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The United States has a mixed economy. Its economic system functions with characteristics of both capitalism and socialism.
A mixed economic system protects some private property and allows a level of economic freedom in the use of capital. But governments also intervene in economic activities for the public good and to achieve social aims.
Key Takeaways
- The U.S. has a mixed economy which exhibits characteristics of both capitalism and socialism.
- A mixed economy embraces the free market when it comes to capital use, but it also involves government intervention for the public good.
- The U.S. government controls part of the economy with restrictions and licensing requirements in areas such as education, roads, hospital care, and postal delivery.
- The federal government provides a limited welfare state to reduce the effects of extreme poverty.
- The government also intervenes through the Federal Reserve by adjusting the costs of borrowing money.
The U.S. Government’s Role in the Mixed Economy
The U.S. government has always played a role in the nation’s economic affairs. Over the course of the nation’s history, many services began to come under the influence or direct control of the public sector.
During some periods, however, the nation had more of a true free-market economy, where the private sector was largely unrestricted in its economic activity.
Free Market Economy vs. Mixed Economy
Free Market Economy
A “true” or “absolute” free market economy requires that all property be owned by private individuals and all goods and services be privately provided.
Prices are allowed to fluctuate based on supply and demand, and all transactions are voluntary, not compelled, or restricted by the government. This system is also referred to as “pure capitalism” or “laissez-faire capitalism.”
Mixed Economy
Conversely, a mixed economy has elements of both free markets and economic intervention by the government. Many private transactions are allowed but only under conditions aligned with the government’s goals.
There are several different ways market economies are changed in a mixed economy. Governments might place restrictions on voluntary transactions, such as licensing or regulatory requirements.
Governments might also own public property to provide public services and use tax policies or subsidies to change the price signals in the market.
The U.S. government keeps partial control over the economy with regulatory restrictions, such as licensing or banning certain activities.
Elements of Our Mixed Economy
The U.S. government controls or partially controls many goods or services, such as education, courts, roads, hospital care, and postal delivery. It also provides subsidies to agricultural producers, oil companies, financial companies, and utility firms.
Controlling What People Buy and Sell
For example, private individuals cannot legally provide or purchase certain types of goods, such as cocaine, haggis, raw milk (in some states), and most types of flavored cigarettes. Other products face heavy taxation to discourage their use.
Business Registration and Licensing
In the U.S., private businesses need to register with government agencies and many types of professionals can only operate with government-approved licenses, including funeral attendants, auctioneers, private investigators, makeup artists, hairstylists, real estate agents, and financial advisers.
Approval of Foods and Medicines
Nearly every type of business and every form of economic exchange is affected by U.S. government policy. The Food and Drug Administration (FDA) must approve consumable foods and medicines before they can be sold, and producers must provide very specific disclaimers.
Advertising
Businesses can only advertise their goods and services if they comply with the Federal Trade Commission (FTC). The hiring, compensating, and firing of employees must comply with the Fair Labor Standards Act (FLSA), the Employee Retirement Income Security Act (ERISA), and many other regulations from agencies such as the Department of Labor (DOL).
The success of the mixed economy in the U.S. is underscored by the nation’s high standard of living in comparison to other countries as well as its global economic strength.
Financial Policies
The U.S. government also plays a role in the economy via financial policies that can influence inflation and business production. The Federal Reserve is charged with controlling monetary policy, which has to do with the quantity, velocity, and availability of the circulating money supply. Congress and the executive branch handle fiscal policy, which focuses on government revenue and spending.
Expansionary monetary policy aims to inject liquidity, stimulate lending and spending, and discourage savings. Contractionary policy is supposed to reduce aggregate demand, encourage savings, slow down the rate of inflation, or burst asset bubbles. While expansionary policy is analogous to pushing on the gas pedal, contractionary policy is like stepping on the brakes.
Other Types of Economic Systems
An economy encompasses all of the activities related to the production, consumption, and trade of goods and services in an entity. Economic systems can be categorized into three main types: traditional economies, command economies, and market economies.
- Traditional: A traditional economy is based on goods, services, and work, all of which rely on customs, history, and time-honored beliefs. Tradition guides economic decisions such as production and distribution. Societies with traditional economies depend on agriculture, fishing, hunting, gathering, or some combination of them, and there is very little division of labor or specialization. The traditional economy is very basic and the most ancient of the four types.
- Command: In a command economy, a central governmental authority controls the economic structure and dictates the levels of production and the prices that may be charged for goods and services. It’s also known as a planned system and is common in communist societies.
- Market: A market economy is based on the concept of free markets. There is very little government interference and control over resources. Any economic decision and the pricing of goods and services are guided by the interactions of a country’s individual citizens and businesses as well as the relationship between supply and demand.
Strength of the U.S. Economy
Following the COVID-19 pandemic, the U.S. economy regained strength at a faster rate than other world economies. By September 2024, U.S. GDP has increased at 3% annual rate. Consumer spending and private inventory investment are particularly strong factors.
However, there are some causes for concern. Consumer prices have steadily risen despite repeated interventions by the Federal Reserve. Inflation had risen 2.4% as of September 2024.
For the year up to September 2024, real average hourly earnings increased 1.5%. This positive change, in combination with the reduction of the average workweek by 0.6%, brought about a 0.9% increase in real average weekly earnings in this year-over-year period.
As of September 2024, the federal government employed more than two million civilians.
Global Impact of the U.S. Economy
Government interventions can also affect the global economy, due to the outsized influence of the U.S. on world markets. A classic example of this is the importance of the Federal Reserve in international financial markets.
Because the dollar is one of the default currencies in international transactions, a sudden change in U.S. monetary or fiscal policy can cause ripples throughout the world economy.
The U.S. also accounts for a large share of global GDP and stock market capitalization. As a result, many regional economies tend to sync with U.S. economic cycles. Global recessions tend to co-occur with severe recessions in the U.S. economy. Although this relationship does not necessarily imply causation, it does indicate a central U.S. role in the world economy.
How Does the Federal Reserve Affect the Economy?
In the United States, the federal reserve intervenes in economic activity by buying and selling debt. This affects the cost of lending money, thereby encouraging or discouraging more economic activity by businesses and borrowing by consumers.
Does the U.S. Have a Welfare State?
The United States has a limited welfare state that is intended to reduce the effects of extreme poverty. Examples of related programs include the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps, and Medicaid, which provides health care assistance to those with limited incomes.
Government subsidies—that is, financial contributions granted to private companies to help them keep the price of a commodity or service low—also play a role in the support of those in need.
Does the U.S. Have State-Owned Enterprises?
The federal government has several government-sponsored enterprises that generate revenue, although that is not their primary purpose. Freddie Mac and Fannie Mae lend money for residential mortgages, thereby facilitating homeownership among people who might not otherwise qualify for a loan. The United States Postal Service also generates revenue from its business activities, although the amount typically is less than its expenses.
The Bottom Line
While U.S. politicians tend to be highly committed to free market values, the government regularly intervenes in the nation’s economic affairs. Thus, the U.S. has a mixed economy. In fact, the public sector has an enormous impact on the American economy.
By providing public goods and services such as education, military protection, federal highways, and national parks, the U.S. government plays a significant role. These goods and services are paid for with tax revenue, which highlights another role of government: redistribution of income.
Public sector employment is also a way of reducing unemployment in the short term and it can create demand in other sectors of the economy.