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The pure forms of economies, the market economy, traditional economy, and command economies have their own loophole. In order to mitigate these loopholes, a form of the economy may be needed where the best attributes of all these three economies are available. The result of such a search ends in a mixed economy.
What is a Mixed Economy?
A mixed economy is a form of economy where a free market co-exists with a little of a command economy. This means that although the market is free, there is some form of government intervention in specific areas of the economy. It is a market system relating to resource allocation, business, and trade.
The emergence of a mixed economy may be a result of government intervention in areas such as transportation, healthcare, and education. This may occur when the central authorities disrupt the economies by introducing state-owned enterprises. Such an intervention may lead to the offer of subsidies, tariffs, taxation policies, and regulations needed to control the state-owned enterprises.
In other words, a mixed economy is a mix of socialism and capitalism where free trade and business activities are allowed but the government controls some of the wings of the economy for the welfare of the society. The neoclassical theory suggests that mixed economies are less efficient than pure free-market economies.
Some economists argue that government intervention may lead to a ‘better for all’ economy. However, the theory’s rational market participants and information equality parts are practically impossible to achieve. This is so because market participants are not sure where to get information from and how to use the information availed from the market.
In the modern world, most economies are mixed because mixed economies are perceived to be more efficient than their individual counterparts. However, since private players are often self-interested and may exploit opportunities, some fractions of business and trade may be governed by a central authority. The aim of inclusion of government intervention is purely for social good.
Example of Mixed Economy
Most modern economies of the world are mixed economies.
The US may be considered a hallmark of the mixed system. The US economy is a mix of capitalism and a command economy. The business and trade part is free for all and participants may act as if they are in a free-market economy, but some sections of trade such as healthcare are retained by the government.
The fifth amendment of the US constitution gives the right to ownership of public properties. It also directs the government not to intervene in private businesses. This promotes the much-needed innovation in the market that is a major feature of a free-market economy.
Most of the emerging economies in the world are also mixed in nature. For example, India is also a mixed economy based upon socialism and capitalism. The Indian constitution provides certain rights to the business and trades. However, the government can intervene in issues of social interest. Businesses are free to accumulate wealth but they must also participate in social welfare by not crossing the limit of rights offered to them by the constitution.
A few decades back, India was more supportive of socialism. However, with the advent of time, it has become increasingly liberal. Many industries that were governed by the central authority have been liberalized and private participation has been allowed too.
The insurance industry in India is a good example of liberalization where even Foreign Institutional Investors (FIIs) are allowed to invest in.
Characteristics of a Mixed Economy
A mixed economy comprises characteristics of its constituent economies - the free-market economy, the command economy, and the traditional economy. The features of the constituent economies are what make the mixed economy more advanced and advantageous.
Characteristics of a Free-Market Economy
A mixed economy contains the following three features of free-market economy:
The mixed economy protects private properties. Individuals can earn and accumulate wealth as much as they wish. The government cannot intervene in the matters of business and trade when it is legal. Therefore, the properties created and owned by individuals are out of reach of the government.
The mixed economy allows a free market where the markets are governed by demand and supply requirements. Unlike a pure command economy where the central authorities plan the production and prices, the mixed economy runs purely on demand and supply in a market. This leads to competition and the quality of goods remains constantly better.
The third feature of a mixed economy that is available in a free market is self-interest. The parties engaged in the mixed economy act on their own behalf and they seek the best in terms of prices. So, while they may want to sell the goods at the best bid while buying the goods they may wish to get them for the lowest bid.
Characteristics of a Command Economy
The characteristics of command economy available in mixed economies are as follows:
It allows the government to engage in areas of social welfare and safety plus the security of the citizens. For example, governments may own healthcare and defense industries so that safety, security, and integrity stay intact. Another reason to control these areas is that they are primary concerns and they require constant attention to keep the country in the best condition.
The government may also intervene in matters that are priorities of the citizens. For example, mixed economies may control energy and aerospace industries in order to offer better services in the most needed areas of lifestyles.
Characteristics of Traditional Economies
The characteristics of traditional economies that may be common with mixed economies include the following:
The areas that are most ingrained in the culture of the economic system. The citizens are usually used to such policies that affect their lifestyle. Some policies of the traditional economy are so in-depth that the people do not realize that they are actually investing in a process that is not a central requirement to them. For example, funding the royal families may be a part of the mixed economy.
Some people are still engaged in farming and hunting. For them, these are traditional businesses and they do not tend to shift their professions. Mixed economies may include such traditions.
Mixed economies are considered a better alternative to their constituents. However, there are some limitations of mixed economies too. As the economy prefers profitability above everything else, there are chances of mismanagement at various levels of the system. This may also create or expand the rich-poor gap which leads to economic disparity. Such occurrences may deplete social harmony in the long run.
Moreover, as wealth accumulation is the primary objective in the mixed economy, there may be corruption at various levels of the system which is conducted in favor of rich businesses and oligarchs.
1. What are the other types of economies than the mixed economy?
Ans. The capitalist economy or capitalism, the socialist economy, and the command economy are the other types of economies.
2. What do Marxists believe that drives the western economies?
Ans. According to Marxist theorists, the accumulation of wealth or capital drives the western economies. In other words, the Western economies are mainly run by profit motives rather than social good.
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