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Due to market failure and other reasons, there is no “pure” market economy in the world of 2014. There is a role for governments in any economic system, and hardly anyone denies an important role for the government. The questions relate to the areas and extent of government intervention. Generally speaking, the wealthy argue for very limited government intervention and low taxes to maximize their earnings and wealth, while the poor want extensive intervention to address unequal opportunities (education and healthcare), wealth disparities, and social safety nets.

But even though they recognize these safeguards and address them, mixed market economies in practice all over the globe have come under considerable criticism. In 2014, there are five major criticisms of the mixed market economic system:

1. Wide and growing income and wealth disparities

2. Recurring and highly disruptive financial crises accompanied by rising unemployment and severe economic hardships, especially for the poorer segments of society

3. Neglect of the human and societal well-being dimension of economic development

4. Irrational assumption of rational self-interest

5. Continuing environmental degradation

Growing Income and Wealth Disparities

In the United States, for example, income and wealth inequalities have deteriorated significantly over time.3 In 1982, those in the top 1 % of the U.S. income distribution received 12.8 % of the total national income; this percentage rose to 21.3 by 2006 and fell back to 17.2 in the aftermath of the financial crash of 2007–2008. Another popular indicator of growing income disparity is a comparison of average chief executive officer pay relative to the pay of an average factory worker; this ratio rose from 42 times in 1960 to a high of 531 in 2000 and fell back to 344 in 2007. An often-used comparator of income distribution across countries is the Gini coefficient (with zero representing perfect equality and 100 representing total inequality, or in other words, one person earning the entire national income); the most recent numbers for some countries are:

United States: 45.0

Iran: 44.5

Japan: 38.1

Egypt: 34.4

United Kingdom: 34.0

Switzerland: 33.7

France: 32.7

Norway: 25.0

Sweden: 23.0

The rankings among 133 countries (with 1 representing the most equal income distribution among countries, namely Sweden):

South Africa: 133

United States: 93

Iran: 90

Sweden: 1

A standard method of addressing income inequality in a capitalist system is through progressive taxation. But this is not always the case in countries that profess progressive taxation. As the following article excerpt notes:

The lowest 20 % of earners (who average about $12,400 per year), paid 16.0 % of their income to taxes in 2009; and the next 20 % (about $25,000/year), paid 20.5 % in taxes. So if we only examine these first two steps, the tax system looks like it is going to be progressive.

And it keeps looking progressive as we move further up the ladder: the middle 20 % (about $33,400/year) give 25.3 % of their income to various forms of taxation, and the next 20 % (about $66,000/year) pay 28.5 %. So taxes are progressive for the bottom 80 %. But if we break the top 20 % down into smaller chunks, we find that progressivity starts to slow down, then it stops, and then it slips backwards for the top 1 %.

Specifically, the next 10 % (about $100,000/year) pay 30.2 % of their income as taxes; the next 5 % ($141,000/year) dole out 31.2 % of their earnings for taxes; and the next 4 % ($245,000/year) pay 31.6 % to taxes. You'll note that the progressivity is slowing down. As for the top 1 % – those who take in $1.3 million per year on average – they pay 30.8 % of their income to taxes, which is a little less than what the 9 % just below them pay, and only a tiny bit more than what the segment between the 80th and 90th percentile pays.

While income figures represent one measure of inequality, a more comprehensive measure is wealth; these figures are even more discouraging. In 2000, the percentages of the national wealth held by the top 10 % of the adult population in a number of Western countries were:

Switzerland: 71.3

United States: 69.8

France: 61.0

Sweden: 58.6

Norway: 50.5

Germany: 44.4

Finland: 42.3

The numbers for the United States, where figures are readily available, are even more alarming when we look at the top 1 %. (See Table 1.1 and Figure 1.1.) Generally speaking, in 1976, the top 1 % held about 20 % of the total national wealth. This figure nearly doubled to 40 % in 1995 and in 2010 stood at over 35 %. The corresponding dollar figures (wealth and income) for the various percentiles are shown in Table 1.2.

Table 1.1 Share of Wealth Held by the Bottom 99 % and Top 1 % in the United States, 1922–2010

Figure 1.1 Share of Wealth Held by the Bottom 99 % and Top 1 % in the United States, 1922–2010

Table 1.2 Income, Net Worth, and Financial Worth in the United States by Percentile, in 2010 dollars

Instability of Economic and Financial Systems

A second major criticism of the mixed market system is the recurring financial crises and the heavy economic toll that follows, especially on the less fortunate members of society. While the Great Depression and the financial crisis of 2007–2008 are the two most prominent standouts, they are not alone.4 The conventional financial system is based on fractional reserve banking and debt, whereby banks create money though loans and investors and consumers borrow to finance investment and consumption. The assumption of excessive debt, or leveraging, exposes the financial system to bad decisions and debt that cannot be repaid, setting off a chain reaction of defaults among financial institutions and causing panic and requiring government bailouts that become a burden for average taxpayers. Moreover, serious financial crises, most notably the Great Depression and the financial crisis of 2007–2008, lead to panics, loss of business and consumer confidence, deleveraging, severe and prolonged recessions or depressions, long-lasting periods of high unemployment, and, ultimately and most ominously, unbearable pressure on families and on the fabric of society and social cohesion.

Neglect of Human Welfare Dimension of Economic Development

A third criticism of mixed market economies is the focus on gross domestic product (GDP) and not on the happiness, well-being, and welfare of individuals and society at large. In the West, under the mixed market system, the focus of economic policy is largely GDP and GDP per capita, not on the condition of all humans. Human beings are not the end result of all economic activity but are taken in part as inputs to economic production, and the economic goal has become how much goods and services are produced. Thus, other goals, especially human well-being, freedom to pursue individual goals, and social cohesion, have fallen by the wayside. These shortcomings became increasingly recognized in the West during the late 1970s and 1980s through the works of Mahbub ul-Haq and Amartya Sen.

Mahbub ul-Haq argued that all development and growth models following World War II considered humans, whether as labor or human capital, to be an input into the production process and therefore a means for development. What was missing, he asserted, was the consideration of the human as the end of the development process. He developed the idea of “basic needs,” which laid the foundation for his later work on “human development,” culminating in the publication of the Human Development Report in 1990. As he says in his book, Reflections on Human Development, “After many decades of development, we are rediscovering the obvious – that people are both the means and the end of economic development.”5 In his foreword to ul-Haq's book, Paul Streeten defines human development as “widening the range of people's choices. Human development is a concern not only for poor countries and poor people, but everywhere. In the high-income countries, indicators of shortfalls in human development should be looked for in homelessness, drug addiction, crime, unemployment, urban squalor, environmental degradation, personal insecurity and social disintegration.” Aside from the recommendation that economic development should focus on humans as ends as well as means, Mahbub ul-Haq concentrated on enhancing human productivity as a means of development, arguing that the labor force is productive when it is well nourished, skilled, and well educated.

The Human Development Index (HDI) was an attempt to devise a technical means to provide an indication of a society's level of human development and to measure its progress through time. In its initial formulation, the HDI included three variables:

1. Per capita GDP, calculated at the real purchasing power exchange rate

2. Literacy rates

3. Life expectancy at birth

This was the first major attempt to focus attention away from the growth of GDP as the measure of the development and progress of countries. By introducing literacy and life expectancy, the HDI broadened the information base of the meaning of development. Any increase in HDI could be interpreted as an improvement in the society since progress on education and health benefits the society as a whole. To a degree, the inclusion of health and education in the original HDI corrected the distributional ambiguity contained in per capita GDP as the only indicator of economic progress since it can conceal large income inequalities. The HDI also made it possible to produce a ranking of countries that would give some indication of drawbacks to affluence by showing “the troubles of overdevelopment – or, better, maldevelopment – as well as those of underdevelopment. Diseases of affluence can kill, just as the diseases of poverty can. Income statistics, by contrast, do not reveal the destructive aspects of wealth,” as reported by the 1990 Human Development Report (HDR). It is thus possible for a country to rank low in terms of per capita GDP but high in terms of HDI.6

Amartya Sen's concept of “development as freedom” was an effort to further modify, expand, and enhance the meaning of development. Sen expanded the theoretical and empirical dimension of human development from its definition as “both the process of widening people's choices and the level of their achieved well-being” to its culmination as “freedom.” The 1990 HDR had identified well-being as including, among others things: access to income; health, education, and long life; political freedom; guaranteed human rights; concern for the environment; and concern for participation. Under the influence of Sen and his colleagues, this view was revised to suggest that the goal of development is “to secure the freedom, well-being and dignity of all.”7

Sen notes that in an age of “unprecedented opulence,” there is also “remarkable deprivation, destitution and oppression.” In both rich and poor countries, there are, in one form or another, problems of “persistence of poverty and unfulfilled elementary needs, occurrence of famines and widespread hunger, violation of elementary political freedoms as well as of basic liberties, extensive neglect of the interests and agency of women, and worsening threats to our environment and to the sustainability of our economic and social lives. Overcoming these problems is a central part of the exercise of development.”8

Sen argues that it is the individual agency (the capacity for human beings to make choices and to impose those choices on the world) and social arrangements that, deeply complementing each other, determine the extent to which problems and deprivations can be addressed successfully. Freedoms of various kinds are essential to the exercise of human agency. Social arrangements, in turn, determine the extent of human freedom and agency; individual freedom has to become a social commitment so that human agency can become effective in solving problems. Sen conceives of the expansion of freedom “both as the primary end and as the principal means of development. Development consists of the removal of various types of ‘unfreedoms’ that leave people with little choice and little opportunity of exercising their reasoned agency. The removal of substantial unfreedoms, it is argued here, is constitutive of development.” Freedom is multidimensional and “instrumental effectiveness by freedoms of particular kinds to promote freedoms of other kinds” serves to promote freedom as the “preeminent objective of development.” These instrumental freedoms include political freedoms, economic facilities, social opportunities, transparency guarantees, and protective security.9

Although the human dimension became recognized, little has changed in economic management and policy in the West. In these mixed market economies, all eyes are glued to quarterly and annual GDP growth with a smattering and infrequent reference to poverty and income inequality here and there. While there are many valid criticisms of modern-day capitalist mixed economies, they still generally are perceived to be the most efficient in delivering economic output and growth, and international institutions such as the World Bank and the International Monetary Fund continue to recommend most of the capitalist prescriptions. But economic efficiency does not necessarily embrace economic justice, human well-being, and social harmony.

Irrational Assumption of Rational Self-Interest

In recent years, more and more economists have raised serious questions regarding the basic postulates of the classical-neoclassical economic paradigm. Aside from those who have focused their criticism on the separation of economics from ethics, such as Amartya Sen, others have focused on the postulate of rational self-interest of the paradigm without rejecting its other features. One example is the position of two prominent economists, George Akerlof and Robert Shiller. In their book Animal Spirits, they revive the concept of “animal spirits” proposed by Keynes, saying that Keynes “appreciated that most economic activity results from rational economic motivation – but also that much economic activity is governed by animal spirits.” While accepting that “people rationally pursue their economic interests,” they, along with Keynes, argue that exclusive adherence to this view ignores “the extent to which people are also guided by non-economic motivations. And it fails to take into account the extent to which they are irrational or misguided. It ignores the animal spirits.”10

The concept of animal spirits refers to a restless and inconsistent element in the economy. It refers to our peculiar relationship with ambiguity or uncertainty. Sometimes we are paralyzed by it. Yet at other times it refreshes and energizes us, overcoming our failures and indecisions. According to Akerlof and Shiller, the animal spirits have “five different aspects,” each of which “affect[s] economic decisions: confidence, fairness, corruption and antisocial behavior, money illusion, and stories.” Confidence derives from the basic trust that people have in one another, the market, and the state “and the feedback mechanisms between ‘confidence’ and the economy that amplify disturbances.” Fairness concerns “the setting of wages and prices.” This theory acknowledges corruption and other social behaviors as playing a role in the economy and affecting it. The theory also revives another Keynesian concept, “money illusion,” which refers to the fact that people are often fooled by nominal values of economic variables, such as wages, prices, income, and wealth. They are “confused by inflation or deflation” and do not “reason through its effects.” Finally, by the stories aspect of animal spirits, Akerlof and Shiller mean the sense of identity people hold of themselves, their economy, and society. “Our sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays an important role in the economy.” Of the five aspects, Akerlof and Shiller consider confidence and money illusion as the cornerstones of their theory. They believe their theory, with its central concept of animal spirits, describes how the economy works. “It accounts for how it works when people really are human, that is, possessed of all-too-human animal spirits. And it explains why ignorance of how the economy really works has led to the current state of the world economy, with the breakdown of credit markets and the threat of collapse of the real economy in train.”11

This digression on the view of Akerlof and Shiller demonstrates how little the classical-neoclassical economic paradigm has advanced its view of humankind, perhaps the most important cornerstone element of any social science theory. It has lasted from the eighteenth to the twenty-first century, from considering man as a purely self-interested egoist of the classical economics to the “rational” self-interested egoist of the neoclassical economics of the twentieth century and finally to the “animal spirits”–motivated, “rational” self-interested egoist of the twenty-first-century neoclassical-Keynesian hybrid conception of Akerlof-Shiller.

Negative Impact on Environment

A fourth major area of concern has been the continuing degradation of the environment and the inability of the global economic system to reverse years of environmental neglect. Generally speaking, the neglect of the environment is classified as a negative economic externality; it is the fallout of economic activities, such as electricity production, or of the manufacturing of goods, such as steel. Producers of electricity, whether using coal, oil, or natural gas, produce as by-products pollutants that damage the environment. In other words, buyers of electricity do not pay for the full cost of its production. Similarly, drivers do not pay the full price for gasoline; they pay for gas but not for the resulting pollution caused by their driving. All modern economies fail to address the environmental damage that their economies, and their citizens more generally, cause. One reason is that a major part of the environmental damage is passed on to future generations who have no vote in what goes on today. Environmental damage is not only local. Countries argue that meaningful policies to reverse global environmental damage, such as global warming, require international agreement, something that is elusive because most countries are not willing to sacrifice their economic output if they can put it off, especially if all countries (no matter what their past contribution to environmental degradation) do not make a similar sacrifice.