Separating Some Terms – Econlib

Political views are often misleadingly discussed as though they span a single left/right spectrum. I want to suggest that a similar mistake gets made when thinking about economic systems and policies. As a corrective, consider that economic systems can be understood along more than one axis or spectrum – and these different axes are often conflated 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, rather than a binary switch. It’s not a matter of if a country is entirely on this or that side, it’s a question of what side the balance tends toward. 

The first axis is whether an economic system is capitalist or socialist. The primary way this axis is defined is that a capitalist system upholds private property, most significantly so in the ownership and operation of the means of production. To the extent that the means of production are privately owned and operated, an economy is more capitalist. To the extent that the means of production are directed by the state instead of private actors, an economy is more socialist. 

A separate axis considers whether an economy has a free market. Capitalism and free markets are often used interchangeably, but they are distinct concepts. What distinguishes a free market is the ability of buyers and sellers to make mutually agreed-upon exchanges without government interference. This axis can also be applied to specific markets within an economy. In America, the majority of health care institutions and pharmaceutical companies are privately owned and operated. To that extent, one could say America has a capitalist health care system. But that doesn’t mean we have a free market in health care. Health care and pharmaceutical production are among the most heavily regulated and legally restricted sectors in the country.

A third axis is free trade. I think of free trade as being about the scope of people with whom you can exchange without state interference. Because countries rarely restrict trade within their borders (Minnesotans can freely trade with Floridians, etc), as a practical matter free trade almost always refers to international free trade. An economy has free trade to the extent that people across political borders can make mutually beneficial exchanges with each other without tariffs, import quotas, or other such restrictions. Just as we don’t have a free market in health care, we also don’t have free trade in health care. Medications that are inexpensive, have been proven safe and effective, and have been used for decades in other countries are forbidden from being imported to the United States, for example. 

The last axis is the presence of a welfare state. The welfare state is often conflated with socialism, but they are distinct from each other. Hayek explicitly endorses a welfare state in The Road to Serfdom (pp. 147–149), after all!  You can have a country that is highly capitalist, has free markets, engages in free trade, but also has a large welfare state. The Nordic countries, so often pointed to by socialists like Bernie Sanders as examples of a desirable system, certainly have large welfare states. But they also are highly capitalist, engage in free trade, and have free markets – to an overall greater extent along all these axes than the United States! 

Treating all of these different ideas as though they lay along a single axis can be very misleading. Many Americans want a more robust welfare state. Because so many people envision economic policy on a single axis, they might mistakenly assume that “welfare state” and “socialism” both exist on this one axis and on the same side. So, it seems to them that wanting a stronger welfare state means they must be opposed to capitalism, free trade, and free markets. Separating some terms helps avoid this common pitfall.

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