Scandinavian Countries Are Super-Capitalist with the Terrible Baggage of a Huge Welfare State

This is my further comment on Kanishka Sinha’s FB post, that I referred to here.

In this I show Kanishka that the laws of economics are INVIOLABLE. They never change, no matter where you go or live. I will also, by the end of this post, more clearly distinguish socialism from capitalism.

ARE SCANDINAVIAN COUNTRIES SUCCESSFUL?

There is no doubt that on most economic benchmarks Scandinavian countries (Denmark, Norway, Sweden) are highly successful. They are up there among the richest 20 nations in the world, their national debt is manageable (not like the Greek socialist state, for instance), and their people even claim to be happy. [True, there is some detail, e.g. huge private debt in Denmark, but I said “most” economic indicators, not “all”].

So what is going on here? Are these guys an example of successful socialist countries, or are the capitalist in some way, or do they follow some other, “third way”?

WHAT DO THE HIGH LEVEL FREEDOM INDICATORS TELL US?

Without going into too much detail (there are plenty of other, similar, indicators), this list of indicators shows that unlike India (which is a HARDCORE SOCIALIST, UNFREE SOCIETY), the Scandinavian countries are FREE countries, with the world’s strongest property rights systems. They are fundamentally NOT socialist. Socialist countries DO NOT have economic (or other) freedoms. The whole idea of socialism is for the state to dictate who does what, and to manage the economy centrally.

PROOF THAT THESE ARE ROBUST MARKET ECONOMIES

Does the price system work in these countries? (e.g.do they use administered prices, like with socialist India?)

Denmark has a “thoroughly modern market economy” [Source]. “Denmark boasts a modern market economy in which the prices of goods and services are determined in a free price system.” [Source]

Market restrictions?

There is no minimum wage in Denmark. [Source]

Labour market flexibilty: In Denmark, the employer’s right to hire and fire their employees whenever they find it necessary is recognised. [Source] This suggests labour market flexibillity at a level that is totally unheard of in any socialist (or even most capitalist) society.

Trade policy?

Denmark advocates free trade [Source]. “All Nordic countries have a commitment to free trade” [Source].  The Economist describes these as  “stout free-traders who resist the temptation to intervene even to protect iconic companies”  [Source]

HOW THE NORDIC COUNTRIES HAVE CHANGED – BECOME MORE MARKET ORIENTED

These countries had a period of greater state intervention in the society, but have become market oriented at a level not heard of in most parts of the West.

In the 1970s and 1980s the Nordics were indeed tax-and-spend countries. Sweden’s public spending reached 67% of GDP in 1993. Astrid Lindgren, the inventor of Pippi Longstocking, was forced to pay more than 100% of her income in taxes. But tax-and-spend did not work: Sweden fell from being the fourth-richest country in the world in 1970 to the 14th in 1993.

Since then the Nordics have changed course—mainly to the right. Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s. Taxes have been cut: the corporate rate is 22%, far lower than America’s. The Nordics have focused on balancing the books. While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system (see Free exchange). Its budget deficit is 0.3% of GDP; America’s is 7%. [Source]

Private management of public hospitals and schools

An example of their private orientation is their operation of schools and hospitals.

Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC. [Source]

BUT THEY DO HAVE AN EXCESSIVE WELFARE STATE

This doesn’t mean that these are free societies in every respect. They have a strong egalitarian focus, implemented through redistribution. This welfare system has led to some rather extreme negative consequences, as outlined in Manipulism and the Weapon of Guilt: Collectivism Exposed by Mikkel Clair Nissen. I’ve provided key extracts from this book here.

I won’t go into details of this, but it is clear that the welfare state is both unsustainable and harmful to human motivation and dignity. There is no doubt that these states will pull back on the excesses of their welfare state as people realise it is not going to work. There is no free lunch. The sooner these countries understand that, the better for them. While they may not go down the path of failed states like Greece, they will face increasing challenges in maintaining their standards of living if their most productive people start working less (or migrate to other, less taxing countries).

CONCLUSION

So what are we to make of this?

Well, to understand this, we need to go back to the two fundamental theorems of economics.

First you must recognise that free markets ALWAYS work best. That’s what the first theorem states. The market ALWAYS creates the most efficient allocation and thereby maximises wealth. Once that has been achieved, you can, if you so wish, transfer funds to meet your egalitarian objectives. You can redistribute “endowments” to create any pareto optimal outcome you wish, through the market. That’s the second theorem.

All economics graduates are taught these basic theorems early in their graduate year. These theorems take tens of pages of non-trivial formal proofs. Kanishka, you perhaps learnt these theorems, as well, didn’t you? (Or does ISB not teach theoretical economics?). 

But note clearly that reallocation as part of a welfare state is NOT socialism. It is redistribution within capitalism. Socialism involves denial of property rights, denial of the price system, denial of free trade. Clearly the Scandinavian countries are extreme-CAPITALIST societies on these indicators. These capitalist institutional features allow them to generate vast amounts of wealth; which they then redistribute.

The excesses of their welfare state have undoubtedly reduced their potential wealth by harming incentives at two levels: at the top, where high taxes reduce incentives to work; and at the bottom, where excessive welfare reduces incentives to work. The documentation of the adverse effects of welfare makes clear that the welfare system is NOT a good idea and should be curtailed.

However, it is fundamentally incorrect to talk of Scandinavian countries as being socialist.

Yes, in casual talk, even I refer to excesses of welfare state as socialism, but socialism is actually quite a different beast.

To identify socialism, look at India, Kanishka. Look at PROPERTY RIGHTS. Look at PRICES. Look at LABOUR MARKETS. Look at TRADE.

ADDENDUM

Debunking the Myth of Socialist “Success” in Scandinavia

IEA Book (free): Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism

The economics of freedom: lessons from the Nordic countries

Some links I had jotted down but forget whether I reviewed as part of writing this blog:

http://www.libsdebunked.com/socialism/scandinavian-socialism-argument/http://thescepticisle.com/2015/06/27/the-myth-of-the-scandinavian-socialist-utopia/http://www.businessinsider.com.au/why-socialist-scandinavia-has-some-of-the-highest-inequality-in-europe-2014-10https://www.facebook.com/permalink.php?story_fbid=855238281177262&id=592589870775439http://reason.com/blog/2012/06/08/sweden-not-a-socialist-standard-bearer-a