Let’s say you want to find out roughly how much of a country’s economy is controlled by the state vs the free market. How would you do so? My first instinct would be to look at state spending as a % of GDP, or maybe taxation as a % of GDP. If that state spends 90% of GDP, it’s pretty clear the government controls mostly everything and visa versa. Now, this isn’t a bad approach. State spending is a good indicator. The problem is it only captures a part of reality.
Imagine two countries. In both the state taxes and then subsequently spends 50% of GDP per year (no deficit or surplus). But let’s imagine a few different ways they could have more or less state control
Both states want to use their % of GDP to buy the same basket of goods. State A uses it’s tax revenue to spin up state owned enterprises. These state owned firms only get inputs from other state owned firms and produce fixed quotas of certain goods. State B runs a competitive bidding process and then has it’s departments (e.g: the army) buy from the market.
State A gives decides what the nation needs and spends all the revenue on that basket of goods. State B spends 10% of it’s tax revenue on core needs (the military, police, judiciary, etc…) and gives 90% of it back to citizens as direct cash transfers. Citizens then spend this money on whatever they want to buy from the private sector
Both states spend their tax revenue in an identical way. Alongside this, state A imposes immense restrictions on the private sector. There’s a license raj. What you can build. Where you can build. Which specific business structures and processes are allowed and which aren’t. Everything is regulated down to the T. Opening a corner store or selling a new kind of Tea requires months of form filling and lobbying. State B largely lets the private sector do what it wants.
TLDR:
% of GDP is a good indicator of state vs market economic control, but it’s a faulty one at best.
If you want to increase economic freedom, it may be worth focusing more on specific, massive distortions of the private sector (zoning/planning, migration, etc…) than on decreasing the state’s tax take by a percentage point or two
Let’s say you want to find out roughly how much of a country’s economy is controlled by the state vs the free market. How would you do so? My first instinct would be to look at state spending as a % of GDP, or maybe taxation as a % of GDP. If that state spends 90% of GDP, it’s pretty clear the government controls mostly everything and visa versa. Now, this isn’t a bad approach. State spending is a good indicator. The problem is it only captures a part of reality.
Imagine two countries. In both the state taxes and then subsequently spends 50% of GDP per year (no deficit or surplus). But let’s imagine a few different ways they could have more or less state control
TLDR: