The Nordic nations, particularly Sweden, are viewed as role models by advocates of large welfare states.
However, the advocates often forget that the admirable features of Nordic countries existed before the shift towards large public sectors. Nima Sanandaji explains that Nordic success has much to do with early adaptation of free markets and a unique culture of success.
“It is a country whose very name has become a synonym for a materialist paradise. […] No slums disfigure their cities, their air and water are largely pollution free… Neither ill health, unemployment nor old age pose the terror of financial hardship.”
This is how Time Magazine described Sweden in the mid 1970s. For a long time American intellectuals, as well as celebrities such as Bruce Springsteen, have argued that the U.S. would be a much better place if it simply adapted the policies of Sweden and other Nordic countries.
Denmark, Finland, Norway and Sweden have high-tax social democratic systems that for long have been admired by the left. Paul Krugman, for example, has said: “Every time I read someone talking about the ‘collapsing welfare states of Europe,’ I have this urge to take that person on a forced walking tour of Stockholm”.
Similarly, in 1979 political scientist John Logue argued: “A simple visual comparison of Scandinavian towns with American equivalents provides strong evidence that reasonably efficient welfare measures can abolish poverty as it was known in the past; economic growth alone, as the American case indicates, does not.”
Logue believed that the greatest threat to the Nordic welfare states was that they were too successful; eliminating social problems to such a degree that people forgot the importance of welfare policies. In 2006 Jeffrey Sachs argued in Scientific American that the ideas of classical liberal economist Friedrich Hayek were proven wrong by the Nordic social democracies: “
In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness.” This list of admirers could be easily extended.
The high regard comes as no surprise. Nordic societies are uniquely successful. Not only are they characterised by high living standards, but also by other attractive features such as low crime rates, long life expectations, high degrees of social cohesion and relatively even income distributions.
Various international rankings conclude that they are amongst the best, if not the best, places in the world in which to live. One example is the “Better Life Index”, compiled by the Organization for Economic Co operation and Development (OECD). As shown below, the Nordic countries rank highly in the index. If one disregards the importance of thinking carefully about causality, the argument for adopting a Nordic style economic policy in other nations seems obvious. The Nordic nations – in particular Sweden, which is most often used as an international role model – have large welfare states and are successful.
This is often seen as proof that a ”third way” policy between socialism and capitalism works well, and that other societies can reach the same favourable social outcomes simply by expanding the size of government. If one studies Nordic history and society in depth, however, it quickly becomes evident that the simplistic analysis is flawed.
To understand the Nordic experience one must bear in mind that the large welfare state is not the only thing that sets these countries apart from the rest of the world. The countries also have homogenous populations with non-governmental social institutions that are uniquely adapted to the modern world. High levels of trust, strong work ethic, civic participation, social cohesion, individual responsibility and family values are long-standing features of Nordic society that pre-date 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. They also play an important role in Finland’s growing prosperity after the Second World War.
The same norms explain why large welfare systems could be implemented in the mid-20th century. Strong work ethics 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. It is important to stress that the direction of causality seems to be from cultures with strong social capital towards welfare states that have not had serious adverse consequences, and not the other way around. Also, cultural traits adapt slowly. It took time to build up the exceptionally high levels of social capital in Nordic cultures. And it took time for generous welfare models to begin undermining the strong work ethic in these nations.
Why do Nordic societies have unusually strong emphasis on individual responsibility and strong social capital? Religion, climate and history all seem to have played a role in forming these unique cultures.
Over a hundred years ago, German sociologist Max Weber observed that protestant countries in northern Europe tended to have a higher living standard, more high quality academic institutions and overall stronger social cohesion than Catholic and Orthodox countries. Weber believed that the cause of the success of protestant nations was to be found in a stronger “protestant work ethic.”
According to Swedish scholar Assar Lindbeck it has historically been difficult to survive as an agriculturalist without working exceptionally hard in the hostile Nordic environment.
The population therefore out of necessity adapted a culture with a great emphasis on individual responsibility and hard work. What is unique about Nordic nations is not only that they are cold, but also that throughout most of their recent history they have been dominated by independent farmers. Most other parts of Europe have had feudal systems, where much of the population were serfs who lacked private ownership of their land. With the exception of Denmark, feudalism did not manage to get the same grip in the Nordics.
Many farmers have historically owned their own land in Scandinavia. Hard work has historically not only been a necessity in the cold north, but also been clearly rewarding due to the presence of wide-spread private ownership.
A vivid example is given by a poem written by Swedish poet Johan Ludvig Runeberg, after he had visited the town of Saarijärvi in middle Finland in the 1820’s. Runeberg wrote about the farmer Paavo, who worked hard to support his family by working the land in the inhospitable Finnish climate. Floods during the spring and hailstorms during the summer ruined much of the crops, and the cold during the autumn destroyed the remainder.
Paavo and his wife were forced to mix bark in their bread to survive the coming year, a common tradition amongst Nordic farmers. During the next year the Finnish farmer worked hard digging trenches to improve his farmland, but was again rewarded with a meagre harvest due to unfortunate weather. The family mixed even more bark in their bread to survive the second year, and worked even harder. Finally the third year’s harvest was not destroyed by the weather.
Paavos wife happily exclaimed that they could afford to eat regular bread. However Paavos insisted that they continue to mix in bark in their bread, since they ought to share their food with their neighbours, whose harvest had been ruined by the cold.
The descriptive poem illustrates that those who lived off the land in the harsh Nordic nations needed to have not only a stoic resolve to work hard and plan ahead, but also strong social trust and cohesion, in order to survive. It also clearly illustrates that the independent farmers, in contrast to landless farmers in many other parts of the world, had much to gain from working extra hard to invest in the productivity of their farms – a result of early adaptation of the market principle of extending property rights to the broad population. The Nordic climate and economic system was thus for generations, well before the rise of industrialism, characterised by conditions that uniquely promoted norms related to work and responsibility. This corresponds with Thomas Jefferson’s description of independent farmers in the United States as “the most virtuous and independent citizens.”
Interestingly, the Nordic success culture is maintained when people from this region move abroad. Amongst the U.S. population, those with Nordic origins have the highest levels of trust. Americans of Nordic descent even have slightly higher levels of trust than the populations of Nordic countries themselves. This suggests that the origin of the Nordic culture of success pre-dates modern welfare states. After all, large-scale migration of people from the Nordic to the U.S. occurred during the late 19th century and the early 20th century, before the shift towards welfare state policies.
The American descendants of Nordic migrants live in a very different policy environment compared with the residents of the Nordic countries. The former live in an environment with less welfare, lower taxes and (in general) freer markets. Interestingly, the social and economic success of Nordic-Americans is on a par with or even better than their cousins in the Nordic countries.
Cultural traits do not disappear when people migrate. In the case of the Nordic working ethics, they appear to have fully bloomed after the migration across the Atlantic. Close to 12 million Americans have Nordic (Scandinavian) origins, that is to say are individuals whose ancestors largely or in some cases entirely migrated from the Nordics and who today identify as having Nordic origins. This group is characterised by favourable social and economic outcomes. According to the 2010 US Census, the median household income in the United States is $51,914.
This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as “Scandinavian Americans” in the US Census. The median household income for this group is even higher at $66,219.
It is notable that Norwegian Americans have household incomes 17 per cent higher than the US average. If we assume that their contribution to GDP is also 17 per cent higher, the GDP per capita of Norwegian Americans would amount to $55,396. This is only slightly less than the $57,945 GDP per capita of oil rich Norway.
Corresponding calculations show that Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 per cent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland. We cannot draw definitive conclusions from these figures, since household composition may differ, but there is prima facie evidence that the decedents of Nordic people who move to the U.S. are significantly better off than those who stay at home.
Moreover, those Nordics who went to the U.S., predominately in the nineteenth century, were not elite groups. A recent study by Ran Abramitzky, Leah Platt Boustan and Katherine Eriksson has for example compared Norwegians who migrated to the U.S. with those who stayed in Norway.
The study shows that the Norwegians who moved from urban areas tended to face poorer economic conditions than those who stayed behind. The descendants of the poor Nordic citizens who left for the opportunities in the U.S. have, over time, thrived on the other side of the Atlantic. Besides oil-rich Norway, those with Nordic descent in the U.S. are considerably more affluent than their cousins who remain in the Nordics.
The success of Nordic immigrants in the U.S. shows the pervasiveness of norms and low level social institutions. The comparison with Nordic Americans illustrates that the pursuit to create “social good” through welfare state policies has hindered economic prosperity. Economists Notten and Neubourg have calculated the poverty rates in European countries and the U.S. using equivalent measures. They have shown that the absolute poverty rates in Denmark (6.7 per cent) and Sweden (9.3 per cent) are indeed lower than the US level (11 per cent). For Finland however, the rate (15 per cent) is somewhat higher than in the US.
At the same time, Nordic nations have for long, even before the rise of large welfare states, been characterised by low levels of poverty. Nordic descendants in the U.S. today have half the poverty rate of the average of Americans – a consistent finding for decades. In other words, Nordic Americans have lower poverty rates than Nordic citizens. This is very much in line with the argument put forward by American Nobel laureate Milton Friedman.
When reportedly faced with the argument “in Scandinavia, we have no poverty,” Friedman simply replied “that’s interesting, because in America, among Scandinavians, we have no poverty, either.” Friedman is right. As Paul Krugman and many other on the left fail to realize, culture matters.
Thus, what makes Nordics uniquely successful is not the welfare states, as is commonly assumed. Rather than being the cause of these nations’ social strengths, the high-tax welfare state instead seems to have been made possible by the hard-won stock of social capital. It was well before the welfare state, when hard work paid off, that a culture with emphasis on work ethic and strong trust and social cohesion developed.
It was these informal institutions that paved way for the introduction of large welfare states which were buttressed by strong social norms. However, in the long run, the large welfare states have eroded incentives, and ultimately the social norms that bounded Nordic societies together. The U.S. system, with greater emphasis on personal responsibility, is more in line with the traditional Nordic system that allowed for the culture of success to develop in the first place. Thus, we should not be surprised that Nordic Americans have both higher living standard and lower poverty than their cousins in the Nordic welfare states.
Dr. Nima Sanandaji is a research fellow at Center for Policy Studies, and the author of “Scandinavian Unexceptionalism – Culture, Markets and the Failure of Third-Way Socialism”. The book, which was recently released is currently being translated to a number of different languages. The entire book is available through the Institute of Economic Affairs which has published it.