Mixed economies are systems which combine elements of free market systems with command economy structures. You will have private enterprises working with public entities, mixing elements of capitalism and socialism together to produce results. This system is such an effective method of economic growth and consistency that most governments in the world today, including the United States, support its use.
The typical mixed economy preserves the individual and corporate right to own property. It will reserve the right of the government to interfere in the market economy when necessary to create specific outcomes or meet societal goals.
These are the significant advantages and disadvantages of a mixed economy to evaluate when looking at this specific system.
List of the Advantages of a Mixed Economy
1. It provides capital through the promotion of innovation.
Mixed economies promote the value of organizations which are the most efficient. The only way to reach this status is to invest in research and development. Innovation is highly prized in this economy type because its consumers demand the best at all times. When an organization solves pain points for their customer, the additional capital they receive gets reinvested into the overall society to solve more issues.
2. It permits spending in systems that a pure capitalist economy would neglect.
Mixed economies allow for private ownership because the view is that the state is less capable of creating profits than the individual. At the same time, however, the government also recognizes that there is a duty to the infrastructure, social needs, and financial safety nets required for a society to survive. Pure capitalism would not offer food stamps, unemployment, or even highway building because each person or company would serve their needs first at all times.
3. It provides goods or services whenever they’re required.
The advantages of a free-market economy are found in the mixed economy from the perspective of distribution. When goods or services become necessary in specific regions, this structure ensures that people and organizations get what they require. Supply and demand are measured frequently with a mixed economy, which creates pricing mechanisms based on scarcity. Companies can then predict how each item will fare to create new efficiencies for each market segment.
4. It protects the general wellbeing of the general population.
The mixed economy approach doesn’t support the concept that anyone can do anything at any time. It won’t support the concept that the bare minimum is the only requirement to meet either. Governments interfere with unsafe products hit the market, when pricing mechanisms are unfair, or when monopolies seek to create an unfair advantage in the corporate/consumer relationship. This structure allows the government to inform consumers that products are unsafe to use without calling for specific restrictions on corporate entities unless illegal actions occur.
5. It provides an equal level of economic control within society.
Consumers, corporations, and governments all offer checks and balances to each other within the confines of the mixed economy. The private sector receives responsibility for the production of goods and services, while the average is given the task of being a consumer. Governments provide the service of protection, safety, and oversight of the overall market, along with the infrastructure necessary that permits economic activities in the first place.
6. It improves production levels and overall efficiency rates.
Mixed economies encourage competition at all levels. They encourage disruptors of any size to enter their industry because that inspires more innovation. Consumers will always shop for the best possible product to meet their needs, even if that means being disloyal to brands they’ve used for years.
35% of the revenues for the average company will come from new customers. 80% of consumers say that they’re willing to pay more for a better customer experience. Companies focus on improvements also because a 2% shift in customer retention for them can lower costs by up to 10%.
7. It provides more opportunities for companies to grow.
Companies earn to their full potential when an innovative and ethical approach to business opportunities are taken. When organizations grow through success, their employees enjoy in it as well. The mixed economy allows everyone to pursue legal business ventures without highly-restrictive government oversights. This structure makes it possible for workers to find jobs they want, businesses to find opportunities they want, and then both contribute to the government to provide for the greater wellbeing of everyone involved.
8. It still defines the role of government within the society.
A mixed economy doesn’t permit the government to take full control of private enterprise. It also provides a specific role for state-backed enterprises to function while maintaining private elements to it. There are currently 26 different government-owned companies in the U.S. operating right now, including Amtrak, Farm Credit System Insurance Corporation, and North Dakota Mill and Elevator. Public utilities are another example of this structure.
Even though these corporations are owned by the government, they follow the free market practices which private companies are bound to in their operations.
9. It helps to create more jobs.
The structure of the mixed economy allows for private corporations to build revenue streams that support direct employment opportunities. Individuals can form their own businesses in this economy too, working as an independent contractor, freelancer, or owner. When the economy grows, the size of government increases too, creating public-sector jobs which contribute spending at the local level.
10. It creates a layer of protection for the most vulnerable.
Without a mixed economy in place, societies would focus on productivity instead of need. Individuals with disabilities would be cast aside unless they could offer contributions to the general good. If you lost your job, then too bad – you’re on your own until you can find another one. The role of the government in this structure creates a safety net which protects the most vulnerable. People don’t get rich off of government benefits. They get the basics of what they must have to survive.
List of the Disadvantages of a Mixed Economy
1. It creates private businesses which could disrupt the economy.
The free market system works toward a monopoly whenever it can. That process occurs because the role of an organization is to maintain its power however it can once it’s achieved. That is why government intervention stops monopolizing efforts. A monopoly creates new pricing structures due to the guaranteed requirement that customers use their goods or services.
A mixed economy still allows companies to become too big. Numerous bailouts were offered during the 2007-2009 global recession years to “prop up” the companies which would create a strong negative influence in personal finances. There must be debt controls in place, then correctly regulated by the government, for a mixed economy to be prosperous.
2. It creates higher levels of debt.
Governments require funding, just as corporations and individuals need income to exist. If the state becomes involved with specific enterprises through subsidies or backing, then the presence of a de facto monopoly occurs, even if the legal definition is not met. One example of this issue involves Fannie Mae and Freddie Mac.
Fannie Mae was chartered by the government in 1938 to ensure a supply of mortgage funds was available throughout the country. It operates today as a shareholder company with a congressional charter. Freddie Mac followed a similar path in 1980, but as a private company, to do the same thing. These enterprises ensure households access debt products if they want them.
3. It triggers poverty if managed incorrectly.
The mixed economy works when all three entities provide checks and balances for one another. If one element receives a greater share of the pie, then someone else receives less of it. The imbalance continues unless specific corrections are made to restore its balance.
This issue affects the United States in profound ways. The wealthiest 1% of Americans own 40% of the country’s wealth. That’s the highest share since at least 1962. Middle Class wages saw their first bump in meaningful value in 2018 since the 1980s. Less than 40% of households are classified as being in the Middle Class as well, which is one of the lowest rates of any developed country.
4. It does not guarantee that the state will avoid interference.
Think about how the government works in the United States. The average person is governed under at least four different tiers of management. They have local regulations and laws to follow, then county statutes, state laws, and then federal requirements. That means four different entities attempt to offer checks and balances to individual and corporate activities. They can all act together or work separately.
The recent surge in cannabis access legislation at the state level is an excellent example of this issue. There are currently 10 states which have legalized recreational marijuana use in the United States, along with the District of Columbia. Some counties may decide to prohibit recreational use. Some local governments have passed moratoriums to prevent businesses from locating there to sell these products. Then there’s the federal government, which still classifies the drug as a Schedule I, making it illegal to possess at the national level.
5. It can become subject to the ideas of special interest groups.
The 2016 presidential cycle in the United States was one of the most expensive in history. Hillary Clinton received more than $10 million in donations from six different groups, including Soros Fund Management, Saban Capital Group, and Renaissance Technologies. Paloma Partners contributed $21.6 million to her campaign.
The same issue occurred with Donald Trump’s campaign, with McMahon Ventures, the Walt Disney Company, and GH Palmer and Associates donating more than $5 million on behalf of the candidate. Renaissance Technologies also donated more than $10 million to Trump’s campaign, as they did to Clinton’s effort. The reason why these contributions occur is to influence governmental policies as they relate to the private business world.
6. It offers higher tax rates than other economy types.
The mixed economy offers numerous benefits, but it also offers high tax rates. Governments are funded through taxation and the revenues (if any) earned from their private or chartered companies. Individuals and corporations are taxed at various, often progressive levels based on the amount of income received.
According to World Atlas, all of the top 10 highest income tax rates in the world are found in Europe, with Belgium leading the way at 40.7%. The United States ranks 16th on the list, with an average rate of 26%.
These mixed economy advantages and disadvantages seek to create harmony between the state and private enterprise. Most nations create checks and balances which allow companies to grow, wealth to be earned, and social services offered to those who require them. Some governments may attempt to legislate a more significant chunk of the available economics, while others might interfere with corporate or individual decisions. The success or failure of this economy type depends on all three groups protecting, supporting, and challenging each other all the time.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.