The Purpose of Mixed Economies - YouTube

Over the past few tutorials, we have been  discussing different economic systems.  

But there’s a common misconception amongst the  public regarding the economic systems that certain  

countries possess. For example, you’ll often  hear that Cuba is a “communist” country, or  

that Denmark is a “socialist” country, or that the  United States is a “capitalist” country. However,  

as we mentioned earlier in the series, all of  those words are misleading. In reality, nearly  

every single country in the world has an economic  system that blends a market system with components  

of government involvement. To better understand  what that means, let’s examine mixed economies. 

First, some review. A mixed economy is  a combination of a traditional economy,  

a market economy, and a command economy.  Sometimes the government steps in to  

guide the factors of production. Sometimes  it’s all about individuals and businesses.  

Sometimes it’s even based on traditional values. But why does the government get involved in an  

economy? Simply put, because markets aren’t  perfect. Early free market proponents like  

Adam Smith believed that if it was simply  left alone, a free market would create the  

most benefits for both consumers and producers.  They favored a laissez-faire economic policy,  

or a policy of just letting things take their  own course in markets, without government  

intervention. However, even Smith admitted that  sometimes government involvement was necessary. 

And ever since, government intervention  in economies has increased, for several  

specific reasons. First, certain needs in a modern  society cannot be easily met in a marketplace.  

For example, how well could a free market provide  a society with highway systems, or a military?  

It’s a highly impractical notion. Second, most  economists now argue that at least some sort  

of government intervention is necessary today to  help lift up those in poverty. There is no perfect  

solution to fight poverty, but the goal of equity  remains the same. For example, to help members of  

a society receive a basic education, governments  in many countries provide public schools.  

Third, governments often need to play  a role in an economy by protecting  

property rights. This means that politicians must  pass laws and enforce laws to protect property.  

Generally, there are two types of  property that governments try to protect:  

private property and intellectual property.  Private property is property owned by individuals  

or companies, as opposed to being owned by the  government or the general public. Intellectual  

property is any work or invention which is the  result of creativity that one has control of.  

For example, a song is the intellectual  property of the composer who wrote it.  

Fourth, governments get involved in an economy to  make sure that trade remains fair. For example,  

a government may step in if there’s a monopoly,  when one seller dominates a market. And finally,  

governments need to fund public projects that  benefit all of society, and they do this primarily  

by taxing individuals and businesses. A tax is  simply any required payment to the government.  

We will learn more about the different  types of taxes in a future tutorial. 

For all these reasons, pretty much every  economist agrees that a mixed economy  

is the economic system that most strongly benefits  a society. Again, this is why it’s the most common  

type of economy around the world by far. When  looking at a country’s economy, it’s most  

sensible to look at where its economy falls on a  spectrum between a complete command economy and  

a pure market economy. Therefore, Cuba might be  somewhere around here, Denmark might be somewhere  

around here, and the United States around here. Ultimately, however, the challenge is finding  

the balance between government involvement and  economic freedom. To do this, every society must  

first assess its values and goals. We must answer  difficult questions like “What are you willing to  

give up in order to eradicate homelessness?” or  perhaps “What is the best way to tax citizens?” 

To illustrate a mixed economy, let’s see how a  simple, everyday transaction can shatter typical  

assumptions. Take the example of buying a gallon  of milk in the United States. First, that farmer  

who owns the cows that produce the milk had to pay  taxes. In addition, the United States Department  

of Agriculture regulates the dairy industry,  requiring certain safety and sanitation standards.  

Next, before the milk is sold in stores, it  has to go through the pasteurization process.  

In other words, it’s illegal to sell raw milk  in the United States due to the possibility of  

containing harmful microorganisms. Next, the  company that pasteurized and bottled the milk  

also has to pay taxes, as well as the grocery  store that sells the milk to you. And finally, you  

have to pay a sales tax to your local government  when buying the milk. Such a simple transaction,  

on the surface, seems like the magic of a free  market. However, behind the scenes, the government  

is actually quite involved. To what degree  should a government be involved in an economy?  

There is quite a lot to discuss here, so let’s  move forward and continue examining this concept.