Alphonse de Lamartine rejecting the red flag of socialism in front of the Town Hall of Paris during the 1848 French Revolution.
Wikimedia Commons/ Henri Félix Emmanuel Philippoteaux (1815-1884)

The American Left has a romance with European nations, particularly with Scandinavia, because of their supposed more socialist mix between the polar-opposite, platonic ideals of Socialism and Capitalism. Bernie Sanders, for example, believes we should sit at the feet of the Scandinavians and learn from their example. Last October during a Democratic Party debate, he said “I think we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people.” A conservative rejoinder that it just ain’t so can take two routes. One is based on history, and one on economic data from the European countries. For the moment, I will take the data route, and discuss the history later in a following post.

The Data For Europe At Large

The data I will use in this essay comes from two basic sources. Straight economic data such as GDP, GDP growth rates, and the GINI index I get from the World Bank. In addition as I have done in the posts Are Leftist Economies Better Than Free-Markets,  The United States: An Exceptional Country?, and Economic Freedom in the United States, I will use the Index of Economic Freedom developed by the Wall Street Journal and the Heritage Foundation. This is a number calculated for each country that indicates how free the country’s economy is from interference by governments. In a totalitarian socialist economy the index is zero, while in the most laissez-faire, free-market economy conceivable, the index is 100. Hereinafter, I will call a country’s Index of Economic Freedom simply its economic freedom.

Another number that needs explanation is the GINI Index, which I define in detail in the essay Comparing the Economies of All Countries on Earth. The GINI index is a measure of how equally a country’s GDP is distributed as income among the population. If it is zero, the GDP is distributed completely evenly; if it is 100, only one person gets all the GDP as income, and everyone else gets nothing.

With those preliminaries, I will first show the scatter plots of all available country positions in the freedom-per capita GDP plane and in the freedom-GINI Index plane. This will give some background context on what comes next,

The country points in this plot demonstrate that as economic freedom increases, the per capita GDP will tend to increase exponentially. Exponential growth with freedom becomes very obvious once economic freedom increases past 60. The scatter of country points around any exponential curve we might fit to this data occurs because there is more on which any individual country’s GDP depends than just the value of the index of economic freedom. With the same degree of economic freedom, different countries might achieve different GDPs, growth rates, GINI indices, or other aggregate economic variables because of different policies that produce the same index of economic freedom. Other factors are availability of raw materials, conditions of war or peace, etc.  Next let us look at the GINI values for countries as freedom varies.

Here, given all the propaganda the progressives put out about how unequally income is distributed in free-market countries, we find a big surprise. From this plot we can see that a country’s GINI tends to decrease as economic freedom increases. Recall that smaller values of the GINI index mean more even distribution of the national income.

Now that we have seen what these two plots look like for all nations, let us see how they look with only the European countries, including eastern Europe, the Baltic Sea states, and Russia. I also include the point for the United States for comparison.

There are several things to note about this plot. First, we see again that countries with lower per capita GDP tend also to have lower economic freedom. Note also the points for the U.S., the United Kingdom, and Germany are grouped together at the high economic freedom region, as are Greece and Russia in the low economic freedom area, with France in-between in both per capita GDP and economic freedom. Next let us look at the GINI index-economic freedom plot.

With this ensemble of nations there is little evidence of the downslope of a trend curve, with almost all European nations existing in a GINI band between 25 and 41. There is perhaps a hint of some uptrend with declining economic freedom with Greece and Russia. The two nations with the highest GINI scores are Russia with 41.6 and the U.S. with 41.1. It seems somewhat anomalous that the U.S. has such a high GINI index, but I believe it to be a symptom of our economic troubles and I will discuss it further later.

Another very important question is how does GDP growth change with increasing economic freedom. We would expect at least some general increase of growth rates, since higher economic freedom tends to give individual citizens more room to produce and earn a living than economies that are more constrained by government intrusion.  Graphing country points with GDP growth rate versus economic freedom, we get the following plot.

Just as we suspected there is a trend upwards with increasing economic freedom, although there is a great deal of scatter of the the data points. This is probably due to the rather strange economic environment in which the entire world has been living for almost a decade with zero real short- and long-term interest rates. Part of the scatter is attributable to mixing data from countries of different economic development. It is well known that more mature economies grow slower than less developed countries. Within the data set we have countries in Eastern Europe that are still recovering from their domination by Soviet Russia, as well as some countries such as Greece and Italy whose growth has been stunted due to quasi-socialist policies.

A Filtered Data Set

To compare how socialist Europe is in relation to the United States, we should use an ensemble of states whose economies are of similar economic development. For that reason I will restrict the ensemble to having an economic freedom ranking of 75 or greater (index of economic freedom of 62.3 or greater), and a per capita GDP of $20,000 or greater. These criteria just barely keeps France in the ensemble, but they filter out Russia, Greece, and all of Eastern Europe. Among the Baltic Sea States only Estonia and Finland remain. The four European states higher in economic freedom than the U.S. are Switzerland (world rank 4), Ireland (world rank 8), Estonia (world rank 9), and the United Kingdom (world rank 10). The scatter plot of per capita GDP vs. economic freedom then is as shown below.

In this plot the general rise of per capita GDP with increasing economic freedom is more apparent. The outlier is the Baltic Sea state of Estonia with economic freedom index of 77.2 and per capita GDP of $20,147. It is a former member of the Union of Soviet Socialist Republics (now a NATO member) whose economy had been suppressed by communism under the Soviet Union. It also had one of the faster rates of GDP growth in Europe at an almost respectable 2.9% growth rate.

Now let us look at how GDP growth rates vary with economic freedom as shown in the plot below.

It is pretty clear that GDP growth rates increase with growing economic freedom.

The plot of the GINI index vs. economic freedom with this reduced ensemble of nations is shown below.

It appears that the nations in this ensemble stay within a fairly narrow GINI band between 27.6 and 35.9, with the U.S. as an outlier with a GINI of 41.1. I will return to this outlier status of the United States later.

Finally, a very interesting picture is revealed if we plot these countries’ GDP growth rates vs their GINI index, as shown below.

Although there is a large amount of scatter, there is a definite trend of GDP growth rising with increasing GINI. I will give my interpretation to all this data in the next section.

My Interpretation of the Data

The data shown in figures 1, 3, and 6 above is not very surprising if you believe in free-markets, albeit gratifying. In general, as economic freedom increases, so does per capita GDP. More than that, figures 5 and 7 reveal that GDP growth rates also generally increase with increasing economic freedom.

After seeing how GDP and its growth rate vary with economic freedom, a very important question is how evenly the distribution of wealth is. A country might have a large per capita GDP that is growing rapidly, but if the lion’s share of the new wealth goes to a small sub-set of the population, the ruling masters of the economy will be oppressors enjoying the fruits of the population’s labor, and Bernie Sanders and the Democrats will have been proven correct. Fortunately, figure 2 using data from all the countries of the world for which we have data says they are wrong. Recall that a smaller GINI means a more even distribution of income. So the generally declining GINI with increasing economic freedom demonstrates, all other factors being the same, an increase in economic freedom results in a more even distribution of wealth. Of course, all other factors are almost never the same, resulting in the scatter of the country points about the blue line linear fit in figure 2. When we restrict the ensemble of countries to the top-ranked European countries, the plot of GINI vs economic freedom is consistent to this picture, but the ensemble is so small and the downward slope of GINI versus economic freedom so small that it is hard to perceive.

But then we come to figure 9 which tells us that as the GINI index increases, i.e. as the distribution of GDP becomes more unequal, the GDP growth rate generally increases. What are to make of this data? I have written about this kind of dependence before in a number of posts, but particularly in Distribution and Use of Wealth in U.S. Capitalism and in The Actual U.S. Distribution of Wealth Today.

In any economy that is growing — whether more socialist or more capitalist — a large fraction of GDP must be saved and directed toward investments to maintain and increase the capacity to produce wealth. A portion of these investments, called replacement investments, are needed to just maintain the current productive capacity, to replace worn-out of obsolete equipment and to upgrade the capabilities of the work force. If an economy does not invest at least that much, GDP will fall with the decrease in productive capacity. To actually grow, the economy must invest more in new productive capacity.

That portion of the GDP devoted to investments is unavailable for distribution among the population, so that at least that much causes an inequality in distribution. In a socialist economy the state is the entity that accumulates the capital for investment, while in a more capitalist economy, individual private investors perform that task. I have argued in The Morality of Wealth and in Morality and Capitalism that investments by individual private investors in a free-market capitalist economy is both more economically efficient and more morally justifiable.

At least a partial explanation for figure 9 is that growth rates increase when more of the GDP is allocated for investment. The fact that more determines growth than just the amount invested, e.g. government taxes and regulations, explains why there is such a large amount of data point scatter around the linear fit.

One further point must be made about the data. In all of the plots above involving the GINI index, the data point representing the United States is an outlier with a GINI index of 41.1 that is larger than those of the others. Is this because the U.S. is more of a free-market economy than the others? Obviously not, when you consider that Switzerland, Ireland, Estonia, and the United Kingdom  have higher indices of economic freedom (81.0, 77.3, 77.2,, and 76.4 respectively vs. the United States’ 75.4) yet have lower GINI indices (31.6, 32.5, 33.2, and 32.6 respectively vs. the United States’ 41.1).

If the fact the U.S. is a more free-market economy than most is not an explanation, then what can explain our higher GINI? Surely the fact that U.S. middle class wages have been stagnant for a very long time must be a large part of the explanation, perhaps the largest. Another part of the explanation lies in the declining labor market participation rate, as discouraged workers leave the labor force. If all this is true, then whatever explains stagnant wages and discouraged workers will explain why our GINI is so high. In fact, we have a plethora of such explanations! U.S governments at all levels, but particularly at the federal level, have created over the decades an economic environment that is increasingly hostile to private businesses. I have described some of these government causes of hostile environment in the following posts:

• Causes of the 2007-2008 U.S. Financial Crisis
• Economic Effects of the Dodd-Frank Act
• The Burden of Government Regulations
• The Debilitating Effects of Obamacare
• The EPA, CO2, Mercury Emissions, and “Green” Energy
• Economic Effects of Current Tax Policy
• Economic Damage Created by the Fed
• The Rahn Curve, Hauser’s Law, the Laffer Curve and Flat Taxes
• Big Corporations Abandoning the U.S. at an Increasing Rate

The explanation for our higher GINI then is not that we are a mean, money-grubbing capitalist country! Instead, the explanation is in the fact we are becoming less capitalist as time proceeds. The proof of this assertion lies in a plot of the U.S.’ economic freedom index over time.

From this graph we see the economic freedom of the United States has been declining fairly steadily since 2009, i.e. since the start of the Obama administration. It is ironic the progressives who loudly complain about economic inequality have themselves been the cause of that inequality!

What is the answer to our original question of whether European states are more socialist than the United States? It depends on which European countries you are talking about.  From the evidence of the index of economic freedom, the U.S. is overall more socialist than Switzerland, Ireland, Estonia, and the United Kingdom. Nevertheless, the United States, even in our presently parlous economic condition, is more capitalist than all the other European countries.

Views: 2,903

GO TO HOME

Sharing is caring!