Reviewed by Sep 30, 2020| Updated on
A mixed economic system is a framework that incorporates both capitalist and socialist elements. A mixed economic system preserves private property and allows a degree of economic independence in capital use but also enables governments to intervene in economic activities to accomplish social goals.
As per the neoclassical theory, mixed economies are less effective than pure free markets, but government intervention advocates that the basic conditions needed for free-market efficiencies, such as fair knowledge and rational market participants, cannot be met in practice.
Most modern economies feature a fusion of two or more economical systems, with economies falling along a spectrum at some point. The public sector is working side by side with the private sector but may start competing for the same limited resources.
Mixed economic systems do not prevent the private sector from seeking profit, but regulate business and can nationalize industries which provide a public good.
For instance, the U.S. is a mixed economy, leaving ownership of the means of production in mostly private hands but incorporating elements, such as agricultural subsidies, manufacturing regulation, and partial or full public ownership of some industries, such as letter delivery and national defence.
All known historical and modern economies actually fall somewhere on the mixed-economy spectrum. Pure socialism, as well as pure free markets, represent only theoretical constructions.
Mixed economic systems are not laissez-faire systems because the government gets involved in planning the use of certain resources and can exercise control over private sector enterprises. Governments can seek to redistribute wealth by taxing the private sector and using tax funds to further social goals.
Common examples of government intervention in mixed economies include trade security, subsidies, targeted tax incentives, fiscal stimulus, and public-private partnerships. They inevitably create economic fluctuations but are instruments for achieving specific goals that, given their distortionary impact, can succeed.