Choosing a Mixed Economy

In the real world, few societies choose an extreme type of economy one that is uniquely based on the market or another that shows constant and generalized government intervention. Most societies tend to choose some sort of mixture of the markets, government intervention and what economists know as traditional production. In their most pure forms, these three types of economies can be described in the following way:

  • In a market economy almost all the economic activity happens in the market, with little or no interference from the government. Due to a lack of government intervention, this system is sometimes called “laissez faire” which is French words that mean, “Stop doing”. 
  • In a planned economy the government directs all the economic activity.
  • In a traditional economy, production and distribution follow traditional ancestral cultures. For example, even when the system of race was abolished in India during the last century, the production of almost all the goods and services could only be made by someone that belonged to the appropriate race. In the same way, in Middle Ages, normally nobody could be part of the government or reach a high military rank unless they were of noble blood.

Due to the fact that almost all modern economies are a mixture of these three pure forms, most of them fit inside the wide category that is commonly denominated as mixed economy. However, with the exception of a few isolated traditional societies, the component of traditional economy has normally diminished in importance because most of the production has gone out to the markets and because the traditional economical restrictions, such as sex and age, are less important now.

The result of this is that now almost all the mixed economies are a mixture of the other two types: planned economy and the economy of the market. The types of mixtures you find in most countries generally show governments that allow their markets to determine what is produced, but it also includes limited interventions to try to improve the result of the independent action of the markets.

The precise nature of the combination depends on the country. While the United Kingdom puts more emphasis on the markets, France is for example, promoting government intervention. On the other side, a few totalitarian states, such as North Korea, still insist on managing pure planned economies as part of their authoritarian regimen.

As the world has seen in the past mainly due to communism, planned economies have been total flops, disasters and failures. It is not even possible for well-intentioned governments to collect enough information about production and distribution to make a good assignation of resources. In fact, they make it become much worse then the price system.

As a result, the extreme opposite, absolutely no government intervention is an attractive option. These types of systems were suggested for the first time a few hundred years ago by French economists in answer to the custom the government had of considerably intervening in the economic activity.