There are certain advantages (merits) and disadvantages (demerits) of mixed economy which may be discussed as follows :
A mixed economy is supposed to possess certain advantages over other forms of economic systems.
1. Economic stability and proper allocation of resources :
We have already analyzed how a mature capitalist economy suffers from economic instability and unemployment. A mixed economy remedies this through state regulation of the economy, and planning. Through economic planning the resources of the economy are utilized in the more efficient and optimal manner. Production is rationally organized. Possibilities of overproduction or underproduction are eliminated. The rigours of unemployment and inequalities are minimized. This enables a mixed economy to enjoy the basic advantages of a socialist economy.
2. Advantages of free initiative and enterprise :
In a mixed economy the various capitalistic institutions such as private property, competition, profit motive and freedom of enterprise, etc., have an adequate scope. There is adequate incentive for hard work and increased productive efficiency and efforts. The operation of price mechanism provides an element of dynamism to the economy.
3. Preservation of freedoms :
A mixed economy is based on democratic principles. It does not suppress the civil, cultural, political or economic freedoms of its members. Consumers' freedom is more or less intact. Private enterprise exists, though somewhat regulated. There is freedom of choice of occupation, it is sometimes contended that planning and freedom are not compatible with each other. But a mixed economy incorporates within itself democratic planning as well as freedom. The two are combined to promote the social interest.
In a mixed economy it is believed that no democracy can thrive in the face of extremes of economic inequalities and exploitation of the common masses. Laissez-faire today stands discredited as it gives are to social injustice. So a reasonable degree of state control over the economy and its wise guidance would promote social justice and strengthen democracy. Although state regulation of the economy may apparently seem to curtail some of the economic freedoms, such wholesome restraint however would only revitalise democracy.
A mixed economy provides us with an economy of checks and balances. As Louis Fischer held, "the mixed economy is one in which the state can check private capital, in which private capital can balance the state and in which citizens organised as consumers or producers, with, little or no property, can check and balance both the state and capital."
4. Rapid economic development :
In the underdeveloped economies, the mixed economic pattern accelerates economic development. Particularly in the face of absolute poverty, colossal unemployment and glaring inequalities in an underdeveloped economy, public ownership of the means of production is indispensable for economic growth and social justice. If economic development in these developing economies is to be initiated through the private sector only, it would be a time consuming process. Besides, resources may not necessarily flow into the desired channels.
Hence it is imperative that the state, should come forward to play a vital role. This explains the importance of the public sector. But the state seeks the co-operation of the private sector, since it possesses adequate resources, expertise and experience. The state can exclude the private sector at its own peril. Together the public and private sectors can bring about rapid economic development thus ameliorating the economic conditions of the people.
5. Foundation of international coexistence :
A mixed economy is based on an amalgam of private enterprise and public enterprise. There is coexistence of the private sector with the public sector. Such peaceful economic coexistence of the two rival sectors at home paves the way for political coexistence abroad. It makes our attitude tolerant towards others. It teaches the rudiments of peaceful coexistence. "In the international sphere, the principle of coexistence has contributed much to the creation of peace and harmony. In the national field, the same principle of coexistence between different sectors of the economy is applied through mutual understanding and spirit of tolerance, so that a balanced and uniform social progress is assured."
Thus we find that both in the capitalist as well as developing economies the principle of mixed economy has become extremely popular. It is rightly considered as a golden link between capitalism and socialism.
Demerits of Mixed Economy :
A mixed economy suffers from^ertain demerits which may be discussed below :
1. Conflict between the two sectors :
Mixed economy represents a compromise between capitalism and socialism and thereby it aims at availing the advantages of both the worlds. This goal may be realised only when there is perfect coordination and understanding between these two sectors. But in reality there may take place frequent collusions between them. This would only give rise to further bitterness and non-co operation. In course of time the private sector may feel suffocated because of the step-motherly treatment meted out to it.
The two actors do not operate under similar conditions. The private sector feels jealous of the privileges enjoyed by the public sector. The public sector tries to shift the responsibility of its incompetence and inefficiency to the mischiefs of the private sector. In a world of mistrust and mutual accusations none can function effectively. The marriage between two strangers is likely to prove unhappy.
2. Unreal :
The mixed economy is based on two irreconcilable economic ideologies, which are diametrically opposed to each other. As has been succinctly put: "In the one case the object of production is profit, in the other case the object is the product itself. In trying to combine these two opposite ideas the mixed economy may find itself doing less than justice to either. The regulation of profits may leave "private enterprise apathetic, while public enterprises they become unmindful of their social purpose and work on the same principles as private enterprise "
The mixed economy has been criticized to be a contradiction in terms. For instance, F.A. Hayek has held the view that there cannot be some middle way between atomistic competition and central direction. Since in a mixed economy there would be a combination of competition and central direction, a mixed economy cannot function properly to quote him: Both competition and central direction become poor and inefficient tools if they are incomplete; they are alternative principles used inefficient tools if they are incomplete, they are alternative principles used to solve the same problem, and a mixture of the two means that neither will really work and that the result will be worse than if either system had been consistently relied upon."
3. Short lived nature :
From the above it follows that a mixed economy runs the risk of being short lived in nature. In course of time fierce struggle ensues between the two sectors for supremacy. If the private sector proves predominant the state may fail to regulate it properly. The public sector may lose its vitality. In that case the mixed economy may be converted into a capitalist one. On the other hand if the public sector becomes all-pervasive and all-powerful it may just strangulate the private sector. Then the mixed economy would relapse into a socialist one.
4. Sign of weakness :
According to some critics a mixed economy itself indicates a diseased state of the capitalist economy. Attempts are made to revive it through the therapy of "Socialisation of investments". In this sense a mixed economy is only a diseased phase of the capitalist economy. So it has been called as "Capitalism in the Oxygen Tent". A mixed economy in that sense is "adulterated capitalism".
5. Endangers freedom :
A mixed economy may ultimately lead to abridgement of individual freedoms. It is feared that imposition of planning and other controls on the economic life may lead to totalitarianism where the individual would lose his identity. This has led Ayn Rand to observe : "A mixed economy is merely semi-socialised economy which means a semi-enslaved society." Three decades ago Hayek had observed that planning was a road to serfdom. The public sector Leviathans may misuse monopoly power enjoyed by them.
6. Inefficient public sector :
In a mixed economy the public sector usually has a record of poor performance. It suffers from inefficiency, redtapism, corruption and waste. Consequently the public sector has failed either to increase the volume of production or reduce costs.
7. Failure to eradicate economic fluctuations :
The principle of mixed economy had become popular in the capitalist countries as it was considered to be a suitable method to eradicate economic fluctuations. But somehow the problem still persists. Economic fluctuations can be removed only when the entire economy is fully covered by the central plan. But the type of regulation that is imposed on the private sector in a mixed economy leaves much to be desired.