A recent opinion piece about the morality of capitalism touched off an argument between two students in one of my econ classes.
In this political season, people are quick to throw terms like “capitalism” and “socialism” around, and assert that one system or the other has special faults or strengths. The problem is that they seldom specify exactly what they mean by either term.
If you are interested in real-world issues, arguments about abstract systems don’t help much. Most countries have “mixed market economies,” in which both private property and private markets play major roles, but in which governments also provide some goods or services, regulate some market activity, and administer programs that redistribute income from one group in society to another.
Yes, there are differences between countries in the size and actions of government. But on closer examination, these differences are narrower than they might seem. There are some countries out on the extremes. North Korea is still trying to achieve the Leninist goal of the state owning all the “means of production” and centrally planning its economy. Cuba, however, long the other holdout from the collapse of Communism, is edging toward more private sector activity. China still has an enormous state sector in both manufacturing and finance. And there are developing countries in which government makes up a small fraction of the overall economy. But most countries are somewhere in the middle.
The problem with trying to classify economies as either “capitalist” or “socialist” is not just that they lie at different places along a single line between two extremes. It is that one must consider multiple dimensions. Does government control much industry or little? Is there little regulation of private economic activity or a lot? Are there many government programs that transfer income from one group to another, or few such programs? Are key goods or services like health care, telecommunications or public transportation government monopolies, or are they produced by private businesses?
When you look at specific real countries considering all these factors, it becomes clear that there are myriad combinations that are hard to classify into arbitrary “capitalist” versus “socialist” groups.
When I lived in Brazil in the late 1960s, government owned most steel production, most iron mining, all petroleum production and refining and all petrochemicals. The airlines were all owned by state governments and railroads were split between state and federal. Government-owned electricity companies were building huge dams. There were detailed labor laws, including restrictions on firing, and the government sponsored unions in many sectors.
Yet there was also free-wheeling entrepreneurship outside of the state sector, both in manufacturing and services. Most urban and all inter-urban buses were private, as was trucking, an enormous sector in a huge country with limited railroad mileage and little barge traffic.
Was Brazil socialist? The conservative generals who took power in 1964 and ran the country for 21 years would have recoiled at the thought. Communists were hunted down, socialist political parties were banned. Many aspects of government economic activity, especially the labor laws, owed much more to Italian Fascism and to Catholic social thought of the 1930s than to anything written by Marx.
Sweden and Finland both have extensive government social programs, and for many years were governed by Socialist parties. But both have thriving world-class corporations. Government in Germany makes up nearly 50 percent of gross domestic product, but this country of 82 million people exports more than the United States with 310 million. Nearly all of Germany’s exports are produced by private firms, including many that are family-owned. Italy has a highly regulated economy, at least nominally, but has a similarly dynamic private sector in its northern areas.
Measured by government spending relative to GDP, Japan is less “socialistic” than most of Europe countries. Government is even smaller than our country, but there is extensive government direction of corporations and finance, both formally and informally, through the Ministry of International Trade and Industry and the Ministry of Finance. There is extensive regulation of retailing.
With its government-run health system, some Americans see Canada as “socialistic.” But drive across the border to Winnipeg or Thunder Bay, and it is hard to see how daily life differs much from that on our side of the border. Are Canadians’ personal freedoms crushed by government? Is their economy hobbled compared to ours?
Go south instead and you can find many countries in which government plays a smaller role relative to GDP than in the United States or Europe. Do the smaller government sectors in Bolivia or Paraguay make their economies markedly more dynamic or give their citizens notably greater personal freedom than the larger governments in the Netherlands or Denmark?
With Social Security, Medicare, Medicaid and other programs, the United States has a safety net for the poor greater than that of China. We also have some government-sponsored industry, from the Tennessee Valley Authority and Bonneville Power Administration to the North Dakota Mill. China has a burgeoning private sector that, in practice, is nearly unregulated. Yet state-owned firms dominate heavy industry and finance. Which country is more capitalistic? Which more socialistic?
The point is that relationships between private and public sectors vary in multiple dimensions. No two countries have exactly the same combinations of varying factors. Trying to classify them into two arbitrary categories is a waste of time.
The question of what role government should play in the economy is a legitimate issue, and an important one. But it needs to be approached on a policy-by-policy and institution-by-institution basis. Applying abstract labels doesn’t help much.