Mises Wire

Taking a Closer Look at the Vaunted Scandinavian Welfare States

Welfare states in Scandinavia are revered by the American Left. Many think that America could reduce social problems by copying their policies. To such people, the success of the Scandinavian states is evidence that socialism works. Confidence in the welfare policies of these places is so great that pundits even attribute the prosperity of Scandinavia to these policies. Few ponder why socialism leads to disastrous consequences elsewhere but fruitful outcomes in Scandinavia.

However, if one truly examines the reasons for Scandinavia’s success, it becomes obvious that the region was already prospering before the advent of the welfare state. Countries like Denmark and Sweden experienced considerable increases in living standards and economic growth before launching welfare states. This occurred because they pursued phases of promarket reforms during the nineteenth and twentieth centuries. In the 1940s, Denmark was already outperforming her peers. After a thorough examination, economist James Beddy concluded that Denmark owed its prosperity to trade openness and high levels of industrial productivity.

Sweden’s prosperity is equally a consequence of adopting promarket policies as the scholar Nima Sanandaji observes in his book Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism:

Sweden was a poor nation before the 1870s, resulting in massive emigration to the US. As a capitalist system evolved out of the agrarian society, the country grew richer. Property rights, free markets and the rule of law combined with large numbers of well-educated engineers and entrepreneurs. These factors created an environment in which Sweden enjoyed an unprecedented period of sustained and rapid economic development.

Adopting such promarket policies resulted in Sweden recording the highest growth rates in the industrialized world from 1870–1936. However, promoting promarket policies is not unique to Sweden because new research has shown that, from 1850 to 2020, Scandinavian countries have consistently performed well on measures of economic freedom, with Denmark being the best performer. Today, Scandinavians are a symbol of prosperity due to years of hard work and strategic planning. However, while welfare is a primary feature of Scandinavian states, it is not the genesis of their success.

Indeed, several outcomes associated with welfare predate the emergence of the welfare states in Scandinavia. Life expectancy is higher in Scandinavia, but it was also high before the expansion of welfare in the 1970s. Nima Sanandaji explains in his myth-busting book Debunking Utopia: Exposing the Myth of Nordic Socialism that the Danes lived longer than Americans in 1960 when Denmark’s tax burden was lower than the United States. Sanandaji also observes this pattern for other Scandinavian countries: “Interestingly, Denmark is not alone in this regard. When Nordic countries had similarly sized public sectors as the United States (1960), Swedes lived 3.2 years longer than Americans while Norwegians lived 3.8 years longer. Today the difference has shrunk to 2.9 years in Sweden and 2.6 years in Norway.”

Further, some say that welfare is linked to social mobility in Scandinavia, but new findings have shown that Sweden had high mobility rates before establishing a welfare state. Incomes in Scandinavia are more equal, but they were also more equal before the expansion of welfare. In Scandinavia, income equality is explainable by genetic and cultural similarities. People with similar genes and cultures exhibit similar preferences and traits. Hence, their professional interests are likely to be common, and this often leads to equal earnings. With greater cultural and genetic diversity, there will be more variation in interests and disparities in income. It is no surprise that countries with greater diversity like America and England are more unequal.

People seem to forget that Scandinavia is a trustworthy, productive, and homogenous region. Because Scandinavians are trusting, transaction costs are lower, so it’s easier to build institutions and secure endorsement for major policies. Even more interesting is that, due to high trust levels, people are going to be more supportive of welfare because they won’t impute unscrupulous intentions to other recipients.

Moreover, Scandinavians trust each other because, on average, they are remarkably honest people. So, the risk of people using welfare to defraud the government is substantially lower. Of equal importance is that homogenous societies are supportive of welfare since outsiders are less likely to benefit. Due to the unique peculiarities of Scandinavia, welfare policies that seem to work in this region would fail elsewhere.

Getting people to endorse welfare is harder in diverse societies, so more-diverse places would not develop the necessary social capital to engender support for welfare. Scandinavian-style welfare states are also impossible in unproductive countries where people are less work oriented. Without the productivity to generate resources, there can never be a welfare state. So less-productive places could never afford Scandinavian-style welfare.

Notwithstanding the accolades heaped on welfare in Scandinavian states, Sweden and Denmark had to restructure their economies in the ’90s to rein in the excesses of statist policies. Undoubtedly, Scandinavia boasts a stellar performance, but this is not due to welfare policies. Countries seeking to follow Scandinavia should copy its culture and market policies rather than its welfare initiatives. Typical places simply do not have the norms to preserve a Scandinavian-style welfare state.

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