports the Ideal of Mixed Economies?

As an economic ideal, mixed economies are supported by people of various political persuasions, typically center-left and center-right, such as social democrats or Christian democrats. Supporters view mixed economies as a compromise between state socialism and laissez-faire capitalism that is superior in net effect to either of those.

Keynesian economics advocates a mixed economy — predominantly private sector, but with a significant role of government and public sector. It also served as the economic model during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the tax surcharge in 1968 and the stagflation of the 1970s. The advent of the global financial crisis in 2008 has caused a resurgence in Keynesian thought.

The Benefits of Mixed Economies

A mixed economy allows private participation in production while ensuring that society is protected from the full swings of the market.

Learning Objectives

Outline the characteristics of a mixed economy that help to maintain a stable economy

Key Takeaways

Key Points

  • Mixed economies allow many more freedoms than command economies, such as the freedom to possess the means of production; to participate in managerial decisions; to buy, sell, fire, and hire as needed; and for employees to organize and protest peacefully.
  • Mixed economies have a high level of state participation and spending, leading to tax-funded libraries, schools, hospitals, roads, utilities, legal assistance, welfare, and social security.
  • Various restrictions on business are made for the greater good, such as environmental regulation, labor regulation, antitrust and intellectual property laws.
  • The ideal combination of these freedoms and restrictions is meant to ensure the maximum standard of living for the population as a whole.

Key Terms

  • monopoly: An exclusive control over the trade or production of a commodity or service through exclusive possession.
  • protectionism: A policy of protecting the domestic producers of a product by imposing tariffs, quotas or other barriers on imports.
  • Social Security: A system whereby the state either through general or specific taxation provides various benefits to help ensure the wellbeing of its citizens.

Overview: The Advantages of a Mixed Economy

A mixed economy permits private participation in production, which in return allows healthy competition that can result in profit. It also contributes to public ownership in manufacturing, which can address social welfare needs.

image

Marketplace: Private investment, freedom to buy, sell, and profit, combined with economic planning by the state, including significant regulations (e.g., wage or price controls), taxes, tariffs, and state-directed investment.

The advantage of this type of market is that it allows competition between producers with regulations in place to protect society as a whole. With the government being present in the economy it brings a sense of security to sellers and buyers. This security helps maintain a stable economy.

Overall, businesses, as well as consumers, in mixed economies have freedoms that are important to both. And while government is actively involved and provides support, its control is limited, which is good for structure.

The Details: The Advantages of a Mixed Economy

  • In a mixed economy, private businesses can decide how to run their businesses (e.g. what to produce, at what price, who to employ, etc.).
  • Consumers also have a choice in what they want to buy.
  • In this system, there is also less income inequality.
  • Monopolies, market structures that are the only producer of a certain product, are allowed under government watch so they do not make it impossible for entrepreneurs in the same industry to succeed.

More specifically:

The elements of a mixed economy have been demonstrated to include a variety of freedoms:

  • to possess means of production (farms, factories, stores, etc.)
  • to participate in managerial decisions (cooperative and participatory economics)
  • to travel (needed to transport all the items in commerce, to make deals in person, for workers and owners to go to where needed)
  • to buy (items for personal use, for resale; buy whole enterprises to make the organization that creates wealth a form of wealth itself)
  • to sell (same as buy)
  • to hire (to create organizations that create wealth)
  • to fire (to maintain organizations that create wealth)
  • to organize (private enterprise for profit, labor unions, workers’ and professional associations, non-profit groups, religions, etc.)
  • to communicate (free speech, newspapers, books, advertisements, make deals, create business partners, create markets)
  • to protest peacefully (marches, petitions, sue the government, make laws friendly to profit making and workers alike, remove pointless inefficiencies to maximize wealth creation).

They provide tax-funded, subsidized, or state-owned factors of production, infrastructure, and services:

  • libraries and other information services
  • roads and other transportation services
  • schools and other education services
  • hospitals and other health services
  • banks and other financial services
  • telephone, mail, and other communication services
  • electricity and other energy services (e.g. oil, gas)
  • water systems for drinking, agriculture, and waste disposal
  • subsidies to agriculture and other businesses
  • government-granted monopoly to otherwise private businesses
  • legal assistance
  • government-funded or state-run research and development agencies

Such governments also provide some autonomy over personal finances, but include involuntary spending and investments, such as transfer payments and other cash benefits, including:

  • welfare for the poor
  • social security for the aged and infirm
  • government subsidies to business
  • mandatory insurance (e.g. automobile)

They also impose regulation laws and restrictions that help society as a whole, such as:

  • environmental regulation (e.g. toxins in land, water, air)
  • labor regulation, including minimum wage laws
  • consumer regulation (e.g. product safety)
  • antitrust laws
  • intellectual property laws
  • incorporation laws
  • protectionism
  • import and export controls, such as tariffs and quotas
  • taxes and fees written or enforced with manipulation of the economy in mind

The Disadvantages of Mixed Economies

The disadvantages of mixed economies can be understood through examining criticisms of social democracy.

Learning Objectives

Examine the criticisms of social democracy as a vessel to understanding the disadvantages of mixed economies.

Key Takeaways

Key Points

  • One disadvantage of mixed economies is that they tend to lean more toward government control and less toward individual freedoms.
  • While most modern forms of government are consistent with some form of mixed economy, the mixed economy is most commonly associated with social democratic parties or nations run by social democratic governments.
  • Some critics of contemporary social democracy argue that when social democracy abandoned Marxism it also abandoned socialism and has become, in effect, a liberal capitalist movement.
  • Marxian socialists argue that because social democratic programs retain the capitalist mode of production they also retain the fundamental issues of capitalism, including cyclical fluctuations, exploitation and alienation.
  • The democratic socialist critique of social democracy states that capitalism could never be sufficiently “humanized” and any attempt to suppress the economic contradictions of capitalism would only cause them to emerge elsewhere.
  • Market socialists criticize social democracy for maintaining a property-owning capitalist class, which has an active interest in reversing social democratic policies and a disproportionate amount of power over society to influence governmental policy as a class.

Key Terms

  • regulation: A law or administrative rule, issued by an organization, used to guide or prescribe the conduct of members of that organization.
  • social democracy: a moderate political philosophy or ideology that aims to achieve socialistic goals within capitalist society such as by means of a strong welfare state and regulation of private industry
  • mixed economy: Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies.

One disadvantage of mixed economies is that they tend to lean more toward government control and less toward individual freedoms. Sometimes, government regulation requirements may cost a company so much that it puts it out of business. In addition, unsuccessful regulations may paralyze features of production. This, in return, can cause the economic balance to shift.

Another negative is that the government decides the amount of tax on products, which leads to people complaining about high taxes and their unwillingness to pay them. Moreover, lack of price control management can cause shortages in goods and can result in a recession.

Disadvantages of Social Democratic Policy In a Mixed Economy

While most modern forms of government are consistent with some form of mixed economy, given the broad range of economic systems that can be described by the term, the mixed economy is most commonly associated with social democratic parties or nations run by social democratic governments. In contemporary terms, “social democracy” usually refers to a social corporatist arrangement and a welfare state in developed capitalist economies.

Critics of contemporary social democracy argue that when social democracy abandoned Marxism it also abandoned socialism and has become, in effect, a liberal capitalist movement. They argue that this has made social democrats similar to center-left, but pro-capitalist groups, such as the U.S. Democratic Party.

image

The Democratic Party Logo: The Democratic party in the United States is seen by some critics of contemporary social democracy (and mixed economies) as a watered-down, pro-capitalist movement.

Marxian socialists argue that because social democratic programs retain the capitalist mode of production they also retain the fundamental issues of capitalism, including cyclical fluctuations, exploitation and alienation. Social democratic programs intended to ameliorate capitalism, such as unemployment benefits or taxation on profits and the wealthy, create contradictions of their own through limiting the efficiency of the capitalist system by reducing incentives for capitalists to invest in production.

Others contrast social democracy with democratic socialism by defining the former as an attempt to strengthen the welfare state and the latter as an alternative socialist economic system to capitalism. The democratic socialist critique of social democracy states that capitalism could never be sufficiently “humanized” and any attempt to suppress the economic contradictions of capitalism would only cause them to emerge elsewhere. For example, attempts to reduce unemployment too much would result in inflation, and too much job security would erode labor discipline. In contrast to social democracy, democratic socialists advocate a post-capitalist economic system based either on market socialism combined with workers self-management, or on some form of participatory-economic planning.

Social democracy can also be contrasted with market socialism. While a common goal of both systems is to achieve greater social and economic equality, market socialism does so by changes in enterprise ownership and management, whereas social democracy attempts to do so by government-imposed taxes and subsidies on privately owned enterprises. Market socialists criticize social democracy for maintaining a property-owning capitalist class, which has an active interest in reversing social democratic policies and a disproportionate amount of power over society to influence governmental policy as a class.