The Purpose of Mixed Economies

Over the past few tutorials, we have been discussing different economic systems.

But there’s a common misconception amongst the public regarding the economic systems that certain

countries possess. For example, you’ll often hear that Cuba is a “communist” country, or

that Denmark is a “socialist” country, or that the United States is a “capitalist” country. However,

as we mentioned earlier in the series, all of those words are misleading. In reality, nearly

every single country in the world has an economic system that blends a market system with components

of government involvement. To better understand what that means, let’s examine mixed economies.

First, some review. A mixed economy is a combination of a traditional economy,

a market economy, and a command economy. Sometimes the government steps in to

guide the factors of production. Sometimes it’s all about individuals and businesses.

Sometimes it’s even based on traditional values. But why does the government get involved in an

economy? Simply put, because markets aren’t perfect. Early free market proponents like

Adam Smith believed that if it was simply left alone, a free market would create the

most benefits for both consumers and producers. They favored a laissez-faire economic policy,

or a policy of just letting things take their own course in markets, without government

intervention. However, even Smith admitted that sometimes government involvement was necessary.

And ever since, government intervention in economies has increased, for several

specific reasons. First, certain needs in a modern society cannot be easily met in a marketplace.

For example, how well could a free market provide a society with highway systems, or a military?

It’s a highly impractical notion. Second, most economists now argue that at least some sort

of government intervention is necessary today to help lift up those in poverty. There is no perfect

solution to fight poverty, but the goal of equity remains the same. For example, to help members of

a society receive a basic education, governments in many countries provide public schools.

Third, governments often need to play a role in an economy by protecting

property rights. This means that politicians must pass laws and enforce laws to protect property.

Generally, there are two types of property that governments try to protect:

private property and intellectual property. Private property is property owned by individuals

or companies, as opposed to being owned by the government or the general public. Intellectual

property is any work or invention which is the result of creativity that one has control of.

For example, a song is the intellectual property of the composer who wrote it.

Fourth, governments get involved in an economy to make sure that trade remains fair. For example,

a government may step in if there’s a monopoly, when one seller dominates a market. And finally,

governments need to fund public projects that benefit all of society, and they do this primarily

by taxing individuals and businesses. A tax is simply any required payment to the government.

We will learn more about the different types of taxes in a future tutorial.

For all these reasons, pretty much every economist agrees that a mixed economy

is the economic system that most strongly benefits a society. Again, this is why it’s the most common

type of economy around the world by far. When looking at a country’s economy, it’s most

sensible to look at where its economy falls on a spectrum between a complete command economy and