It doesn't matter whether the cat is black or white, as long as it catches mice.
— Deng Xiaoping
Part 1 covered why the labels "capitalism" and "socialism" rarely match what's actually happening on the ground. Now for a tour through the rest of the world's economic systems, and the word that best describes the economic system in the U.S.
China is a big economic challenger to the US, but it’s the Scandinavian economic systems that are truly the boogeyman. Scandinavian economic policy elicits a level of fear/fascination in Americans, mainly because the flavor of socialism practiced there is one that could actually be instituted in the US. That most actual socialists would confidently identify the Scandinavian model as capitalism should tell you something about the utility of these labels.
Social democracy, as practiced in the countries that practice it best — Denmark, Sweden, Norway, Finland, the Netherlands, and, on a good day and with the wind behind it, Germany — is a form of market capitalism in which the state does not particularly try to redirect the economy but does redistribute a very large fraction of its output. Firms are private. Markets set prices. Competition is fierce and, in some cases (Sweden's labor market, Denmark's "flexicurity" regime), fiercer than in the United States. What makes these countries social democracies rather than just capitalist economies are high tax rates and what those taxes cover: healthcare, childcare, education (including university), unemployment insurance, parental leave, and a floor beneath which citizens are, at least in theory, not permitted to fall.
The social democratic wager being made is that one can have a genuinely dynamic capitalist economy and a floor, and that the two reinforce each other. The reasoning is that if losing your job doesn't mean losing your healthcare, your house, and your children's future, you'll be more willing to take the sort of risks that a dynamic economy actually depends on. A Danish company can fire you tomorrow because Denmark will retrain you, subsidize you, and quite possibly send you back to school. This is a very different social contract from the American one, in which losing your job means losing your health insurance, which is itself a distinctly American contribution to the annals of institutional design and one that no other developed country has felt the urge to copy, with good reason.
The Nordic model has produced results that are absurdly good across the board. Life expectancy: high. Happiness surveys: consistently topped. Corruption: nearly nonexistent. Upward mobility: higher than in the country whose founding myth is upward mobility. Innovation per capita: startling. Sweden has produced Spotify*, Skype, Ikea, H&M, Ericsson, and Klarna, from a population smaller than the state of Ohio. This is a hallmark of an innovative, risk-based economy.
There are three highly valid criticisms of Scandinavian social democracy. First, it may not scale. The Nordic countries are small, largely homogeneous, and trust each other. These things make redistributive institutions much easier to sustain than they would be in a country of 340 million people with a lower-trust political culture and eighteen different opinions on everything, including whether it is currently Thursday. Second, the tax rates required are very high, and there is plenty of evidence suggesting they discourage certain kinds of entrepreneurial risk-taking. Third, the whole model may depend on demographic and cultural conditions that are, in the long run, difficult to preserve — a point the Nordic countries themselves have been quietly wrestling with for two decades and about which the honest answer is that nobody yet knows.
Still, if you ranked the world's countries by the plain question "would you like to be born here, not knowing in advance who your parents will be," social democracy wins every year, going away. This is a version of the question the philosopher John Rawls asked, and it is, I think, the one question about economic systems that actually matters.
Then there is a whole category of countries that do not really have an economic system in any meaningful sense, because they don't need one. It turns out that if you sit on enough oil, the oil does the work of the economy for you. Saudi Arabia, Kuwait, the UAE, Norway, Russia, Gabon and Venezuela have wildly different politics, wildly different cultures, and roughly the same underlying economic structure, which is that a substantial fraction of national income comes from pulling black stuff out of the ground and selling it to someone who intends to burn it.
Yes, I said Norway and Venezuela have similar underlying economic structures. This is true even though the more pertinent question is what they do with the money. Norway’s oil largesse has funded a sovereign wealth fund now worth somewhere north of $1.5 trillion, managed with the grim Lutheran discipline of a man who does not entirely believe he deserves nice things. Venezuela’s economic structure has been hollowed out by political patronage, causing millions of Venezuelans to flee. Same input. Radically different output. It turns out the resource matters less than what you do with the resource. Come to think of it, a decent summary of economic history generally.
Argentina demonstrates that every theory you have about economic systems is wrong.
In 1913, Argentina had a higher GDP per capita than France or Germany. Read that again. On the eve of World War I, Argentina was one of the ten richest countries on Earth. Since then it has tried, in no particular order: import substitution, aggressive free trade, currency pegs, currency floats, Peronism, military rule, Kirchnerism, more Peronism, and, most recently, turned its governance over to an economist with terrible fashion sense who would very much like to abolish the central bank and has taken a chainsaw to nearly every institution in the country.
None of it has worked. Argentina has defaulted on its sovereign debt roughly nine times, an economic statistic that remains amongst the top in the world.
The Argentine case is instructive because it undermines almost every confident claim anyone makes about economic systems. If capitalism worked, Argentina should have been fine in the 1990s. If protectionism worked, Argentina should have been fine in the 1950s. If populism worked, Argentina should have been fine in almost any decade you care to pick. The consistent variable is not the system. It is Argentina.
Economic systems are less like religions than they are like recipes. The ingredients matter— property rights, functional courts, an educated population, some kind of coherent monetary policy, a state that can collect taxes without stealing them—but the cook matters more. Two countries can adopt the same nominal system and produce radically different results, because the system is only ever half the story. The other half is culture, institutions, geography, luck, and the slow, unglamorous accumulation of habits. The end result is a set of national institutions that are either trusted by the populace for good reason, or not—also for good reason.
The economies that do best over long stretches do a few things well. They stay curious. They copy what works and abandon what doesn't. They don't confuse their national mythology with economic policy. Also, they generally seem to understand what should be obvious: the purpose of an economy is not to prove a theory correct, but to make it possible for the people living inside it to have decent, dignified, reasonably interesting lives.
This is, I realize, a distinctly unsatisfying lesson. It doesn't give you a team to root for. It doesn't tell you which system is going to win. It doesn't even really tell you what to do at the ballot box, other than perhaps vote for competence.
But then, if there's one thing worth remembering about global markets, it's that competence is criminally underrated as a source of national wealth. There is a reason that tiny Singapore, bereft of natural resources, has a stock market nearly 10 times the size of Nigeria’s. It all comes down to trust. Ideology gets the headlines. Execution gets the results. The rest is mostly branding. One can look at the outcomes of socialist systems and say, “well, in general it fails,” but the reality is that no economic system is, on its own, correct.
The countries that have done best over the long run are the ones that picked a system as a matter of convenience, and then quietly imported whatever pieces of the other systems they needed to make the whole apparatus work. Germany runs a market economy with codetermination laws that would look socialist in Texas. Sweden runs a welfare state on top of a business environment that would look libertarian in Paris. Singapore runs a market economy with a state housing program that houses 80% of the population, which would look Soviet almost anywhere. China runs whatever it is China is running, and asks that you please stop asking.
None of these countries is confused about what it's doing. It's the countries that treat their economic system as a matter of identity rather than of engineering that tend to run into trouble. Ideology, in the end, is a luxury good. The countries that can afford it are the ones that don't take it very seriously. The countries that can't afford it are usually the ones insisting on it most loudly.
Which is, I suppose, the closest thing to a general law of political economy that two centuries of trying every possible variation has managed to produce. Pick your tools. Use them. Don't fall in love with them. And when they stop working, put them down and pick up different ones. The economy does not care what you call it. It only cares whether it works.
If it turns out that what works is a market with a floor beneath it and a strategic hand above it and worker representation in the middle of it and a functional bureaucracy running the whole thing without stealing too much, well — that isn't a betrayal of any of the great -isms. It's just a decent recipe. And in the end, the recipe is the whole game.
Oh! And that term that more accurately describes the US economic system than “capitalism”? The French have a word for it because the French have a word for everything, and also because they have been doing it longer and more openly than anyone else. It’s dirigisme, which describes market-based capitalism where the state maintains strong opinions about which industries should win.
The postwar French state, from de Gaulle onward, ran an economy that was privately owned, market-priced, and profit-seeking, but in which the state took an active hand in deciding which sectors mattered, which national champions should be nurtured, and which technologies France ought to have on strategic grounds even if the market alone wouldn't produce them. The result was Airbus, TGV, a domestic nuclear industry that today produces about 70% of French electricity, and Minitel, which was a distinctly French version of the internet that lasted until roughly 2012 and was, on its own strange terms, sort of magnificent. If your only exposure to Minitel is a footnote in a book about the internet, I would encourage you to look further. There is a whole world in there. Most of it was for ordering flowers.