Mixed Economy: Definition, Pros, Cons, Examples

Definition: A mixed economy is a combination of market, command, and traditional economic systems. It has the critical advantages of all three with few of the disadvantages. Mixed economies have three of the six characteristics of a market economy. The first is the protection of private property. They allow the free market and laws of supply and demand to determine prices. Third, they are driven by the motivation of individual self-interest.

Mixed economies have a command economy in strategic areas. Most allow the federal government to safeguard the people and the market itself. That usually includes the military, international trade, and national transportation. An increased governmental role depends on the priorities of the citizens. Many mixed economies also allow centralized planning and even government ownership of key industries. These include aerospace, energy production, and even banking. Some mixed economies encourage the government to manage health carewelfare, and retirement programs.

Also, most mixed economies follow traditions that are so ingrained that they may not even be aware of it. For example, many still fund and give power to royalty or emperors.

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Advantages

Mixed Economy
Mixed economies encourage innovation. That's one of the advantages of market economies. Photo: Alexey Dudoladov/Getty Images

A mixed economy has all the advantages of a market economy. First, it can efficiently allocate goods and services where they are needed. It allows prices to measure supply and demand.

Second, it rewards the most efficient producers with the highest profit. That means customers are getting the best value for their dollar. Third, it encourages innovation to meet customer needs more creatively, cheaply or efficiently.

Fourth, it automatically allocates capital to the most innovative and efficient producers. They, in turn, can invest the capital in more businesses like them.

A mixed economy also minimizes the disadvantages of a market economy. A larger governmental role allows fast mobilization in priority areas, such as defense, technology, or aerospace. The expanded governmental role can also make sure less competitive members are cared for and valued. That overcomes on of the disadvantages of a pure market economy. It only rewards those that are most competitive or innovative, leaving others at risk. 

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Disadvantages

Disadvantages of a Mixed Economy
The Federal government bailed out banks that had taken on too much risk. (Photo: Getty Images)

A mixed economy can also take on all the disadvantages of the other types of economies, depending on which characteristics are emphasized.

For example, if it is too much free market, it can reward the competitive members of society and leave others without any government support.

On the other hand, central planning might do extremely well in mobilizing forces for defense, creating a government-subsidized monopoly or oligarchy system. That could also put the country into debt, slowing down economic growth in the long run. Businesses that are already successful can lobby the government for more subsidies and tax breaks. The government's role of protecting the operation of the free markets might mean not enough regulation. That leads to taxpayer-funded bailouts of businesses that took on too much risk. 

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Examples

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An X-47B Unmanned Combat Air System (UCAS) demonstrator is towed into the hangar bay of the aircraft carrier USS George H.W. Bush (CVN 77) May 13, 2013 in the Atlantic Ocean. Photo by Mass Communication Specialist 2nd Class Timothy Walter/U.S. Navy via Getty Images

The United States is a good example of a mixed economy that was established by its Constitution. It protects ownership of private property. It also limits government interference in business operations. That promotes the innovation that's a hallmark of a market economy.

At the same time, the U.S. Constitution encourages the government to promote the general welfare. That creates the ability to implement aspects of a command economy where needed.

The Constitution also protects the rights of traditional groups to practice their beliefs. For example, the Amish in Pennsylvania continue their traditional economy.

Most of the world's major economies are now mixed economies. It would be difficult to avoid, thanks to globalization. A country's people are best served through international trade. That includes  oil from Saudi Arabia, consumer products from China, and food from Mexico. When a country encourages its businesses to export, it must give up some control to free market forces.

Second, the global economy is primarily free-market based. That's because no one government controls it. World organizations have implemented some regulations and agreements. But no world government has the power to override a country's sovereignty and create a global command economy.

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More on a Market Economy

Market Economy
The U.S. stock market shows how a free market economy works. (Photo: Spencer Platt/Getty Images)

A market economy has six defining characteristics. The United States has the six characteristics of a market economy. First, ownership of private property is protected by law. Second, everyone is free to live, work, produce, buy, and sell whatever they choose. Third, the buying and selling of goods and services, including employment, are driven by self-interest. Sellers try to get the highest price, while buyers try to get the best value for their money.

Fourth, competition is protected by law. Fifth, prices are allowed to float freely. And sixth, the role of government is primarily to make sure that the market is protected, and that everyone has free access to it. Congress passes regulations to make sure no one is unfairly manipulating the market. The Constitution protects the free press to ensure everyone has equal access to information. More

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More on the Command Economy

Command Economy
Bow of ice breaker w/ USSR sign, Baffin Island. Credit: Yvette Cardozo PREMIUM/Getty Images

Many aspects of the U.S. economy follow the characteristics of a command economy. First, there is an annual federal budget that outlines the government's priorities. That's takes the place of a central plan.

Second, Congress guides the allocation of resources. Taxes discourage some activities and subsidies encourage others. Third, government spending outlines the priorities for the country. For example, U.S. military spending increased after the 9/11 terrorist attacks. Fourth, the government owns a monopoly in important national industries. These include NASA, the interstate highway system, and defense. Fifth, the federal government uses laws and regulations to support economic priorities. More

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More on the Traditional Economy

traditional
Many emerging market countries are traditional economies. Photo: Eric Thayer/Getty Images

The United States is moving further away from a traditional economy. But tradition still guides many economic policies. First, a traditional economy is based on agriculture, hunting and fishing.  American traditions support the family farm. That has led to millions in federal subsidies,even though today's U.S. agribusiness is run by a few global corporations. Laws and treaties also protect the fishing industry. Tradition also supports hunting, even though it is no longer needed as a primary source of food for America. Laws and permits protect the right to hunt. More

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