Socialism boosts the economy and closes income gaps

The score derives from four components, with each made up of several subcomponents. The “State Ownership Score” combines data on the market value of State-Owned Enterprises relative to the overall economy, the share of government financial assets as a percentage of GDP, and the share of total public wealth as a share of total overall wealth. The “Public Goods and Welfare Score” combines government expenditures on welfare transfers, education, housing, etc. as a share of GDP. The “Democracy Score” simply comes from Freedom House’s “Freedom Ratings.” And the “Union Score” combines the percent of the workforce who are members of unions and the percent who are covered by collectively bargained contracts. To appropriately average these scores into a single overall score, I converted them into “standardized t-scores.”

Now that we have a way to approximate the degree of socialism in countries, we can see how socialism correlates with important indicators of the population’s quality of life. By looking at actual life outcomes across countries, we can see whether it’s justified to argue that socialism is incompatible with living the good life. If we find that more socialist countries are more productive or healthier than capitalist ones, that’s not proof that socialism causes such outcomes—but it does offer a hint. And more importantly, if we find correlations that move in the opposite direction of what a capitalism-booster would argue, it’s powerful evidence against the idea that capitalism has unique features that lead to prosperity.

Making Money

Socialist-skeptics usually argue that socialist societies cannot keep pace with capitalism’s capacity to efficiently produce goods and services. Does this claim hold up?

The claim does not hold up. While there is a lot of variance around the trendline (r^2=0.29), the trend goes in the opposite direction of what the skeptics would argue. Our No. 1 Democratic Socialist country, Norway, has the third highest productivity per hour behind only the two tax-haven countries (Ireland and Luxembourg). Other socialist-leaning countries like Denmark, Sweden, and Finland score high as well. So it’s fair to say that socialism does not hinder productivity — if anything, it helps.

Raw productivity is important, but how that productivity is distributed matters for people’s actual experience. Since most people earn a living by working, the share of national income going to the labor force matters, as does its distribution within the labor force.

Here we find that workers in most socialist countries earn high incomes per hour worked — comparable to the United States. But we also find that equality among workers is much higher in the more socialist countries. In such countries, earnings are compressed between the top and the bottom, and between genders.

While the working class is large and important, non-workers are almost as large. And all workers are at some point unable or unwilling to work, and non-workers depend on workers’ income. That dependence can be a parent caring for a child or an aging relative, or payroll taxes funding insurance for unemployment or disability. So instead of focusing on the earnings of workers, let’s expand to look at household disposable income. That is, income after taxes and transfers from workers, owners, and non-workers.

A similar trend emerges. Typical households in more socialist countries have high disposable incomes, while also compressing the differences between top and bottom households, with some of the lowest poverty gaps on record. Socialist countries being more equal is not surprising, but the point is emphasized in the following graph:

The five countries with the five highest socialism scores also have the five highest economic equality scores. The economic equality score derives from an average (using standardized scores) of earnings ratios between the 90th and 10th deciles, the gender wage gap, the total poverty gap, post-tax-and-transfer gini coefficients, disposable income ratios between the 90th and 10th deciles, and the share of wealth from the top 1 percent.

While flows of income are important, the ability for people to save and earn wealth also matters. Do socialist societies limit this ability?

Wealth data across countries is harder to get, but the data we have does not support the idea that socialism impedes accumulating wealth for the typical household. The median household in Norway, Finland, and Belgium all have more net-wealth than the United States.