A mixed economy is variously defined as an economic system blending elements of market economies with elements of planned economies, free markets with state interventionism, or private enterprise with public enterprise. There is no single definition of a mixed economy.
One definition is about a mixture of markets with state interventionism, referring specifically to capitalist market economies with strong regulatory oversight, interventionist policies and governmental provision of public services. The other definition is apolitical in nature, strictly referring to an economy containing a mixture of private enterprise with public enterprise.
In most cases, particularly with reference to Western economies, the term mixed economy refers to a capitalist economy characterized by the predominance of private ownership of the means of production with profit-seeking enterprise and the accumulation of capital as its fundamental driving force. In such a system, markets are subject to varying degrees of regulatory control and governments wield indirect macroeconomic influence through fiscal and monetary policies with a view to counteracting capitalism’s history of boom/bust cycles, unemployment and income disparities. In this framework, varying degrees of public utilities and essential services are provided by government, with state activity often limited to providing public goods and universal civic requirements. This includes healthcare, physical infrastructure and management of public lands. This contrasts with laissez-faire capitalism, where state activity is limited to providing public goods and services as well as the infrastructure and legal framework to protect property rights and enforce contracts.
In reference to post-war Western European economic models as championed by Christian democrats and social democrats, the mixed economy is a form of capitalism where most industries are privately owned with only a small number of public utilities and essential services under public ownership. In the post-war era, European social democracy became associated with this economic model, as evidenced by the implementation of the welfare state. As an economic ideal, mixed economies are supported by people of various political persuasions, typically centre-left and centre-right such as Christian democrats or social democrats.
There is not only one definition of a mixed economy. However, there are generally two major definitions, one being political and the other apolitical.
The political definition of a mixed economy refers to the degree of state interventionism in a market economy, portraying the state as encroaching onto the market under the assumption that the market is the natural mechanism for allocating resources. The political definition is limited to capitalistic economies and precludes an extension to non-capitalist systems, being concerned with public policy and state influence in the market. On the other hand, the apolitical definition relates to patterns of ownership and management of economic enterprises in an economy.
The apolitical definition of mixed economy strictly refers to a mix of public and private ownership of enterprises in the economy and is unconcerned with political forms and public policy.
The term mixed economy arose in the context of political debate in the United Kingdom in the postwar period, although the set of policies later associated with the term had been advocated from at least the 1930s. Supporters of the mixed economy, including R. H. Tawney, Anthony Crosland and Andrew Shonfield were mostly associated with the Labour Party, although similar views were expressed by Conservatives including Harold Macmillan. Critics of the mixed economy, including Ludwig von Mises and Friedrich von Hayek, argued that there can be no lasting middle ground between economic planning and a market economy and any move in the direction of socialist planning is an unintentional move toward what Hilaire Bloc called “the servile state”.
In the apolitical sense, the term mixed economy is used to describe economic systems which combine various elements of market economies and planned economies. As most political-economic ideologies are defined in an idealized sense, what is described rarely—if ever—exists in practice. Most would not consider it unreasonable to label an economy that, while not being a perfect representation, very closely resembles an ideal by applying the rubric that denominates that ideal. When a system in question, however, diverges to a significant extent from an idealized economic model or ideology, the task of identifying it can become problematic. Hence, the term mixed economy was coined. As it is unlikely that an economy will contain a perfectly even mix, mixed economies are usually noted as being skewed towards either private ownership or public ownership, toward capitalism or socialism, or toward a market economy or command economy in varying degrees.
Catholic social teaching
Jesuit author David Hollenbach has argued that Catholic social teaching calls for a “new form” of mixed economy. He refers back to Pope Pius XI’s statement that government “should supply help to the members of the social body, but may never destroy or absorb them”. Hollenbach writes that a socially just mixed economy involves labour, management and the state working together through a pluralistic system that distributes economic power widely.
However, subsequent scholars have noted that conceiving of subsidiarity as a “top-down, government-driven political exercise” requires a selective reading of 1960s encyclicals. A more comprehensive reading of Catholic social teaching suggests a conceptualization of subsidiarity as a “bottom-up concept” that is “rooted in recognition of a common humanity, not in the political equivalent of noblese oblige“.
Although fascism is primarily a political ideology that stresses the importance of cultural and social issues over economics, fascism is generally supportive of a broadly capitalistic mixed economy. Fascism supports a state interventionism into markets and private enterprise, alongside a corporatist framework referred to as the “third position” that ostensibly aims to be a middle-ground between socialism and capitalism by mediating labour and business disputes to promote national unity. 20th century fascist regimes in Italy and Germany adopted large public works programs to stimulate their economies, state interventionism in largely private-sector dominated economies to promote re-armament and national interests. Scholars have drawn parallels between the American New Deal and public works programs promoted by fascism, arguing that fascism similarly arose in response to the threat of socialist revolution and similarly aimed to “save capitalism” and private property.
In the early post-war era in Western Europe, social democratic parties rejected the Stalinist political and economic model then current in the Soviet Union, committing themselves either to an alternate path to socialism or to a compromise between capitalism and socialism. In this period, social democrats embraced a mixed economy based on the predominance of private property, with only a minority of essential utilities and public services under public ownership. As a result, social democracy became associated with Keynesian economics, state interventionism and the welfare state while abandoning the prior goal of replacing the capitalist system (factor markets, private property and wage labor) with a qualitatively different socialist economic system.
Mixed economies understood as a mixture of socially owned and private enterprise have been predicted and advocated by various socialists as a necessary transitional form between capitalism and socialism. Additionally, a number of proposals for socialist systems call for a mixture of different forms of enterprise ownership including a role for private enterprise. For example, Alexander Nove’s conception of feasible socialism outlines an economic system based on a combination of state-enterprises for large industries, worker and consumer cooperatives, private enterprises for small-scale operations and individually owned enterprises.
The social democratic theorist Eduard Bernstein advocated a form of mixed economy, believing that a mixed system of public, cooperative and private enterprise would be necessary for a long period of time before capitalism would evolve of its own accord into socialism.
The People’s Republic of China adopted a socialist market economy which represents an early stage of socialist development according to the Communist Party of China. The communist party takes the Marxist–Leninist position that an economic system containing diverse forms of ownership—but with the public sector playing a decisive role—is a necessary characteristic of an economy in the preliminary stage of developing socialism.
The Socialist Republic of Vietnam describes its economy as a socialist-oriented market economy that consists of a mixture of public, private and cooperative enterprise—a mixed economy that is oriented toward the long-term development of a socialist economy.
Mix of free markets and state intervention
This meaning of a mixed economy refers to a combination of market forces with state intervention in the form of regulations, macroeconomic policies and social welfare interventions aimed at improving market outcomes. As such, this type of mixed economy falls under the framework of a capitalistic market economy, with macroeconomic interventions aimed at promoting the stability of capitalism. Other examples of common government activity in this form of mixed economy include environmental protection, maintenance of employment standards, a standardized welfare system and maintenance of competition.
Most contemporary market-oriented economies fall under this category, including the economy of the United States. The term is also used to describe the economies of countries that feature extensive welfare states such as the Nordic model practiced by the Nordic countries which combine free markets with an extensive welfare state.
The German social market economy is the economic policy of modern Germany that steers a middle path between the goals of social democracy and capitalism within the framework of a private market economy and aims at maintaining a balance between a high rate of economic growth, low inflation, low levels of unemployment, good working conditions, public welfare and public services by using state intervention. Under its influence, Germany emerged from desolation and defeat to become an industrial giant within the European Union.
The American School is the economic philosophy that dominated United States national policies from the time of the American Civil War until the mid-twentieth century. It consisted of three core policy initiatives: protecting industry through high tariffs (1861–1932; changing to subsidies and reciprocity from 1932–1970s), government investment in infrastructure through internal improvements and a national bank to promote the growth of productive enterprises. During this period, the United States grew into the largest economy in the world, surpassing the United Kingdom by 1880, although not the British Empire.
Mix of private and public enterprise
This type of mixed economy specifically refers to a mixture of private and public ownership of industry and the means of production. As such, it is sometimes described as a “middle path” or transitional state between capitalism and socialism, but it can also refer to a mixture of state capitalism with private capitalism.
Examples include the economies of China, Norway, Singapore and Vietnam—all of which feature large state-owned enterprise sectors operating alongside large private sectors. The French economy featured a large state sector from 1945 until 1986, mixing a substantial amount of state-owned enterprises and nationalized firms with private enterprise.
Following the Chinese economic reforms initiated in 1978, the Chinese economy has reformed its state-owned enterprises and allowed greater scope for private enterprise to operate alongside the state and collective sectors. In the 1990s, the central government concentrated its ownership in strategic sectors of the economy, but local and provincial level state-owned enterprises continue to operate in almost every industry including information technology, automobiles, machinery and hospitality. The latest round of state-owned enterprise reform initiated in 2013 stressed increased dividend payouts of state enterprises to the central government and mixed ownership reform which includes partial private investment into state-owned firms. As a result, many nominally private-sector firms are actually partially state-owned by various levels of government and state institutional investors; and many state-owned enterprises are partially privately owned resulting in a mixed ownership economy.
Mix of markets and economic planning
This type of mixed economy refers to a combination of economic planning with market forces for the guiding of production in an economy and may coincide with a mixture of private and public enterprise. It can include capitalist economies with indicative macroeconomic planning policies and socialist planned economies that introduced market forces into their economies such as in Hungary.
Dirigisme was an economic policy initiated under Charles de Gaulle in France, designating an economy where the government exerts strong directive influence through indicative economic planning. In the period of dirigisme, the French state used indicative economic planning to supplement market forces for guiding its market economy. It involved state control of industries such as transportation, energy and telecommunication infrastructures as well as various incentives for private corporations to merge or engage in certain projects. Under its influence, France experienced what is called Thirty Glorious Years of profound economic growth.
Hungary inaugurated the New Economic Mechanism reforms in 1968 that introduced market processes into its planned economy. Under this system, firms were still publicly owned but not subject to physical production targets and output quotas specified by a national plan. Firms were attached to state ministries which had the power to merge, dissolve and reorganize them and which established the firm’s operating sector. Enterprises had to acquire their inputs and sell their outputs in markets, eventually eroding away at the Soviet-style planned economy.
In 2010, Australian economist John Quiggin wrote: “The experience of the twentieth century suggests that a mixed economy will outperform both central planning and laissez-faire. The real question for policy debates is one of determining the appropriate mix, and the way in which the public and private sectors should interact.”
Numerous economists have questioned the validity of the entire concept of a mixed economy when understood to be a mixture of capitalism and socialism.
In Human Action, Ludwig von Mises argued that there can be no mixture of capitalism and socialism—either market logic or economic planning must dominate an economy. Mises elaborated on this point by contending that even if a market economy contained numerous state-run or nationalized enterprises, this would not make the economy mixed because the existence of such organizations does not alter the fundamental characteristics of the market economy. These publicly owned enterprises would still be subject to market sovereignty as they would have to acquire capital goods through markets, strive to maximize profits or at the least try to minimize costs and utilize monetary accounting for economic calculation.
Classical and orthodox Marxist theorists also dispute the viability of a mixed economy as a middle ground between socialism and capitalism. Irrespective of enterprise ownership, either the capitalist law of value and accumulation of capital drives the economy or conscious planning and non-monetary forms of valuation ultimately drive the economy. From the Great Depression onward, extant mixed economies in the Western world are still functionally capitalist because they operate on the basis of capital accumulation.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder TBIL.co STATX Fund.