Mixed Economic System
A mixture of capitalist and socialist economic systems.
What is a Mixed Economic System?
As the name suggests, a mixed economic system is a mixture of capitalist and socialist economic systems.
There are three types of economic systems found in the modern world, namely:
- Capitalist or a “free market” system
- Socialist, or a “state” system
- The “Mixed Economy” system
Almost all the world’s economies fall under these three categories.
How Does the Mixed Economic System Work
This system is fairly complex but easy to understand. Most developing countries currently follow this mixed economic system. However, to understand this system, we have to look closely at the other two systems from which it is derived.
Only three major economies in the world, India, the UK, and France, follow a mixed economic system. A mixed economy refers to an economy that is neither entirely free nor state-controlled.
It is characterized by both the participation of the state and private businesses.
Government spending also plays a huge role in determining the type of economic system a nation follows. Generally, capitalist countries spend large amounts on healthcare, defense and social security, and pension plans.
The majority of the demand in capitalist countries is driven by government spending. Government spending usually makes up between 35-60% of all demand. This allows the government to regulate the nation’s economy.
A communist country spends through public entities, and the government indirectly influences most of the demand. For example- it provides incentives to produce goods like medicines which are considered to be public goods.
Mixed economic systems consist of both these functions in sync to develop a good working system for the economy.
Capitalism
Capitalism is an economic system that promotes economic development through private ownership of means of production. It encourages innovation through private participation and is profit-centric.
It works through basic concepts of demand and supply and has little to no government intervention. The three problems of economics, what to produce, how to produce, and for whom to produce, are solved through private participation.
All business decisions under this system are made while keeping in mind the profit element and the return on investment, instead of public welfare like under the other two systems.
Land and other means of production are privately owned and controlled by individuals or groups of individuals. Here, the government plays the role of the observer and regulator.
Merits of Capitalism:
- It fosters rapid economic growth by eliminating unprofitable activities.
- It fosters innovation and growth in every area of the economy.
- Transparency allows proper communication.
- Private ownership encourages effective working.
Demerits of Capitalism:
- It can increase income inequality.
- Factors of production are wasted because of diseconomies of scale.
- Capitalism is only concerned with what people want, not what they need.
- It is too profit-centric, which can sometimes pose a problem.
- It creates an incentive to monopolize.
Socialism
In this economic system, the factors of production and central problems of the economy are controlled and managed by the state.
This is also known as the “state” economic system. The government plays the role of a participant and central authority. It has a significant presence in almost every prominent sector of the economy.
The main motive behind government control is to foster rapid economic growth and to improve the quality of life by promoting the welfare of all.
This is a non-profit-centric model where everybody gets an equal share regardless of their economic contribution. The state is responsible for the welfare of each citizen.
However, every person gets an equal share in profits and gains but not every citizen gets equal fundamental rights and freedom. Socialist economies often devolve into propaganda control and state censorship.
There is little freedom of speech and high authoritarian supervision. In addition, there can be rampant corruption under this system as some people get more power, especially the ones who are part of the government.
Merits of Socialism:
- Every person gets something, so no one is left behind.
- Its main objective is to reduce income inequality.
- There is no chance of monopolies being formed except those controlled by the government.
- There is minimal wastage of resources because of economies of scale.
Demerits of Socialism:
- It does not foster innovation growth.
- It does not essentially focus on economic growth every time, so the growth can be slower.
- It lacks transparency and, because of this, is prone to inefficient bureaucracy.
- People do not get basic human rights in front of the state.
- The state controls everything, so if the government manages the business poorly, the whole economy suffers.
Mixed Economic System
This system is a hybrid of both the systems we discussed earlier. A mixed economic system facilitates the coexistence of private players and government management.
Here the government plays a role of a facilitator rather than a full participant. As a result, the government has a limited presence in only some select sectors, and the rest is left to private participants.
Mixed economies are characterized by private ownership and their ability to promote innovation but also public welfare. One of the main goals of this system is to reduce income inequality between people within a nation.
It has free media and freedom of speech, and other basic rights. People enjoy their freedom along with many programs run by the government for the unprivileged people.
The central problems of economics are dealt with here collectively by the state and private players according to their abilities.
Merits of Mixed System:
- It contains all the benefits of both systems.
- It eliminates some of the demerits of both systems through synergies.
- It promotes income equality while conferring the benefits of a free market system.
Demerits of Mixed System:
- Delay in economic decisions due to the long process of decision-making and government involvement.
- Lack of efficiency in the public sector as it lacks motivation because there is no competition.
- It lacks the proper power of capitalism, as certain sectors have considerable state control.
- The state can become more powerful through its law and outweigh the capitalist element of this system.
Example of a Mixed Economy
India is the world’s largest democracy and one of the biggest economies in the world. It ranks third after the US and China by GDP in PPP terms.
India is situated above the Indian Ocean in South Asia, towards the east of Pakistan and southwest of China.
India gained independence from the British in 1947, and the people in power then decided that India’s economy should follow a mixed system. They were concerned about their country’s foreign takeover and economic colonization, so they took up a mixed economy to combat these risks.
The government initially had more control than required to secure the economy. As a result, it had a major presence in almost 60 - 70% of all economic sectors.
The result was that the private sector did not thrive due to huge public participation, and public entities lacked motivation and became lethargic.
India has a GDP of almost $3 Trillion in nominal terms and is the third-largest economy in Asia in nominal terms.
Its economic growth has been a rapid success after 2000, but at the same time, economies like China and Indonesia have grown faster than India.
This is because of better economic policies by the governments and also less inefficiency and red-tapism in those countries. However, India ranks very high on the list of countries with the most corruption.
Large public businesses gained a monopoly. Because of the strict labor laws regarding people working for the government in India, these corporations became inefficient and lethargic in their work, delaying many main projects for the country.
Red-tapism is also a major issue affecting India’s economy; the lack of government control over these corporations has ruined its work culture. But out of all government corporations, some have no success stories.
India has one of the cheapest internet rates, with the highest number of internet users, just after China. It also has electricity at a meager and stable price. These are the privileges given to the people by state-run corporations.
Most of the country’s biggest banks are publicly owned corporations. LIC, which is an insurance provider, has more policyholders than the population of the United States! Some of the largest state-run companies in India enjoy this fascinating operating power.
Despite its bumpy experience after independence, as India’s economy grows rapidly, it is shifting its economy towards a capitalist one from a state-dominated economy.
This is being done to foster faster economic growth and grow at a comparable pace, at least with its peers in Asia.
The United Kingdom
The UK is perceived as more of a capitalist economy than a mixed economy everywhere in the world. It is tightly integrated with the capitalist economies and the free markets as other capitalist economies are.
The UK has a history of long monarchical rule. It was one of the largest empires in the world, and its monarchical roots can still be seen. The UK still has a queen in this era of democratically elected governments.
Although the UK’s parliament runs the government, it still houses the queen.
The country is one of the largest financial clearance centers in the world, and its capital city, London, is also known as the world’s financial capital.
Spending by the government of the United Kingdom makes up more than 35% of the country’s total GDP. This is the main characteristic of a capitalist economy as it has to spend money directly on infrastructure, healthcare, and education for its people.
The UK also has some major state-controlled businesses like the British Broadcasting Channel, a multimedia news agency with a presence in over 90 countries.
The government of the UK has a majority stake in the company.
The reason behind the United Kingdom’s economic structure has a lot to do with the effects of the 2008 Financial Crisis. During that crisis, the UK suffered greatly due to its free market economy.
The recession was not under the control of the government, which lost popularity among its supporters. This led to a process of gradual change where the government of the UK tried to bring the economy under more significant government control.
To achieve this, they had to open state-run companies in various sectors of the economy and create regulatory and financial policies which gave the government the power to control those companies.
The UK is mainly a capitalist economy, and the main function of the government is to avoid or control a recession and make healthy financial decisions to keep the economy on the right track.
Analysis of the Mixed Economy of France
France is one of the major economies of the European Union and is also a permanent member of the UN Security Council.
It is one of the most developed economies in the world and was the largest recipient of foreign direct investment in Europe in recent years. It is also the most visited destination in the whole world.
Paris is the capital city of France and is known as a global city. It ranks 3rd among Fortune 500 companies operating within the city’s borders. Paris has one of the highest GDPs compared to its peer cities worldwide.
France’s main sectors are agriculture, luxury fashion products, and its defense sector. The government has a considerable presence in the defense sector.
Its laws are very strict towards property rights infringements, and any laws concerning intellectual property rights are taken very seriously.
The yellow labor code and the tax laws of France facilitated its economic rise in western Europe. However, the highest tax rate in this country stands at 45%.
The government spends a considerable amount of money on research and development, the most among its peers in the European Union.
The French government is also actively spending more money across different sectors, but it qualifies as a moderately-free economy by all standards.
The main reason for this is because of its relatively low government expenditure. France has one of the lowest government expenditures as a percentage of its GDP among developed economies.
The main reasons behind this are the low economic growth of the country over the past decade and its high debt-to-GDP ratio.
France’s GDP will hover around $2.6-2.9 Trillion in 2022, and its debt-to-GDP ratio stands at a hefty 118% of its GDP (a considerable amount).
It also defies the rules set by the EU and EEA, as they do not allow countries to keep such a high debt ratio. It decreases the value of the Euro.
Mixed Economic System FAQs
India, Brazil, the UK, France, Bangladesh, and Pakistan are good examples of mixed economies.
It is not a proven fact that a mixed economy is better than the other two types, but it certainly has advantages of both types and some disadvantages. This type of economy is suitable for a developing country.
This type of economy is perfect for small countries that are shifting their economy from one type to another or a country that has faced some dire economic and social events in the recent past. In addition, it is suitable for developing countries.
A mixed economic system is the most commonly found economic system in the world today. Earlier centuries of humankind saw more authoritarian economies than the other two.
Researched and authored by Aditya Murarka | LinkedIn
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