Market socialism and mixed economy are very similar economic models that combine elements of the capitalist and the socialist approaches. As such, in order to understand their main features, we need to identify the primary characteristics of capitalism and socialism – the two theories on which mixed economy and market socialism are based upon.
Socialism is an economic, political and social theory that advocates for collective ownership of the means of production. According to this paradigm, the government should largely interfere in the economic sphere in order to promote the redistribution of goods and to control the production process. In a socialist system, there is no space for private property and none has private control over resources and means of production.
Capitalism is an economic system organized around private property and corporate (or private) ownership of goods and means of production. Within the capitalist system, prices are determined by competition in a free market and the government is not involved in the economic sphere. Capitalism prioritizes individual rights, corporate competition and private property.
If capitalism and socialism are at opposing ends of a continuum, market socialism and mixed economy are situated somewhere in the middle – with market socialism leaning more towards the socialist side and mixed economy more towards the capitalist end.
Market socialism is an economic system in which firms and means of production are owned and controlled by the government. Yet, firms sell their products to consumers in competitive markets. In other words, market socialism is based on social (cooperative or public) ownership of the means of production but within the context of a market economy. When we consider the means of production, we can identify two types of market socialism:
- Cooperative ownership of the means of production in a market economy: employees are at the core of this system. Workers own the enterprises as well as the profits of their operations; and
- Public ownership of the means of production in a market economy: in this case, firms are owned and managed by public authorities while profits are divided among all citizens.
In market socialism, the government is largely involved in the economic sphere but private property is not entirely abolished. In fact, while in socialist systems everything was owned and controlled by the government, in this case, enterprises work within the framework of a competitive market economy.
Examples of market socialist countries in the recent past include:
- The Socialist Federal Republic of Yugoslavia – this is considered the model of market socialism as the economy of the country was based on socially-owned cooperatives and market allocation of the capital;
- Cuba – under the rule of Castro; and
- Certain aspects of public policies in Norway and Alaska – namely, policies regarding common ownership of natural resources.
Market socialism – also known as “liberal socialism” – is a moderate form of classic socialism. In fact, in a market socialist system, the government does not have control over all means of production and does not oversee the entire process of production.
Market socialism revolves around the idea of equilibrium of the market. According to Oskar Lange, the main supporter of such theory, the economic activity should be established and coordinated by a planning board (comprising members of the government). Prices should be set by the government and firms should be directed to produce until the cost of production equals the cost previously foreseen by the board. Subsequently, the board should adjust prices in order to achieve a market equilibrium (equilibrium between supply and demand).
The main problem of this approach is the fact that it is virtually impossible for the government to estimate the exact price of a specific item and of all its parts. Furthermore, while markets equilibrate, they never reach a perfect equilibrium as the economy’s driving forces (i.e. competition, volatility) constantly change and shift.
A mixed economy entails an economic system that combines elements of the capitalist and of the socialist models. In a mixed economic system:
- The government can interfere in the economic sphere;
- Private property is protected;
- The private sector works alongside the public sphere;
- The capital can be used and invested freely;
- The government may nationalize companies;
- The government can establish trade restrictions and subsidies; and
- The government can monitor profit levels.
Not all mixed economies are the same as the involvement of the government into the business sphere can vary. The following countries are mixed economies and the percentages indicate the share of government spending as a percentage of GDP (as of 2012):
- United Kingdom – 47,3%;
- United States – 38,9%;
- France – 52,8%;
- Russia – 34,1%; and
- China – 20%
Today, most economic systems can be considered mixed economies, as it is hard to find pure capitalist or pure socialist (or communist) countries – with few exceptions. In a mixed economic system, the government has limited power but it is allowed to create regulations aimed at preventing market failure. In fact, the government, can:
- Interfere to reduce high prices;
- Interfere in the environmental sphere (i.e. taxation on pollution);
- Provide macro-economic stability;
- Provide support to education and health system; and
- Prevent monopoly.
In a mixed economic system, the government acts as a safety net to protect citizens from the negative effects of capitalism. In fact, while in a capitalist system the wealth is in the hands of few rich individuals, in a mixed economy the government prevents the capital from flowing into few pockets while the rest of the population lives in poverty.
Mixed economic systems are criticized by both socialists and capitalists: socialists believe that the government should allow less market forces in order to prevent inequalities, whereas capitalists argue that the government should interfere less in the economic sphere. Indeed, determining the right degree of governmental intervention can be problematic.
Mixed economy vs market socialism
Mixed economy and market socialism are very similar economic systems built on a combination of capitalist and socialist policies.
- In both systems, government and private companies are involved in the economic sphere – however, in market socialism the government plays a bigger role;
- In both cases, the government interferes in the economic sphere to promote and achieve social equality – yet, this tendency is stronger in market socialism;
- In both systems, private and public sectors work alongside – although private property is more protected in mixed economies;
- In both cases, the government can interfere with subsidies and can nationalize private enterprises; and
- In both systems, the government can act to protect citizens and prevent the abuse of monopoly power.
Despite the similarities, mixed economy and market socialism mainly differ on the degree of interference of the government in the economic sphere. The government plays a bigger role in market socialism, while it mainly acts as “safety net” in the case of mixed economies. Moreover, private property is protected in mixed economies whereas common/cooperative/public ownership remains one of the main features of market socialism. Both systems allow for competition among enterprises but, in market socialism, firms are not (or in very few cases) privately owned.
Market socialism and mixed economy are two economic models that combine elements of both capitalism and socialism. The capitalist perspective prioritizes private property and advocates for a free market where the capital can flow freely. Conversely, socialism strives for an economic system entirely controlled by the government. The State should own all means of production and should redistribute the wealth among all citizens in order to eliminate inequalities.
While market socialism and mixed economy have similar starting points and have many features in common, there are few important differences between the two:
- In market socialism, firms are partially or entirely owned by the state but are allowed to act in a competitive market economy, whereas, in a mixed economy, private property and private firms are protected but work alongside the government; and
- In market socialism, prices are determined by the government and the goal is to achieve market equilibrium while, in a mixed economy, prices are determined by the market’s shifts – although the government can intervene to “protect” citizens and prevent economic inequalities.
The two theories also have many aspects in common:
- They both combine elements of capitalism and socialism;
- They both strive for balance between governmental involvement and free market economy;
- In both cases, the government acts to regulate and limit the expansion of the free market;
- Both theories have been criticized by both capitalists and socialists (for different reasons); and
- In both cases, the government should provide macro-economic stability.
Therefore, the main difference between market socialism and mixed economy lies in the degree of governmental involvement – which remains bigger in market socialism as the government owns many firms, sets the prices, acts to eliminate social inequalities, intervenes to prevent the abuse of monopoly power and monitors the allocation of resources and wealth.