Economics

Mixed Economy: The Perfect Economic System?

Mixed Economy

There’s been a never-ending debate among economists about which economic system is the best for countries, Market Economy, Non-Market Economy, or Mixed Economy. And which of the economic system guarantees economic prosperity together with the public welfare, and which of this system reduces economic inequality and enhances an individual’s income. Summing it up, a perfect economic system would provide higher GDP growth with higher per-capita income. So, in this blog, we’ll navigate through these economic systems and try to find a solution, as to what constitutes the perfect economic system.

Mixed Economy
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First, let’s briefly understand the terms, Market and Non-Market economy and their benefits and drawbacks.

Market Economy

In a market economy, the means of production are owned by individuals and private entities, and the goods are distributed and exchanged in a free market. This free market is not regulated by a central authority or the government and there is very little or no intervention by the government. The term was first introduced by Scottish Economist Adam Smith.

Mixed Economy
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The Market Economic policies such as the policy of laissez-faire (French for ‘leave it alone’), states that the market would function most effectively and would bring high economic prosperity to the nation if the government does not intervene in the free market and does not play any economic role such as the production of goods and services. And the policy that the market is regulated by the prevailing competition among the producers keeps the quality and prices of goods in check. And the consensus that monopolies should be prevented and penalized leads to innovation and the existence and development of new and small companies. These policies are democratic and support individual liberty. Hence, this system paved the way for individual success and innovations, and highly prosperous businesses. Apart from these policies, the forces of demand and supply determine what to produce and how much.

This economic system came into practice in 1777 in the USA from where it spread to the European countries.

Mixed Economy
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Wanna know more about Market Economy? Check this article – Market Economy: Origins and The Great Depression

Non-Market Economy

The non-Market economy has two variants- a Communist economy and a Socialist economy. The idea of the non-market economy was proposed, indirectly, by Kral Marx, and this system is opposed to the market economy. Though this system was not in use initially, after the Great Depression of 1929, the salience of the non-market economy increased substantially, which evolved as a reaction to the market economy. The principles of the non-market economy are just opposite to the market economy. In this system, the government has sole authority over all means of production, and the goods, instead of being traded in a free market, are allocated to the people directly by the government.

Mixed Economy
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Hence, individuals are not given property rights, due to the belief that this would lead to a portion of the population becoming richer over time, while the rest of the population remaining poor. And opposed to the policy of prevention monopoly in the market economy, the non-market economy supports the monopoly of the state over the means of production and supply. So, the forces of demand and supply are not in play, and the state determines what to produce and how much.

Mixed Economy
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This system was initiated in USSR in 1919, from where it spread to the Eastern European countries and China.

Wanna know more about the non-market economy? Check out this article- Non-Market Economy: The best system for social development?

Drawbacks of Market and Non-market Economic systems-

Market Economy

  • The Government, adopting the policy of laissez-faire, did not intervene in the economy, even if it was required. The Great Depression of 1929 couldn’t have been stopped, but the effects of the depression could have been mitigated if the Governments interfered and provided additional support to the economy.
    Image by- Communist Party USA
  • As the governments did not interfere in the economy, it was dysfunctional in playing the welfare role for the poor. And the laborers, in this capitalist system were exploited. There was very little or no regulation over the companies, they did not have the policies of fixed working hours or minimum wages, ultimately leading to the workers being exploited. And due to very little or negligible taxation, there was no redistribution of wealth to the poor, leading to widening income inequalities.

Non-Market Economy

  • Due to the absence of property rights, and the policy to forbid the individuals and private players from playing economic activities, there was literally no incentive for the individuals to give their hundred percent, as there was no scope of development and innovation, with the individuals being mere employees of the state.
  • Image by – Geckoandfly
  • Due to these policies, and the absence of the idea of ‘creating wealth’ and ‘making profits’, the investible capital reduced substantially after the initial years and this drained the overall economy of the nation.

Mixed Economy

In simplest terms, the mixed economy is an economic system that includes certain traits of both market and non-market economy. Due to the Great Depression of 1929, the market economies were drastically affected and found it very difficult to emerge out of the crisis. Then, in order to help these economies to recover, British Economist John Maynard Keynes, in his work The General Theory of Employment Interest and Money, analyzed the causes of the Great Depression and proposed certain economic policies to help these economies out. Keynes suggested that the economies should move towards Mixed Economic System i.e. to include certain traits of non-market economy in their economic policies.

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The mixed economic system includes traits from both Capitalism and Socialism. The mixed economic system allows the individuals and private entities to acquire property and means of production, it also protects their property rights. But unlike the market economy, the government actively interferes in the economy. The production and supply of goods and services are done by both states and the market. Certain goods are brought and sold in the free market, while some goods and services are provided to the people directly by the state, either for free or at a subsidized rate. For example- PDS (Public Distribution System) of the Government of India under which it procures essential food grains such as rice, wheat, sugar, etc, and then supplies it to the people belonging to the BPL (Below Poverty Line) category at very subsidized prices. This action by the government would’ve been highly discouraged if India were a market economy.

Mixed Economy
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In a mixed economy, the states play the role that does not have a ‘profit motive’ and are meant mostly for public welfare. And private players play the role where there’s a profit motive, like the hospitality sector. However, the roles played by the state and private entities are not constant and can change over time. The private sector is free and has indeed done the roles which lack profit motive and involve public welfare, and at the same time, the state is not prohibited to play the role that involves profit-motive.

So, this answers the question as to what constitutes the perfect economic system that guarantees economic growth along with social welfare, a higher GDP together with a higher per-capita income.

World Bank on Mixed Economy

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The World Bank, which was the advocate of the market economy, openly supported the mixed economy and asserted that government intervention in the economy is not optional but rather a necessity. And both the existing economic systems, market and non-market, have certain drawbacks which make it unsuitable for any country. And the perfect economic system would be their mixture i.e. mixed economy.

Learn about other economic systems-

Market Economy

Non-Market Economy

Interested in Economics? Check out our other blogs-

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Fiscal Deficit: Implications and Benifits

 

 

 

 

 

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