The choice isn’t between capitalism or socialism

Americans are once again interested in debating economic systems. The 2016 presidential candidacy of Bernie Sanders, a self-described socialist, reignited a debate about capitalism and socialism that some thought died with the Soviet Union. Younger Americans are now divided on which system they like best.

Unfortunately, the debate about what these terms actually mean is hopelessly muddled.


Self-appointed defenders of capitalism will point to the economic failures of the former USSR, China and North Korea, or to the more recent economic disaster in Venezuela as proof positive of socialism’s defects

Socialism’s champions tend to rebut these charges by pointing to the successes of the Scandinavian countries. But American socialists, on occasion, receive pushback from residents of those countries — in 2015, Danish Prime Minister Lars Rasmussen stated bluntly that Denmark was a market economy rather than a socialist one.

There will never be a clear, simple definition of socialism or capitalism because there are multiple ways a government can try to intervene in markets.

Markets aren’t perfect.

They generate unequal outcomes, often unfair ones, and are subject to numerous inefficiencies.

Governments can try to remedy these problems in a number of ways. They can provide services directly, as with the U.K.’s National Health Service. They can own businesses, as China does with state-owned enterprises. They can write regulations to restrain or promote various forms of market activity. They can sanction and empower various institutions such as unions that counter the power of business. And they can use taxes and spending to redistribute income and wealth.

But governments don’t have to do all of these things at once.

In Scandinavia, for example, there are a lot of government-provided services, a lot of redistribution and strong unions, but a relatively light regulatory touch otherwise.

In a recent report, J.P. Morgan Asset Management researcher Michael Cembalest breaks down the Nordic model using various indicators from the World Bank and the Organization for Economic Cooperation and Development. As he notes, the Nordic countries (in which he includes the Netherlands) generally have fewer capital controls and trade barriers than the U.S. They also score quite highly on indexes of property rights and business freedom.

Rankings from the OECD confirm the general picture of Scandinavia as a lightly regulated place. Interestingly, the indicators also show higher direct state control of industry in the U.S.

Labor markets are a different matter, however; Scandinavian countries generally make it harder to fire workers than the U.S. Unions and collective bargaining also are stronger. Interestingly, though, Cembalest finds that labor in Nordic countries claims a slightly smaller share of national income than in the U.S., suggesting the impact of pro-business policies in those countries might outweigh the impact of labor protections when measured in purely monetary terms.

The Scandinavian countries, of course, have much higher taxes and spend more on social services.

Whether these various policy differences are large enough to constitute different systems is open to debate. Some economists consider them all merely different varieties of capitalism. The picture is complicated by the fact that countries change their policies with time.

The spirited online debates about socialism and capitalism are, therefore, mostly useless. They ignore and obscure the multiple dimensions of policy, as well as changes with time, and thus make it harder rather than easier to think about concrete ways to fix the problems in the U.S. system.


But one thing is for certain — the dichotomy of social versus capitalism, inherited from the ideological battles of the past two centuries, is badly out of date.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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