The Scandinavian Countries of Denmark, Norway, and Sweden
Image Credit: Wikitravel/Stefan Ertmann

In the previous post Are European States More Socialist Than The US?, I noted that American progressives had a particular love affair with the Scandinavian states because they were supposedly more socialist than the United States. For example Bernie Sanders said last October during a Democratic Party debate, “I think we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people.” In this essay I intend to narrow my focus to these Scandinavian countries to see how much they should be considered socialist paragons.

A Note On Nomenclature

After my last post on European socialism, I was taken to task by a reader for using the words “socialism” and “capitalism” in a confusing way. Rather than make myself liable to the same criticism, I will first explain the double meanings of those two words and how I will distinguish between them. The more common way they are used nowadays is to indicate that a country is more oriented toward socialism than toward capitalism if it is described by “socialism”, and vice versa if it is described by “capitalism”. This is a rather bastardized and imprecise use of two perfectly good words.

It would be much better if the words had retained their original meanings, since they would then have very precise meanings that you can look up in any dictionary or encyclopedia. Below are the meanings as given by the Wikipedia online encyclopedia. The words “Capitalism” and “Socialism” below are links to their Wikipedia articles. Quoting Wikipedia verbatim we have:

• Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market.
• Socialism is a range of economic and social systems characterised by social ownership and democratic control of the means of production; as well as the political ideologies, theories, and movements that aim at their establishment. Social ownership may refer to forms of public, collective, or cooperative ownership; to citizen ownership of equity; or to any combination of these. Although there are many varieties of socialism and there is no single definition encapsulating all of them,  social ownership is the common element shared by its various forms.

The Wikipedia definition of capitalism is one I can almost whole-heartedly accept. The one exception I have is where Wikipedia says that “in a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets.” This is because these decisions are determined just as much by consumers as by producers through what quantities for various goods the consumers are willing to buy at different prices.

I have a much greater problem with their description of socialism as social systems that are characterized by, among other qualities, democratic control of the means of production. While it is not totally inconceivable that such control could be democratic, history has shown us that any country closely approaching Socialism very quickly devolved into totalitarianism. Whether it was the fascism of 1930s Italy and Germany, or the communism of the Soviet Union, once a country’s government gets close to total control of the economy, it quickly develops a totalitarian government. Otherwise I have no problem with Wikipedia’s definition.

If you reflect on these two terms for a while, it may occur to you that no country’s economy could possibly be completely socialist or capitalist; and that all realistic economies are mixtures of qualities of both. Even in the most capitalist of countries, the state creates goods and even monopolizes the production of some goods, such as public infrastructure, the maintenance of law and order, and military and naval forces. Even the most totalitarian of socialist countries allows for some private production, such as privately owned and run farms in the Russia of the Soviet Union. Socialism and capitalism are then platonic ideals that might be approached, but never achieved. More than that, they are polar opposites: Socialism occurs when there is total state control of the economy, and Capitalism describes an economy with absolutely no government control.

Therefore every economy we observe in reality is a mixture of both Socialist and Capitalist characteristics. The fact that Socialism and Capitalism are disjoint, polar-opposite, platonic ideals suggests strongly that we view the composition of any real economy as lying in a continuous spectrum between Capitalism and Socialism at either end of the spectrum. This gives us a definition of the “mixed” economy. Can we then find a scalar number that is some kind of mixture ratio between Capitalism and Socialism? That is the function the Wall Street Journal/Heritage Foundation Index of Economic Freedom attempts to fulfill. For any totalitarian, Socialist economy it is constructed to give a value of zero; if the country being described is the most laissez-faire, free-market conceivable, the index has a value of 100.

The index of economic freedom is an imperfect yet useful attempt to characterize the position of a country’s economy in that spectrum with a single scalar number. You might object that any single scalar number can not possibly make such a characterization, since there are so many ways in which the state can intrude into an economy, and of course you would be correct. The most accurate way of characterizing the departure of a particular economy from a pure laissez-faire, free-market, would require at least a vector. Analogues from physics would include describing a material’s dielectric properties with a scalar dielectric constant rather than the dielectric tensor that complete accuracy would require.

In a way, the authors of the index have recognized this problem by constructing it from various factors, where each factor (or more accurately its mapping to a scalar ranging from 0 to 100) is like the component of a displacement vector from an origin that is a totalitarian, socialist economy. The index of economic freedom is then like the length of the vector, which is the amplitude of the displacement from a free-market. Of course, the analogy is imperfect since the “vector” formed by the factors does not obey vector algebra. Pity.

In the past to solve the nomenclature problem, I adopted a convention where “Socialism” as a platonic ideal would be spelled with a leading capital ‘S’ as befits a proper noun, and “socialism” as a mixed economy closer to the Socialist end than to the Capitalist end would be spelled with a lower case ‘s’. Similar remarks apply to the uses of “Capitalism” and “capitalism”.

The Historical Explanation of Scandinavian Socialism

We are now ready to examine Scandinavian socialism, and attempt to ascertain just how Socialist it might be. One fascinating fact is the Scandinavia that Progressives so glowingly romanticize is increasingly a thing of the past. This is the conclusion of a study by a Swedish economist of Kurdish heritage, Nami Sanandaji. His monograph, entitled  Scandinavian Unexceptconalism: Culture, Markets and the Failure of Third-Way Socialism [H7]. Published by The Institute of Economic Affairs (IEA) in London, you can obtain it as an ebook for a modest price from Amazon, or as a free download as a PDF document from the IEA website.

When progressives like Bernie Sanders and Hillary Clinton wax eloquent about Scandinavian socialism, what they seem to be thinking about most is how they can have an extensive welfare program with no deleterious economic or social effects on their society. However, there is a lot more to socialism with government domination of the economy than just an extensive welfare program, a subject to which I will return shortly.

Yet Sanandaji rebuts even those claims about Scandinavian welfare programs. He informs us that Scandinavians’ wealth and well-being predated the rise of their welfare state by almost a century. For example, between 1870 and 1936 Sweden had the highest growth rates in the industrialized world. Up until 1960, the tax revenues were comparable to other industrialized countries. In that year tax revenues were between 25 percent of GDP for Denmark to 32 percent for Norway. During the period between 1870 and 1960 and before the rise of the Scandinavian welfare state, Scandinavian countries built a great deal of what Sanandaji calls social capital. Their societies were more sociologically  homogenous than most other developed nations, with a work-oriented ethos that discouraged people from taking advantage of others by not working. In chapter 1 of his monograph, Sanandaji writes,

The [Scandinavian] countries also have homogeneous populations with non-governmental social institutions that are uniquely adapted to the modern world. High levels of trust, a strong work ethic, civic participation, social cohesion, individual responsibility and family values are long-standing features of Nordic society that predate the welfare state. These deeper social institutions explain why Sweden, Denmark and Norway could so quickly grow from impoverished nations to wealthy ones as industrialisation and the market economy were introduced in the late 19th century … The same norms explain why large welfare systems could be implemented in the mid-20th century. A strong work ethic and high levels of trust made it possible to levy high taxes and offer generous benefits with limited risk of abuse and undesirable incentive effects.

A high degree of income equality was also something that arose before the rise of the Scandinavian welfare-state. Income equality grew dramatically between the years of 1870 and1950

The “third-way” radical social democratic era, with which progressives are so enamored, was in existence only between the early 1970s to the early 1990s. During this period the rate of business formation plummeted. Sanandaji states that in 2004 only 38 out of the 100 businesses with the highest revenues had begun as privately owned companies. Of that 38, only two had been started after 1970. Even more shockingly, Sanandaji writes. “Furthermore, between 1950 and 2000, although the Swedish population grew from 7 million to almost 9 million, net job creation in the private sector was close to zero.” 

It was not just business formation and job creation which withered under the welfare state. The social capital that had been so beneficial before the welfare state began to deteriorate under it. Sanandaji writes,

Despite the fact that Nordic nations are characterised by good health, only the Netherlands spends more on incapacity-related unemployment than Scandinavian countries. A survey from 2001 showed that 44 per cent believed that it was acceptable to claim sickness benefits if they were dissatisfied with their working environment. Other studies have pointed to increases in sickness absence due to sporting events. 

By the middle of the 1990s many Scandinavians had had enough of the welfare state, and have been episodically reducing the role of the state. During the 1990s, Sweden introduced neoliberal reforms that reduced the role of government in the economy. Taxes have been reduced and markets have been liberalized. Concerning taxes and government spending, in chapter 14 of his monograph, Sanandaji writes,

Since the 1980s, there has been a tentative return to free markets. In education in Sweden, parental choice has been promoted. There has also been reform to pensions systems, sickness benefits and labour market regulations, though the precise nature of reforms varies between countries. … Furthermore, the level of taxation and government spending in Scandinavian countries, though still high by historical and international standards, is no longer significantly higher than other EU countries. Economic freedom has increased in Scandinavia more rapidly than in most other developed countries and the relative decline of Scandinavian living standards has now been reversed.

Also the social democratic parties that had introduced the welfare state seem to be losing their hold on government. Last year in June the Wall Street Journal reported the Danish Prime Minister and head of the Social Democrats, Helle Thorning-Schmidt, lost her seat in the Danish Parliament and her party lost power to the center-right Venstre party. That left Sweden as the only Scandinavian government in Social Democrat hands,

Historical Data on Scandinavia’s Economies Since 1995

From the early 1990s onward, the intrusion of Scandinavian governments into the economy, particularly with the welfare state, appeared to be fitfully receding. Unfortunately, we can monitor the progress of these nations through their index of economic freedom scores only since 1995 when the index was started. Below is shown the evolution of Scandinavian economic freedom since 1995. Remember while considering these plots that the overall score, the index of economic freedom, and its constituent factor scores all vary from 0 to 100, where 0 is what one would have with a totalitarian, socialist state, and 100 denotes an absolutely free (from government), laissez-faire, free-market economy.

You can see how the economic freedom of all the Scandinavian countries have increased, while that of the United States has declined since 2009. Currently our total score is approximately the same as Denmark’s.

Next we will look at their property rights scores over time. This score is constructed with the attitude that the more restrictions the state puts on individuals and companies to accumulate and use private property, the lower the score should be.

The quantum like jumps are explained by the qualitative determination of the score with increments of 10 between distinctly defined labels. See the post A Closer Look at the Index of Economic Freedom for more explanation. A score of 80 means

• 80: Private property is guaranteed by the government. The court system enforces contracts efficiently but with some delays. Corruption is minimal, and expropriation is highly unlikely.

A Score of 90 denotes the following:

• 90: Private property is guaranteed by the government. The court system enforces contracts efficiently. The justice system punishes those who confiscate private property unlawfully. Corruption is nearly nonexistent, and expropriation is highly unlikely.

Note that all of the country property rights scores are truly excellent, while the world average is falling,

Next we look at the fiscal freedom from taxes score.

It would appear the only significant decreases in taxes in recent years, with a consequent increase in their fiscal freedom scores, have come from Sweden and to a lessor extent Denmark. Nevertheless, all three Scandinavian nations show significantly less freedom from taxes than the United States.

Next we come to the tremendously important freedom from government spending score. It has a value of 0 if the government spends 57.7 percent or more of GDP, and a value of 100 if government does not exist and spends nothing.

The scores of Sweden and Denmark remain abysmal with even Norway being below a truly awful U.S. Score.The United States score of 54.7 for 2016 is equivalent to government spending (federal, state, and local) of 38.9 percent of GDP.

Next, we will consider the scores for business freedom from government regulation.

The scores of all three Scandinavian states and the United States appear to be excellent, with the United States nevertheless having an inferior scare to those of the Scandinavian countries.

From business freedom we go to labor freedom from government regulation, the plots of which are shown below.

Here Denmark closely shadows the U.S., with Sweden and Norway being even below the world average.

Next we will look at monetary freedom from inflation, deflation, and price controls.

Here we see Denmark close to Sweden with a reasonably good score, with the U.S, close to Norway with a not so good score.

Next, we will consider trade freedom. This score is increased when the difference between the country’s maximum tariff rate and its average tariff rate becomes a larger fraction of the difference between the maximum and minimum rates. Penalty points are subtracted from this score if there are non-tariff barriers to international trade.

For a number of years then all three Scandinavian countries have had a very good trade freedom score close to that of the United States, and considerably better than the world average.

Next, we will look at investment freedom from government interference and regulation. If the government completely dictates capital investment flows, the score will be zero; if there are absolutely no government investment constraints, the score will be 100.

With this factor of economic freedom, the U.S. scores less well than all three Scandinavian nations, with Sweden and Denmark scoring very well, while Norway and the U.S. have  so-so scores. The source of the U.S. bad score, which began to fall around 2009, is almost certainly primarily due to Dodd-Frank Act financial regulations.

Finally, we come to the final economic freedom factor of financial freedom. The score for this factor is a measure both of banking efficiency and independence from government control and interference. In a completely free banking and financial environment there will be a minimal level of government control and interference.

Here we see both Sweden and Denmark with fairly good scores in recent years, with the U.S. having deteriorated from an excellent score in 2006 to a not-so-good score in 2010. Norway increased from an abysmal score of 50 in 1995 to a merely horrible score of 60 in the years from 2009 to the present.

Overall, the Scandinavian countries appear to have recovered fairly well from their social democratic past, with Denmark and Sweden doing better than Norway. The data also shows that the U.S. has fallen in economic freedom until it has nearly as much economic freedom overall as Denmark has.

Perhaps Bernie Sanders and Hillary Clinton should re-evaluate their recommendation that we emulate the Scandinavian countries.

[N.B.: A correction was made in the description of the government spending factor score of the Index of Economic Freedom on 7/20/2016]

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