Will the Nordic model work in non-Nordic countries?

Lane Kenworthy, The Good Society
February 2023

Before advocating widespread adoption of a new product or policy, it’s common to try it out on a small group. A company that develops a new medicine will evaluate its benefits and drawbacks via a clinical trial. In the United States, state and local governments frequently experiment with policy ideas before the federal government decides to adopt them. This is, in effect, what has happened with social democratic capitalism over the past several decades. The Nordic countries, its chief practitioners, have served as trial subjects.

The results are very encouraging. The Nordic nations’ coupling of democracy, capitalism, and education together with expansive public insurance, employment-friendly public services, and moderate product and labor market regulations has produced a better standard of living for their least well-off members, greater economic security, and very likely more equality of opportunity than in other rich democratic nations. And the Nordics have gotten these results without sacrificing economic growth, freedom, community, or any of a large number of other outcomes we want in a good society.1

However, unlike in a trial of a new medicine, the Nordic countries weren’t randomly selected from the world’s rich longstanding-democratic nations to receive this “treatment.” It’s conceivable that the Nordics are blessed with attributes that enable them, and only them, to reap the benefits of social democratic capitalism without suffering tradeoffs. It’s possible, in other words, that while social democratic capitalism works quite well, it can do so only in Denmark, Finland, Norway, and Sweden. Varying versions of this hypothesis identify the Nordics’ secret sauce as an immutable work ethic, superior intelligence, trust, solidarity, small population size, racial and ethnic homogeneity, institutional coherence, effective government, corporatist concertation, a willingness to be taxed, tax compliance, or strong labor unions.

The question here isn’t whether other nations are likely to adopt social democratic capitalist policies. They may or may not. Nor is it whether social democratic capitalist policies, if other countries do adopt them, will yield a higher standard of living for the least well-off, better economic security, and more equality of opportunity. They almost certainly will. The question is whether other nations that adopt social democratic capitalist policies will be more likely than the Nordics to suffer tradeoffs.

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WORK ETHIC AND PERSONAL RESPONSIBILITY

One possibility is that Nordic culture features a deeply ingrained (Viking? Lutheran?) commitment to employment, and this causes people in the Nordic countries to continue to work, and work hard, even in the face of financial disincentives created by public social programs. In the words of one observer, “The uniquely strong norms associated with personal responsibility and work in the Nordics made these societies particularly well suited for avoiding the moral hazard of generous welfare systems.”2

Are Nordic citizens more culturally predisposed than others to work hard in the face of monetary disincentives? Three pieces of evidence suggest they probably aren’t.

The first comes from a World Values Survey question asking whether it is justifiable to claim government benefits to which you aren’t entitled. Figure 1 shows the share responding that doing so is never justified. A generation ago, this share was comparatively high in Denmark, Norway, and Sweden. That seems consistent with the hypothesis of a deep-seated cultural commitment to employment. In the past three decades, however, there has been a significant shift.

Figure 1. Claiming government benefits to which you aren’t entitled is never justified
Question: “Please tell me for each of the following actions whether you think it can always be justified, never be justified, or something in between: claiming government benefits to which you are not entitled.” The lines show the share responding “never be justified.” The vertical axis doesn’t begin at zero. Data sources: World Values Survey and European Values Survey. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

In Denmark, a comparatively large share continues to say “never justified.” But Norway and Sweden have moved from the top of the ranking to the middle, joining Finland. They now look much like most of the other countries in their share of citizens who feel it’s never justifiable to claim government benefits to which you aren’t entitled. We shouldn’t take this to mean that Finns, Norwegians, and Swedes are lacking in personal responsibility or work ethic, but it does give us reason to doubt that they are uniquely highly endowed with these qualities.

A second piece of evidence is the number of hours worked by people who are employed. Figure 2 shows average hours worked per year by employed persons in the rich democratic countries. Here too there is no empirical sign of an overriding commitment to work in the Nordic nations. Denmark, Norway, and Sweden are at the low end of the spectrum, with Finland toward the middle but in the lower half.

Figure 2. Hours worked by employed persons
Average annual hours worked per employed person. “k” = thousand. The vertical axis doesn’t begin at zero. Data source: OECD. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

Third, there are specific policy episodes in the Nordic nations that offer a useful test of the “uniquely strong work ethic” hypothesis. One is Sweden’s sickness insurance program in the late 1980s. Jonas Agell describes the circumstances: “According to the rules in place by the end of the 1980s, employees were entitled to a 90 percent compensation level from the first day of reporting sick. Due to supplementary insurance agreements in the labor market, however, many employees had a compensation level of 100 percent. For the first seven days of sickness leave, a physician’s certificate was not required.” How did Swedes respond? Did they continue to show up for work, ignoring the monetary incentive to be out “sick”? According to Agell, the average number of work days missed due to sickness increased from 13 in the mid-1960s to 25 in 1988, despite an improvement in actual health among the Swedish population.3 To put this in cross-national perspective, Americans on average miss 5 days of work per year.4

Disability programs offer another test. Children of persons who receive disability payments are more likely than others to be aware of the program and to know its eligibility and benefit rules. If those children are more likely than others to end up on the disability program as adults, this suggests some degree of benefit cheating. Norway is a useful case to examine, because its economy has been exceptionally strong during the past generation, with lots of high-paying jobs. It offers plenty of opportunity, in other words, for people to make a good living via employment. A recent study finds that Norwegian children of disability benefit recipients are indeed more likely to become recipients themselves, suggesting that they do respond to incentives.5

None of this evidence is definitive, but it leans strongly against the hypothesis that a unique cultural emphasis on work and personal responsibility makes Nordic citizens less likely to succumb to employment disincentives than their counterparts in other affluent countries.

We don’t need to look to culture in order to explain high employment rates in the Nordic nations. Social democratic capitalism aims to boost employment via work-conducive public services and moderate rather than stringent product and labor market regulations. In the event that policy makers go too far with government transfer generosity and create employment disincentives, as they sometimes have, these two elements of social democratic capitalism are likely to offset the damage. These policies, rather than an immutable work ethic or a culture of personal responsibility, are the key cause of high Nordic employment rates. We should expect the same result when social democratic capitalist policies are used in other nations.

INTELLIGENCE

If people in the Nordic countries have an advantage in average cognitive ability, they might be able to compensate for employment and innovation disincentives by working smarter. We can’t directly compare intelligence across countries, but scores on international tests of reading, math, and science are inconsistent with the hypothesis of superior Nordic cognitive ability. As figure 3 shows, high school students in Finland have done comparatively well on these tests over the past decade, but the scores of their counterparts in Denmark, Norway, and Sweden have been average or below. This isn’t what we would expect to see if people in the Nordic countries have an intelligence advantage.

Figure 3. PISA test scores
Average student score on Program for International Assessment (PISA) reading, math, and science tests. 15-year-olds. The PISA tests ask students to solve problems they haven’t seen before, to identify patterns that aren’t obvious, and to make compelling written arguments. The vertical axis doesn’t begin at zero. Data source: OECD, PISA Database. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

TRUST

Some research suggests that interpersonal trust improves key societal outcomes such as economic growth, educational attainment, health, safety, and happiness.6 The standard measure of trust comes from survey responses to the question “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” The World Values Survey has asked this question since the early 1980s. Figure 4 shows the share of the population in each of the rich democratic countries who choose the “most people can be trusted” response. The Nordic nations have tended to feature comparatively high levels of interpersonal trust.7

Figure 4. Interpersonal trust
Share of adults who believe most people can be trusted. Question: “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” Data source: World Values Survey. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

Is trust what enables the Nordics to achieve desirable outcomes without suffering tradeoffs?8 To begin, is trust a key contributor to good outcomes? The supportive evidence is, in my view, quite thin.9

Even if trust does contribute to good outcomes, there is little reason to think a high level of trustingness is possible only in the Nordic nations. Figure 5 shows the level of trust in Denmark and Sweden according to the World Values Survey and in the United States according to the National Opinion Research Center. The question wording is virtually identical. In the 1960s, Americans were just as trusting as Danes and Swedes, and perhaps more so.

Figure 5. Interpersonal trust
Share of adults who believe most people can be trusted. Data source for Denmark and Sweden: World Values Survey. Data sources for the United States: General Social Survey, sda.berkeley.edu/ archive.htm, series trust; National Opinion Research Corp.

What drove the large decline in interpersonal trust in the United States? The main cause seems to have been a reduction in trust in government, spurred by the Vietnam War in the 1960s and Watergate in the 1970s. As figure 6 indicates, trust in government correlates very closely with interpersonal trust over time. The pattern across rich democratic nations gives additional reason to think that trust in government is an important determinant of interpersonal trust. As figure 7 shows, the cross-country association is quite strong.10 Rising trust in government also appears to have been a key cause of the increase in interpersonal trust in Denmark over the past generation.11

Figure 6. Trust in government and interpersonal trust in the United States
Share of adults. Trust in government question: “Do you trust the government in Washington to do what is right always, most of the time, some of the time, or never?” The line shows the share responding “always” or “most of the time.” Data source: Pew Research Center, “Public Trust in Government, 1958-2017,” using data from assorted surveys. Interpersonal trust question: “Generally speaking, would you say that most people can be trusted or that you can’t be too careful in life?” The line shows the share responding “most people can be trusted.” Data sources: General Social Survey, sda.berkeley.edu/archive.htm, series trust; National Opinion Research Corp. The correlation is +.85.

Figure 7. Confidence in government and interpersonal trust
Interpersonal trust: Share of adults saying “most people can be trusted.” The other response option is “You can never be too careful when dealing with others.” Data source: World Values Survey. Confidence in government: Share of adults responding “yes” to the question “Do you have confidence in the national government?” Data source: Gallup World Poll, via the OECD. The asterisks highlight the Nordic countries. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line. The correlation is +.76.

If countries can in theory achieve Nordic levels of interpersonal trust, how can they do so in practice? As it happens, a prominent hypothesis, supported by recent findings, holds that an effective route is via an expansive and generous welfare state — a key component of social democratic capitalism.12

What can we conclude? Interpersonal trust probably isn’t vital for good outcomes. Even if it is, high trustingness isn’t unique to the Nordic countries; other rich nations might well achieve comparable levels of trust by embracing social democratic capitalism.

SOLIDARITY

For much of the past century, the Nordic countries have had strong labor unions, a tradition of voting for political parties that promote social inclusion, and a commitment to high levels of foreign aid for poor nations. These are frequently seen as expressions of a solidaristic, egalitarian culture, which contrasts with the more individualistic “You’re on your own” attitude that dominates in nations such as the United States and with the priority attached to the family in southern European countries.

We shouldn’t, however, overstate the role of egalitarian sentiments in the Nordic countries. Figure 8 shows that in public opinion surveys, the share of Swedes who say freedom and family security are very important to them has consistently been much larger than the share saying equality is very important.

Figure 8. Importance of freedom, family security, and equality to Swedes
Share responding “very important” to the question “How important do you consider the following things to be to yourself?” Other response options: fairly important, neither important nor unimportant, not very important, not at all important. Data source: Johan Martinsson, Ulrika Andersson, and Annika Bergström, eds., “Swedish Trends, 1986-2017,” SOM Institute, University of Gothenburg, 2018, p. 18.

Nor, to my knowledge, is there scholarly research that convincingly links solidaristic or egalitarian culture to better societal performance on outcomes such as economic growth, health, happiness, or others.

SMALL SIZE AND HOMOGENEITY

The Nordic nations are small in population: Denmark, Finland, and Norway each have 5 to 6 million people and Sweden has 10 million. They also are relatively homogenous: according to a common measure of ethnic heterogeneity, among 21 rich longstanding-democratic nations Finland is the eighth most diverse, Denmark sixteenth, Norway seventeenth, and Sweden eighteenth.13

Homogeneity and small size very likely played a role in why the Nordics adopted social democratic capitalist policies.14 But do they underlie the Nordic countries’ success in achieving good outcomes while avoiding tradeoffs? According to Tyler Cowen, “A small country with higher ethnic homogeneity and with only a few concentrated population centers usually can provide higher levels of social insurance without experiencing the level of system abuse that might occur in the United States.”15 But he doesn’t offer any reason why that would be true, nor any evidence suggesting it is. As noted earlier, a comparatively large share of Nordic citizens believe it’s okay to cheat, and their work commitment decreases when benefits get too generous.

It’s also worth noting that across the rich democratic countries, neither small population size nor homogeneity is associated with faster economic growth or greater affluence.16

INSTITUTIONAL COHERENCE

According to the “varieties of capitalism” hypothesis, the economies of the world’s rich democratic nations fall into two groups. Coordination is market-based in “liberal market economies” such as the United States and the United Kingdom. Coordination is based largely on nonmarket or extramarket institutions in “coordinated market economies” such as Germany and Austria. What matters for successful economic growth, in this view, is not the type of economic coordination, but the degree of institutional coherence. Countries with more coherent institutions — those with consistently market-oriented or consistently nonmarket-oriented institutions and policies — should grow more rapidly.17

Does institutional coherence account for the Nordic nations’ success in coupling the advantages of social democratic capitalism with an absence of tradeoffs?18 That’s unlikely. The Nordic countries’ configuration of institutions and policies hasn’t been more coherent than those of Germany, Japan, the United States, and some other rich democracies.19 In any case, the empirical record suggests no association between institutional coherence and economic success; nations with hybrid institutions and policies, or with a mix that changes over time, have performed as well as those with more coherent arrangements.20

EFFECTIVE GOVERNMENT

The Nordic countries have tended to have good government.21 A common measure is the World Bank’s “government effectiveness” index, which attempts to gauge public and expert perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. Scores are available beginning in the mid-1990s. As figure 9 shows, the Nordic nations have consistently ranked at or near the top among the rich democracies. A particular strength has been their willingness to experiment and adjust, to be pragmatic rather than bound by dogma. As one observer colorfully puts it, “The streets of Stockholm are awash with the blood of sacred cows.”22

Figure 9. Government effectiveness
Government effectiveness attempts to capture perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. Data source: Stefan Dahlberg, Sören Holmberg, Bo Rothstein, Anna Khomenko, and Richard Svensson, Quality of Government Basic Dataset, version Jan16, Quality of Government Institute, University of Gothenburg, series wbgi_gee, using data from the World Bank. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

Have Nordic governments been uniquely effective? I’m not aware of evidence that supports such a conclusion. According to the World Bank measure, the level of government effectiveness in Switzerland and the Netherlands has tended to match that of the Nordic nations, with Canada, Australia, Austria, and until recently Germany and Japan close behind.

Policy makers in the Nordic countries have made some significant mistakes. From the 1930s through the 1970s, each of these countries had a policy of compulsory sterilization aimed at curbing reproduction by people with mental illness, disability, or other traits considered undesirable. Sweden had a government-funded eugenics institute and forcibly sterilized an estimated 60,000 people.23 In the late 1980s and early 1990s, the governments in Finland and Sweden caused recessions by reducing capital controls rapidly, and both then decided to impose austerity measures, deepening the recessions.24 The downturns, which ended up lasting from 1990 to 1995, were among the most severe experienced by any rich country since the 1930s. Denmark’s government proved no more effective than those of many other rich countries at identifying and preventing a housing bubble in the mid-2000s. And on various occasions Nordic policy makers have overshot in the generosity of public social programs, as noted earlier.

Let’s back up. To what degree does social democratic capitalism’s success hinge on a high level of government effectiveness? It surely helps, but it’s likely less critical than some imagine.

Policy design isn’t too difficult, because policy experimentation in the Nordic nations and others lightens the burden on the governments in other countries. Rather than starting from scratch, they can draw on “best practice” in the Nordics and elsewhere.

What about implementation? Students of economic development in poorer nations increasingly recognize that application of a ready-made template for a particular policy sometimes doesn’t work well, because the problem has idiosyncratic features in a particular country or locality, because the needed government administrative capacity doesn’t exist, because information is limited, or because the new policy disrupts existing routines and hence fosters resistance by administrators or beneficiaries.25 But these problems are of limited relevance for most social programs in affluent democratic nations.

A big welfare state is sometimes assumed to require a massive bureaucracy that will inevitably be inefficient, ignorant of on-the-ground needs and complexities, vulnerable to rent-seeking by private interest groups, and more attentive to its own interests than to those of its customers or clients.26 However, many public insurance programs don’t in fact suffer from these problems. Think of pensions, the government transfer program that spends the largest quantity of money. It works very simply: A small tax is regularly deducted from each employed person and from his employer. When the person reaches the age of eligibility, he begins receiving a payment. There are some complicated cases that must be sorted out by government personnel, but this is minor. The administrative cost is low — for Social Security in the United States, just 0.4% of total program expenditures.27 The potential for self-interested bureaucrats to expand their turf is minimal, as is the ability of private actors to grab a share of the money. For the Earned Income Tax Credit, America’s next-largest antipoverty program, administrative costs also are less than 1% of expenditures.28 Or consider healthcare. Administrative costs for Medicare, America’s government health insurance program for the elderly, are less than 2% of expenditures.29 For Medicaid, which is administered separately by each of the 50 states, they are 4.6%.30 If the United States were to enact a public sickness insurance program or paid parental leave, two policies that every other affluent democratic nation already has, the size and cost of the government administrative apparatus would be smaller than many critics of big government imagine.

What about government’s capacity to correct mistakes? An effective government, Franklin Roosevelt once said, will “Take a method and try it. If it fails, admit it frankly and try another.”31 Might this be a problem for a nation such as the United States, which has an array of governmental veto points that make it difficult to change course? Policy adjustment in the US is indeed more difficult than in, say, Sweden. Yet America’s experience with public insurance programs since the 1930s has been one of frequent adjustment. Every program has been changed a number of times, sometimes in minor ways and other times in major ones.32 Often these adjustments have been expansions, but sometimes they have involved cuts, and occasionally those cuts have been quite large, such as the mid-1990s “welfare reform.” Program adjustment can be difficult in the United States, but it does happen.

CORPORATIST CONCERTATION

Regularized dialogue among organized interest groups and between interest groups and government, known as corporatist concertation (or corporatism), can improve government policy making and implementation. Policies are likely to be based on more and better information, to be better coordinated across policy areas, and to be subject to less dispute and resistance once implemented. Some studies have linked corporatist concertation with healthier economic performance: lower unemployment and inflation, faster economic growth, and greater adaptability to economic change.33

While the Nordic countries have been among the most prominent practitioners of corporatism, they aren’t exceptional in this regard, as we see in figure 10. Moreover, corporatism’s beneficial effects on economic outcomes seem to have dissipated by the 1990s.34 This, then, is an unlikely candidate for why the Nordic nations have been comparatively successful.

Figure 10. Concertation
A composite measure formed by combining indicators of the involvement of unions and employers in government decisions, the organizational structure of collective actors, the structure of works council representation, the rights of works councils, government intervention in wage bargaining, the dominant level of wage bargaining, coordination of wage bargaining, and mandatory extension of collective agreements. Data source: Detlef Jahn, “Changing of the Guard: Trends in Corporatist Arrangements in 42 Highly Industrialized Societies from 1960 to 2010,” Socio-Economic Review, 2016. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

WILLINGNESS TO BE TAXED

Government debt forces a portion of revenues to go toward interest payments, which means those revenues can’t be used for transfers or services. A nation with social democratic capitalist policies but stuck with a sizable government debt might, for this reason, be less successful in boosting low-end living standards, improving income security, and equalizing opportunity without experiencing tradeoffs. The Nordic nations have tended to balance their public budget. The result, as we see in figure 11, is little or no government debt.

Figure 11. Government debt
Government financial liabilities minus government financial assets (“net debt”), measured as a share of GDP. Higher on the vertical axis indicates larger debt. Data source: OECD, data.oecd.org, series general government financial wealth. Norway, which has a surplus (negative net debt) of better than 200% of GDP, is omitted. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick line: Finland.

Is this because Nordic citizens are uniquely amenable to paying high taxes? Figure 12 shows tax revenues as a share of GDP in the Nordics and other rich nations going back to the mid-1960s. While Denmark and Sweden had the highest tax revenues from the mid-1980s through the mid-2000s, in prior years their revenue levels were similar to those of several continental European nations. That has been true for Finland and Norway throughout the past half century (apart from a brief spell in the early 1990s when Finland’s GDP fell sharply), and in recent years it has been the case for Sweden as well. This is thin evidence on which to rest a conclusion that only the Nordic nations can generate a quantity of taxes sufficient to pay for social democratic capitalist policies.

Figure 12. Tax revenues
Share of GDP. Includes all types of taxes at all levels of government. Doesn’t include nontax sources of government revenue. Data source: OECD. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

Why, then, have the Nordics had lower public debt levels than most other rich nations? The chief reason is their commitment to genuine Keynesianism in fiscal policy. Keynes argued for deficit spending during economic recessions, in order to compensate for a shortfall in private-sector demand.35 After World War II some policy makers in the rich countries shifted to a view that deficit spending should be used to stimulate the economy on a regular basis, not just during downturns.36 Nordic social democrats have tended to stick with Keynes’s approach, which means running a surplus when the economy is growing in order the keep the budget in balance over the business cycle.37

TAX COMPLIANCE

Even if Nordic citizens are no more fond of high taxes than their counterparts elsewhere, are they more likely to pay them? The social democratic capitalist model requires heavy tax revenues. If too many people react to high tax rates by cheating, the model may run into trouble. Are people in the Nordic countries less prone to tax cheating than citizens in other rich democracies?

One indicator is what people say in response to a survey question. Since the early 1980s, the World Values Survey and European Values Survey have asked citizens whether they think cheating on taxes “can never be justified, always be justified, or something in between.” Figure 13 shows the share responding “can never be justified.” The Nordic countries don’t stand out. Based on what they say, they don’t appear to be less likely to cheat on tax payments than their counterparts abroad.

Figure 13. Cheating on taxes is never justified
Question: “Please tell me for each of the following actions whether you think it can always be justified, never be justified, or something in between: cheating on taxes.” The lines show the share responding “never be justified.” The vertical axis doesn’t begin at zero. Data sources: World Values Survey and European Values Survey. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

What about actual behavior? Research on tax cheating suggests it is largely a function of incentives rather than culture or individual virtue.38 When a person’s income is reported to the tax authority by a third party, such as an employer or financial company, the incidence and magnitude of tax cheating tends to be very low. It increases when income is self-reported, as is the case for many people who are self-employed.

What do we observe among self-reporters in the Nordics compared to other countries? In Denmark, the tax evasion rate among those with only or mainly self-reported income is about 50%. In the United States it is similar, at about 56%.39 This suggests no grounds for believing that the Nordic nations are uniquely able to get their citizenry to comply with heavy taxation.

STRONG LABOR UNIONS

The unionization rate is higher in the four Nordic countries than in all other rich democratic nations apart from Belgium, as we see in figure 14. In other countries unionization has been declining, in some cases quite rapidly. The fact that union decline is so widespread across these nations suggests grounds for pessimism about a reversal of this trend.40

Figure 14. Unionization
Union members as a share of all employees. Data source: Jelle Visser, “ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts,” version 6.0, 2019, Amsterdam Institute for Advanced Labour Studies, series ud, ud_ s. “Asl” is Australia; “Aus” is Austria. Solid thick lines: Denmark and Sweden. Dashed thick lines: Finland and Norway.

This is a potential problem, because labor unions have been a key driver of rising earnings and income for ordinary households. However, there are alternative ways for rich democratic countries to achieve this — tight labor markets, statutory minimum wages, profit sharing, and earnings subsidies.41

SOCIAL DEMOCRATIC CAPITALISM’S SUCCESS VERY LIKELY IS GENERALIZABLE

The Nordic nations have used social democratic capitalism to achieve economic security, decent living standards for the least well-off, and equal opportunity with little or no sacrifice of other elements of a good society. Skeptics hypothesize that the Nordics have unique attributes that enable them, and only them, to reap the benefits of social democratic capitalist policies without suffering tradeoffs. While these hypotheses are plausible, none of them turn out, on close inspection, to be compelling.

Compared to their counterparts in other affluent democratic nations, Nordic citizens don’t have a uniquely strong work ethic or personal responsibility norms, they aren’t more intelligent, and they aren’t less prone to tax cheating. They are more trusting of fellow citizens, but that appears to have little impact on outcomes and in any case can be duplicated via improved confidence in government. It isn’t clear that they are exceptionally solidaristic, nor that solidarity matters for successful outcomes. The Nordic nations’ small size and homogeneity may well have made it more likely that they would adopt social democratic capitalist policies, but it probably hasn’t contributed to their ability to get good outcomes. The Nordic countries have had a comparatively high level of government effectiveness, but not a uniquely high level. They have made greater use of corporatist concertation than many other rich democracies, but that doesn’t seem to have had much impact on outcomes since the 1990s. They have avoided running up a large public debt despite high levels of government spending, but that owes to a commitment to balancing the budget across the business cycle, not to an abnormally strong citizen willingness to be heavily taxed.

One feature of the Nordic nations that is likely to matter is union strength. Countries such as the United States, where unions are weaker and there is no other mechanism to expand the reach of collective bargaining, will need to turn to other policies and institutions to ensure rising incomes for ordinary households.

Political impediments to full embrace of social democratic capitalism are formidable in some nations. But once those impediments are surmounted, we can be relatively confident in the likelihood of good results. The successful outcomes we observe in the Nordic nations are likely to carry over to other countries that adopt social democratic capitalist policies.

  1. Lane Kenworthy, Social Democratic Capitalism, Oxford University Press, 2020; Kenworthy, “Social Democratic Capitalism,” The Good Society. ↩︎
  2. Nima Sanandaji, Debunking Utopia: Exposing the Myth of Nordic Socialism, WND Books, 2016. ↩︎
  3. Jonas Agell, “Why Sweden’s Welfare State Needed Reform,” Economic Journal, 1996, p. 1767. See also Gøsta Esping-Andersen, The Three Worlds of Welfare Capitalism, Princeton University Press, 1990, ch. 6. ↩︎
  4. OECD, “Absence from Work Due to Illness,” stats.oecd. ↩︎
  5. Gordon B. Dahl, Andreas Ravndal Kostøl, and Magne Mogstad, “Family Welfare Cultures,” Quarterly Journal of Economics, 2014. ↩︎
  6. Robert D. Putnam, “The Prosperous Community: Social Capital and Public Life,” The American Prospect, 1993; Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity, The Free Press, 1995; Robert D. Putnam, Bowling Alone: The Collapse and Revival of American Community, Simon and Schuster, 2000; Henrik Christoffersen, Michelle Beyeler, Reiner Eichenberger, Peter Nannestad, and Martin Paldam, The Good Society: A Comparative Study of Denmark and Switzerland, Springer, 2014, p. 136; Christian Bjørnskov, Happiness in the Nordic World, Aarhus University Press and University of Wisconsin Press, 2021, ch. 6. ↩︎
  7. Christian Albrekt Larsen, The Rise and Fall of Social Cohesion, Oxford University Press, 2013. ↩︎
  8. Alan Cowell, “An Economy with Safety Features, Sort of Like a Volvo,” New York Times, 2006; Bjørnskov, Happiness in the Nordic World. ↩︎
  9. Lane Kenworthy, “Social Capital, Cooperation, and Economic Performance,” in Beyond Tocqueville: Civil Society and the Social Capital Debate in Comparative Perspective, edited by Bob Edwards, Michael W. Foley, and Mario Diani, University Press of New England, 2001. ↩︎
  10. Bo Rothstein and Dietlind Stolle, “The State and Social Capital: An Institutional Theory of Generalized Trust,” Comparative Politics, 2008; Bo Rothstein, “Solidarity, Diversity, and the Quality of Government,” in The Strains of Commitment: The Political Sources of Solidarity in Diverse Societies, edited by Keith Banting and Will Kymlicka, Oxford University Press, 2017. ↩︎
  11. Kim Mannemar Sønderskov and Peter Thisted Dinesen, “Danish Exceptionalism: Explaining the Unique Increase in Social Trust Over the Past 30 Years,” European Sociological Review, 2014. ↩︎
  12. Kathryne B. Brewer, Hans Oh, and Shilpi Sharma, “‘Crowding In’ or ‘Crowding Out’? An Examination of the Impact of the Welfare State on Generalized Social Trust,” International Journal of Social Welfare, 2014; Staffan Kumlin and Atle Haugsgjerd, “The Welfare State and Political Trust: Bringing Performance Back In,” in Handbook of Political Trust, edited by Tom van der Meer and Sonja Zmerli, Edward Elgar, 2017. ↩︎
  13. Alberto Alesina, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat, and Romain Wacziarg, “Fractionalization,” Journal of Economic Growth, 2003. ↩︎
  14. David R. Cameron, “The Expansion of the Public Economy: A Comparative Analysis,” American Political Science Review, 1978; Peter J. Katzenstein, Small States in World Markets, Cornell University Press, 1985; John L. Campbell, John A. Hall, and Ove K. Pedersen, eds., National Identity and the Varieties of Capitalism: The Danish Experience, McGill-Queen’s University Press, 2006. ↩︎
  15. Tyler Cowen, “Denmark’s Nice, Yes, But Danes Live Better in U.S.,” Bloomberg View, 2016. ↩︎
  16. Alberto Alesina, Enrico Spolaore, and Roman Warczarg, “Trade, Growth, and the Size of Countries,” in Handbook of Economic Growth, volume 1B, edited by P. Aghion and S.N. Durlauf, North-Holland, 2005; Alberto Alesina, Johann Harnoss, and Hillel Rapoport, “Birthplace Diversity and Economic Prosperity,” Working Paper 18699, National Bureau of Economic Research, 2013; Lane Kenworthy, “Economic Growth,” The Good Society. ↩︎
  17. Peter A. Hall and David Soskice, “An Introduction to Varieties of Capitalism,” in Varieties of Capitalism, edited by Peter A. Hall and David Soskice, Oxford University Press, 2001; Peter A. Hall and Daniel W. Gingerich, “Varieties of Capitalism and Institutional Complementarities in the Political Economy: An Empirical Analysis,” British Journal of Political Science, 2009. Coherence applies both within and across economic spheres. A country’s institutional mix is deemed more coherent to the extent that its institutions within each sphere are closer to one or the other of the two poles (liberal market or coordinated market) rather than in between and its institutions are consistent across spheres. Incoherence can be a product of being in the middle within each sphere or having liberal market institutions in some spheres and coordinated market institutions in others. ↩︎
  18. For suggestive arguments in this vein, see Jonas Pontusson, “Once Again a Model: Nordic Social Democracy in a Globalized World,” in What’s Left of the Left?, edited by James Cronin, George Ross, and James Shoch, Duke University Press, 2011; Erling Barth, Karl O. Moene, and Fredrik Willumsen, “The Scandinavian Model — an Interpretation,” Journal of Public Economics, 2014. ↩︎
  19. Lane Kenworthy, “Institutional Coherence and Macroeconomic Performance,” Socio-Economic Review, 2006; John L. Campbell and Ove K. Pedersen, “The Varieties of Capitalism and Hybrid Success: Denmark in the Global Economy,” Comparative Political Studies, 2007; Hall and Gingerich, “Varieties of Capitalism and Institutional Complementarities in the Political Economy: An Empirical Analysis”; Peer Hull Kristensen and Kari Lilja, eds., Nordic Capitalisms and Globalization, Oxford University Press, 2011. ↩︎
  20. Kenworthy, “Institutional Coherence and Macroeconomic Performance.” ↩︎
  21. Bo Rothstein, The Quality of Government, University of Chicago Press, 2011; Sven Steinmo, “Governing as an Engineering Problem: The Political Economy of Swedish Success,” in Politics in the Age of Austerity, edited by Armin Schäfer and Wolfgang Streeck, Polity Press, 2013; Adrian Wooldridge, “The Secret of Their Success,” The Economist, 2013. ↩︎
  22. John Micklethwait and Adrian Wooldridge, The Fourth Revolution: The Global Race to Reinvent the State, Penguin, 2014. ↩︎
  23. Gunnar Broberg and Nils Roll-Hansen, eds, Eugenics and the Welfare State: Sterilization Policy in Denmark, Sweden, Norway, and Finland, Michigan State University Press, 1996; The Economist, “Here, of All Places,” 1997. ↩︎
  24. Darius Ornston, Good Governance Gone Bad: How Nordic Adaptability Leads to Excess, Cornell University Press, 2018. ↩︎
  25. Matt Andrews, Lant Pritchett, and Michael Woolcock, Building State Capacity, Oxford University Press, 2017. ↩︎
  26. Milton Friedman, Capitalism and Freedom, University of Chicago Press, 1962; William A. Niskanen, Bureaucracy and Representative Government, Aldine, 1971; Milton Friedman and Rose Friedman, Free to Choose, Harcourt Brace Jovanovich, 1979; James M. Buchanan, “The Economic Theory of Politics Reborn,” Challenge, 1988; James Q. Wilson, Bureaucracy, Basic Books, 1989; John E. Chubb and Terry M. Moe, Politics, Markets, and America’s Schools, Brookings Institution Press, 1990; James C. Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed, Yale University Press, 1998; Vito Tanzi, Government Versus Markets, Cambridge University Press, 2011; Luigi Zingales, A Capitalism for the People, Basic Books, 2012. ↩︎
  27. Social Security Administration, “Social Security Administrative Expenses.” ↩︎
  28. Robert Greenstein and CBPP Staff, “For Major Low-Income Programs, More Than 90 Percent Goes to Beneficiaries,” Center on Budget and Policy Priorities, 2012. ↩︎
  29. Nick Buffie, “Overhead Costs for Private Health Insurance Keep Rising, Even as Costs Fall for Other Types of Insurance,” Center for Economic Policy Research, 2017; Manuela Tobias, “Comparing Administrative Costs for Private Insurance and Medicare,” PolitiFact, 2017; Austin Frakt, “Is Medicare for All the Answer to Sky-High Administrative Costs?,” New York Times, 2018. ↩︎
  30. Greenstein et al, “For Major Low- Income Programs, More Than 90 Percent Goes to Beneficiaries.” ↩︎
  31. Franklin D. Roosevelt, “Address at Oglethorpe University in Atlanta, Georgia,” 1932. ↩︎
  32. Theodore R. Marmor, Jerry L. Mashaw, and John Pakutka, Social Insurance, CQ Press, 2014. ↩︎
  33. Katzenstein, Small States in World Markets; Alexander Hicks and Lane Kenworthy, “Cooperation and Political Economic Performance in Affluent Democratic Capitalism,” American Journal of Sociology, 1998; Harold L. Wilensky, Rich Democracies, University of California Press, 2002; Darius Ornston, “Creative Corporatism: The Politics of High-Technology Competition in Nordic Europe,” Comparative Political Studies, 2012. ↩︎
  34. Lane Kenworthy, “Corporatism and Unemployment in the 1980s and 1990s,” American Sociological Review, 2002; Kenworthy, “Economic Growth.” ↩︎
  35. Paul Krugman, The Return of Depression Economics and the Crisis of 2008, W.W. Norton, 2009. ↩︎
  36. John Kenneth Galbraith, The New Industrial State, Princeton University Press, (1967) 2007. ↩︎
  37. Lane Kenworthy, “Good Government: Additional Data.” See also Carles Boix, “Partisan Governments, the International Economy, and Macroeconomic Policies in Advanced Nations, 1960-93,” World Politics, 1998; Jonas Pontusson, “Once Again a Model: Nordic Social Democracy in a Globalized World,” in What’s Left of the Left?, edited by James Cronin, George Ross, and James Shoch, Duke University Press, 2011. “The boom, not the slump, is the right time for austerity at the Treasury,” wrote Keynes in 1937. See Paul Krugman, “The Fraudulence of the Fiscal Hawks,” New York Times, 2018; Krugman, “Why We Should, But Won’t, Reduce the Budget Deficit,” New York Times: Paul Krugman Newsletter, 2023. ↩︎
  38. Henrik Jacobsen Kleven, Claus Thustrup Kreiner, and Emmanuel Saez, “Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries,” Working Paper 15218, National Bureau of Economic Research, 2009; Henrik Jacobsen Kleven, Martin B. Knudsen, Claus Thustrup Kreiner, Søren Pedersen, and Emmanuel Saez, “Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark,” Econometrica, 2011; Fred Pampel, Giulia Andrighetto, and Sven Steinmo, “How Institutions and Attitudes Shape Tax Compliance: a Cross-National Experiment and Survey,” Social Forces, 2019. ↩︎
  39. Henrik Jacobsen Kleven, “How Can Scandinavians Tax So Much?,” Journal of Economic Perspectives, 2014. ↩︎
  40. Lane Kenworthy, “Employee Voice,” The Good Society. ↩︎
  41. Lane Kenworthy, “How to Ensure Rising Incomes When Labor Unions Are Weak,” The Good Society. ↩︎