David R. Henderson  

What Happened to the Mixed Economy?

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Open up any principles of economics textbook written between the 1950s and the early (and maybe even late) 1970s, and the odds are high that it will say that the United States has a mixed economy. One part of the mix, it will say, is free markets or capitalism. It's sometimes vague about the other part of the mix. It might call the other part "regulation" or the "welfare state." It might even say "socialism." It's highly unlikely to use the F-word (no, not that one; the really bad one--Fascism.)

But sometime in the 1980s, writers of economics textbooks--and even many economists in popular articles--lost some accuracy. They started saying that the U.S. has a free-market economy. Gone was the mix; gone were the qualifiers. It's true that the economy became freer in fundamental ways. The biggest dose of freedom was elimination of the military draft. And then, in the late 1970s, President Carter and Congress decontrolled airlines, trucking, and railroads. In the 1980s, the feds decontrolled natural gas. Still, the net result was still a mixed economy and the mix has, since the late 1980s, shifted in the direction of more regulation.

I noted this change when I reviewed a book of Rudi Dornbusch's essays, Keys to Prosperity, for the Wall Street Journal in 2000. Rudi advocated a free market and economic freedom. But virtually every regulation and large government program he criticized, I noted in my review, was in Europe or some other bigger-government country. To the extent he criticized U.S. economic policy, he wanted bigger government: the particular program he wanted expanded was unemployment insurance.

My memory of all this was triggered when I read the following quote from Paul Samuelson (HT to Robert Murphy) in 1975:

It is a terrible blemish on the mixed economy and a sad reflection on my generation of economists that we're not the Merlins that can solve the problem. Inflation is deep in the nature of the welfare state. Even when there is slack in the system, unemployment doesn't exert downward pressure on prices the way it did under "cruel" competition.


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CATEGORIES: Economic Education



COMMENTS (15 to date)
Bill Woolsey writes:

The mix was with command--not regulation, welfare state, or even socialism.

Why did they quit describing the U.S. status quo as a mixture between command and market?

I am not sure, but I think it was an improvement.

The U.S. does have a market economy with lots of piecemeal interventions in no way connected to a comprehensive plan for the economy has a whole.

I suspect that few textbook writers take seriously the alternative of anarcho-capitalism.

And if you just assume that some interventions are essential (national defense?) then the live issue is which interventions do more good than harm and vice versa.

If you assume that all the interventions improve the the market, then perhaps, again, one might say the status quo is some kind of mixture. On the other hand, when some intervention is recognized as being counterproductive rent seeking and the like, what is being mixed in?

Perhaps the key change was the clear failure of communism. That the actual U.S. economy run generally along the principles of the center left was no longer seen as combining the virtues of the market and command was due to the clear failure of command.

The Soviet Union is quite efficient, produces lots of steel, and grows fast. But, consumer goods are low quality. And there are some issues of personal freedom. Strict laissez faire results in working people having too low incomes relative to the rich, depressions, and whatever. The glorious U.S. under the Roosevelt, Kennedy, and Johnson combines the best characteristics of the two systems. Mixed economy.

Now we learn that command was a complete disaster. The actual regulation of the market system is often counterproductive....

We have a market system with piecemeal intervention, and each intervention might do more good than harm, or more harm than good.

Finally, free market economists, who lean towards the more harm the good for many interventions, are less marginalized. And so, it is just vague--hampered market economy? improved market economy?

Kevin writes:

David,

I think you made a mistake regarding the quote from Samuelson. The article you linked has that quote from 1975, two years after his ninth edition textbook.

David R. Henderson writes:

@Kevin,
Correction made. Thanks, Kevin.

Michael Wiebe writes:

This sounds like a good Econ Journal Watch article: going through the textbooks and documenting the change in language, and then evaluating whether the change was justified.

David R. Henderson writes:

@Michael Wiebe,
Interesting thought. Maybe you should do it. :-)

Matthew C. writes:

David,

You are correct that we have a terribly "mixed" economy, particularly in the banking, education and health care sectors.

I don't know how you reconcile your "they earned it" series with this fact.

In truth, a huge portion of the high earners earn what they do because of our terribly distorted and hyper-regulated economy.

Daublin writes:

Thanks for the sober look at the rhetoric being used on this topic.

It sounds like economics textbooks are caught up in the political battles of the day. The running narrative today is that the U.S. hass a radically free market economy and that European countries are socialized (but not "socialist"!); other countries seem to largely be ignored. So they say the U.S. is a market economy.

I don't think the word means what they think it means. Market economies don't acquire GM so the president can implement his plan for the future of automobiles. They don't force every citizen to switch over to a particular kind of light bulb in 2012. They don't say that every bar will be non-smoking and that no restaurant will sell happy meals. They don't make a master energy plan and funnel all of our corn yield into supporting that plan. They don't tell you how much water your faucet or your toilet is allowed to use. They don't force "insurance" companies to cover clients at well below their expected cost.

The result is not much like a textbook market economy. Almost every major industry in the U.S. has many specific requirements from the government on what the participants are allowed to do. Yes, those requirements leave some sort of market in place, but it's not the sort of market most people have in mind as a "free market".

A better description, of both the U.S. and Europe, is a corporate state. Major corporations use the government as a negotiating table where they set the rules of engagement with each other. Everyone outside of the elite circles joins into the rank and file of one corporation or another. The free part of the economy seem largely to be the result of the limits of enforcement.

During the Long Boom, the planners wanted credit for it.

When stagflation set in, they wanted to blame capitalists.

Andy Hallman writes:

I would think the nominal change from "mixed economy" to "free market economy" would actually benefit libertarians in light of the status quo bias. The statists would be the ones seen/i> as wanting to change the status quo, and therefore suspect, while the libertarians are simply preserving traditional American values.

You see the same thing in the debate about the role of religion in politics. The debate is often about the status quo, whether the U.S. is a Christian nation or a secular nation, and it's clear to the combatants in the debate that the answer to that question is relevant. Again, the status quo bias is at work.

Mark M. writes:

"some issues of personal freedom."
Bill W.,
Such as death camps?

Lars P writes:

Matthew C hits the head of a terrifying nail.

In a free economy, people earn money by providing goods or services to others, who freely choose to pay them.

In a regulated economy, there is less of that, and more wealth is distributed to the politically powerful, from the powerless.

Conventional wisdom about the vastly increased US income and wealth disparities the last few decades is that it's a symptom of the free market gone wild. But it also coincides with a big increase in regulation and lobbyism. I suspect that that is a major factor, but I don't know how you would go about verifying/falsifying that hypothesis.

David R. Henderson writes:

@Matthew C,,
It's easy to reconcile. I prefaced my "earned it" point with "In a free society." My point with this post is that it's not a completely free economy.

NeedleFactory writes:

FWIW: A decade ago I ran across the link below giving several U.S. dictionary definitions of Fascism, from 1941 to 1992, alleging these definitions have continuously changed to prevent the U.S. from fitting the definition.

reference: page 2 of:
http://frontiersman.t15.org/1994/1994-12/1994-12.html

Matthew C. writes:
My point with this post is that it's not a completely free economy.

I'd say this qualifies as a very large understatement of the problem. But you are recognizing the problem, which is great.

Robert writes:

The U.S. is a "mixed-up" economy. I don't know of any economic system that is not mixed.

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