What Happened to the Mixed Economy?
By David Henderson
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.