Sunday, June 29, 2014

Nordic Social Democracy as the Capitalist Welfare State


This is a chart from The Economist showing that by many of the standard measures of social health, the Nordic countries (Sweden, Denmark, Finland, and Norway) are at the top.

At the end of the 20th century, many socialists were dispirited by the apparent triumph of neoliberal models of economic development and globalization.  There were debates over whether socialism had failed in its attempt to challenge liberal capitalism.

But now the economic crisis of the Great Recession and the political crisis of liberal democratic states that have lost confidence in their capacity to solve their problems have forced a reconsideration of the achievements of socialism.  Many socialist experiments--and particularly the Marxist regimes--have a dismal record.  But the democratic socialism of social democracy as manifest in the Nordic countries (Norway, Sweden, Finland, Denmark, and Iceland) seems to have succeeded (see Brandal, Bratberg, and Thorsen, 2013).  They have some of the highest rates of economic growth and lowest rates of poverty and economic inequality in the world.  They have the largest welfare states in Europe, which provide social security and public services universally for all citizens.

Now we have a new book by Lane Kenworthy--Social Democratic America--arguing that the United States should become a social democracy like the Nordic countries, because they "come as close as any nation in history to having a set of institutions and policies conducive to a good society" (137).  And we have a new book by John Micklethwait and Adrian Wooldridge--The Fourth Revolution: The Global Race to Reinvent the State--arguing that the Nordic countries show us what the modern state of the future should look like.

Does the success of the Nordic model show that the welfare-state socialism of social democracy is superior to the free-market capitalism of classical liberalism, because social democracy combines the best features of socialism and capitalism?  It all depends, I suggest, on how one ranks the goods of liberty, equality, and prosperity.  If one ranks equality over liberty and prosperity, then Nordic social democracy is superior to classical liberalism.  But if one ranks liberty and prosperity over equality, then classical liberalism is superior.

Of course, the proponents of the Nordic model will respond by pointing out that the Nordic nations actually have high levels of liberty and prosperity as well as equality.  My argument, however, is that the Nordic nations have achieved this in spite of their large welfare state, not because of it, because they have enacted free-market policies that promote individual liberty and economic growth, and these are the free-market policies that have been recommended by classical liberals (like Friedrich Hayek and Milton Friedman).

The question of whether social democracy can combine the values of socialism and capitalism goes back to the founder of the social democratic tradition--Eduard Bernstein.  He was a leading member of the German Social Democratic Party, which was the most important socialist party in Europe that was heavily influenced by the thought of Marx. In a series of articles published in 1896-1898, and in a book published in 1899 (The Preconditions of Socialism), Bernstein contended that Marx's teaching needed to be revised in the light of recent historical experience.  Marx had predicted that capitalism would inevitably collapse because of its own internal contradictions, and because the growing intensity of the class struggle would lead the proletariat (the working class) to see the necessity of a violent revolutionary overthrow of the bourgeois class and the bourgeois state.  The economic depression of the 1870s and 1880s seemed to confirm this prediction.  But then, the new economic growth and global trade of the 1890s seemed to show that capitalism was not going to collapse anytime soon.  Moreover, the partial success of the labor movement in demanding social reforms favoring the working class suggested that the socialist workers' movement could advance its goals through peaceful reforms rather than violent revolution. 

The political freedom of a liberal democracy could provide the conditions for the evolution of socialism out of capitalism, Bernstein argued.  Socialism could be understood as "organized liberalism" (Preconditions of Socialism, 150).  And, indeed, Rosa Luxemburg in her Marxist critique of Bernstein's revisionism complained that he had transformed socialism into a "variety of liberalism" (Reform or Revolution, 85).  Bernstein thought that "there is actually no really liberal thought which does not also belong to the elements of the ideas of socialism," including the liberal ideas of individual liberty and responsibility (Preconditions of Socialism, 147).  Even those socialist measures that appear coercive must be justified as expanding the range of liberty in a society.

While orthodox Marxists insisted that true socialism required the abolition of private property and of market competition and the public ownership of the means of production, Bernstein thought that "democratic socialization" would not require a complete state management of the economy or abolition of private property, at least in a long transitional period.  He thought that socialism "would be completely mad to burden itself with additional tasks of so complex a nature as the setting up and controlling of comprehensive state production centers on a mass scale--quite apart from the fact that only certain specific branches of production can be run on a national basis . . . Competition would have to be reckoned with, at least in the transitional period" (Marxism and Social Democracy, 218-19).  He also thought that private property was necessary for any social order.  "We do not abolish private property, we limit its rights.  The total abolition of property is impossible" (Steger, 147).

Such social democratic revisionist thinking became dominant in the Swedish Social Democratic Party in the 1920s and 1930s.  Per Albin Hansson, the leader of the party, declared that the party's ideal was "a society of free and equal individuals in democratic cooperation, where common resources are used to ensure security and well being for all.  We Social Democrats do not accept a social order with political, cultural, and economic privileges or one where the privately-owned means of production ae a way for the few to keep the masses of people in dependence."  And yet, "we have no desire to interfere economically in such a way that will hold back or injure production," because "our main interest is in getting the most out of our nation's productive capacity" (Berman, 176).

In 1936, American journalist Marquis Childs' book Sweden: The Middle Way became a bestseller, and he popularized the idea that Sweden had found a "middle way" between the extremes of American capitalist individualism and Russian socialist collectivism.  Childs described Sweden's policies as combining governmental economic planning, market competition, and cooperation between the government, business, and labor unions to achieve a "modification of the capitalist economy" for the common good.  At the 1936 convention of the Democratic Party, President Franklin Roosevelt held a press conference to speak about the importance of Childs' book in showing how capitalism and socialism could be combined; and he announced that he was sending a special commission to Sweden to study this "middle way."

So do Sweden and the other Nordic countries today still offer a model for all the world to imitate?  The Nordic welfare state provides universal publically supported health care and health insurance, generous unemployment benefits, a universal pension system, universal free education, and a system for redistributing wealth from the richest to the poorest.  As a consequence, their levels of economic inequality are lower than in other developed economies.  They also have low rates of crime.  And in international studies of the "happiness index," their people report some of the highest levels of happiness.

Their welfare states are expensive.  Government expenditures as a share of Gross Domestic Product are around 47% for these countries, as contrasted with 37% for the United States.  This requires higher taxes in these countries.  Many Americans assume that such levels of governmental spending and taxing must impede economic growth.  But in fact, the Nordic countries have had high economic growth rates over the past two decades; and their wealth per capita is good compared with other wealthy countries.

Kenworthy (a political scientist at the University of Arizona) infers from this that the United States could easily increase governmental spending to 47% of GDP to pay for new welfare programs without any decrease in economic growth.  He declares: "Freedom, flexibility, and market dynamism have long been hallmarks of America's economy.  These are qualities worth preserving.  The Nordic countries' experience shows us that a nation can successfully embrace both flexibility and security, both competition and social justice.  Modern social democracy can give us the best of both worlds" (9).  Kenworthy has summarized some of his reasoning in an interview. Micklethwait and Wooldridge (editors at The Economist) make the same argument.

But it should be stressed that achieving this "best of both worlds" requires a high level of economic freedom in the Nordic countries (Kenworthy, 8-9, 89, 102-107, 127, 178; Micklethwait and Wooldridge, 169-87).  Contrary to what Kenworthy suggests, Micklethwait and Wooldridge show that the Nordic countries achieved this through a reduction in public social spending, taxation, and governmental regulation of society and business beginning in the mid-1980s.  In doing that, they adopted some of the policies proposed by Milton Friedman, Friedrich Hayek, and other classical liberals for reducing governmental intrusion into social and economic life.

The Social Democratic Party ruled Sweden from 1932 to 1976, and they had steadily increased taxes, government spending, and the restrictions on business.  In 1974, Olof Palme, the party's leader said that "the era of neo-capitalism is drawing to an end," and that "it is some kind of socialism that is the key to the future."  But then the government began to face public protests and financial crises, and free-market ideas began to enter the public debate.  In 1970, Sweden was the fourth richest country in the world as measured by per capita wealth.  But by 1993, it has fallen to 17th.  There were a series of radical reforms, including cuts in public spending.  Public spending as a share of GDP had reached 67% by 1993, but now it's down to 49%.  Public debt as a share of GDP fell from 70% in 1993 to 37% in 2010.  Sweden has cut the marginal tax rate by 27% since 1983 to 57%, and it has cut the corporate tax rate to 22%, much lower than in the United States.

Denmark and Norway allow private firms to run public hospitals.  Denmark has a system of "flexicurity," which makes it easier for employers to fire people, but with programs for supporting and training the unemployed.  Sweden has reformed it's pension system to make it affordable by replacing a defined-benefit system with a defined-contribution system and making automatic adjustments in benefits to reflect longer life expectancy.  Sweden also has a universal system of school vouchers, so that private for-profit schools can compete with the public schools.  Micklethwait and Wooldridge observe: "The Swedes have done more than anyone else in the world--certainly more than the cautious Americans--to embrace Milton Friedman's idea of educational vouchers" (171).

Friedman helped the Frazer Institute--a classical liberal think tank in Canada--to develop a method for measuring and ranking "economic freedom" in countries around the world.  In the Fraser Institute Report on Economic Freedom for 2013, the variables for this rating are summarized:

"The index published in Economic Freedom of the World 2013 measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Forty-two variables are used to construct a summary index and to measure the degree of economic freedom in five broad areas: (1) size of government; (2) legal system and property rights; (3) sound money; (4) freedom to trade internationally; and (5) regulation."  
They now have ratings for 152 nations.  All of the Nordic countries have high rankings.  Finland is #7, and Denmark is #14.  Thus, they rank higher than the United States, which is #17.  Sweden is #29.  Norway is #31.  Iceland is #41.

The Heritage Foundation--another classical liberal think tank--has a similar "Index of Economic Freedom."  Denmark ranks at #10, ahead of the United States at #12.  The other Nordic countries rank high once again--Finland at #19, Sweden at #20, Iceland at #23, and Norway at #32.

Swedish economist Andreas Bergh argues that Sweden became rich because of its capitalist institutions, and that Sweden's high level of income equality is not a result of its welfare state, because inequality was low before the expansion of the welfare state.  (Bergh has summarized his argument in a video interview with Reason.TV.)

In a forthcoming article, Bergh offers some general conclusions about the history of Sweden as a capitalist welfare state (pp. 34-36).  From 1870 to 1970, Sweden moved from being one of the poorest countries in the world to being one of the richest, while also showing a relatively equal distribution of income.  Explaining this, he concludes: "Well-functioning capitalist institutions, especially property rights and a non-corrupt state sector, promotes prosperity.  Primary schooling, risk spreading social insurance schemes and labor unions contribute to a more equal distribution of income."  From 1970 to 1995, Sweden's economic growth slowed.  He explains:  "the combination of unsuccessful macro-economic policies and a very generous welfare state caused big problems for Sweden. . . . For a universal welfare state like Sweden, it is crucial to achieve a balance between people who work and pay taxes, and people who do not.  Clearly, the trend in Sweden from 1970 to 1995 was not sustainable.  The share of adults not working more than doubled, from about 10 percent to above 20 percent after the crisis of the 1990s."  The economic revival of Sweden over the past 20 years, he argues, is due to reforms that increased economic freedom (see the chronology of reforms in his Appendix).  This all supports his final conclusion: "The welfare state seems to survive because it co-exists with high levels of economic freedom and well-functioning capitalist institutions."

This suggests that the economic success of the Nordic countries has been due not just to their welfare state policies but crucially to their economic freedom.  And we can explain this natural human desire for freedom as rooted in evolved human nature (Rubin 2012).  This explains why many socialists reject the Nordic model of social democracy as a capitulation to neo-liberal capitalism (see also here and here).

Actually, there is evidence that increases in government spending as a share of GDP bring decreases in wealth per capita (Bergh and Henrekson 2010).  An average person in a Nordic country has only 65% of the disposable income of the average American (Mitchell 2007).  Kenworthy passes over this fact in only one sentence (124).  In fact, there is plenty of statistical evidence that Americans on average are wealthier than Europeans, that the American population has a lower proportion of its people in poverty than is the case in Europe, and that those who are poor in America are wealthier than the poor in Europe.  The one European country that comes closest to the United States in average wealth is Switzerland, in which government spending in proportion to GDP is lower than in the United States.  Kenworthy never mentions this, although it shows up in some of his graphs (11, 103-104, 122).

There is a tradeoff, however, between liberty, prosperity, and equality.  The Nordic countries have less economic inequality--disparity between the very rich and the very poor--than does the United States.  The economic pie for the Nordic countries is a little smaller than that for the United States, but the Nordic pie is cut a little more equally, although the richest still get bigger pieces than the poorest.  Nevertheless, in recent decades, the level of inequality has been growing even in the Nordic countries.  In Sweden, the richest 1% of the people hold 20% of the wealth, and the richest 10% hold 60% of the wealth.  If we wanted to move towards absolute equality, we would have to accept less liberty and less prosperity for all.

Deciding how much liberty and prosperity one would trade off for more equality is a matter of individual preference, and so there will always be a lot of disagreement about this.  A classical liberal society is a pluralist society in which people can express their preferences about this.  For example, they can form socialist communes and cooperative enterprises in which the wealth is shared equally, but no one can be compelled to join.  In a liberal civil society, people are free to enter or exit groups as they wish, which allows for the maximum expression of communitarian diversity.

Nordic social democracy confirms the classical liberal argument for individual liberty as a condition for the good society, but it also confirms that classical liberal liberty cannot produce equality.

Of course, the classical liberal ideal would require a minimal government with no welfare state at all.  For the classical liberal, goods such as poverty relief, education, and health care can be best provided by free markets and the voluntary associations of civil society through economic growth, mutual aid associations, and philanthropic activity.  There is historical evidence that this worked well in the Anglo-American world prior to the emergence of the welfare state in the 20th century.  The classical liberal will argue that if the welfare state were abolished, free markets and civil society would do a better job of performing the functions that have been assigned to the welfare state (Murray 1997; Pennington 2011, 151-90).

But if most citizens in the liberal democracies today want a welfare state, classical liberals can recommend the sort of capitalist welfare state that is manifest in the Nordic social democracies and in the United States, although the American model is better because Americans are richer and freer than those in the Nordic countries.

So Rosa Luxemburg was right--social democracy is "a variety of liberalism."  Much of what one sees in the Nordic social democracies today looks a lot like what Hayek recommended in Part 3 of The Constitution of Liberty, which is entitled "Freedom in the Welfare State."  He distinguished the welfare state from socialism, and he argued that a properly designed welfare state could be compatible with individual liberty.  This seems to be what Micklethwait and Wooldridge propose as the "fourth revolution."  They identify themselves as classical liberals, but not libertarians, because they think the state needs to be more than a nightwatchman state.  They echo Hayek's reasoning in suggesting ways that a limited welfare state can promote rather than impede individual liberty (21, 221-48).


Andreas Bergh, "What Are the Policy Lessons from Sweden? On the Rise, Fall, and Revival of a Capitalist Welfare State," New Political Economy (forthcoming).  Available online.

Andreas Bergh, Sweden and the Revival of the Capitalist Welfare State (Edward Elgar Publishing, forthcoming in 2014).

Andreas Bergh and Magnus Henrekson, Government Size and Implications for Economic Growth (AEI Press, 2010)

Fredrik Bergstrom and Robert Gidehag, EU Versus USA (Stockholm: Timbro, 2004).  Available online.

Sheri Berman, The Primacy of Politics: Social Democracy and the Making of Europe's Twentieth Century (Cambridge University Press, 2006)

Eduard Bernstein, The Preconditions of Socialism, edited and translated by Henry Tudor (Cambridge University Press, 1993)

Nik Brandal, Oivind Bratberg, and Dag Einar Thorsen, The Nordic Model of Social Democracy (Palgrave Macmillan, 2013).

Fraser Institute, Economic Freedom of the World: 2013 Annual Report.  Available online.

Heritage Foundation, 2014 Index of Economic Freedom.  Available online.

Lane Kenworth, Social Democratic America (Oxford University Press, 2014).

Rosa Luxemburg, Reform or Revolution, in Mary-Alice Waters, ed., Rosa Luxemburg Speaks (Pathfinder Press, 1970).

John Micklethwait and Adrian Wooldridge, The Fourth Revolution: The Global Race to Reinvent the State (Penguin Press, 2014)

Daniel J. Mitchell, "What Can the United States Learn from the Nordic Model," Policy Analysis, Cato Institute, November 5, 2007.  Available online.

Charles Murray, What It Means To Be a Libertarian (Broadway Books, 1997).

Mark Pennington, Robust Political Economy: Classical Liberalism and the Future of Public Policy (Edward Elgar, 2011)

Paul Rubin, "Evolution and Freedom," in Fred McMahon, ed., Towards a Worldwide Index of Human Freedom (Fraser Institute, 2012), 173-88.  Available online.

Manfred B. Steger, The Quest for Evolutionary Socialism: Eduard Bernstein and Social Democracy (Cambridge University Press, 1997)

Henry Tudor and J. M. Tudor, eds., Marxism and Social Democracy: The Revisionist Debate 1896-1898 (Cambridge University Press, 1988)     


Kent Guida said...

Very interesting. I especially appreciate the background on Bernstein and Goldman.

Do you plan to comment further on The Fourth Revolution? I was planning to pick it up, since it is getting so much praise, but your piece convinced me to re-read part III of Constitution of Liberty first.

On the whole, your analysis makes it sound like the two current works on the subject leave a good deal to be desired.

Narciso said...

I don't think it was ever argued that the liberty and prosperity was caused by the welfare state. It's not like they cannot coexist, so the existence of the welfare state comes in the pursue of equality, not in the pursue of less liberty and less prosperity. Therefore it makes no sense to say that liberty and prosperity exist in spite of the welfare state.
I think the welfare state is necessary because in a liberal society there is little concern to the well-being of workers. It is very easy to replace someone that works for you, and there are many cases of psychological abuse of workers. Also, how does a pure liberal society help the poor, sick and disabled that cannot afford a private social security service? The welfare state is an ethical correction of liberalism, a mechanism necessary to integrate ethics into an otherwise ethic-lacking society.

Larry Arnhart said...

Mr. Narciso,

Have you ever considered the possibility that those who manage the welfare state--politicians and bureaucrats--might not have necessary knowledge and incentives for serving the public good? Are you assuming that they are always omniscient and benevolent?

Is it possible that ordinary people allowed to live their lives as they please might have the knowledge and the incentives to solve their problems themselves?