Part 1: What Capitalists Get Wrong About Capitalism

It doesn't matter whether the cat is black or white, as long as it catches mice.
— Deng Xiaoping

I am a capitalist. I’m other things, but also I am definitely that. I want to get this out of the way before I am, inevitably, accused by someone of being “bothsides-ist.” In the main, I think socialism kind of sucks. The historical scoreboard suggests quite strongly that socialism sucks.

And yet, following the election of Zohran Mamdani as Mayor of New York and the subsequent surge in profile of the Democratic Socialists of America, those who are strong adherents to the capitalist system should not be deceived into thinking that those who are rejecting it are doing so simply because they fail to understand history.

This being said, allow me to say some pretty obvious things about the world's economic systems, starting with this: most of them are lying about what they are. In fact, at the end of this article I’m going to describe the American system with a word that is most likely unfamiliar to you.

Let’s get started by saying that there are, roughly speaking, five kinds of economic systems in the world: capitalism, socialism, petrostates, plus whatever it is they're doing in China and Argentina.

A rough guide to economic systems

Taking its branding at face value, capitalism is the system where the government stays out of the market and lets individuals and firms sort things out through the price mechanism. This is a beautiful theory, and about the only place it’s ever been practiced is the Somali cellular communications industry. ¹

The United States, the world’s defender of capitalism, spends something like $7 trillion a year to operate the federal government, subsidize farmers, insure bank deposits, guarantee mortgages, fund a defense industry that Adam Smith would have recognized on sight as a straightforward exercise in central planning, and, when things get sufficiently exciting, occasionally nationalize automotive and semiconductor sectors.

American capitalism, in other words, is a mixed economy that has convinced itself it isn't one.

Socialism, meanwhile, is the system where the state owns the means of production and allocates resources according to social need rather than market signals. This is also practiced almost nowhere, certainly not in the countries that Americans most confidently identify as socialist. Sweden, for example, has no legally mandated minimum wage. Denmark has looser hiring-and-firing rules than most U.S. states. Finland has a school-choice system that would give an American teachers' union a small stroke followed by a medium-sized stroke.

What these countries actually have are broadly capitalist economies upon which is laid a robust welfare state financed by extremely high taxes. That is, to be clear, a different system than what’s practiced in the United States. It’s just not socialism. I appreciate the broad nature of this confusion because it's funny, but also because it demonstrates something important: the name on the label almost never matches the recipe inside the box.

What successful economies actually have in common.

I mention the Scandinavian countries mainly because those are the ones that Americans fond of socialism point to as being models for why socialism is pretty neat and would work in this country. We should note that these same Americans fond of socialism rarely point to countries like Cuba as models for what would work in the United States, which is a shame because Cuba’s pretty socialist, though its private sector is probably much broader than you might think.

In the main, the true believers of one system or another have it pretty wrong when they point to both successes and failures that bolster their argument, because ultimately the systems that actually work do not have an ideology.

If you look at statistics that measure economic success, be they GDP per capita, life expectancy, self-reported happiness, upward mobility—pick whatever composite you find least objectionable—the top of every list looks weirdly similar. It is, in some order, the Nordics, plus Switzerland, a couple of city-states with the population of Cleveland, plus, depending on the metric, the Netherlands or New Zealand or Ireland.

What do these countries have in common besides being really rich? When it comes to ideology, not much, actually. Some have very high taxes. Some have very low taxes. Some have expansive welfare states. Some have essentially none. Some are aggressively free-trading (Singapore). Some are cautiously protective (Norway, on account of the oil).

What they do share is a certain seriousness about execution: competent bureaucracies, low corruption, functional courts, an educated workforce, and a general willingness to look at what's working somewhere else and copy it without getting sentimental about the source.

This last part is important. It is also not what economies do well when they've decided their system is a religion. It’s what happens when the institutions of a country tend to be trusted by their populations.

China, or what happens when you stop believing your own PR

“But what about China!”, you say? OK, maybe you didn’t say this, but it does seem dumb to talk about global systems without spending a second thinking about the lesson of the greatest economic success story of the last 50 years.

Officially, the People’s Republic of China is a communist country, so its economic system should confidently be described as socialist. That’s what the “People’s Republic” part is about. China has a Communist Party. It has five-year plans. It has broad economic coordination organized by the state, which owns or controls enormous swaths of the economy.

China also has an entrepreneurial class that would embarrass Silicon Valley in its aggressiveness, several thousand billionaires (nobody is quite sure how many, and the count varies quarter to quarter depending on who is currently under house arrest), and a state sector that competes ferociously with the private sector. Karl Marx would not pop up today in Shenzhen and recognize it as a socialist paradise. Neither would Mao Zedong.

The Chinese economic miracle got its start when the Chinese Communist Party under Deng Xiaoping quietly stopped believing in communism as an economic doctrine and started treating it as a political brand. What replaced its Maoist economic system was something quite different: state-directed capitalism, with the state's thumb pressed firmly on the scale in favor of strategic industries and against anyone who might become powerful enough to threaten the Party.

News about China can’t help but talk about its demographic time bomb, the property overhang, and the recurring problem of nobody wanting to invest in a country where your CEO can vanish for three weeks and return with, uh, clarified priorities. But China’s is a genuinely novel system, and pretending it is just capitalism with extra steps, or communism with shopping malls, misses the point entirely. On some levels, China is the ultimate libertarian paradise. Businesses don’t wait for the government to give its blessing to try things; it’s an economy based on innovation, and then, if necessary, asking forgiveness for having ignored government regulation.

In Part 2, I'll get to the Nordic boogeyman, the strange economics of sitting on a lot of oil, Argentina's century-long streak of proving every theory wrong, and the one word that actually describes what America is doing.