The Economist discussed recently the necessary ‘devolution’ of the Scandinavian model in Norway, following similar trends in Sweden and Denmark. The article makes several good points about the effects of bureaucratization and high-tax welfare on entrepreneurship and corporate culture in a country where the government owns 40% of the stock market and employs 33% of the workforce (almost double the percentage in OECD countries). With the drop in oil prices precipitating economic decline, Norwegians have recently voted for higher spending and no reform. But, as The Economist suggests, better long-term measures are those implemented by Sweden, which shrunk its state by “allowing private firms to run its schools, hospitals and surgeries, and reducing its tax burden.”
The discussion, however, relies on a premise too often heard and always wrong, that this change is needed despite the fact that “for decades this unusual economic model has served Norway well.” Many get the causal relationship wrong, connecting the appearance of a prosperous economy with the high taxes and government spending which happen to take place at the same time. As Mises explained, however, the latter type of policies amount to nothing more than capital consumption:
It may sometimes be expedient for a man to heat the stove with his furniture. But if he does, he should know what the remoter effects will be. He should not delude himself by believing that he has discovered a wonderful new method of heating his premises (Mises 1998, 650).
The long-run consequences of a welfare state are always a decline in prosperity leading to impoverishment, but their outward symptoms may often be misleading, if the market, while hampered, remains powerful enough to weather the taxes and still progress. Even if one inconspicuously burns only one piece of furniture every year, it does not mean the model is working, but only that the reveal of its inadequacy is postponed.
It is therefore crucial to inquire whether these models are working not by comparing static pictures of an economy, but by looking at its counterfactual evolution. How prosperous would Norway have been had it not created a huge welfare state atop a well-functioning free market? How prosperous would Sweden or Denmark have been if they hadn’t slowly consumed from or impeded more capital accumulation in the past decades?
The answer is that Nordic countries prospered in spite of the Scandinavian model, not because of it. The Scandinavian welfare state has simply never worked.
