Mixed economy was introduced after laissez-faire. Since the Industrial Revolution in England and elsewhere the world came to be dominated by laissez-faire capitalism. According to the proponents of the laissez-faire philosophy, there should be minimum intervention in economic matters. Since man is always guided by self-interest, people’s efforts at maximization of self-interest would automatically lead in the maximization of production and economic activity, and thus maximization of social welfare. Similarly competition promotes efficiency and productivity.
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Operation of Say’s law precludes any overproduction or’ wider-consumption, ensuring an automatic equilibrium between demand and supply. But these arguments were not fully correct. Capitalism had certain inherent weaknesses, but these hardly attracted any serious attention. Malthus had propounded his theory of gluts. The development of socialist and communist thoughts took place as a direct reaction to the evils of laissez-faire capitalism. Yet capitalism was not put to a serious test. In fact, till the Bolshevik Revolution in Russia there was even no rival system to capitalism.
As we have already discussed earlier, capitalism had an almost uninterrupted run till the twenties of this century. There was all-round economic development under this form of economic organisation. Particularly after the First World War, an overall mood of confidence and optimism prevailed in the major capitalist countries.
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During this era, in 1926, Keynes in his book “The End of Laissez-faire”, wrote, “The world is not so governed from above that private and social interests always coincide. It is not a correct deduction from the principles of Economics that enlightened self-interest always operates in public interest. Nor it is true that self-interest is generally enlightened. More often, individuals acting separately to promote their own ends, are too ignorant or too weak to attain even these.”
The truth of this epoch, making prophecy was tested very soon Airing the great depression that followed. The great depression exposed the serious drawbacks inherent in the working of the capitalist economy. It led to a paradoxical situation when there was poverty in the midst of plenty. There was mass unemployment, and consequent misery and deprivation. It proved that there was no self-adjusting automatic mechanism under capitalism. It also proved that without the deliberate help from the state, smooth economic progress and full employment could not be maintained. The depression dealt a death below to the laissez-faire doctrine of the 19th Century.
While capitalism was languishing under the stress of depression and was gasping for recovery, experiment of socialism in the Soviet Union proved a success, notwithstanding some initial setbacks. Practical operation of socialism without the attendant evils of unemployment, etc., opened up a new vista. People started looking forward to socialism as a better and more efficient alternative, to the inherent ills of capitalism. It was argued by many that through socialization of all the means of production and economic activities, that the evils of capitalism could be remedied.
But socialism is not completely free from evils either. It has its own drawbacks. Socialism lacks some powerful sources of initiative, drive and efficiency which constitute the essence of capitalism. It suffers from the absence of a pricing process. It fails to provide much of economic freedom with which we are accustomed in a capitalist society. So the question was how to retain the good qualities of capitalism while eliminating its-defects.
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Under these circumstances a compromise formula – was evolved between the two opposing systems of traditional orthodox capitalism and totalitarian socialism. As a result of this, a new economic system slowly took shape. It was the mixed economy which was supposed to be more efficient than either capitalism or socialism. The philosophy of mixed economy became still more popular since the Second World War, when many countries in the Third World War initiated the progress of economic development.
Features of Mixed Economy :
For a proper understanding of the concept of mixed economy we may discuss some of its salient features.
1. Public Sector :
An important feature of a mixed economy is the pubic sector. The public sector represents that part of the economy which is managed by the state. Here the state acts as the entrepreneur. The public sector is constantly growing controlling the commanding heights of the economy. The public sector is particularly dominant in those fields of productive activity which necessitate huge investments where prospects of profit are low or which have a long gestation period.
Thus, the railways, transport and communication, posts and telegraphs, power projects, steel plants, atomic energy and other basic heavy industries are usually operated by the state. Similarly, strategic sectors such as banking and finance, etc., also come to be controlled by the state.The mere presence of the public sector is not enough to make a mixed economy. Today there is hardly any economy where there is no public sector, Even in the case of the U.S. in 1975 about 32 per cent of the gross national product passed through the fiscal process of the state.
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Still in the true sense of the term the American economy cannot be called a mixed economy. The size of the public sector must be substantially large controlling the vital sectors of the economy and having an overall dominance over the economy. The public sector must act as an effective engine of economic development. The state assumes an overall responsibility for the general direction of the economy.
2. Private Sector :
In a mixed economy there is also a huge private sector. The private sector includes that part of the economy where the undertakings are owned and managed by the private individuals Agriculture production of consumer goods, retail trade etc. are left to private initiative and enterprise. Unless absolutely essential the state usually does not encroach upon this sector. The private sector is not weak and emaciated. It is not like an oasis in the desert of the state-controlled economy In this sense even in the Soviet Union or Cuba there is a private sector.
But in a mixed economy the private sector operates vigorously It exists, in its own right. The private sector constitutes unmistakably an integral part of the planned economic organisation. But private sector has to operate on socially desirable lines. The private sector must submit to public control. Hence in a mixed economy flexibility and adaptability are the raisen d’ etre of private enterprise.
In a mixed economy in addition to the private sector there may also be a Joint sector and a co-operative sector, particularly in the developing economies.
3. Co-existence of Capitalistic and Socialistic Features :
Under mixed economy there is a peculiar combination of some features of capitalism with some features of socialism. There is a rational compromise between the views of the right and the left. The institution of private property is respected. Profit motive plays an important role in motivating and guiding economic activities. There is unfettered competition. The mechanism has a free operation. On the other hand, we find the presence of economic planning and regulation of the economic activities for the of Social welfare. Economic equality is emphasized. The price mechanism is not allowed to operate completely unregulated. To avoid exploitation of the consumers administered prices also exist. may be resorted to for some essential commodities suppIy at scarce.
4.. Planning :
The most important feature of a mixed economy is economic planning. There is a well-formulated plan mechanism. This plan may be a short-term one or a long-term one. In a mixed economy, the private and public sectors co-exist side by side. If there will be no harmony or coordination between these two sectors, utter economic confusion is likely to prevail in the economy. It is through general economic planning that the economy operates in a smooth and systematic manner. Planning in a mixed economy should not be confused with state regulation of a certain part of the economy.
For example, even in a capitalist economy the state may control certain aspects of the economy or may directly take part in the production of certain goods or services. But such piecemeal interference with the economic life is not planning! Planning in a mixed economy comes to regulate the entire economy by some fixed pattern, to achieve certain predetermined goals. Actually mixed economy has travelled far away from what Keynes had conceived of. Today in a mixed economy comprehensive economic planning is adopted in place of the Keynesian piecemeal planning based on thermostatic control.
A capitalist economy may be compared with a car without a driver, in which the passengers go on turning the steering wheel from time to’ time. But in a mixed economy, there is a regular driver. Here we should remember that planning in a mixed economy is not of the totalitarian type embracing and regulating the entire economic and social life of the country.
5. Regulation and Control of the Private Sector :
In a mixed economy the private sector operates and there is freedom of enterprise. However the state exercises due control over the private sector, through the various monetary and fiscal instruments at its disposal. The paternal band of the all pervading state would be guiding the private enterprise in keeping with the larger interest of the society. In a mixed economy there is no room for completely unregulated private enterprise. Economic activity is organized by free market transactions no doubt. But these are constantly modified, regulated or replaced by taxes, credit control measures, subsides, licensing arrangements, anti-monopoly arrangements and administrative controls. etc.
Maximization of profit is the sole objective of the private sector. It is true. But it cannot maximize profit at the cost of the society. Private self-interest has to be reconciled with social interest, if a conflict between the two interests arises. So to prevent hoarding and black marketing the of pertain may curb It may put a ceiling on the holding of land. Therefore in a mixed economy the state would regulate economic activities in consonance with the welfare objectives of the society. The most important thing to note is that private enterprise must have a public purpose.
6. Promotion of Public Welfare :
A mixed economic system is also a welfare system. Promotion of public welfare is the avowed goal of a mixed economy. So the state makes conscious effort through different measures to promote the welfare of different classes of people. To that effect the state may pursue certain policies to improve the economic lot of the small farmers and agricultural labourers. The State also comes to protect the interests of the labourers through various labour laws. The consumers also are not left at the mercy of private businessmen and traders to be exploited. Economic inequalities are minimized. The economic condition of the poor is improved through various social security measures.
7. Preservation of Freedoms :
Unlike in a totalitarian economy, in a mixed economy all the economic and political freedoms are preserved. A mixed economy is based on democratic principles. Since the private sector is not eliminated, a mixed economy leaves enough scope for private . Freedom of choice of occupation prevails. People are free to save and invest as they like. In a mixed economy there is democratic planning which does not interfere with one’s basic freedoms.
Today throughout the world the mixed economic organisation has ‘become highly popular. As Gruchy has observed the emerging economic system throughout the world exemplifies the principle of neither laissez capitalism, nor full socialism, it is instead what may be best described “public private enterprise economy.”