Mixed Economy

A market-oriented economy in which a government plays an active role in fine-tuning the economy, rather than allowing the invisible hand of the market to correct the market. A mixed economy therefore shows traces of market capitalism (market freedom and free ownership of the means of production, inputs) and socialism (public ownership of economic resources and regulation of markets). The mixed economy is a testimony to the imperfection of markets, which results in market failure.

By definition, socialist economies, which have started to embrace privatization and market outcomes, can also be classified as mixed economy. The fundamental difference is the intensity of privatization and reliance on the market, which is much more inherent and prevalent in capitalist societies. The use of the expression is therefore traditionally more akin to the capitalist orientation, in which private enterprises play a dominant role in the market relative to publicly owned enterprises.

Over the years, the underallocation or overallocation of resources to the provision of public and private goods has made the role of the public sector increasingly important. For example, in the United States, there has been a tendency to subsidize farming and tax cigarettes or regulate polluting industries. Planning and economic growth are not merely left to the market.

Policymakers respond to downturns just as central planners target economic output and prices. In capitalist societies, governments employ a significant amount of the labor force, redistribute income by taxation, and provide social services.

[Page 327]Therefore, in mixed economies, the major economic decisions of what to produce, how to produce, and for whom to produce are made by public and private agents. Private and public sectors compete for available inputs and respond to consumption propensities and deficiencies.