Capitalism and Size of Government
18 Pages Posted: 12 Feb 2020
Date Written: January 15, 2020
Economic theories for policy are naturally biased either to capitalism or socialism, in ideological opposition. The theories are used as rhetorical tools by right or left politicians to argue for less or more government spending. The reality is: most economies are at least to some extent socialist determined by the sizes of their governments. What is the size limit of government above which a capitalist economy transitions to a more recognizably socialist one? This paper determines empirically for a capitalist economy a sustainable upper bound based on the size of government as measured by total expenditure relative to gross domestic product (GDP). It is shown that government total expenditure above 25 percent of GDP usually leads to budget deficits which depress rather than stimulate economic growth, resulting eventually in economic stagnation and potentially collapse.
Keywords: capitalism, socialism, government, state, economic growth
JEL Classification: P1, P2, E02, E10, E60, E62
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