Mixed Economy

The belief in the self-correcting quality of the market and the 'invisible hand' of Adam Smith got a major setback in an early 20th century during the Great Depression (1929). The impact of the depression spread from the USA to other economies of Western Europe escalating large-scale unemployment, downfall in demand and economic activities and lockouts in industrial enterprises. The prevailing Smithsonian macro ideas failed to check the crisis. A new approach was needed which came in the famous work, The General Theory of Employment, Interest, and Money (1936) by the English economist at Cambridge University, John Maynard Keynes (1883-1946).

Keynes questioned the very principles of 'laissez-faire' and the nature of the 'invisible hand'. He even opined that the invisible hand brings equilibrium to the economy but by 'strangulating the poor'. He suggested that prices and wages are not flexible enough to provide employment to all. It means there will be some people unemployed when the economy will be at its full potential. Ultimately, a fall in demand will be imminent resulting in recession and if unchecked, in depression which happened in 1929. Questioning the limitations of the market mechanism, Keynes suggested strong government intervention in the economy. To get the economy out of the depression, he suggested an increase in government expenditures, discretionary fiscal policy (fiscal deficit, lower interest rates, cheap money supply, etc.) to boost the demands of goods and services as this was the reason behind the depression. As Keynesian policies were followed, the concerned economies were successfully pulled out of the Great Depression.

While Keynes was inquiring into the causes and cures of the Great Depression he questioned the capitalist economic system being practiced throughout Euro-America. He suggested the capitalistic order to assimilate the goals of the socialistic economy (economic ideas of the socialists, i.e., the ex- USSR). In the capitalist economies of the time, all the basic goods and services were the part of the market mechanism, i.e., being produced and supplied by the private sector. It meant that almost everything the people required was supplied by the private enterprises via the market which was ultimately a unidimensional movement of money and wealth (from the mass of the people to the few who controlled the production and supply chain) and the masses were going through the process of pauperisation every day, thereby weakening their purchasing power. In the end, it affected overall demand and culminated in the Great Depression.

As a follow up to the Keynesian advice, many trendsetting economic policies were initiated throughout the capitalist economies. One very important initiative which came out was the government's active role in the economy. The governments of the time started producing and supplying some basic goods and services which are known as 'public goods'. These goods basically intended to guarantee a minimum level of nutrition to all, healthcare, sanitation, education, social security, etc. The expenditure on public goods was incurred on the public exchequer even if it required deficit financing. Starting from the 1930s up to 1950s, almost 50 percent of the GDP in the Euro-America was spent by the governments on the public goods which also become popular as the social sector. The essential goods and services which were till date being purchased by the people as 'private goods', were soon made available by the state 'free-of-cost', giving people more spare money to create demand for the goods and services which were part of the market.

The above instance has been cited here just to show the process as to how capitalism redefined itself by including some useful traits of the non- market economy,i.e., the state economy. The mixed economy arrived in this way and the classical capitalistic economy was challenged by it.

On the margins of these developments, it is interesting to note the development that occurred in the sate economies of the time. It was Oscar Lange (1904-65), the Polish philosopher, who in the 1950s suggested the same things for the socialist economy as Keynes had suggested for the capitalist economy. Lange praised the state economy for many of its good things but also suggested the inclusion of some of the good things of the capitalistic economy. He advised the state economies to adopt 'market socialism'. His suggestions were outrightly rejected by the state economies as such compromises in the socialistic economic order were blasphemous at that time (this was taken as a suggestion towards democracy from the dictatorship).

As Keynes has suggested that the capitalist economy should move few steps towards socialistic economy, Lange was suggesting just the same in the case of the state economies. Democracies are flexible thus they were able to go for an experiment which paid them in coming times. But as the socialist and communist political systems had been stubborn by nature, they did not go for an experiment and thus started moving towards their economic decay.

The process of economic reforms in India started in 1991. It was in fact, the search for a new 'state-market mix', while India had been a mixed economy since Independence.

After Independence, India opted for a mixed economy when the state-market dilemma was at its peak globally. In the process of organizing the economy, some basic and important infrastructural economic responsibilities were taken up by the state and rest of the economic activities were left to private enterprises, i.e., the market. The kind of state- market mix for which India went was thought to be fit for the socio-economic and political conditions of the time. Once the country started the process of the economic reforms in the early 1990s, the prevailing state-market mix was redefined and a new form of the mixed economy began to practice. As the socio-economic conditions had changed, the state-market mix also changed. The redefined mixed economy for India had a declared favor for the market economy. Many economic roles which were under complete government monopolies were now opened for participation by the private sector. Ex are many- telecommunication, power, roads, oil and natural gas, etc. At the same time, the responsibilities which were till date being shouldered by the state alone and which could be taken up by the state only were given extra emphasis. In this category comes the whole social sector- education, healthcare, drinking water, sanitation, nutrition, social security, etc.

The economic system of India was a mixed economy in the pre-1991 years as it is in the post- 1999 years, but the composition of the state-market mix has gone for a change. In future, as the socio-economic and political factors will be changing, India will redefining its Mixed Economy, accordingly.