It was the failure of the capitalist system that leads to the emergence of the mixed economy. Harold Laski declared that laissez-faire as a principle ended with the outbreak of war in 1914. The First World War led to the near total government control of every aspect of economic life in nearly all Western countries.
The worldwide depression brought unemployment and economic misery on an unprecedented scale and led to vigorous demands for state intervention. Keynes’ General Theory which was published in 1936 is a repudiation of the foundations of laissez-faire.
Keynes remarked that the outstanding faults of the economic system in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and income.
He recommended for establishing certain controls in matters which are now left in the main to individual initiative in order to exercise a guiding influence on the propensity to consume partly through its scheme of taxation and partly in other ways and also in order to ensure a somewhat comprehensive socialisation of investment which will prove the only means of securing an approximation to full employment.
The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government.
Keynes himself played an important part in the evolution of the concept of mixed economy. He thought that capitalism, shorn of some of its defects, was the best system. Socialism of the authoritarian type would kill individual freedom.
But state control and direction was inevitable in a mixed economy. A mixed economy is a compromise between socialism on the one hand and capitalism on the other. Neither pure capitalism nor pure socialism could survive as a stable social movement.
And so came the philosophy of mixed economy. Keynes is the originator of the concept of mixed economy. Mixed economy is also called the “dual economy” or the “controlled economy”.
Considering the limitations of both “maximum role” of government under socialism and communism and “minimum role” of government under capitalism, the world politico- economic order has moved towards mixed economy with “optimum role” of government.
The increasing government intervention in business is justified for “welfare capitalism”. Government is expected not to end but to mend capitalist pattern of development in accordance with the principle of “maximum social advantage”. Government is required to supplement the individual entrepreneur whenever they fail.
This is a sort of a “compensation role” by government. Today in no country is there either pure capitalism or pure socialism. Everywhere it is a mixed form of economy. The mixed economic system operates through a combination of planning and pricing.
Ours is a mixed economy in which both the public and the private enterprises would work side by side. It is a compromise between private capitalism and state socialism. Private enterprise is actuated by profit motive which may be looked upon as an index of efficiency while public enterprise serves a social end.
Therefore we may say that a mixed economy is a combination of efficiency with social objective. To secure the aim of rapid economic growth, the public sector has not only to initiate development which the private sector is either unwilling or unable to undertake, it has to play the dominant role in shaping the entire pattern of investments in the economy whether it makes the investments directly or whether these are made by the private sector.
In a mixed economy, private, public, joint sectors and the like, all have some say in the major decisions that influence the functioning of an economy.