ISET Economist Blog

Different Capitalisms
Wednesday, 27 March, 2013

Those among our readers who happened to spend a good deal of their lifetimes in the Soviet Union may remember that there was not just one kind of socialism, but there were many different versions. For example, socialist countries favored different ways to achieve industrialization and economic progress. In China, Mao pushed for what one could call “grassroots industrialization” – villages, small towns, and urban collectives were supposed to independently set up industrial endeavors. Rice farmers started to build up manufacturing plants, factories, and even steel furnaces and heavy industries. Stalin, on the other hand, fostered massive industrialization through megaprojects, fueled by forced labor and guided by the iron hand of the central planners in Moscow. Tito in Yugoslavia emulated a market by introducing a system of artificial prices and letting the factories (managed by their own employees) decide how to adjust to these prices. The Sandinistas in Nicaragua and Castro in Cuba tried to achieve development through large-scale investment into the human capital of their populations, leading to alphabetization rates that surpassed many advanced Western countries. Allende in Chile envisioned what one might call an “algorithmic socialism” (sometimes it is called scientific socialism, but that is a misleading term), aiming to optimize central planning through the use of the most advanced computer technology of his days. Unfortunately, we cannot evaluate the outcome of the Chilean socialist experiment, as the CIA swiftly toppled Allende’s government and murdered him and many of his followers.

What many people are less aware of, however, is the variety of different capitalisms existing in the world. There are unique capitalistic traditions, like the Scandinavian model, which has many elements of a socialist system. If you want to rent an apartment in Stockholm from private landlords, you have to sign up on a list and wait in a queue for several years. When you have waited long enough, you can rent an apartment at a rental price determined by the government. That is not far away from how it was to buy a car in socialist countries like Eastern Germany. Having money was not enough – one had to sign up on a waiting list and wait up to 12(!) years before a “Trabant” was delivered.

Then there is the Rhine Capitalism which assigns a less central role to the state – the government provides a framework in which competition takes place. It guards this competition through strong antitrust authorities, but it does not organize economic processes directly. Conflicts between different groups are solved through compromises, sometimes facilitated through government pressure.

At the other end of the spectrum, there is Anglo-American Capitalism, emphasizing the freedom of individuals to engage in economic activities without being disturbed by the state. The role of the government is minimal; intervention occurs only in exceptional cases, and even then rather reluctantly.

The difference between the European and the Anglo-American philosophy of capitalism can be illustrated by looking at health care in Europe and the USA. Prior to the Obama reforms, the provision of health care to the American population was almost exclusively left to the market, leading to big parts of the population lacking health insurance coverage. In Europe, on the other hand, health care is primarily organized through the state, either through heavily regulated markets, like in Germany, or through a fully state-run health sector, like in Italy and the UK. The UK is an exception in this respect, as by and large it leans towards the American model, but its health sector is run as in a socialist country. Almost all doctors in the UK are employed by the state.

The spectrum of different capitalisms can also be illustrated by looking at the share of the government in economic activities. For example, in the year 2012, a share of 56.2% of the gross domestic product of France was generated through government activities. If one thinks of capitalism vs. socialism to be poles on a continuous scale, one would have to consider France to be more a socialist than a capitalist society. In the USA, on the other hand, the government share is traditionally around 35%, though it went up after the 2008 financial crisis and amounts now to more than 40%.


The United National Movement followed an economic agenda that leaned towards the Anglo-American version of capitalism. Government regulations were minimal, taxes were flat, and one tried not to interfere with the market forces. Since the elections, however, the general orientation of economic policy has changed. Georgia will be introducing a couple of measures that have a clear European flavor. There will be the labor code reforms, among other things forcing employers to provide reasons for layoffs that can be contested at the courts. Similarly, competition law is about to be implemented, allowing the Georgian authorities to break up monopolies and cartels.

As there was no “objectively best” socialism in the past, there is no “objectively best” capitalism today. Whether one prefers the European or the Anglo-American model crucially depends on one’s beliefs about the performance of free markets. Are markets generally capable of solving economic and social problems, or do they typically fail? Also, ethical questions are touched on. Is the inequality that comes about through the free play of market forces a great concern, or is it a low price to pay for economic development? Should the government restrict the freedom of its citizens to pursue their economic goals, or should it respect individual freedoms above everything else?

It is interesting to discuss the orientation of economic policy with regard to a concrete policy measure. Minimum wages were not picked up yet in the Georgian debate, but they are a typical issue that separates liberal economists from those who have socialist inclinations. As can be seen on the Chart, many countries in the world have introduced a law that forces employers to pay a minimum wage, and the levels of these minimum wages vary considerably. While in Romania, an employer is not allowed to pay a monthly salary below 157 Euro, in Luxemburg it is illegal to work for less than 1874 Euro per month.

An interesting thing to note is that minimum wages do not divide Anglo-American countries from those that have a more European tradition. In fact, USA and UK have rather high minimum wages, while the  Scandinavian countries Denmark, Finland, and Sweden, as well as Austria and Germany, do not have minimum wages at all. This apparent paradox can easily be explained. In Scandinavia, Germany, and Austria, the welfare state endows every citizen who does not work with relatively generous transfer payments, sufficient to cover more than the basic needs. Therefore nobody is really forced to work – if the wage that can be realized on the labor market is not satisfactory, individuals can decide to stay out of the labor force and sustain their livings through transfer payments. In effect, nobody will work for wages that are below the transfer payments, and hence they essentially play the role of minimum wages elsewhere.

It would not be surprising if also the Georgian government would put minimum wages onto their agenda within the near future. But would that be a good idea?

The classical argument against the introduction of a minimum wage is the adverse effect it will have on labor demand. According to neoclassical economic theory, a company will hire new workers as long as the wage that has to be paid to them is lower than what they contribute to the company. Technically speaking, the wages of workers are assumed to correspond to the marginal productivity of the workers. But this means that if there is a minimum wage, then those workers whose productivity is below this threshold will not find employment. A company that would hire them would incur losses. As a result, minimum wages would hurt those who are at the bottom end of the productivity scale. The least productive will not find jobs anymore, and unemployment in society will increase.

Those who are in support of minimum wages point at the unequal bargaining power of companies and employees. For many segments of the labor market, the supply of labor exceeds the demand. As long as a worker does not have unique expertise that makes him a sought-after specialist, it is not a big deal for a company to replace him. In addition, workers must sell their labor, as they have to feed themselves and their families. In the absence of transfer payments, a worker can hardly opt for withholding his labor from the market if wages are too low. This competition among workers for workplaces provides the employers with opportunities to offer lower wages than the workers’ marginal productivities. In other words, the workers do not receive their “fair share” of what they produce but are forced to accept almost any wage offered to them. If one adopts this standpoint, minimum wages are a reasonable means to compensate for the weak bargaining position of workers vis-à-vis the employers.

Of course, if one would introduce minimum wages in Georgia, they would have to be adjusted to the general economic situation of this country. The average monthly salary in the year 2011 in Georgia was 636 GEL, and wages varied considerably across sectors. While the average monthly nominal salary of employees was the highest for financial intermediation services (1268 GEL), in public administration employees earned only 999 GEL on average, and in the education and agricultural sectors, these numbers were 320 and 393 GEL correspondingly. As minimum wages are typically not sector-specific, minimum wages should be determined according to the lowest salaries. So they should be less than 300 GEL.

In Georgia’s current situation, however, it is highly questionable whether the country can afford the introduction of minimum wages. Many Georgians are struggling to find employment at all and earning possibilities are very limited. Minimum wages would artificially worsen the situation. If Georgia continues its growth path for many years to come, the situation will look different, and minimum wages may be a policy measure to be seriously considered.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.