Despite personal or political preferences for capitalism or socialism, almost every country in the world today practices a mixed economy. This system receives some elements of the free market, mixed with some socialistic concepts, to create an outcome that maintains private ownership and control of production. Then the government keeps its oversight role by requiring specific forms of regulation.
A mixed economy can fall anywhere on the spectrum between pure capitalism and pure socialism. Most governments decide to socialize specific industries in this structure because of how important they are for the public good.
Economists believe that a mixed approach is less efficient than a pure free market, but this approach creates more equality for the consumer. It provides for equal information and rational participation in ways that an extreme approach on either side cannot offer.
The advantages and disadvantages of the mixed economy are essential to review periodically because small tweaks to the system can create profound results.
List of the Advantages of the Mixed Economy
1. A mixed economy distributes goods and services to where they need to be.
Most mixed economies retain the characteristics of the traditional economic approach. Those traditions don’t guide functionality because most people aren’t even aware of their actions. You go hunting, purchase a fishing license, and go to the grocery store each week. Those activities are possible because the structure of this approach ensures that goods and services are where they’re needed for each community.
Even if the government owns or operates vital industries in a country, the central plan works to the benefit of as many people as possible. The United States operates in the aerospace, healthcare, and banking sectors quite often. When the economic crisis hit in 2008, they became owners of the auto industry.
2. Supply and demand get measured through pricing instead of regulation.
Instead of creating one price for each item someone requires, the structure of the mixed economy allows for competition. The state might regulate an industry, but it is up to the individual players to be innovative. This competitive drive encourages a system of supply and demand that impacts pricing. When there are low levels of products or services in high demand, then the price to acquire them goes up. If the opposite occurs, then the price goes down.
An excellent example of this advantage is found in the U.S. housing market. The average price of a home in Seattle, which is one of the most popular places to live in the country, is now $750,000. The median cost of a property in Coffeyville, KS is only $59,900.
3. A mixed economy improves production efficiency.
Because of the presence of competition in the mixed economy, there are fewer chances for organizations to form monopolies. Government regulations often prevent this outcome, which a purist capitalism approach would not. That means a mixed economy promotes better production efficiencies.
Organizations must produce high-value assets cheaply and quickly to improve their profit potential. A pure market economy shifts private businesses toward mergers and acquisitions, whereas a purist socialist approach would place the government in full control of this responsibility.
4. Mixed economies promote control equality.
The private sector is responsible for the activities which produce goods and services in most mixed economies. Microsoft makes computers for customers around the world under government regulations instead of being at a state-run facility. That means the public sector is responsible for the infrastructure that makes private production possible.
The government handles roads, bridges, utilities, and entitlements. It gives people and businesses the foundation they need to pursue whatever goals or dreams they have.
5. Employment opportunities are more readily available.
A purist socialist approach might offer employment options that benefit everyone, but there is no way to create advancement. Your life will always be the way that it is. In a purist capitalism approach, a race to the bottom in wages creates a significant gap between the wealthy and those without assets to offer.
When private corporations can produce higher revenues in the mixed economy, then they eventually create more employment opportunities that support their new activities. It becomes a powerful creator of jobs because it encourages people to develop new skills to help themselves. This approach can even preserve more employment options during a recession.
6. It minimizes the role that the state plays in the economy.
The mixed economy attempts to balance the need for private innovation with the need for the massive supports a government provides. Small businesses have limited purchasing power, but the government purchases on a gigantic scale. The state can implement subsidies to help particular industries and enforce specific policies that encourage desired consumer behaviors.
This approach allows the mixed economy to balance the benefits of capitalism and socialism in a way that benefits a majority of people consistently.
7. The mixed economy provides people with a second chance.
The goal of most modern societies is to allow every individual to succeed in whatever manner they prefer. A socio-economic network is created to catch those who might fail in the mixed economy that you wouldn’t find in a purist socialist or capitalistic approach.
If someone fails in a purist capitalistic economy, then that person faces a significant risk of entering poverty and never recovering from that outcome. It is also possible to become poor in a mixed economy, but there is better access to resources that can reverse that situation.
8. A mixed economy automatically allocates capital to the most efficient producers.
Competition in the mixed economy encourages producers to seek out innovative processes. Consumers have the option to choose whatever goods or services they prefer, but the average person will select the item that provides them with the highest value proposition. That means the structure of this approach automatically allocates the highest levels of resources to the organizations that create the best outcomes.
When innovative producers receive this infusion of capital, it gives them an opportunity to invest in more companies that perform in a similar way. This advantage naturally encourages more people to gravitate toward the best items at the price points they can afford.
9. The mixed economy minimizes the disadvantages of a market approach.
When a purist capitalistic approach is the preference of an economy, then vital areas can experience neglect if they aren’t profitable – or don’t make enough profit to satisfy producers in that industry. The three primary areas that typically benefit from this approach are aerospace, defense, and technology. When there is a larger governmental role in the development of these vital resources, then faster mobilization can occur to protect these areas. This advantage also creates more opportunities for employment, higher wages, and vocational specialization that aren’t always possible in other approaches.
10. A mixed economy protects the minority against the whims of the majority.
The expanded role of the state in the mixed economy when compared to pure capitalism provides more protection for the minority in daily activities. Regulations prevent companies from exploiting their workers or creating unsafe working conditions. People cannot get together to oppress others or influence pricing schemes because there are protections in place that force them to separate.
You don’t need to be the most innovative or competitive to find success in the market economy. Companies and individuals are still at risk if others have better production methods, but there are still options for disruption.
11. It equalizes the levels of control found in the economy.
In purist capitalism, the producers are in full control of goods and service acquisition. The purist socialistic approach places the government in this position. It is only in the structures of a mixed economy where both of these elements come together with cohesiveness. This fusion generates a need to coordinate responsibilities within the marketplace to help it continue growing. That means there is an equal level of distribution.
12. People become the driver of economic success.
When a purist socialist approach is the economy’s preference, then a group of people or organizations work together to meet the needs of everyone. Instead of private ownership, everything is mutually owned in some way. Communism takes this idea to an extreme by putting everything into the hands of the state. The purist capitalist will have everyone pursue the highest levels of competition and innovation possible.
The mixed economy allows people to drive it forward by following their private self-interests. Each person and organization can pursue whatever incentives they prefer to carve out their desired existence. The government can regulate these activities, but the structures often prevent the state from stopping a personal pursuit toward happiness.
13. The mixed economy rewards the hardest workers.
If you are highly productive in a mixed economy, then you have an opportunity to create your own definition of success. Even if an employer doesn’t recognize these efforts, you can become an entrepreneur to create a self-employment resource that generates the income you want. The power to work or not is in your hands, and you have the option to chase after whatever goals you prefer. That means you can work a job that gives you more family time, focus on a high-income situation, or find part-time employment so that you can pursue a hobby.
The producers who create the highest profits eventually rise to the top. This advantage creates capital generation, leading to better pricing schemes.
List of the Disadvantages of the Mixed Economy
1. It can leave the less competitive members of society without support.
The mixed economy can take on all of the disadvantages that other approaches generate since it is a mix of capitalism and socialism. That means its primary problem involves the members of society who cannot reach the same levels of innovation or competition. When the marketplace has too much freedom, then these at-risk individuals and companies might find themselves without any support from the government.
This disadvantage creates a system where the wealthy get more, and the poor get less. As people gain more power over others, they work to consolidate their positions so that they don’t lose them. It creates a wealth curve where the Middle Class struggles to exist.
2. The mixed economy doesn’t eliminate the possibility of monopolies.
When the government can still centrally plan in specific industries while operating in a mixed economy, then there can be problems with oligarchies or monopolies forming. This issue often happens in the defense industries that support the armed services. When subsidies become necessary to help people afford goods or services, then it creates more debt for the state to manage. This process slows economic growth in the long-term perspective that short-term gains cannot manage.
3. A mixed economy often produces high taxation responsibilities.
The state is responsible for public-sector services that make the marketplace accessible to consumers and producers. That means it needs financial support that comes from thee two entities. The most common method of achieving this result is through taxation. The mixed economy will tax companies and individuals at different levels, with more government involvement often dictating a higher level of responsibility in this area.
Social services and infrastructure needs are benefits that everyone enjoys, but a high tax rate can also become a disadvantage. People need to see the benefits of this kind of investment. If they believe that the state is wasting their money, then there is less motivation to find employment.
4. Organizations have restrictions in their overall size.
As the world shifts toward more of a global economy, today’s companies are becoming beginner than ever in terms of market value. Apple, Amazon, and Microsoft are all above the $900 billion level, with Alphabet close behind at $863 billion as of 2018. Apple is also the world’s most profitable company, earning a net income of $59.4 billion that year. These figures are higher than some small countries.
Even with these size considerations, the market economy prevents additional growth from occurring. Companies can scale upward by themselves, but they cannot control the entire market to create monopolies. The government ensures the marketplace continues to receive competition so that an appropriate value proposition continues to be available.
5. The state has the power to change its mind in a mixed economy.
The mixed economy serves at the luxury of the government. Officials have the opportunity to change their minds with this approach, sliding it toward a purist state if that is their preference. This disadvantage is especially prevalent in the countries where operations occur under an uncodified constitution. Canada, Saudi Arabia, New Zealand, Israel, and the United Kingdom operate on a set of laws, principles, and agreements rather than a single constitution.
When there isn’t a direct set of expectations that govern the economic processes, it is much easier to change them to create personal advantages.
6. The mixed economy encourages people and agencies to go into debt.
One of the most prominent dangers of the mixed economy is overdevelopment. This disadvantage occurs in the centralized planning of the public sector most often, but individuals and companies can also fall into this debt trap. Government-run industries can hastily turn into subsidized mergers that require massive spending. The state then shifts budget resources from other segments to settle those charges, creating new obligations in a never-ending cycle.
This disadvantage is how the U.S. manages its overall debt. The current national debt surpassed $23 trillion for the first time in November 2019. Almost $400 billion in interest payments, about 50% of the defense budget, gets paid annually because of this issue.
7. It can encourage companies to become top-heavy.
When the recession hit the United States in 2008 because of the real estate market and other factors, it became apparent that some companies had become so integral to our economic state that they were too big to fail. This problem doesn’t apply only to American businesses. Several international firms are also systemically important based on their total assets.
You’ll see names like Mizuho, Deutsche Bank, Credit Suisse, Bank of America, Goldman Sachs, Citigroup, and Wells Fargo on that list. The mixed economy creates this situation when there isn’t enough regulation in the marketplace to control growth. If a recession occurs, then individual consumers end up being responsible for their needs and the survival of these institutions.
8. The mixed economy encourages special interest activities.
The synergy between the government and operating producers creates a market where each lobbies the other. Successful organizations can lobby the state to receive more tax breaks, subsidies, and other financial considerations. This process can lead to a company taking on more risks than the free market would allow, creating problems that eventually need a fix.
The government can lobby businesses to perform in specific ways through contracts. By creating specific employment and revenue generation opportunities, the state controls the way some businesses behave in the economy. Both approaches rely on those with the most money and influence, so it can be challenging for others to have a say in the legislative process.
9. Private protections don’t need to exist in a mixed economy.
The mixed economy will usually protect private ownership, but this approach doesn’t always occur. Before the privatization efforts in the Soviet Union took place in the 1990s, it was essentially illegal to own property or enterprises. The government emphasized national control over all production except for human labor, leading to the development of about 45,000 state enterprises.
Even when privatization does occur, the government can take it back. Russia took control of strategic sectors once again by gaining a controlling interest in private businesses. Their efforts to take VSMPO-Avisma and its titanium production was one of several examples that happened between 2004-2007.
Even during the days of extreme communism, a mixed economy was still present in each country. Dictatorships still use this approach. Tyrants have encouraged their societies to adopt these principles. Why is it that every society humanity has ever documented prefers this approach?
It is because a pure approach to capitalism or socialism does not work. The purist approach to capitalism focuses on the accumulation of wealth at the expense of others, while the socialist efforts produce what is good for all without a focus on innovation. A combination of the two at some level must occur to produce consistent results.
When we evaluate the advantages and disadvantages of the mixed economy, it is still possible to critique specific combinations. Something closer to communism may not be as effective as a system found in the UK, Canada, or the United States. There will always be winners and losers, but this approach seeks places of compromise as much as possible.
Keith Miller has over 25 years of experience as a CEO and serial entrepreneur. As an entrepreneur, he has founded several multi-million dollar companies. As a writer, Keith's work has been mentioned in CIO Magazine, Workable, BizTech, and The Charlotte Observer. If you have any questions about the content of this blog post, then please send our content editing team a message here.