How Capitalistic Are We? A comparative look.

Why Social Capitalism? What does that mean?  First there is capitalism, which is the private ownership of the means of production and the creation of goods for profit. In theory, pure capitalism is free of all government interference. Then there are the ideas of socialism, where the government controls certain aspects of the economy.  So which economic system do we adhere to in the United States? We certainly are capitalists with private enterprise, but we also apply socialist practices with government controls and spending. Economists define our economic system as a “mixed economy”. Well, a mix of what? It’s a mix of capitalism and socialism, which is why I like to call it social capitalism.

While we can argue the exact definitions of each theory, one cannot deny that we have always employed some balance of both theories. The main question is what should that balance be? Most of our political arguments today are based on how much of each theory we should apply to our economy. Republicans believe we should apply more capitalistic practices and Democrats believe in applying more socialist ideals. While we can go on and on arguing about different policies, here I wanted to try and see how capitalistic or socialist America is compared to other countries.

largest economies

We can start by measuring how capitalist or socialist a country is by looking at how much of a country’s GDP is controlled by the government. In the following chart, I list the top 21 countries in the world with the largest economies. I also list each country’s total government spending as a percentage of their GDP.

In this table we see the U.S. is still the largest economy in the world followed by China, Japan, Germany, France, etc. all the way down to Saudi Arabia. In the United States our government spends 38.9% of our GDP. These figures account for all government spending: federal, state and local. (Current federal spending in the U.S. is about 25% of GDP)

We can see some countries spend a higher percentage than the U.S, and some spend a lower percentage. If we arrange this list in order of spending as a percentage of GDP, we can see that France spends the highest percentage at 52% of GDP.  Indonesia is the lowest at 19.2%. top spendersWhere does the U.S.  sit comparatively? We are right in the middle. Half of the world’s largest economies spend higher percentages than us and half spend less. So we certainly aren’t near any extreme when compared to the government spending of others. Is any of this information really useful?

Before we look deeper into what these numbers may mean, I would like to first make sure we are all on the same page with the same goal. I continue with the assumption that we are all looking to improve our country’s economy with the hopes of benefiting everyone in our country.  In our quest for balance we ask if we should we be leaning further towards conservative ideals with less government spending or should we lean more towards liberal ideals with increased government spending? If we are looking to improve our economy what can these numbers tell us?

First, out of the 177 nations for which there are records (there are 206 nations total), 55 governments spend a higher percentage of GDP than America does and 121 countries spend less. If we look at the world’s top 21 economies, 9 of them spend more and 11 spend less than the U.S. This means that 16% of all the governments that spend higher portions of GDP are among the top 21 economies. In converse only 9% of countries that spend a smaller percentage of GDP have made it into the top 21 economies.

However, the overall size of a country’s economy can be largely based on shear physical size and population, as opposed to just a government’s economic policies. In order to account for population we can take the same list of countries and organize them according to GDP per capita. GDP per capita or PPP is a country’s GDP divided by the population. This gives a more accurate representation of how wealthy a country is, relative to its size and population.

GDP per capitaIf you look at this table, you’ll notice that the U.S. is only number 7 in terms of GDP per capita. The countries not on this list whose PPP is higher than that of the largest world economies are all tiny countries. Qatar, Brunei and Singapore are all countries with a higher PPP because of thier small populations that have emense oil resources or other strategic resources.

What else can we see when looking at GDP per capita for the top 21 economies? The United States still has the highest GDP per capita among the world’s biggest economies. India comes in last because its GDP is divided among a large population.

If we do some math we can see that those countries who’s governments spent higher percentages of GDP have an average GDP per capita of $32,585. Of those economies that spent a smaller share of GDP, their PPP is only $22,211, about $10,000 less per person.  If we look further we can see that out of the top ten on this list, seven countries spend more than the U.S. and only three spend less. The reverse is also true for the bottom 10 on the list. Of the bottom 10, only two countries spent higher percentages of GDP and eight of them spent less than America.

Now, government spending is only one factor that can affect economic growth.  There’s certainly other comparisons to look at, such as overall debt, areas or sectors that money is spent on, tax rates, investment policies and strategies, all of which I hope to examine in future articles.

But here, when we simply look at the top world economies, there is an undeniable trend. Those who have spent higher percentages of GDP than the U.S. are about 4 times more likely to have higher GDP than those who spend a smaller percentage compared to the U.S.

Again this isn’t a 100% conclusive cause and effect relationship. There are many other factors to consider, but government spending is a big factor, which shouldn’t be overlooked or denied.