Question

In a mixed economy, the features of both the capitalist and the socialist economies are included. Substantiate.

Answer 1

Instructions: We can approach this question in two simple steps. Firstly, we will try to understand what is a capitalist economy and a socialist economy. Thus, we will understand the difference between the two.

Next, we will try to understand how a mixed economy combines elements of both capitalist and socialist economies.

Solution: First, let us understand what capitalism means.

Capitalism refers to an economic system in which private individuals or businesses own the country’s resources.

The decisions of individuals or firms are taken on the basis of profit maximation. People or firms will tend to take actions that will result in them profiting or making money.

A capitalist economy is also called a free-market economy because of minimal government intervention in the market. The government gives a free hand to the market forces and does not intervene in economic activities.

Thus, an individual is the basic unit of society and he has the freedom of enterprise. He operates in a fair and competitive market with minimal government intervention.

Let us now learn how a socialist economy differs from a capitalist economy.

Socialism refers to an economic system in which the government owns all of the country’s economic resources such as land, labour, capital (money), etc. Thus, since the government owns the country’s resources, it takes all major decisions regarding production and distribution. The government decides which goods to produce, how much to produce and when to produce.

The decisions of the government are taken on the basis of social welfare and not profit maximisation.

A centralised approach towards resource allocation by the government allows for more equitable distribution of resources and a fairer society.

A mixed economy refers to an economic system that combines elements of both free–market economy and socialism.

Although individuals have the freedom of enterprise and ownership of private property is allowed, the government will intervene in certain special circumstances to create a fair society by redistributing income equitably.

Trade protection (when the government protects certain domestic industries from foreign competition), subsidies (when the government provides financial assistance to certain individuals or industries to encourage or help them), tax breaks (when certain industries are exempt from paying tax to the government), etc are all examples of government intervention.

In the present scenario, most economies are mixed economies. Most capitalist economies, including the US economy, have some kind of social security nets relating to public housing and medical care, to create a more equitable society.

Most socialist economies, including Russian and Chinese economies have some elements of capitalism, such as market determined prices and free trade albeit with some degree of regulation.

Most economies in the present world are mixed economies. There are no more purely capitalist or purely socialist economies in the world.

I hope you have all understood how mixed economies combine elements of both capitalist and socialist economies.