Last Monday, Prof. Richard Swedberg, one of the most interesting sociologists around, came to George Mason University to give a presentation at the PPE Workshop. Swedberg has a very good command of economic theory and knows the work of many Austrian economists, especially Schumpeter and Kirzner. I highly recommend three of his books: Max Weber and the Idea of Economic Sociology, Principles of Economic Sociology, and Joseph Schumpeter: A Biography.
While we were driving him back to the airport after the presentation, we started talking about Sweden and how an economic sociologist like him would assess the situation. Interestingly, in this short conversation Swedberg mentioned two things about his country:
- The population is very supportive of the welfare state. Most Swedes are willing to pay high taxes to obtain many social and medical benefits from the government.
- However, everyone knows that the welfare state comes at a cost and must be somehow financed. A solution that has been in place for a long time has been to favor free trade. The Swedes have a long engineering tradition, have had great families of entrepreneurs, and have exported their products well. The government and the unions know this: at the heart of Sweden is a very opened and competitive economy – without it, there would be no financing of the welfare state.
As Assar Linbeck explains in his paper The Swedish Experiment (JEL 1997), Sweden experienced almost a century-long increase in productivity between roughly 1870 and the 1960s. However, like all the other social democracies in Europe the Swedish model is now experiencing more difficulties, as structural weaknesses in the economy are showing more and more.
What I find puzzling is that the Swedish experiment has been working for so long. This is also true for other Scandinavian countries. The Christian Science Monitor currently has a series on the welfare state in Europe. Finland is described in a similar way as Sweden is. It has a very generous welfare system along side with a very competitive industry.
As in the case of Sweden, Finland is almost made of two countries running side by side: on the one hand a private sector producing wealth, opened to international competition, and highly turned towards exports (with the highest levels, with Sweden, of R&D investments in Europe), and on the other a welfare state. As the article explains, Finland’s welfare state is also experiencing difficulties. The public health system is overcrowded and seeing a doctor takes hours, for instance. However, as in the case of the Swedes, the Fins embrace and support their welfare system.
Scandinavian countries such as Sweden and Finland seem to be cases where history defies what logic (i.e. economics) dictates. In other words, we should expect these countries to crumble under their contradictions as did other countries in the past, such Uruguay or Argentina. We don’t. The reason, I believe, is that there is more free entrepreneurial activity than one believes in the Nordic countries. At least three fundamental issues explain Scandinavian success.
First of all, Nordic countries have a long tradition of rule of law and protection of property rights. Their institutions are very sound, and corruption is very low. For instance, the very dynamic and free economy that existed in Sweden before WWII was based on this institutional background. This still influences Nordic countries today.
Second, these countries show the importance of Smithian growth. Indeed, as argued above they have been opened to international trade for a long time and have highly benefited from the large markets that come with international trade. The exports sectors are not overburden by government regulations to make sure investment continues and opportunities are captured. The welfare state has been financed by the gains from trade obtained from international commerce. New Zealand, for instance, chose to focus on its relationship with Britain for most of the 20th century. It was left with very little international trade when this relationship fell apart in the early 1970s. In the absence of the international trade with Britain, there was no export industry and thus nothing to finance the welfare system. The economy imploded.
Third, Scandinavian countries are small and still have very homogenous populations. In these conditions, individuals believe they are contributing to a system which will work for them, for their families or for their fellow citizens who also contribute to the system. In other words, they don’t think it will be abused by free-riders. Alesina, Baqir, and Easterly wrote on the issue of redistribution in the context of non-homogenous populations in US cities (see for instance here). When populations are fragmented because of ethnicity, religion or income levels, people are less inclined to finance core public goods and other types of redistribution. The opposite logic likely applies to the small, homogenous Nordic countries.
I don’t think there is much secret in the success of Scandinavian countries. With good institutions, a history based on free markets, small homogenous populations, and opened economies, they have been able to finance welfare systems for a while. However, as other European welfare states such as France and Germany are learning, the logic of economics always prevails in the long run.
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