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.