More Realistic Systems

More Realistic Systems

A mixed economy is one that is a mix of the two extremes above. Below is a list of the characteristics of these economies. It should be noted, though, that a 'mixed economy' could mean anything depending on the degree of mix. For this reason, it is difficult to answer the 'three questions' specifically, and so I won't bother. Instead, after the Characteristics sub-section, I have written a section looking at some examples of economies with different emphasises on the market/planning split.

Characteristics of this system

  1. Ownership. The government owns some of the country's factors of production publicly and some are owned privately.
  2. Objectives. Again, a combination of the two extremes. The market part of the economy will be motivated by self-interest. Firms will profit maximise, consumers will maximise their welfare and the factor owners will maximise rent, interest and profit. The government, again, has the 'common good' goal. We will see what that entails later.
  3. Free enterprise. Only in the free market part of the economy (the private sector).
  4. The level of competition. Again, the private sector can be quite competitive. It depends on the market structure that prevails in the various industries. In the real world few industries are perfectly competitive. Governments do tend to set up bodies, though, whose job is to make sure that industries do not become too uncompetitive (The Competition Commission and the Office of Fair Trading).
  5. The pricing system. The price mechanism operates in the private sector. Its efficiency depends on how competitive the market structures are. The government run activities, like the NHS and education in the UK, tend to be provided free at the point of use, although there are some charges even in these areas (paying for prescriptions and school lunches)

In the real world it is fairly easy to assess how 'mixed' an economy is. Economists simply look at the percentage of a country's Gross Domestic Product (GDP) that is devoted to government spending.

More Realistic Systems

The USA is often thought of as the economy with the most capitalist or 'free market' model. The statistics bear this out - the government spend just over 30% of GDP. This is one of the lowest figures in the world, and yet the government is still a huge player in the economy. Even in the capitalist centre of the world (the land of the free!), there is a need for a defence system and a system of law. There is a health system and a system of welfare payments, but they are only used as a last resort, or by the poor who have no choice. Those who can afford it have health insurance.

More Realistic Systems

The UK currently devotes about 40% of its GDP to government spending. That extra 10% means that the health service is more comprehensive, as is the welfare state, although it can be argued that both are in decline. The first because the demand for health care grows much faster than the average growth rate of the economy, partly due to the need to introduce new technology as it is invented. The second because of the huge increase in claimants (the unemployed, for example) plus the increase in the number of pensioners relative to those in work. And then there's the transport system!

More Realistic Systems

Many other European governments spend up to 50% of their GDP (France, for example), but the darling of the political left wing (who believe in a caring, spending state) is Sweden, whose government spend almost 60% of its GDP (it was as high as 70% in the mid 90s)! State benefits and pensions are generous; the health service is of a good quality and is free at the point of use; there is automatic retraining for those who lose their job and free child minding facilities for women wanting to go back to work. There are no student loans either!

You are probably saying to yourself at the moment, "Why aren't all countries like Sweden?" Well, all these lovely government provided things do not come cheap. Sweden also has one of the highest tax burdens in the world. This causes problems for incentives (why work that extra hour if you will lose over 50p of ever £1 that you earn?) and lack of foreign investment in Sweden.

The question that governments have to ask themselves is, "Do I want our economy to be like the USA or more like Sweden?" It is difficult to get the mix right. A government never manages to please all the people all of the time. If I was an unemployed person with little spare cash, I think I'd rather live in Sweden, where I'd get free health care and training for a job. If I were rich I'd rather live in the USA; I could afford good health care and a private pension, etc., from my post-tax income and still have money over to enjoy as I wished.

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