Types of Economic Systems

Everything you need to know about the types of economic

systems. Economic system determines the nature of state intervention in
the business.
Thus, economic system is an integral part of the business
environment. Economic System consists of “those institutions which a
given people, a nation or a group of nations have chosen or accepted as the
means through which their resources are to be utilized for the satisfaction
of the human wants.”
The three types of economic systems are:-

1. Capitalism 2. Socialism 3. Mixed Economic System.

3 Types of Economic Systems:

Capitalism, Socialism and Mixed Economic System

Types of Economic Systems – Capitalism, Socialism and Mixed Economic

System (With Features, Merits, Demerits and Comparison)
1. Capitalism:
Capitalism is an economic system which can be identified from
private ownership on the means of production and profit motivated
production relations. In the literature, it is also named as free
market economic system or a laissez-faire capitalism. In such an
economic system, each economic entity whether individuals or
companies, own and distribute resources or goods in a way so as to
maximize their respective financial gains.
According to Macmillan Dictionary of Modern Economics,
capitalism is defined as a social and economic system in which
capital assets are mainly owned and controlled by private persons,
labour is purchased for money wages, capital gains accrue to private
owners, and the price mechanism is utilized to allocate capital
goods between uses.
Features of Capitalism:
Following are the important features of capitalism:
i. Economic Freedom:
Economic freedom, as a basic feature of capitalism, has two major
constituents, freedom of choice and freedom of enterprises.
a. Freedom of Choice:
It means that all economic entities, such as consumers, producers
and workers, in the economy are free to make their own economic
decisions, in the backdrop of resource scarcity, with regard to the
resources they own. To a consumer, it means freedom to spend
income on whichever goods and services he may desire.
b. Freedom of Enterprises:
A freedom of enterprises means freedom to a producer to own and
operate any business. As an owner of a business organization, an
individual is free to make any business decision.
Given the economic freedom, price mechanism plays an important
role in the economy according to which a rational individual will
exercise his rights in the best self-interest aimed at profit maximiza-
tion or satisfaction maximization.

ii. Private Ownership:

In a capitalist setup, all the factors of production, as also goods and
services, are privately owned. Such an ownership entitles the
owners to use the resources in a manner in which they are
comfortable with. Obviously, being rational owners, they will deploy
the resources so as to get maximum rewards or earnings.
The right of private ownership will facilitate accumulation of wealth
by all the economic entities which, in turn, will push the economic
growth at aggregate.

iii. Right of Inheritance:

The inheritance means transfer from one generation to next genera-
tion. In the context of capitalism, it means transfer of assets from
father to offspring. The capitalism provide right of inheritance to all
individuals which act as an incentive to accumulate more wealth. It
implies more economic activities and more income generation in a
capitalist economy.
iv. Profit Motive:
In the capitalist economy, every activity will be governed by profit
consideration. A producer will strive for maximum profit, a con-
sumer for maximum satisfaction and a factor for maximum reward.
Obviously, resources will be deployed only in those areas which are
capable of providing maximum return or profit, given their scarcity.
v. Competitive Market:

All the capitalist economics are required to have competitive mar-

kets in which numerous sellers offer their goods and services to
numerous buyers. This will ensure that each seller will make only a
normal profit. Likewise, factor markets are also competitive which
means that each factor will provide its services to a producer who
offers a maximum rewards. Such competitive markets will be self-
regulatory through the invisible hands of price mechanism.
This will encourage firms to always strive for better products and
services for a larger market share or profit. A factor will also strive
for higher productivity for better rewards as factor payments. Thus,
each economic entity will attempt to improve all the time which, in
turn, will push the entire economy up and up.
vi. Price Mechanism:
The price mechanism in a capitalist set up acts as a coordinating
mechanism. It determines price of each and every economic
activity. It works through demand and supply forces to determine
equilibrium price.

vii. No Government Intervention:

The capitalist system does not involve any government interven-
tions. Economic decisions are taken freely on the basis of price
mechanism.

Merits of Capitalism:
i. Promote Economic Growth:
Many economist have argued that capitalism have great ability to
promote economic growth. It leads to a faster GDP growth and
better capacity utilization.
ii. High Living Standards and Hard Work:

The capitalism, while ensuring rapid economic growth, also facili-

tates a high living standard for all the consumers, each one of which
is paid according to their respective contribution in production
process. Thus, it encourages factors to strive for higher productivity
and work hard so as to be rewarded better. With higher income,
they will have higher living standard. The common capitalist
mantra is that anyone can be rich if they work hard enough.
iii. Promote Technological Progress:
Given the intense market competition, rate of technological innova-
tion will be high as each firm will attempt to grab market. In other
words, capitalism will promote innovation and improvement in
production techniques which may either contribute in lowering cost
of production or improve product quality. In the quest of profit,
each firm will try to offer products better than competitors. Thus,
successful innovations will strengthen the competitive strength of a
firm in a capitalist setup.
iv. Stimulate Rate of Capital Formation:
Two of its features, viz., private ownership and law of inheritance,
encourages everyone to own more and more properties, physical as
well as intellectual, and pass it on the next generation after their
death. Such a tendency will stimulate the rate of capital formation
in the economy.
v. Optimum Resource Utilization:

Since all the markets in a capitalist economy are competitive, it

promotes efficient and optimum resource utilization at each level.
Further, the interplay of market forces ensures resource to be
deployed in most productive uses. In brief, thus, capitalism encour-
ages optimum resource utilization.
vi. Emergence of Entrepreneurship:
Give the prevalence of profit prospects in the market, whosoever
may have potential and capabilities will emerge as entrepreneur.
Hence, there will be addition of new entrepreneurs all the time.
vii. Benefit of Automatic Functioning:
The capitalism has a unique advantage of automatic functioning of
the economy. All the economic decisions are based on price mecha-
nism. It, in other words, it means that cost of decision making at
each level is nil.
viii. Sovereignty of Consumers:

Consumer in a capitalist society is accorded a status of king. It

means that all the economic decisions revolve around the consumer.
His decision making regarding what to consume and how much will
significantly influence the firms’ survival and growth.

Demerits of Capitalism:
i. Income Inequality:
It is not true that anyone can be rich if they work hard enough. In
fact, one will grow under capitalism at the cost of others only. It
means that along with every rich, a large army of poor will coexist.
In simple terms, there will be a growing income inequality in a
capitalistic setup.
In fact, it is this demerit of capitalism that has been amply
highlighted by the socialist thinkers including Karl Marx. It has
provided a basis for the evolution of socialist form of economic
system, as an alternative to capitalism.
ii. Economic Instability:

The free market mechanism of a capitalist society is a source of

cyclic behaviour of the economy, commonly known as trade cycle or
business cycle. Such behaviour of economy will produce recession
and inflation in the economy one after other and, hence give rise to
instability in growth.
Both of it will not be good for the economy. A recessionary phase
will result into unemployment causing considerable hardship to the
workers who will be thrown out of their jobs for none of their
mistake. Likewise, an upward economic swing will strengthen infla-
tion again adversely affecting the poor in the economy.
iii. Social Welfare is Ignored:
Another important demerit of the capitalism is that it does not
bother about social welfare. For example, in the process of
allocating resources across products, more allocation is made for
luxury goods rather than basic necessities. It is because of the fact
that the profit prospects are much better in the production of luxury
items as compared to basic necessities.

iv. A Lot of Wasteful Expenditure:

In capitalism, intense market competition force companies to go for
large selling cost though which aggressive sale-promotion is carried
out. Such expenditure is wasteful in nature since it does not add any
value to the products for the consumer. It may simply help compa-
nies to protect their respective market share from competitors. In
fact, capitalism is known for a cut-throat competition implying that
such wasteful expenditure is huge.

Another source of wasteful expenditure comes from unequal income

distribution in a capitalist society. While the rich usually do a lot of
wasteful expenditure, poor do not find enough to meet even basic
necessities and hence starve.

v. Exploitation:
It is not correct to say that a capitalist economy pays everyone as
per their contribution to the production process. The marginal
productivity theory of distribution, tells that every worker is paid a
sum equals to marginal productivity of last unit of labour and not
that of his own. The difference between the own marginal
productivity and that of the last unit is basically the profit of the
producer or exploitation of the worker.

vi. Emergence of Monopoly Market:

Under capitalist society, each firm wants to become bigger and
bigger. They even adopt strategies to throw out competitors out of
market to grab the market share. Obviously, competitive markets
will gradually become oligopolistic or even monopolist in long run.
A monopolist firm produces a lower quantity and charges a higher
price than that of a competitive firm.
Further, in long run, a competitive firm will only earn a normal
profit while a monopolist will always earn a super normal profit.
Again, a monopolist will not mind to sell the same product at
different prices to different customers through price discrimination
while a competitive firm will not be capable of doing so.
Based on all these facts, one can say that the under capitalism the
monopolies will emerge and exploit the workers and consumers
enormously and impoverish the majority of the population as the
monopolists want to maximize their super normal profits.

vii. Undemocratic in Nature:

While it is claim that capitalism is democratic in nature, this is not
true. Rich and powerful, both individuals and companies, usually
have more say in government policy-making as compared to the
poor.

Criticism:
It is not surprising therefore that the capitalism has been severely
criticized by a large number of social scientists including
economists and sociologist, for all the demerits inbuilt in it. So
much so that the capitalism have been completely discarded by the
socialist thinkers. They have propagated altogether a new form of
economic system which is based on equality and social justice. It is
known as socialism.

2. Socialism:
Emergence of socialism has been traced above in the criticisms of
capitalism, specifically the rising income inequality under it which
divides the society into have and have-nots. Further, the root cause
of income inequality in capitalism is the private ownership on
factors of production.
The socialist thinkers have, thus, proposed a socialist mode of
product as an alternative to capitalism or as a solution to all the
demerits of capitalism. To be precise, socialism proposes state
ownership on means of production and maximum social benefits as
profit motive in the production system. The system is looked upon
as need-based rather than profit-based.

Important features of socialism can be highlighted as

follows:
Salient Features of Socialism:
i. Social Ownership on Production Factors:
The basic feature of a socialist economy is that all major means of
production are placed under collective social ownership rather than
under the individual ownership. It thus takeover private property
and transforms them into social property through nationalization.
In simple words, all big industries and land are to be bought under
state ownership. As a matter of fact, private ownership is considered
at par with private robbery under socialism.
Practically speaking, however, only key and strategic means of
production are brought under public ownership while some minor
activities are left for individual ownership. Such private activities
constitute an insignificant portion of the total activities in the
economy.
ii. Motive of Social Welfare:
The socialism is fully dedicated to social welfare and the individual
interests take a back seat. That is, individual interests are being
sacrificed for social interests. The social interests are always su-
preme and maximizing social gains is the guiding motive of
production. Basic philosophy is that entire society should be
enriched rather that enriching a few.
iii. Economic Decisions and Planning:
Under socialism power to take economic decisions rest with public
authorities and not with the profit-seeking private individuals and
firms. The economic development is carried out through economic
planning, which is an essential feature of socialism. Decisions
regarding central problems (what, how and for whom to produce)
are taken by a central board or planning commission. It follows
need-based decision-making in place of a profit-based one.
A need-based decision-making system is one which assured every-
one a share in national income irrespective of his/her contribution
in it. Given that decisions are taken through a planning process and
not through market forces, such economies are also called as cen-
trally planned economies.
iv. No Role of Price Mechanism and Lack of Market
Competition:
Given the pre-dominant role of planning process, market oriented
decision making through price mechanism has no role to play. As a
result, there is no market competition, no rivalry between produc-
tion units and, hence, no wastage of resources in the form of selling
cost or sale promotion measures like . The State commands a
virtual monopoly on production system.

v. Classless Society and No Exploitation:

Capitalist mode of production divides society into have and have-
nots. Contrary to it, socialism attempts to create a classless society,
a society of peasants and workers. Means of production being state-
owned, there is no capitalist class.
Even if it existed, as under liberal socialism, it is effectively
regulated and controlled by the state institutions. It has to operate
within the framework provided by the State. It has to follow the
regulation imposed on it. Obviously, such a system has no scope of
exploitation.
In nutshell, the root cause of exploitation, the individual ownership
on means of production, is being rooted out to a significant extent.
vi. Inequality in Income and Wealth Distribution:
Another important feature of the socialism is that income and
wealth inequalities are within the pre-determined limits since it is a
need-based rather than productivity-based system. Thus, there is no
scope for social tension and no risk of disintegration.
vii. Social Security:
It provides social security to all implying that every member of the
society is assured of an income, which is sufficient for satisfying his
needs irrespective of the fact whether he is able to work or not. It
even takes care of old age needs of the people when they are unable
to make contribution in production.

Merits of Socialism:
There are many advantages in socialism.
They can be summarized as follow:
i. Efficient Resource Utilization:
In a socialist economy, production decisions are taken by a central
body on the basis of requirements of the economy. Depending upon
the availability of resources, it decides to produce the items most
needed and in just quantity ruling out any duplication of
production. Hence, there is neither any wastage of resources nor
unemployment. On this basis, one can argue that a socialist set up
ensures efficient resource utilization.
ii. Inequality of Income within Desirable Limits or
Distributive Justice:
Since factors of productions are owned by the government and the
factor payments are need based, there is no possibility of income
inequality beyond desirable limits. Moreover, it also offered social
security to everyone, at least with regard to basic needs. In nutshell,
it upholds the principles of distributive justice.
iii. No Class Struggle:
As the society does not divide into have and have-nots, there is no
possibility for social tension and, hence, no scope for class struggle.
iv. No Economic Instability:
Since market mechanism has no role to play, presence of business
cycles are not witnessed and hence no economic instability under
socialism. Each and every sector develops in a planned manner.
There is no excess demand or excess supply scenario. It implies that
resources are better allocated under socialist mode of production.
v. No Unemployment:
In socialist mode of economic system, production is planned as per
the availability of resources and, hence, there is no scope for unem-
ployment.
De-Merits of Socialism:
i. Efficiency and Factor Productivities are Low:
Being a need based system it ignores efficiency and factor produc-
tivity. No serious attention is given, especially at individual level, to
increase productivity since factor payments are no way linked to
their respective contributions in the production.
Moreover, high social security also discourages a person to work
hard as he knows that even if he does work, or does not work hard,
his future is secured at least for basic needs. Further, even if he
works harder, he will not gain much in terms of better life style. His
needs are pre-determined by the system. As such labour
productivity in socialism is always low.
At the other end, the production system is managed by state
officials who have no personal interest in it and hence, has no
incentives to perform.
For all these reasons, the socialism witness low labour productivity
which may even decline overtime. The efficiency level is also found
to be low in such a system.
ii. De-Motivating Hard Work:
An important weakness of socialism was that it adversely affected
the motivation to work hard as no personal gains and losses are
involved. This ultimately resulted in slower economic growth and
smaller income generation.
iii. Complex Administration:
Since every venture and each aspect is managed by bureaucrats, the
administrative process becomes very complex and the network
becomes multi-layered. The state officials used to consider produc-
tion system just as an extension of government departments. Thus,
often it used to take a long time to take a decision which has to be
approved at various levels. This not only increases the cost but often
cause considerable delay in decision-making.
iv. No Consumer Sovereignty:
A serious drawback of the socialist system is that it has no respect
for the consumer sovereignty. His preferences for the goods and
services to be consumed have just no place in the decision making.
He has to consume whatever decided for him by the State
authorities. This considerably lowers his motivation to work.
v. No Economic Freedom:
In this form of economic system, there is neither a freedom of
choice nor a freedom of enterprise, as observed in case of
capitalism. Hence, workers have no job satisfaction. They are asked
to perform a task and one has to do it whether he likes or dis-likes.
vi. Concentration of Power:
It has also been argued that the socialist system is also not free from
concentration of power. Under it, power gradually concentrates in
the hands of bureaucracy and the State machinery.
Criticism of Socialism:
Despite many merits and positive features of socialism, it has been
criticized for several reasons, which are amply elaborated under its
demerits. With the demise of socialism, it appears that its demerits
were more powerful and its merits did not exist in reality.

3. Mixed Economic System:

A mixed economy is nothing but an attempt to incorporate
advantages of both capitalism and socialism under it while keeping
their respective disadvantages away.
Conceptually speaking, two forms of mixed economy can
be identified:
i. Mixed capitalist economy, and
ii. Mixed socialist economy
i. Mixed Capitalist Economy:
A mixed capitalist economic system is one that rely more on
capitalism while incorporating a few features of socialism into it. It
is basically a market economy characterized by the presence of a
small public sector to protect the welfare, especially of the weaker
sections of the society. The presence of public sector is also
noticeable in the areas such as, national security. The market
mechanism plays a dominant role under it and government
interventions in the market are limited.
As a matter of fact, almost all the capitalist economies of the world,
now-a-days, are the mixed capitalist economies marked by the
presence of a public sector and wide-ranging government
interventions for orderly functioning of the respective economies.
The policy perception provided by Keynes following the great
depression of the thirties laid the emergence of such mixed
capitalist economies.
ii. Mixed Socialist Economy:
On the other hand, a mixed socialist economy will look
more like a socialist economy marked by:
i. Some freedom to producers to operate mostly in non-core areas of
production. Even the limited freedom to private sector is subjected
to considerable government interventions through various macro-
economic policies. This is to ensure that it functions in accordance
with national development priorities.
ii. Considerable freedom to consumer to select goods and services
for consumption, and
iii. Almost a complete freedom to factors of production, labour in
particular, to choose the work place. The state influence resource
deployment indirectly through different policy instruments.
Nonetheless, the State keeps an effective control over the economy
and different markets are regulated to varying extent for their
orderly functioning.
The two forms of mixed economic systems, thus, differ considerably
with each other depending upon their leaning towards capitalism or
socialism.
India’s Economic System:
India is one of the countries that have experimented with a mixed
socialist economic system since 1951. It instituted a physical control
regime up until 1984. Towards this —
i. It established an industrial licensing regime, a rigid foreign
exchange regulation regime, several price and distribution controls,
and so on.
ii. It also setup several public sector undertakings and a distribution
network consisting of numerous ration-shops.
iii. The state acted as a biggest employer in the economy providing
employment to millions of youth.
iv. The financial sector, including the commercial banks, has func-
tioned totally under RBI regulations and controls.
Despite all these and numerous other initiatives, the country
suffered from slow growth, industrial stagnation, rising
unemployment and high cost production structure.
This led policy makers to do a rethinking on policy regime and
paved the way for economic liberalization since 1985 under which
the country move away from the principles of socialism. Since 1991,
it initiated an aggressive reform process under which role of market
forces was gradually widened, areas reserved for public sector were
considerably curtailed and more and more areas were opened up for
private initiatives. In nutshell, India has made a gradual move from
a mixed socialist economy to a mixed capitalist economy. Such a
process of transformation is still continuing.

Features of a Mixed Economy:

Important features of a mixed economic system, keeping
Indian economy in view, are highlighted below:
1. Public and Private Sectors:
A basic feature of mixed economic system is the co-existence of both
public and private sectors under it. Mostly, essential and core pro-
duction activities are placed under public sector while private sector
is allowed to operate in non-core areas, such as production of
consumables.
In India for example, production of heavy machinery and most of
the critical intermediates, like petroleum products, fertilizers,
chemicals, iron & steel etc., were put under the State ownership
while private entrepreneurs were allowed to take up production of
items like farming, textiles, leather items, and so on.
The Industrial policy-1991 has however, introduced a radical shift in
the policy perception. It curtailed the scope for public sector by way
of reducing areas reserved for it from 17 to just 4. Many public
sector units were gradually privatized. The industrial licensing was
virtually abolished which was a very powerful instrument for
regulating private initiatives in industrialization in pre-1991 era.
All these and many other measures have significantly curtailed the
scope for public sector and widened the scope for private sector.
Still, even today Indian economy can be characterized by the
presence of both public and private sectors.
2. Economic Welfare:
Under a mixed economic system, the Government introduces sev-
eral instruments to safe-guard the interests of weaker and
unorganized segments of the economy. For example,
i. Regional balance may be taken into account while approving
investment in different areas even though it lead to high production
cost due to logistic disadvantages.
ii. Similarly, for the sake of more employment opportunities a
relatively out-dated and less efficient technology may be selected in
place of a modern one.
iii. In the field of distribution, essential items, like food grains,
vegetable oil, sugar, salt etc. may be provided at a cheaper rate from
public distribution system.
3. Economic Planning:
A mixed socialist economy considerably relies upon the planning
process since the Government has to carry out almost all the critical
production activities. For this purpose, in addition to a central
planning board, the State and district level planning machinery is
also established.
However, the role played by such a network of planning agencies is
considerably less in a mixed capitalist economy. In a way, planning
process will transform itself from a lead role to a supportive role in
development process when an economy moves from mixed socialist
to a mixed capitalist arrangement, as happened in the case of India
in post-1991 era.
4. Profit Motivation:
Economic activities guided by profit motivation are limited in a
mixed socialist economy but are considerable under a mixed capita-
list economy. Even the role market mechanism is different under
the two modes of production, more in a mixed capitalist economy
and less in the other.
5. Private Ownership:
Both the forms of mixed economic system allow private ownership
on means of production though in the socialist setup they may be
subjected to regulations for a more equitable distribution of such
ownerships. For example, in India, rich are subjected to wealth tax
so that capital accumulation in a fewer hands may be restricted, to
an extent.
Likewise, earlier an Estate duty was also in force which was
abolished in the reform process. Further, there are land-ceiling
Acts, applicable to both rural and urban areas. Such regulations in a
mixed capitalist setup are fewer in number and less severe.
6. Freedom of Choice:
Similarly, the two types of mixed economic systems also provide for
freedom of choice to all means of production but this may not be
unlimited in case of the socialist one.
7. Income Inequality:
Given that market mechanism is in force, possibility of rising
income inequality cannot be ruled out. However, under an
inclination towards socialism, the government through various
policy instruments attempts to keep it within a desired limit.
For example, high personal incomes are subjected to higher income
tax under progressive taxation or luxury goods are imposed high
excise duty. On the other hand, income of the workers may be
protected through Minimum Wage Acts. Subsidies may be provided
to the necessity goods.
Merits of Mixed Economic System:
Being an attempt to bring positive aspects of the capitalism and the
socialism both, the mixed system is marked by several advantages.
They are highlighted below as merits of mixed economic system.
1. Faster Economic Development:
Given that the mixed economic system provides a role to both
public and private sectors, it ensures a faster and balanced growth.
2. Limited Income Inequality:
Further, the mixed economic system ensures income inequality to
remain within a desired limit since the Governments apply various
policy instruments to control it.
3. Equal Opportunities to All:
The mixed economic setup provides opportunities to grow to all.
For example, in India, it has provided reservation to the backward
castes in jobs for facilitating their uplifting.
Likewise, it has exclusively reserved certain sectors for small scale
and tiny units. The large companies are not allowed to venture in
those areas. However, post-1991, areas under such reservations is
curtailed considerably.
At the same time, planning process also ensure development of all
the geographical pockets of the country by way of making a balance
in investment allocation.
4. Scope for Private Initiatives:
The mixed economic systems being marked by the co-existence of
both public and private sectors, provides ample scope for private
growth initiatives. It is, however, somewhat more in case of mixed
capitalist system than that in mixed socialist system.
It is very much evident from the Indian example. The post-reform
era has widened the scope for private sector considerably not only
by way of opening newer areas for it but also by way of reducing
restrictions on its operations. For example, The MRTP Commission
and FERA regulations were abolished and replaced by a
Competition commission and FEMA regulations respectively. They
are far less restrictive on growth of private sector.
5. Ensure Social Justice:
Governments under mixed economic systems, enact various legisla-
tions to protect the interests of backward sectors which save them
from market exploitation. This ensures growth with social justice.
For example, Indian government provides considerable support,
financial or otherwise, to backward classes. It also runs numerous
schemes for the benefits of poor or low income population.
6. Freedom of Choice and Consumer’s Sovereignty:
Despite restrictions, consumers in a mixed economy enjoy a consi-
derable sovereignty as the consumables are mostly governed by
market mechanism. At the same time, government ensures
availability of essential items to all at reasonable prices. Workers
are allowed freedom to choose the place of work. The system,
however, imposes some restrictions on big companies in the
national interests.
7. Economic Stability:
In a mixed economy, government being the biggest market player
allows economy to oscillate within a desirable limit. In case of high
inflation or recession, policy interventions and direct actions may
be introduced by the government.
Further, even the private sector may be asked to operate within the
broader policy framework to limit the economic instability. Hence,
the mixed economic system ensures economic stability to a
considerable extent and, at the same, leave ample scope for market
forces.
Demerits of Mixed Economic System:
1. Slower Economic Growth:
Theoretically, a mixed economic system is expected to achieve a
faster growth. However, India in reality has witnessed not only a
slower economic growth but industrial stagnation as well under its
socialist setup. In contrast, the post 1991 era, which is marked by
closeness to capitalism, has witnessed a higher growth. This
indicates that the mixed socialist system may not be favourable to
the economic growth.
2. No Efficient Use of Resources:
In a mixed system, efficient use of resources may not be promoted
all the time. The investment in public sector may suffer from
economic irrationality and hence less productive. On the other
hand, private sector may suffocate due to excessive regulations. In
totality, such a system may lead to inefficient use of resources.
3. Too much Government Intervention:
This is a universal tendency in all the mixed economic setups that
the governments continue to make rules and regulations for every
problem faced by the economy. Too much government intervention
will defeat the purpose for which the mixed economic system was
setup.
4. Disadvantage of Capitalism and Socialism:
While the conceptualization of mixed economy is aimed at to incor-
porate merits of both capitalism and socialism into it, in practice it
appears that in has incorporated demerits of the both the systems.