There is more than one way to skin an economic cat. That may sound obvious, but not all economists believe it. Many on both sides of the political spectrum believe their ideas are the only path to national economic success. And the discipline as a whole has moved away from examining outcomes from diverse approaches.
For years, a course in “comparative systems” was offered in any comprehensive university economics curriculum. But such courses largely have fallen by the wayside. One reason is there are fewer substantive differences between the economic systems and policies of different countries now than in the 1950s or 1960s.
After World War II, some countries, especially in northwest Europe, seemed headed toward socialism, with government controlling the “commanding heights of the economy” such as coal, steel, railroads and the like. In others, notably France and Japan, government engaged in broad economic planning and direction, explicit or implicit, even though ownership of industry remained in the private sector.
In areas where Catholic social thought was influential and Christian Democratic parties were active, private enterprise prevailed, but with much government action to protect workers against any concentrated power of business owners. Finally, communism prevailed in some countries and was viewed as a model to emulate by many in the developing world. There were endless discussions of variations among Russian, Chinese, Czech and Yugoslav versions of the same basic system.
Much changed from 1975 through 1995. Socialism lost much of its appeal. Communist regimes fell nearly everywhere except North Korea and Cuba. Keynesian “demand management” to control the business cycle seemed to lead to both higher inflation and higher unemployment in many countries. Nations converged toward the “Washington consensus” that balanced budgets, moderate growth of the money supply and free trade and capital flows were key to prosperity.
Many economists in the Anglo-Saxon countries, whose theories seemed to have won the day, took the attitude “we are obviously right, so why waste time studying anything else?” As the aging professors who taught comparative systems died off, the courses disappeared.
This is a loss, because differences, even subtle ones between countries with very similar systems, shed light on important issues.
Years ago I taught at a small denominational college in Iowa with many Canadian students. At that time, the United States had about 14,000 individually chartered banks. Canada had 14. Now, we have over 7,000 and Canada has eight or so. Which country has been better served by its system? Regardless what answer you arrive at, merely considering the question teaches you that very different banking systems can lead to comparable national economic performance.
Similarly, in our country, unions represent just a small percent of the private-sector labor force, even in manufacturing. In Germany, unionization is near 50 percent, and taxes on payrolls to support the social welfare system are higher than here. Yet, Germany’s manufacturing sector remains healthy, both in terms of employment and as a share of the overall economy. With a population one-fourth that of our country, Germany is the world’s second largest exporter only after China, which has a population 16 times as large.
The United States, Canada, Australia and Switzerland all fall into a similar range considering government spending as a proportion of overall economic activity. Household incomes and value of output per person vary somewhat between these countries, especially as exchange rates fluctuate, but are closer than most people realize. Yet, the other three countries have been quite successful in balancing their budgets in recent decades, while doing so seems politically intractable here.
France, whether under left-wing or right-wing governments, does many things wrong from the point of view of orthodox U.S. economists. However, labor productivity—output per hour worked—is as high in France as here. They have lower per capita incomes because they work fewer hours. Similarly, labor productivity in Japan has grown quite well over the last decade. It is a declining labor force that has kept overall Japanese output stagnant.
This is not an argument that these other countries are doing everything right and we are doing it wrong. Moreover, many factors not mentioned here are at play in all these cases. But the fact that other countries can do quite well economically in many ways with very different policies than we have followed should engender some humility on our part as we debate our own issues.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.