Political views are often misleadingly discussed as if they span a single left-right spectrum. My point is that similar mistakes are made when thinking about economic systems and policies. As a correction, consider that economic systems can be understood along multiple axes or spectra. And these different axes are often confused with each other.
Here I propose four axes for evaluating a country’s economic system. Each axis should be thought of as a sliding scale, not a binary switch. It is not a question of whether the country is entirely on this side or that side, but on which side the balance tips.
The first axis is whether the economic system is capitalism or socialism. The main way this axis is defined is that the capitalist system maintains private property, most importantly in the ownership and operation of the means of production. To the extent that the means of production are privately owned and operated, the economy becomes more capitalist. To the extent that the means of production are directed by the state rather than by private actors, the economy becomes more socialist.
Another axis considers whether there is a free market in the economy. Although capitalism and free markets are often used interchangeably, they are different concepts. A free market is characterized by the ability of buyers and sellers to engage in mutually agreed-upon exchanges without government intervention. This axis can also be applied to specific markets within an economy. In the United States, the majority of medical institutions and pharmaceutical companies are privately owned and operated. In that respect, America can be said to have a capitalist healthcare system. But that doesn’t mean there’s a free market in health care. Healthcare and pharmaceutical production are among the most highly regulated and legally restricted sectors in the country.
The third axis is free trade. I believe that free trade refers to the range of people who can interact without interference from the state. In practice, free trade almost always refers to international free trade, since countries rarely restrict trade within their borders (for example, a Minnesotan can trade freely with a Floridian). Free trade exists in an economy as long as people can engage in mutually beneficial exchanges across political borders without tariffs, import quotas, or other restrictions. Just as there is no free market in health care, there is no free trade in health care. For example, drugs that are inexpensive, proven to be safe and effective, and have been used in other countries for decades are prohibited from being imported into the United States.
The final axis is the existence of a welfare state. Welfare states are often confused with socialism, but they are different from each other. After all, Hayek explicitly supports the welfare state in The Road to Serfdom (pp. 147-149)! There may be countries that are highly capitalist, have free markets, free trade, but also have large welfare states. The Nordic countries, which socialists like Bernie Sanders often point to as examples of desirable institutions, do have large welfare states. But they are also highly capitalist, engage in free trade, have free markets, and are overall better than the United States along all these axes.
Treating all these different ideas as if they were along one axis can be very misleading. Many Americans want a stronger welfare state. Because many people think of economic policy in terms of a single axis, they may mistakenly believe that the “welfare state” and “socialism” are on the same axis and on the same side. So for them, wanting a stronger welfare state seems to mean having to oppose capitalism, free trade, and free markets. By separating some terms, you can avoid this common pitfall.
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