Johan Norberg’s work revolves primarily around economic and intellictual history and attempting to learn lessons from past financial systems. In this episode of Faster, Please! — The Podcast, Johan takes us through his version of capitalism, giving an especially interesting perspective on the economic system of his home country.
Johan is a senior fellow at the Cato Institute and the author of several books. His latest is The Capitalist Manifesto: In Defense of Global Capitalism, available now.
In This Episode
“Capitalism” and its meanings (0:55)
The state of contemporary capitalism (2:34)
Coordination in capitalism (7:59)
The cyclical nature of economic systems (13:54)
Swedish capitalism (16:56)
The case for capitalism (21:48)
Below is a lightly edited transcript of our conversation
James Pethokoukis: Let's begin with a little definitional work here. Capitalist Manifesto: “Capitalist” is a word people assign a variety of meanings to. What is the capitalism that you're talking about here?
Johan Norberg: Yeah, it's not a great word. Quite often it's misunderstood; people think it's all about capital. It's not. We can have capital in many different economic systems. To me, free-market capitalism is about a decentralized economic system with private property where decisions are made locally, decentralized, not command and control, and the prices and wages and things are set in voluntary negotiations rather than top-down.
The economist Deirdre McCloskey hates the word "capitalism." She prefers "innovism" or "trade-tested progress." Should we insist on using a different word to describe the world’s dominant socio-economic system?
Deirdre McCloskey is right. Capitalism is a bad word. I would much prefer “innovism” or something like that. But I've realized that in order to communicate with people, I'd better use some of the words that they are using. And I've realized that we're stuck with the word “capitalism” and the whole concept of capitalism, and if we don't fill it with meaning, those of us who like free markets and free trade, I've realized that somebody else is going to fill it with meaning, and in that case, we are losing the debate. Go to where the sinners are. That's my take.
Twenty years ago, it seemed like markets had won. Capitalism was changing the world and bringing people out of poverty. President Clinton declared "the era of big government is over." China was opening its economy. What happened? Why did you feel the need to write this book in this moment?
That's exactly why I wrote this book, because nowadays it seems like nobody likes free markets and free trade anymore. I've realized that, in the US, and that should be a place where people appreciate some of this, fewer people believe in capitalism than believe in ghosts nowadays. And there's this lack among politicians and governments everywhere in belief in global capitalism. There's this whole, repatriate stuff, subsidize specific businesses and sectors back home, rather than having global supply chains. So that's why I wrote this.
I think this is all based on a complete misunderstanding of what has happened in the world in the past 20 years. It's not that markets have failed. On the contrary, despite the fact that we've had 20 rough years with financial crises and wars and the Great Pandemic and stuff like that, and yet we've seen, when you look at objective indicators of human living standards, more progress than ever before over these 20 years. When it comes to the reduction in poverty, more than 130,000 people lifted out of extreme poverty every day over the past 20 years. We've seen an increase in global GDP per capita of roughly a third. We've reduced child mortality by almost half, which means that four million fewer children died last year than in 2002. And this is because entrepreneurs and innovators, they keep innovating ourselves out of problems all the time — if we give them some freedom to do that. And that's what I'm worried about: that they'll have less freedom in the future if we do not keep on pounding and keep on explaining this.
Those are some pretty impressive statistics. But people don't seem to notice. We keep hearing the same narrative of "late-stage, failed capitalism.” Why is that?
I think the financial crisis is a very important part of this. If some capitalists do bad stuff, people lose faith in capitalism and I think we saw this in the US but also around the world. There's this sense that perhaps we shouldn't imitate what America is doing if these are the consequences. And I don't think that the financial crisis was a result of unleashed market forces. And I even wrote a book on this a couple of years back, Financial Fiasco. I think there were massive regulatory failures and central banks and ministers of finance trying to make capitalism very safe by implementing a very homogenous structure on everybody, telling everybody to go into the same way, searching for the same AAA-rated securities and stuff like that. And if everybody behaves in the same way, if that fails, there's massive disaster. We need decentralization partly to minimize risks like that. But — doesn't matter, we don't have to go into history. I think this partly explains why we're in this lack of trust in capitalism right now.
But also other things. People, when they're afraid of the world, they tend to retreat. They don't want to explore. They don't want to innovate. It triggers their fight-or-flight mechanism and sometimes the societal fight-or-flight mechanism. You want to hide behind walls and tariff barriers and strong, big governments that protect you, and that is a misunderstanding of how we get out of crises. And this is what I think we've learned from these past 20 years. Yes, lots of bad stuff happened. It makes us afraid. It triggers some sort of evolutionary tendency to get away from openness and learning and discovery processes and instead we want just one instant solution to all the problems.
But what we're learning is, how did we get out of the pandemic? We did it by having thousands of entrepreneurs constantly finding new ways to rebuild supply chains and find replacements for the resources they couldn't get. And innovators who were looking for new treatments and coming up with a vaccine in a record period of time. It didn't take a thousand years as it usually does, coming up with a vaccine against polio, but more like three months. But try to tell that to our reptilian brains. When we're fearful, we want one simple solution. And as H.L. Mencken once put it, there is always a solution to every problem: it is “neat, plausible, and wrong.” And it's so dangerous because it involves replacing all that discovery, all that learning and wisdom of millions with just the preferences of a few people at the top.
Let me read a brief tweet by the right-wing populist writer, Sohrab Ahmari: “We are entering a new age of industrial war. The ‘California ideology,’ neoliberalism, Reagan-Clintonism — whatever you want to call it, it’s kaput. We’re going to see close coordination between state, enterprise, labor. It took security threats to bring us here. I’ll take it.” Why won't you take it?
That's a scary prospect to me. There is a reason why he’s talking about this Silicon Valley thing, because that worked splendidly, and one of the reasons it succeeded was that the outcomes weren't decided in advance by any kind of command-and-control thing. It was, as some criticized it in the ‘70s, it looks more like the Wild West, allowing entrepreneurs and innovators to experiment with crazy ideas, even in garages. And that's the way to … if you want to explore all possible avenues and ideas, we have to let everybody go out and look for it. I think the reason why Sohrab Ahmari is wrong is that he thinks that there is one solution to all the problems we face. Perhaps there is, but I don't know one and he doesn't know it. We have to allow more eyeballs to look at the problems and more brains to go out thinking hard about these things, and that involves not starting geopolitical divisions and nationalist temptations, but it involves having lots of people in other places helping us to find the solutions in a division of labor where we learn from what they're doing.
Why has America been so successful so far? When people say that it's failing, this American, this Washington consensus thing, please keep in mind that just 15 years ago, the American economy was slightly smaller than the European one. Now it's almost a third bigger. It's not entirely broken, but some of the fixes might break it, I'm afraid, if we continue doing things like this. Why is it successful? Well, look at different areas. Look at AI. Why is America so successful? We thought that China would come up with it. Well, one reason is that the Chinese have to teach machines not just what to say, but also what not to say, but also the fact that America is learning from others. More than half of America's top AI experts have education or background in other countries and almost a third come from China. So if we want to win against China and everybody else, we also have to allow lots of Chinese to do the work for us.
This notion of close coordination between state and business and labor, where does that work well? Is there a model? Is there an example of that kind of formula working elsewhere?
A leading European economist just published a book called, I think it's some 50 of them, called Questioning the Entrepreneurial State, where they evaluate this whole idea that we would have this close coordination between governments and businesses, and what they say is that the history of it, at least in Europe but they look around the world as well, is that it's usually a full employment program for lobbyists and for attorneys who just reformulate everything that businesses would usually do as something that fits with this new industrial policy thing. If it was successful, you would look up stuff on the internet by using Quaero, because that's the close coordination stuff in Europe with the European and German and French governments heavily funded a “European Google.” The whole idea was that we will own the digital future by heavily subsidizing this one project. It doesn't work, because you lose some of the trial and error, you lose some of the mechanisms whereby we understand what's a success and what's not.
It's okay to fail. Industrial policies fail all the time, but so does big tech. Entrepreneurial capitalism as well. But the great thing with free markets and not having the governments investing heavily in one particular model is that you replace this trial-and-error, constant experimentation and feedback and adaptation that comes when you work on markets and you're risking your own resources. Once you do that by having the government picking a winner, then, when you lose out, you spend more money on these projects instead. And you lose this learning process whereby we're constantly channeling capital and labor to more successful ones. What people would tell you is that China is the most successful place where we’ve had this…
Yes, there seems to be a cyclical component to this belief. I mean, I'm old enough to have seen the version where Japan had figured it out. That didn't turn out so well. And then I think you have people who looked at China. If you have a natural inclination to like the idea of central planning and you eschew the kind of natural chaos of capitalism, you could point to China So that's why I wonder if this is a passing phase, because China doesn't seem like they're able to pull it off either.
Yeah, but that'll keep on moving, then, and find another example where it seems to be working. Because it's always easy to find out in retrospect that something seemed to be working. And if the government is involved somewhere, they try to give it credit. But until recently, I think 49 American states tried to spend heavily to create a biotech cluster in their own state to attract businesses from other states. And if one of them succeeded, people would've said, “Look, this is because of this top-down government intervention,” but probably not, right?
And it's the same thing with China. Yes, China has been tremendously successful for 30 years, but in which sectors? In the sectors that the government didn't plan for it, in places where we saw grassroots capitalism, farmers secretly privatizing their land, starting village enterprises. And then, and only then, did the Communist Party see that, “This seems to be more successful than what we've been doing recently, so allow them to continue to experiment,” experiment in export processing and stuff like that. But they wanted to keep it elsewhere so that it wouldn't spread throughout the rest of the economy. But it was so successful that it did. That's what succeeded: when people experimented. Entrepreneurs were allowed to innovate. What was it that failed? The large, state-owned enterprises. They were less productive. They were wasting cheap credit and ruining, destroying resources over the years. And once the government gets involved, there's plenty of research into this, they find less productive businesses and they become even less productive if they get access to this cheap credit and cheap land. And I think people are coming around to that now as they're seeing that China has many problems, some of them related to demography, as well. But they would need innovation, strange new business ideas, crazy people in garages coming up with new ideas. That's exactly the thing that top-down governments don't really like, and what they've been doing over the past few years is just destroying tech businesses, [education] businesses, and the gaming industry in China because authoritarians aren't good at spotting where the true potential lies.
I wonder if you could clear up a question that confuses many Americans. Do you come from, and are you currently living in, a capitalist country?
Yes, I am.
We don't know. We're not sure. We're very confused about Sweden.
Yes, I know, and that's because lots of perceptions, just like the ideas, are stuck in the 1970s. Sweden had a brief period of some 20 years when we really experimented with socialist ideas, but this was also the moment — the only moment in modern economic history — when Sweden lagged behind other countries. So up until the early 1970s, we had a very limited government, low taxes, free markets, and free trade — that made us rich. It made us so rich in Sweden that we thought that we could experiment with these ideas. Just stop thinking about how to create wealth, just spend it, redistribute it. And that resulted in an awful 20, 25 years when companies like Ikea and Tetra Pak and the greatest entrepreneurs, they just left Sweden because it wasn't possible to do business in Sweden.
This is what people still remember: the 1970s. We did all these things: doubled the size of the government, jacking up taxes and so on. At the same time, it looked like a fairly successful place, it's a rich place. But it's like that old joke: How do you end up with a small fortune? Well, you start with a large fortune and then you waste most of it. And that's what we did. This is actually why, since that terrible economic financial crisis that we had in the early 1990s, Sweden has once again liberalized markets quite drastically compared to other places, and we're now back to a system which many Americans would actually think of as more free market in many ways than the US system.
As you know, people think of Sweden and Scandinavia more generally as big government with a giant welfare [system], cradle-to-grave welfare, all the welfare you would ever want. So in what ways is Sweden maybe more market friendly than the United States, and perhaps some ways which would greatly surprise many Americans as well as Bernie Sanders?
Yeah, I'm trying to tell the Bernie Sanders of the world that if they want to be like Sweden, they would have to do plenty of things. They would have to become more free trade-oriented in many ways. They would have to reform social security, partially privatize it with individual accounts, they would have to introduce a national school voucher system so private schools get the same funding as the public ones. They would actually have to lower taxes in many ways on the rich, and they would have to abolish taxes on property wealth inheritance and lower the corporate tax, and instead put most of the tax burdens on low- and middle-income households, because that's the dirty little secret of the Swedish welfare state. We learned in the 1970s that if you want to have a big universal welfare state that's very generous, in that case, everybody is going to have to pay for it.
You have to redistribute over people's life cycle, rather than trying to get the rich to pay for it all, because we realized that the rich are too few and the economy is too dependent on them. So if we are trying to get them to pay for it all, they will flee Sweden, they will move to other places, leave their resources elsewhere, and we won't get the new businesses, the new successful ones that we all depend upon. So for 30 years, we didn't create a single net job in the private sector, the ‘70s, ‘80s, and the ‘90s. So instead, you have to move towards more taxing consumption, 25 percent value-added tax, and making sure that the poor and middle income households pay the bulk of income taxes. So, counterintuitively — and this is something that people really don't get—Sweden has a much less-progressive tax system than the United States does, less-progressive tax system than almost any other rich country because we've learned that the poor are loyal taxpayers. They don't move, they don't dodge taxes, and they don't have tax attorneys.
What is the quick pitch for capitalism? If you're on an airplane next to someone who's heard a lot about inequality and wage stagnation and losing to the Chinese, how do you make the case for market capitalism?
It's much, much better than you think, but it could be even better. It is much better because we can see, look at the long-term indicators and the data, and perhaps this is where I lose my fellow passenger. But wage stagnation was a phenomenon in the ‘70s and ‘80s, partly because we had to rebuild the economy because it was at risk of becoming much less competitive and we were about to lose jobs everywhere. Once we did that, from the ‘90s and onwards, we've had a tremendous increase in wages, and we can measure this in wages and total compensation and increase in 60 percent. I'd say if you look at the best indicators, but even more interesting is what can you do with those resources? And then you see that all those amenities and goods and technologies that we all considered luxuries in the ‘70 and ‘80s, we're getting close to 100 percent possession in American households.
The poor people who fall below the poverty line in the US now own more amenities like that — washing machines, television sets, dryers, clothes washers, and of course cell phones and computers — than the rich did in 1970. That tells you something. If you look around the world, we've actually had the best era ever when it comes to poverty reduction, and we've even, since the turn of the millennium, reduced global inequality for the first time since the Industrial Revolution. So it's much better than the headlines. If you look at the trend lines, they're much better.
Yeah, tell me about that. Give me a little of that “could be even better.” Give me a little flavor of that.
Yeah. I think that we've lost — you know this and you just wrote a book on this — we've entered a period where we've thought that things cannot be better. We've tried to protect old business models and old ways of doing things, and often in a low interest rate environment, I think protected many businesses that should have been put out of their misery so that capital and labor could go to the new sectors, to the frontiers of the economy. We are seeing some of that happening now with everything from mRNA technology to the new space race to AI, but we're in a mindset and a regulatory situation where we don't want to experiment with the new weird stuff. But we have to do that because that's the only way where we'll get the new goods and services and jobs in the future. So here’s to the crazy ones, as Steve Jobs would put it. And in that case, we can't be too protective of our old, safe ways of doing things.
🌐 My chat (+transcript) with Johan Norberg on the case for capitalism — and the myth of Swedish socialism