Monday, January 16, 2012

Can Markets and Socialism Coexist? Denmark's Case

So hold on, here we go
Hold on, to nothing we know
--The Motels

Cato's Dan Mitchell considers the solid economic performance of Denmark despite major policy contradictions.

On the one hand, Denmark has very free markets as measured by the Heritage Economic Freedom Index, scoring highly in legal structure that protects property rights, lack of regulation, free trade policy, et al. On the other hand, Denmark has stifling fiscal policies, with tax burdens and government spending levels that exceed 50% of GDP.

Mitchell concludes that the only way that the Denmark model 'works' here is that the free market environment pulls an otherwise untenable fiscal situation out of the economic abyss. Were Denmark to reduce market freedom, then the model would collapse.

He also suggests that Denmark moved towards more socialization only after free markets had created large amounts of wealth. This has been the progression in nearly all Western countries: get rich, then expand government. The rich country/big government relationship is sometimes referred to as Wagner's Law.

We should note that Sweden, whose situation we pondered recently, has a similar set-up to Denmark's.

One thing that nags me about these conclusions is that they are based on an assumption that freedom can be categorically managed. Keep market freedom high in order to offset low fiscal freedom. Over time, it is hard for me to see how this can be maintained. Government spending at these levels seem certain to engulf freedoms of all kinds, including those involved in exchange. Indeed, it can be argued that market freedoms are already severely compromised if taxes exceed 50% of GDP.

Measures that comprise the Economic Freedom Index illustrate the contradiction. Mitchell notes that Denmark's free market score is strengthened by country practices that preserve property rights. But taxes exceed 50%! How can property rights be respected when government takes more that half of national income under conditions of force?

This is a nice example of the problems evident with the Economic Freedom Index as measured.

In sum, Mitchell's conclusions seem reasonable on a static basis and assuming that the data employed are valid. On a more dynamice basis, however, it is hard to see how the arrangement currently practiced by Denmark (and Sweden) is stable over time.

1 comment:

dgeorge12358 said...

Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individuals life and the unrestricted supremacy of the government in its capacity as central board of production management.

Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.
~Ludwig von Mises