Sunday, 25 January 2015

Pros and Cons: Mixed Economy

A mixed economy is the most common in today's world, and seems to be the most efficient balance of private and state participation in the economy. It is positioned between a complete command economy (in which the economy is totally run and planned by the governing authorities), and a totally laissez-faire, free market economy in which the government has little/no role, rather private companies and individuals operate everything (though no economy has yet fully devoted itself to this, not even the US).

The concept of a mixed economy is by no means a recent discovery, but perhaps its greatest proponent was John Maynard Keynes. Arguably the greatest economist of the 20th century, much of his work investigating the potentially positive effects of state intervention in the economy was particularly relevant in times of crises- FD Roosevelt, US President who led the nation's recovery out of the Great Depression of the 1930s attributed much of his policy decisions to Keynes.

So, let's look deeper into the idea of mixed economy by evaluating the pros and cons of a market economy.

PRO- Monopoly.

Government involvement in the economy can prevent market failures, such as the emergence of monopolies (for more information on these see this previous article). This is largely done by government regulation; the UK has 'competition laws', designed to prevent massive business blocking smaller ones from entering a market. This means companies that, for example, block competition by setting rock bottom prices for their products that they know their smaller competition won't be able to maintain (a practice known as predatory pricing), can be prosecuted and penalised by authorities. Shell and Esso were two fuel companies accused of this malpractice in 2013.

The breaking up/prevention of monopolies means that all businesses in the economy are able to compete on a level playing field, and ensures that the most efficient and popular businesses are those that succeed most.

CON- Monopoly.

There is another side of this argument, however; that is that certain types of government involvement in a mixed economy can itself create monopolies. This was a significant argument behind the privatisation of the Royal Mail; despite its supposed 'loss of monopoly' in 2005 when other competitors were allowed to enter the market, the state-owned Royal Mail, though slightly weakened, maintained its domination of the postal market. Monopoly can encourage complacency- and the Royal Mail was accused of gross inefficiency when the idea of privatisation was being kicked about.

Some argue that state ownership leads to sector monopolies- the energy market a couple of decades ago was another example- and thus reduce competition and innovation. The private sector on the other hand is seen to encourage competition, as long as the barriers to entry are low.

PRO- Motives.

The actions of the government in an economy hold an advantage over those of private entities in that the government is directly accountable to its people. The government is less likely to act against the wishes of its citizens because if it does so it is far less likely to be re-elected and maintain power.

Furthermore, the profit-making motive is not ingrained in state institutions as it is in the private sector. State institutions such as the NHS and (formerly) the Royal Mail were created not to make the government money, but rather to serve the people of Britain; ultimately creating a service more helpful to the patient. Compare the NHS with private health systems across the world; the lack of a profit motive is the reason why, for example, no doctor in Britain will advise for extra treatments/medicines solely to extract money from you, and it is a major reason why the British healthcare is renowned across the world.

Open access to healthcare for all citizens has been of huge benefit to Britain; looking at the masses of debt accumulated by people across the world due to circumstances out of their control (such as accidents), one can see how effective and beneficial for the people the NHS is. It allows the poor to have access to healthcare, and thus prevents the socio-economic gap in Britain increasing to the extent of countries such as the USA.

The governments' motives to maintain favour with the public and genuinely serve the public rather than make profits makes it often more effective in improving the lives of the citizens.

CON- Motives.

One the other side of the coin, however, government economic policy is occasionally branded as short-termist, unsustainable electioneering. Gaining favour with the voting public can often be done via short term economic boosts. The MacMillan government of the 1950s is an example of this; two major tax cuts in 1954 and 1959 (just before elections) of a combined value of £504m certainly gained favour with the people, but this ultimately contributed to a massive deficit of over £800m five years later. Had the tax cuts not been made, it is likely the economic situation later would not be so dire; but the desire of the government to instantly win votes led to pursuit of short term policies that ultimately damaged the economy as a whole more than it benefited it.

Libertarians argue this as a reason why the government should have little/no role at all in economic management; that the primary motive of a politician is to be re-elected rather than benefit the country, reasoning that certainly has credence. Whether there is a better alternative or not though, remains an open question.

PRO- Investment.

Linked to the earlier pro of motives, one of JM Keynes' major contributions to the arena of public economic policy was that the government should intervene in times of trouble to invest in employment, through state-led projects. These could be anything, such as a development of infrastructure (hiring people to design and build roads, public buildings, etc.), or more employment in publicly owned entities like the NHS.

For private companies chasing profits, the best way to do so is often not to try to increase income but to decrease expenditure- and a way to do this is to cut down on employment. In recent times this has not just come in the form of job cuts but outsourcing also; the cheap labour available throughout the world has encouraged companies to cut on jobs domestically and save money by hiring labour elsewhere.

This is something the government would be less prepared to do- Britain's recovery from the 1930s crisis showed this, as the government invested more in jobs in order to get out of its hole, upon Keynes' advice. More people found work, boosting spending again and eventually bringing the economy into recovery.

CON- Taxes

Taxes, the bane of any proponent of 'laissez-faire'. More state intervention in the economy, of course, requires greater investment from the government, which largely comes from tax revenues. Therefore an argument against intervention is that the more there is, the more people must be taxed- and higher income tax for example, is claimed to be a cause of a reduction in motivation to work, as an individual will see a large proportion of the money he earns go to the taxman.

Therefore libertarians often argue that less state intervention in the economy allows taxes to fall, increasing peoples' motivation to work as they see more of the money they earn go directly to them.

Mohammad Lone Editor