Mixed Economic System

What It Means

A mixed economic system combines elements of a planned economy and a market economy. In a planned economy government planners make most of the decisions about the production and distribution of goods and services, while in a market economy such forces as supply (the amount of any good or service that a seller is willing to sell over a range of prices), demand (the amount of any good or service that buyers are willing to buy over a range of prices), and prices make most of these decisions.

In the strictest planned economies the government decides the quantities of all goods to be produced (how much milk and ice cream, how many airplanes and cars, how many computers and telephones). It also determines how these products should be produced and how they should be made available to consumers, given the available materials and labor in the country. The government in such an economic system would also determine which citizens are allowed to buy these products and under what circumstances, and it would be in charge of distributing the proceeds from the sale of these products. All of these economic activities could be tailored to match the society’s goals rather than being determined by uncontrolled forces.

In a strict market economy, by contrast, there would be no government involvement in the production and distribution of goods and services. High prices for any given product (milk, airplanes, computers, and all other items for sale in the economy) would make sellers more eager to supply that item at the same time that buyers would demand it in lesser quantities. Low prices for any given product would reverse these attitudes. By creating a balance between the opposing forces of supply and demand and by sending signals to both sellers and buyers, prices would establish the grounds for making all important economic decisions. Prices would tell sellers what to supply (and in what quantities), and prices would necessitate the most cost-efficient production and distribution methods. The interaction of supply, demand, and prices (rather than a central authority figure) likewise would determine who buys what and who benefits from production and distribution.

Practically speaking, all economies mix qualities from both of these ways of organizing production and distribution. The most famously market-oriented economy in the world, that of the United States, uses central planning to organize production in such areas as national defense, education, and agriculture. Though belief in market forces dominates in the United States and among many economists internationally, other countries in the world have found sustainable combinations of market and planned economic structures that differ greatly from the U.S. model.

When Did It Begin

The earliest human communities employed neither planned nor market economic systems. Instead they relied on tradition to orchestrate the production and distribution of material needs and wants. Traditional economic systems were usually employed by societies dependent on hunting and gathering foods and other necessities that would then be distributed according to inherited rules and hierarchies. Even these relatively pure economic systems, however, might be considered mixed economies, though in a different sense than we use the term today. Instead of a mix between market and planned economies, these societies can be said to have had mixed traditional and planned systems. Rigid traditional hierarchies within a tribe, for instance, might have functioned similarly to a group of central planners organizing the community’s hunting and gathering efforts and distributing the produce of these activities in various quantities to different tribal members.

No one knows exactly when true economic planning, as it is known today, emerged from tradition-based systems, but the impressive accomplishments of early civilizations in Egypt, China, and elsewhere were made possible by a high degree of such planning. Pharaohs in Egypt, for example, forced people away from their traditional occupations and into such endeavors as pyramid building, along with the other, more mundane forms of labor required to build cities. Planned economies overseen by powerful rulers dominated the civilized world through the Middle Ages (which lasted from about 500 to about 1500), but it is unlikely that any of these economic systems relied exclusively on central planners. Marketplaces where merchants and consumers could freely come together to exchange goods and services existed in the earliest planned economies, for instance, and tradition continued to play a major role in organizing society.

Market economies began to overtake planned economies in global importance between the sixteenth and the eighteenth centuries. During this time capitalists (those who owned their own businesses and freely pursued profits) were able to amass money in greater quantities than many aristocrats (those belonging to a small privileged class with inherited wealth), who had depended on central authority figures to ensure their financial well-being. More and more the market system eclipsed central planning as the key to economic development, but even economies that trust market forces most fully, such as the U.S. economy, have always relied on central planning in some areas.

More Detailed Information

Economic systems are classified as traditional, planned, or market-driven depending on how they answer three basic questions: What will be produced? How will it be produced and distributed? And for whom will it be produced and distributed? In any society either traditions, central planners, or market forces take the lead in answering these questions, with far-reaching results for individuals and societies.

Though people generally speak of economies as falling into one of these three basic categories, in reality all nations have mixed economies. Those nations dependent on traditional economies today (usually poorer, less-developed countries) might adopt more planning or more market-based elements in their attempts to modernize, depending on a variety of cultural and other factors. Developed, wealthier nations might be viewed as occupying specific positions on a spectrum that stretches from a pure planned economy at one extreme to a pure market economy at the other. It is often difficult to decide what point along this spectrum a given nation’s economy occupies, and there is often a lack of consensus about this among the nation’s own members.

Many Americans, for example, assume that the United States relies entirely on market forces to determine the size and shape of its economy. In reality the government intervenes significantly (if less than in most developed countries) to answer the what, how, and for whom questions listed above. Like all governments, the U.S. government plans economic activity related to military and other national-defense issues. It also oversees the public educational system and portions of the health-care system (providing health care to elderly and poor people through such programs as Medicare and Medicaid and regulating the pharmaceutical industry through the Food and Drug Administration). These and other government activities are financed with taxes. Though U.S. citizens pay lower taxes than people in most other developed countries, the collection of taxes and the provision of free services in an attempt to meet society’s basic goals interfere with market forces. There has been and perhaps always will be debate about what portions of the economy should be influenced by the government and what portions should be left alone. Some Americans believe that the government should play a greater role in economic affairs, while others believe that the United States should move as close as possible to a pure market system.

At the other end of the spectrum, the Soviet Union, which existed from 1922 until 1991, had the best-known example of a planned economy in recent history, and its leaders indeed attempted to plan virtually every aspect of production and distribution. Though central planners were effective at solving production and distribution problems early in the nation’s history, modernization throughout the world made economic decision-making more complex, and planners could not gather and process information as effectively as markets could through their pricing systems. Many people view the collapse of the Soviet Union, caused chiefly by the failings of its planned economy, as proof that planned economies do not work.

It is common for people to believe that there is no middle ground between a market economy and a planned economy, but successful economies with a more even mix than the United States exist. One example is Sweden’s economy. Most Swedish businesses are privately owned and depend on market forces to decide production and distribution issues (as in the United States), but the government intervenes much more broadly in the economy than the U.S. government does. While Sweden’s per capita gross domestic product (the total value of goods and services its economy creates, per person) rivals that of the United States, its taxes are much higher. Approximately 60 percent of all wealth created in Sweden is channeled through the government. This allows the nation to distribute the benefits of its economic activity much more evenly than in the United States and to provide citizens with a wide range of services that a more market-based economy cannot supply. Citizens of Sweden are guaranteed a certain minimum standard of living, and they have access to government assistance in case of emergencies. There is a national health-care system to which all citizens have equal access, parents are allotted much more leave from work to take care of their children than in other countries, and all education up to and including the university level is free.

Recent Trends

Views about the roles that market forces and central planning should play in the U.S. economy shifted periodically during the twentieth century. Bolstered by the economic theories of the British economist John Maynard Keynes (1883–1946), who encouraged government intervention, public sentiment during and after the Great Depression (the severe economic crisis that afflicted market economies in the 1930s, lasting from 1929 until about 1939 in the United States) favored large increases in government planning. The basic idea that the government could and should play a substantial role in assuring the economic well-being of society began to lose influence in the 1970s, when a stagnant U.S. economy was blamed on the very government intervention that had helped the country out of the Great Depression. The 1980s saw Americans, led by conservative economists and politicians, embrace ideologies calling for a more purely market-based economy. Though these views were moderated somewhat in the 1990s, the idea of large-scale government planning remained out of fashion into the early twenty-first century. In general Americans were more likely, during this time, to distrust government planning of economic matters than were the citizens of other wealthy countries.