Social democratic capitalism

Lane Kenworthy, The Good Society
April 2023

Social democratic capitalism has six core elements: (1) Democratic political system. (2) Capitalist mixed economy: mostly private ownership and markets. (3) Basic education: good-quality K-12 schooling. (4) Expansive, generous public insurance programs. (5) Employment-promoting public services: early education, affordable college, training and retraining, job placement assistance, individualized support and monitoring, lifelong learning, eldercare. (6) Moderate regulation of product and labor markets.1

This set of institutions and policies enhances economic security, improves living standards for the least well-off, and boosts equality of opportunity. And it very likely increases happiness. It achieves these goals without sacrificing the many other things we want in a good society, from liberty to economic growth to community and much more.2

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SOCIAL DEMOCRATIC CAPITALISM YIELDS GOOD OUTCOMES

Figures 1 through 5 give a flavor of social democratic capitalism’s success. On the horizontal axis in each of the charts is a social democratic capitalism index. Every affluent longstanding-democratic country has a welfare state, but their expansiveness and generosity differ significantly. Employment-oriented public services and moderate (rather than stringent) product and labor market regulations aim to boost employment, and these too vary widely across the world’s rich democratic nations. The social democratic capitalism index captures these country differences.3

The country ranking is consistent with what we would expect. The Nordic countries score highest (they are to the right on the horizontal axis). They are followed by five continental European nations that have big welfare states but less public spending on employment-promoting services and heavier regulation of product and labor markets: Austria, Belgium, France, the Netherlands, and Germany. In the lower half of scores are Switzerland, Japan, and six English-speaking countries, which have smaller welfare states and limited public spending on employment-oriented services. They are joined by three southern European nations and South Korea, which have medium-sized or small welfare states, comparatively little employment-promoting service spending, and heavy product and labor market regulation.4

Social democratic political parties in the Nordic countries have been the prime movers in the adoption of this set of institutions and policies, and it’s for this reason that I use the label “social democratic capitalism.”5 Others might prefer a different label, such as the Nordic model, social capitalism, social investment capitalism, or flexicurity.6

On the vertical axis in figure 1 is a measure of the living standards of the least well-off: the income of a household at the tenth percentile of the income distribution (90% of households have larger incomes, and 10% have smaller ones).7 The incomes are adjusted for inflation over time and for cost-of-living differences across countries. The chart shows that the incomes of low-end households tend to be higher in nations that make greater use of social democratic capitalism. And this income measure understates social democratic capitalism’s benefits, because it doesn’t take into account the monetary value of government services such as childcare and eldercare, which tend to be more plentiful under social democratic capitalism.

Figure 1. Social democratic capitalism and living standards of the least well-off
Low-end household income: posttransfer-posttax income at the 10th percentile of the income distribution. 2010-2016. The incomes are adjusted for household size and then rescaled to reflect a three-person household, adjusted for inflation, and converted to US dollars using purchasing power parities. “k” = thousand. Data sources: Luxembourg Income Study; OECD. Social democratic capitalism: average standard deviation score on four indicators: public expenditures on social programs as a share of GDP, replacement rates for major public transfer programs, public expenditures on employment-oriented services, and modest regulation of product and labor markets. The data cover the period 1980-2015. Data source: Lane Kenworthy, Social Democratic Capitalism, Oxford University Press, 2020, pp. 39-40. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line. The correlation is +.73.

In figure 2 we see that the employment rate tends to be higher with social democratic capitalism. This owes partly to its extensive use of employment-promoting government services: active labor market programs such as retraining and job placement and family-friendly programs like early education and eldercare.8 These kinds of services encourage more people, particularly women and parents, to enter employment, they help persons who lose a job to prepare for and find another one, and they serve as a direct source of jobs for teachers, trainers, caseworkers, and others. High employment rates also owe to social democratic capitalism’s use of moderate, rather than heavy, regulation of product and labor markets.9 The easier it is to start up, operate, and shut down a business, and the more flexible firms can be in hiring and firing workers, the more private businesses are likely to be able and willing to boost employment.

Figure 2. Social democratic capitalism and employment
Employment: employed persons age 25-64 as a share of all persons age 25-64. 2010-2016. Data source: OECD. Social democratic capitalism: see figure 1. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line. The correlation is +.47.

An emphasis on high employment hasn’t always been at the forefront for the countries that today most fully embrace social democratic capitalism. (Sweden was committed to pursuit of “full employment” as early as the 1950s, but that referred mainly to a low unemployment rate among men.) As public social programs expanded in the decades after World War II, some program benefits reached a level of generosity at which they clearly dampened work incentives, and this wasn’t necessarily considered a vice. Here is one description of the situation as of the 1980s: “Like pensions, sickness and related benefits were originally meant to help only the truly incapacitated. The idea of paid absence from work has undergone a decisive transformation in terms of both quality and scope. In most European countries, sickness benefits today equal normal earnings. In some countries, notably Scandinavia, legislation has deliberately sought to emancipate the individual from work-compulsion by extending high benefits for a broad variety of contingencies, including sickness, maternity, parenthood (for mother and father), education, trade union and related involvement, and vacation. Controls and restrictions have been eliminated or liberalized; waiting days have been abolished, a medical certificate of illness is required only after one week, no previous work experience is required to qualify, and benefits can be upheld for very long periods…. When, as in Sweden, on any given day approximately 15 percent of workers are absent yet paid to work … a very large share of what normally is regarded as labor time is in fact ‘welfare time’.”10

Since then, employment promotion has become increasingly central to the social democratic capitalist model.11 Why the shift? After all, employment isn’t always a good thing. The need for a paycheck can trap people in careers that divert them from more productive or rewarding pursuits. Work can be physically or emotionally taxing. It can be monotonous, boring, and alienating. Some jobs require a degree of indifference, meanness, or dishonesty toward customers or subordinates that eats away at one’s humanity. And work can interfere with family life.

Yet employment has significant virtues.12 It imposes regularity and discipline on people’s lives. It can be a source of mental stimulation. It helps to fulfill the widespread desire to contribute to, and be integrated in, the larger society. It shapes identity and can boost self-esteem. With neighborhood and family ties weakening, the office or factory can be a key site of social interaction. Lack of employment tends to be associated with feelings of social exclusion, discouragement, boredom, and unhappiness. In addition, employment may help to achieve desirable societal outcomes such as economic security and opportunity.

So employment has benefits and drawbacks. Some believe policy should therefore aim to enhance people’s freedom to opt in or out of paid work.13 What tips the balance in favor of high employment for social democratic capitalism is the fact that paying for a big welfare state requires a large amount of government revenue. High tax rates are one way to get that revenue, but capital mobility has made it more difficult for nations to keep tax rates high, or to increase them. A larger share of the population in paid work means more taxable income, which increases tax revenue without necessitating an increase in tax rates. High employment eases the fiscal crunch another way too, by reducing the number of people fully or heavily reliant on public benefits.

In figure 3, the vertical axis shows a measure of economic insecurity: the share of households that experience a large income decline from one year to the next. The share tends to be smaller in nations with more of a social democratic capitalist orientation. This is partly because public insurance programs compensate for lost earnings. It’s also because social democratic capitalism boosts employment, so if a household member loses his or her job, it’s easier to find a new one or for another member of the household to become employed, increase work hours, or take on a second job.

Figure 3. Social democratic capitalism and economic insecurity
Large income decline: Share of households experiencing a year-to-year income decrease of 25% or more. Average over the 2-year periods between 1985 and 2015. Excludes households that enter retirement between one year and the next. Data source: Jacob S. Hacker, “Economic Security,” in For Good Measure: Advancing Research on Well-Being Metrics beyond GDP, edited by Joseph E. Stiglitz, Jean-Paul Fitoussi, and Martine Durand, OECD, 2018, table 8.4, using data from the ECHP, EU-SILC, CPS, and CNEF (BHPS, SOEP, HILDA, KLIPS, SHP, SLID). Social democratic capitalism: see figure 1. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line. The correlation is -.88.

Figure 4 shows a strong positive association between social democratic capitalism and opportunity. We can think of opportunity as individuals’ capability to choose, act, and accomplish — what Isaiah Berlin called “positive liberty” and Amartya Sen has labeled “real freedom.”14 While critics of big government tend to assume that public social programs reduce freedom, many of these programs are capability-enhancing. They boost people’s cognitive and noncognitive skills, increase their employment options, ensure that hard times do minimal damage, and reduce dependence on family and friends. More than a century ago, John Stuart Mill recognized that true freedom to lead the kind of life we want requires education, health, and economic security.15 More recently, Anu Partanen has highlighted this point in a comparison of her native Finland with her adopted country, the United States. Observing that many Americans don’t have access to high-quality, affordable health insurance, childcare, housing in good school districts, college, and eldercare, Partanen notes that this diminishes not only Americans’ economic security but also their freedom16:

Most people, including myself, assumed that part of what made the United States a great country, and such an exceptional one, was that you could live your life relatively unencumbered by the downside of a traditional, old-fashioned society: dependency on the people you happened to be stuck with. In America you had the liberty to express your individuality and choose your own community. This would allow you to interact with family, neighbors, and fellow citizens on the basis of who you were, rather than on what you were obligated to do or expected to be according to old-fashioned thinking. The longer I lived in America … the more puzzled I grew. For it was exactly those key benefits of modernity — freedom, personal independence, and opportunity — that seemed, from my outsider’s perspective, in a thousand small ways to be surprisingly missing from American life today…. In order to compete and to survive, the Americans I encountered and read about were … beholden to their spouses, parents, children, colleagues, and bosses in ways that constrained their own liberty.

We have no direct measure of opportunity, but a useful indirect measure comes from a question asked by the Gallup World Poll: “Are you satisfied or dissatisfied with your freedom to choose what you do with your life?” We can treat the share responding “satisfied” as an indicator of opportunity, of the degree to which capabilities extend widely across the population. This share is on the vertical axis of figure 4. The pattern across countries is consistent with the hypothesis that social democratic capitalism enhances opportunity.17

Figure 4. Social democratic capitalism and opportunity
Freedom to make life choices: share responding “satisfied” to the question “Are you satisfied or dissatisfied with your freedom to choose what you do with your life?” 2005-2019. Data source: Gallup World Poll, via the World Happiness Report 2020, online appendix. Social democratic capitalism: see figure 1. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line. The correlation is +.72.

Figure 5 looks at happiness, which some consider the ultimate prize.18 The Gallup World Poll regularly asks the following question: “Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?” Across the rich democratic countries, we see a strong positive association between social democratic capitalism and life satisfaction. There is some evidence that this association is causal.19

Figure 5. Social democratic capitalism and happiness
Life satisfaction: average response to the question “Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?” 2005-2019. Data source: Gallup World Poll, via the World Happiness Report 2020, online appendix. Social democratic capitalism: see figure 1. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line. The correlation is +.72.

So greater use of social democratic capitalism seems to contribute to better incomes for the least well-off, higher employment, greater economic security, more opportunity, and higher life satisfaction. The conclusion that these relationships are causal isn’t a slam dunk, because we don’t have over-time data that would allow a better test of causality.20 But the links are compelling on theoretical grounds, and the evidence we do have is supportive.

THESE ARE RAWLSIAN OUTCOMES

In A Theory of Justice, John Rawls argued that among the features we should want in a good society, three stand out as especially important: basic liberties, equality of opportunity, and the best possible living standards for the least well-off.21 I share this view, though I think it needs a clarification and an addition.

Begin with the clarification. For Rawls, basic liberties refer to both democratic political institutions and personal freedoms.22 All of the world’s rich democratic nations have both democratic polities and extensive personal liberties.

Next, the addition. Given what social scientists have learned about loss aversion since A Theory of Justice was published in the early 1970s, if Rawls were writing today he likely would include income security as an additional core attribute of a good society. Humans dislike loss, and we’re willing to pay substantial sums to avoid it or limit it.23 As a person’s income or assets increase, she will tend to buy more insurance. Similarly, as nations get richer, they tend to allocate a larger portion of their income (GDP) to insurance. Richard Layard puts it as follows: “Many studies have found that a loss hurts roughly twice as much as an equal gain helps. That is why people are so keen to avoid loss, and so unwilling to incur the risk of loss…. It is precisely because people hate loss that we have a social safety net, a welfare state. People want the security that these entities provide…. If security is what most of us desperately want, it should be a major goal for society. The rich have quite a lot of it and the poor less. A happy society requires a lot of it all round.”24

We can think of this set of features — a democratic political system with basic personal liberties, economic security, equality of opportunity, and the best possible living standards for the least well-off — as an “expanded Rawlsian” result. Social democratic capitalism has proven effective at achieving these aims.

A BIG WELFARE STATE AND EMPLOYMENT BOTH MATTER, AND THEY HAVE SEPARATE EFFECTS

I mentioned several times above that public insurance programs and employment have beneficial effects.25 Is it a mistake to conclude that both of them matter? Might it instead be the case that countries with big welfare states also tend to have higher employment rates, with one or the other doing all of the causal work, rather than both? No. For one thing, welfare state size and employment rates aren’t correlated across nations; the Nordic countries are high on both, but some countries are high on one and low on the other.26 Also, statistical analyses suggest that welfare state size and employment have separate effects on expanded Rawlsian outcomes.27

Are the beneficial effects of public insurance and those of high employment interdependent? In other words, does a country need to have both in order to get the benefits of either one? Again, no. Public insurance helps on its own and so does employment.28 Social democratic capitalism isn’t an interdependent configuration (a “gestalt”). It’s a collection of helpful institutions and policies.

WHAT WE PAY FOR COLLECTIVELY AND INDIVIDUALLY

Social democratic capitalism spreads the cost of what we otherwise would have to purchase with our own resources. A host of things end up paid for collectively via tax revenues. That lightens the burden on individuals and families who have less income. It also encourages people to do things that are beneficial for their health and well-being, such as attending school, visiting a doctor, starting a business, and more. And it facilitates employment, because some of these things are services, such as childcare and training and eldercare, that give people the time and capability to be in paid work.

Begin with things that end up free or inexpensive:

  • Safety: police, criminal justice system, military
  • Water
  • Food: school breakfast and lunch
  • Healthcare: physical and mental, prevention and treatment
  • Childcare, preschool (“early education”)
  • Elementary school, secondary school
  • Job training, apprenticeship
  • Job placement assistance
  • Disability services
  • Eldercare
  • Transportation: buses, subways, roads, bridges, bike lanes, walking paths, sidewalks, stoplights, enforcement of speed limits, air traffic control
  • Information: internet, libraries, public television and radio programming
  • Data: census, health, economic, and more
  • Weather forecasts
  • Communication: phone lines, internet
  • Legal representation if accused of a crime or facing eviction
  • Enforcement of property rights and contracts
  • Financial safeguards: limited liability for passive investors, bankruptcy, bank deposit insurance, protection against unauthorized use of credit cards
  • Tax preparation
  • Public spaces: museums, parks, sports fields, forests, campgrounds, beaches, oceans, lakes, swimming pools, zoos, festivals, public restrooms
  • Trash and recyclables collection
  • Disaster prevention and relief: firefighting, levies, cleanup, compensation to uninsured victims
  • Protection of basic freedoms (speech, religion, etc)
  • Antidiscrimination protection and enforcement
  • Access to voting and other forms of political participation

Government provides money that supplements earnings:

  • Child allowance
  • Earnings subsidy
  • Guaranteed minimum income (social assistance)

Government also provides money that substitutes for earnings in particular circumstances or at particular points in the life course:

  • Unemployment compensation
  • Sickness compensation
  • Disability payment
  • Parental leave (12-14 months)
  • Paid vacation days and holidays (25-30 per year)
  • Retirement pension: basic and earnings-related

Some things are subsidized by government but nevertheless amount to a large expense for households:

  • College (tuition free, but room and board not)
  • Rental housing
  • Homeownership
  • Home electricity, heating, cooling

What else do people need? Here are the main things that are neither free nor subsidized in contemporary social democratic capitalism:

  • Food (other than school meals)
  • Clothes
  • Transportation: car, ridesharing, bicycle
  • Home goods: furniture, appliances, kitchen stuff, toys
  • Home services: cleaning, maintenance, repair, upgrades, pest control
  • Electronics: smartphone, computer, television
  • Wireless phone service
  • Entertainment and news: streaming, movies, concerts, plays, newspapers, for-pay websites
  • Private training, tutoring, counseling, coaching
  • Pets
  • Insurance: life, home, auto, pet
  • Travel
  • Gifts, charitable donations, tithes

DETAILS, DETAILS

Neither the general description of social democratic capitalism that I’ve offered nor the previous section’s list of what is paid for collectively versus individually gives us guidance on a host of important policy details: What is the optimal replacement rate for unemployment compensation, disability benefit, and sickness insurance? Should early education be universal or targeted to the poor (or to the poor plus middle)? Should paid parental leave be for six months or one year? Should it include a “daddy quota”? Should health insurance cover dental services? Should there be a statutory minimum wage? If so, how high? Should low wages be supplemented with a tax credit? What’s the best balance between taxation of income, payroll, and consumption? What is the optimal age of eligibility for full pension benefit? And many, many more.

Answers to these questions hinge on public preferences and on evidence about what works.

TRADEOFFS

Does social democratic capitalism require us to sacrifice economic prosperity, stable families, community, or other desired outcomes?

One tradeoff is baked into the social democratic capitalist model: upper-middle-class and rich households forgo cash income in favor of services that they may or may not utilize and in favor of more transfers and services for less well-off households. To fund a big welfare state and employment-oriented services, tax rates need to be fairly high for most of the population. For households in the middle and below, these tax payments are more than offset by the value of services they use and transfers they receive. For those in the top quarter or so (the exact cut-off point varies), particularly those with children, there may be considerable benefit to the services and transfers provided — childcare, preschool, child allowance, free or low-cost college, and more. But most people with high incomes and few or no children will pay more in taxes than they receive in services and benefits.

What about other possible tradeoffs? A frequent worry about generous government benefits and services, and the high tax rates needed to fund them, is that they may reduce the financial incentive to innovate, invest, create and expand businesses, increase skills, and work hard. At some level of taxes or government expenditures, such responses will be sufficiently widespread and large that they will reduce economic growth. The question is where the tipping point lies, and whether or not existing nations have reached that point.

Over the medium and long run, innovation is the key driver of economic growth. Innovation isn’t easy to measure, particularly when trying to compare across countries. The best indicator we have is expert judgments. Two influential country rankings are by the Global Competitiveness Report and the Global Innovation Index. The vertical axis in figure 6 shows the average for each nation on these two rankings as of 2015. Countries that make greater use of social democratic capitalism tend to do quite well.

Figure 6. Social democratic capitalism and innovation
Innovation rank: average innovation ranking for 2015 according to the Global Competitiveness Report and the Global Innovation Index. Data sources: World Economic Forum, The Global Competitiveness Report 2015-2016, pillar 12, table 5; Cornell University, INSEAD, and WIPO, The Global Innovation Index 2015, p. xxx. Social democratic capitalism: see figure 1. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line.

Nor does there appear to be a tradeoff with economic growth.29 The vertical axis in Figure 7 has economic growth rates since the late 1970s. Countries with more of a social democratic capitalist orientation have grown, on average, just as rapidly as others. Examination of trends within countries also suggests no reason to conclude that social democratic capitalism impedes economic growth.

Figure 7. Social democratic capitalism and economic growth
Economic growth: average annual rate of change in real GDP per capita, adjusted for initial level (catch-up). 1979 to 2019. Data source: OECD. The line is a linear regression line. South Korea is an outlier and so is omitted. Social democratic capitalism: see figure 1. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line.

It’s conceivable that by reducing the need to have a partner to help with the breadwinning and childrearing, government services and transfers will cause fewer people to commit to long-term family relationships. Because families have beneficial effects, that would be potentially problematic. Marriage isn’t a helpful indicator here. While marriage as an institution has fallen out of favor in many western European countries, that doesn’t necessarily mean there are fewer long-term relationships. A better measure is the share of children who live in a home with two parents. As figure 8 shows, across the affluent democratic countries there is no correlation between the social democratic capitalism index and the share of children living with two parents.

Figure 8. Social democratic capitalism and children living with two parents
Children living with two parents: share of all children. 2016. Data source: OECD Family Database. Social democratic capitalism: see figure 1. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line.

Community is difficult to measure, but one element is participation in voluntary organizations. Some critics expect that social democratic capitalism will depress such participation, because “progressive social policy … has sought to make civil society less essential by assigning to the state many of the roles formerly played by religious congregations, civic associations, fraternal groups, and charities, especially in providing help to the poor.”30 Figure 9 shows a measure of civic participation: the share of adults who say they are an active member of a civic group or organization. The pattern across the countries suggests no tradeoff between social democratic capitalism and civic engagement.

Figure 9. Social democratic capitalism and civic participation
Active organization membership: share of the adult population. Average across eight types of voluntary organization: sports-recreation, religious, art-music-education, charitable, professional, labor union, environment, consumer. Question: “Now I am going to read off a list of voluntary organizations. For each organization, could you tell me whether you are an active member, an inactive member, or not a member of that type of organization?” 2005-14. Data source: World Values Survey, worldvaluessurvey. org. Social democratic capitalism: see figure 1. “Asl” is Australia. The line is a linear regression line.

A good society won’t unduly burden future generations with a large public debt that they will have to repay. It’s reasonable to hypothesize that countries with greater public expenditures might tend to accumulate larger debts. But as figure 10 reveals, that isn’t the case. Countries with more of a social democratic capitalist approach, which requires higher levels of government spending, have tended to raise enough in revenue to pay for that spending.

Figure 10. Social democratic capitalism and government debt
Government net debt: government financial liabilities minus government financial assets, measured as a share of GDP. Higher on the vertical axis indicates larger debt. 2005-15. Data source: OECD. Social democratic capitalism: see figure 1. Norway, which has a surplus (negative net debt) of better than 200% of GDP, is omitted. “Asl” is Australia; “Aus” is Austria. The line is a linear regression line.

There are lots of other things we want in a good society — education, safety, health, environmental sustainability, and much more. For these, too, there is no indication that social democratic capitalism requires a sacrifice. If anything, it tends to produce better outcomes, not worse ones.31

IS THERE AN ATTRACTIVE SMALL-GOVERNMENT ALTERNATIVE?

Is there a small-government set of institutions and policies that can do as well as social democratic capitalism? Some believe there is.32 It consists of low government spending and taxes, strong families and voluntary organizations, private rather than public services, and public transfer programs heavily targeted to the least well-off.

Here, in principle, is how it would work: Smaller government produces faster economic growth. Even if a disproportionate share of this growth goes to the affluent, over the long run it will boost the living standards of the least well-off. Private actors provide healthcare, preschool, college, and other services via markets, with competition driving quality up and prices down. Families and voluntary organizations are the principal source of support for those in need. Government transfers targeted to the most needy fill in any gaps left by markets, families, and civic groups.

While plausible in theory, the record of the world’s affluent democratic nations over the past half century suggests that in practice this isn’t likely to work as well as social democratic capitalism.33 Countries with smaller government haven’t had faster economic growth. Families and voluntary organizations aren’t comprehensive in coverage, they sometimes are less effective and efficient than government programs, they’ve been weakening over time, and they are nearly or equally as prominent in nations with a big government as in those with a smaller one. Private provision of services should be welcomed, even embraced, but it is most useful as a complement to public provision rather than a substitute. Relying on heavily targeted government transfers can reduce poverty and insecurity, as we see from Australia’s experience, but not as effectively as social democratic capitalism.

Switzerland is perhaps the most successful small-government country.34 It is prosperous, free, orderly, and pleasant. It also does fairly well in income security and the decency of its income floor — not as well as the Nordic countries, as we can see in the charts above, but better than a number of other small-government nations. However, Switzerland isn’t a useful case for assessing the attractiveness and viability of a small-government model. For several centuries, Switzerland has positioned itself as a financial safe-haven. This has brought in large amounts of foreign money, which has spilled over into economic growth, significant financial-sector employment, and high wages. In this sense, Switzerland is like Norway with its oil revenues — a genuine success story, but not one from which we should draw inferences for other countries.

HAS SOCIAL DEMOCRATIC CAPITALISM BEEN ABANDONED OR BECOME LESS EFFECTIVE?

Skeptics on the left sometimes suggest that social democratic capitalism peaked in the 1960s and 1970s, retreating since then in the face of a business offensive and economic globalization.35 But that’s mistaken. In fact, it’s precisely during the post-1970s period that the model’s leading practitioners — Denmark, Finland, Norway, and Sweden — solidified a policy approach coupling a big welfare state with employment promotion.36

And key outcomes haven’t worsened. Among the five outcomes shown on the vertical axes in figures 1 through 5 above, we have over-time data for three. Figure 11 shows that incomes of households at the low end of the socioeconomic ladder have continued to rise rapidly in all four Nordic countries since the 1970s, both in absolute terms and relative to what’s happened in the United States.37 Figure 12 shows that the Nordics have maintained or improved their high employment rates.38 And in figure 13 we see that life satisfaction has increased slightly in Norway and Finland while falling slightly in Denmark and Sweden. Here, too, all of the Nordics have performed a good bit better than the United States.39

Figure 11. Incomes of the least well-off
Tenth-percentile household income. Posttransfer-posttax income. The incomes are adjusted for household size and then rescaled to reflect a three-person household, adjusted for inflation, and converted to US dollars using purchasing power parities. “k” = thousand. Data sources: Luxembourg Income Study; OECD. The lines are loess curves.

Figure 12. Employment
Employed persons age 25-64 as a share of all persons age 25-64. The vertical axis doesn’t begin at zero. Data source: OECD. The lines are loess curves.

Figure 13. Happiness
Average response to the question “All things considered, how satisfied are you with your life as a whole these days?” Scale of 0 to 10. The vertical axis doesn’t begin at zero. Data source: World Values Survey.

While the Nordic nations are, to this point, the only ones to have fully embraced social democratic capitalism, other countries have been moving in that direction.40 Many of the continental European nations have long had expansive and generous public social programs. Over the past two decades, some of them — most notably Germany, the Netherlands, and Austria — have added early education, lifelong learning, active labor market policy, and other employment-conducive public services, and some have loosened their product and labor market regulations. Both steps bring these countries into closer alignment with the social democratic capitalist model. The United Kingdom also moved in this direction under the New Labour governments headed by Tony Blair and Gordon Brown from 1997 to 2010, though the Conservative governments since then have pulled back somewhat.

Even the United States, long seen as the welfare state laggard among the affluent democracies, has continued its slow but persistent long-run movement toward social democratic capitalism.41 One way to see this is via data on the scope and generosity of public social programs. Figure 14 shows the amount governments in the rich democratic countries spend on social programs as a share of gross domestic product (GDP). The share has been rising in all of these nations for roughly a century. And the difference between the Nordic countries today and the United States today is much smaller than the difference between the United States today and the United States a century ago.

Figure 14. Public social expenditures
Share of GDP. Gross public social expenditures. Data source: Esteban Ortiz-Ospina and Max Roser, “Public Spending,” Our World in Data, using data for 1880-1930 from Peter Lindert, Growing Public, volume 1, Cambridge University Press, 2004, data for 1960-979 from OECD, “Social Expenditure 1960-1990: Problems of Growth and Control,” OECD Social Policy Studies, 1985, and data for 1980ff from OECD, Social Expenditures Database. “Asl” is Australia; “Aus” is Austria.

IS SOCIAL DEMOCRATIC CAPITALISM SUITED FOR FUTURE CHALLENGES?

Not only has social democratic capitalism worked very well up to now. It also is well positioned to face some key challenges that lie ahead.

One is population aging. As the elderly population grows due to retirement of the large baby boom generation and rising life expectancy, the cost of public pension programs and healthcare will increase. How will countries pay for this? High employment is likely to be key. The larger the share of the population in paid work, the greater the tax revenue that can be raised from them.

What about capital mobility? Doesn’t it hinder governments’ ability to raise tax revenues?42 It can, but we’ve seen little evidence of large-scale capital flight or a race to the bottom in tax rates. The best way for countries to keep investors at home is to provide a skilled workforce, good services, and product and labor market flexibility, each of which is a hallmark of social democratic capitalism.43

As noted earlier, families and voluntary organizations have weakened in most affluent nations over the past half century. This is a consequence of women’s improved economic position, religion’s declining influence, shifting norms, and other developments. This trend seems likely to continue, or at least to not reverse. It is most problematic for the least advantaged — children, single parents, persons with less education or with disabilities. Expansive and generous public services and transfer programs are in many instances an effective substitute. Indeed, because of their wider reach, they may be more effective than families or intermediate organizations.

In the contemporary “postmaterialist” era, many individuals want more ability to choose.44 The social democratic model already enhances individuals’ array of choices and their capacity to take advantage of them by reducing dependence on family, friends, and employers. Critics sometimes portray the model as inherently limiting of choice in service providers, but that’s mistaken. The Nordic countries have engaged in a variety of experiments with enhanced choice in public services — giving individuals more options among government providers and allowing private providers to compete with public ones.

Advances in automation and the rise of the “gig” or “platform” economy have increased work flexibility but also precariousness. This may cause more people to fear losing their jobs, move in and out of jobs, work irregularly, or work multiple jobs. In this environment, individuals and households will be more economically secure if benefits and insurance are generous and provided by government.45 Think of a stereotypical member of the modern “precariat,” working irregular shifts at a coffee shop and driving for an on-demand ride service. In the contemporary United States, such a life can be semi-hellish — low income, unpredictable, at the mercy of finicky managers and customers. Now imagine it where every person has health insurance, access to good-quality childcare and preschool, paid parental leave, paid sick leave, free or low-cost college, a decent pension, and an array of other public services and goods and insurance. In this latter context, while irregular or low-paid employment may still be suboptimal, it will be noticeably less stressful and problematic.

What about robots and artificial intelligence replacing jobs currently performed by humans? As this plays out, more and more of us will work in in-person service positions — caring, repairing, healing, cooking, cleaning, teaching, training, mentoring, coaching, counseling, advising, planning, organizing. People in these types of jobs will have greater ability to flourish, to have a good life, if they are supported by an array of goods, services, benefits, and insurance programs that are guaranteed by government.

Finally, there is growing worry that technological advance, globalization, financialization, union weakening, and other developments are reducing the degree to which the economic product ends up in the paychecks of ordinary workers, because more goes to profits instead of wages and because a growing portion of wages goes to those at the top. This could significantly reduce consumer demand, in turn reducing economic growth.46 It’s too soon to know whether this is a real problem, and if so how big it is. Social democratic capitalism won’t necessarily solve it, but by transferring more of the GDP to low- and middle-earning households via government benefits and by boosting the share of people in paid work, it’s likely to help.

SUMMARY

Social democratic capitalism features a democratic polity, a capitalist economy, good primary and secondary education, expansive public insurance programs, employment-promoting public services, and moderate regulation of product and labor markets. It aims to combine individual freedom with economic security, good living standards for the least well-off, and equality of opportunity. The evidence from the world’s rich longstanding-democratic nations suggests that it achieves these goals. And it does so without sacrificing other elements of a good society, from economic growth to family to community and much more. It is, to this point in history, the most successful package of institutions and policies we have devised.

  1. Robert E. Goodin, Bruce Headey, Ruud Muffels, and Henk-Jan Dirven, The Real Worlds of Welfare Capitalism, Cambridge University Press, 1999; Gøsta Esping-Andersen, with Duncan Gallie, Anton Hemerijck, and John Myles, Why We Need a New Welfare State, Oxford University Press, 2002; Per Kongshøj Madsen, “How Can It Possibly Fly? The Paradox of a Dynamic Labour Market in a Scandinavian Welfare State,” in National Identity and the Varieties of Capitalism: The Danish Experience, edited by John L. Campbell, John A. Hall, and Ove K. Pedersen, McGill-Queen’s University Press, 2006; Jørgen Goul Andersen, “The Danish Welfare State as ‘Politics for Markets’: Combining Equality and Competitiveness in a Global Economy,” New Political Economy, 2007; Jingjing Huo, Moira Nelson, and John D. Stephens, “Decommodification and Activation in Social Democratic Policy: Resolving the Paradox,” Journal of European Social Policy, 2008; Gøsta Esping-Andersen, The Incomplete Revolution, Polity, 2009; 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; Nathalie Morel, Bruno Palier, and Joakim Palme, eds., Towards a Social Investment Welfare State?, Policy Press, 2012; Anton Hemerijck, Changing Welfare States, Oxford University Press, 2013; Henrik Christoffersen, Michelle Beyeler, Reiner Eichenberger, Peter Nannestad, and Martin Paldam, The Good Society: A Comparative Study of Denmark and Switzerland, Springer, 2014; Jon Erik Dolvik, “The Social Foundations of the Nordic Models: A Review of the Labour and Welfare Regime’s Evolution and Distinctions,” NordMod2030: Summaries of Project Reports, Fafo, 2014; Lane Kenworthy, Social Democratic America, Oxford University Press, 2014; Anton Hemerijck, ed., The Uses of Social Investment, Oxford University Press, 2017; Axel West Pedersen and Stein Kuhnle, “The Nordic Welfare State Model,” in The Nordic Models in Political Science: Challenged, but Still Viable?, edited by Oddbjorn Knutsen, Fagbokforlage, 2017; Lane Kenworthy, Social Democratic Capitalism, Oxford University Press, 2020; Lane Kenworthy, Would Democratic Socialism Be Better?, Oxford University Press, 2022; Anna Diamantopoulou, Agnieszka Chłoń-Domińczak, Bernhard Ebbinghaus, Elena Granaglia, Anton Hemerijck, Hans-Peter Klös, Catherine Mathieu, Pasi Moisio, Jozef Pacolet, Yves Stevens, Dorottya Szikra, and Anu Toots, The Future of Social Protection and of the Welfare State, European Commission, Social Protection Unit, 2023. ↩︎
  2. For more detail and evidence, see Kenworthy, Social Democratic Capitalism, ch. 2. See also Kenworthy, “Life in the Good Society,” The Good Society. ↩︎
  3. The social democratic capitalism index is a composite of four indicators. Two measure the size and generosity of public insurance programs. One of these is public expenditures on social programs as a share of GDP, with an adjustment for the size of the elderly population and the unemployment rate (see Kenworthy, Social Democratic Capitalism, figures 2.1 and 2.58). The other is a measure of replacement rates for major public income transfer programs at three stages in the life cycle: childhood, working-age, and retirement years (Social Democratic Capitalism, figure 2.57). The other two indicators are for policies that aim to boost employment. One is public expenditures on employment-oriented services (Social Democratic Capitalism, figures 2.1 and 2.59). The other is modest regulation of product and labor markets (Social Democratic Capitalism, figures 2.2 and 2.60). I convert each of these four measures to a common metric (standard deviation units) and then calculate the average for each nation over the period from 1980 to 2015. (The replacement rate scores aren’t available for Portugal, Spain, and South Korea, so for these countries I substitute their scores for public expenditures on social programs.) ↩︎
  4. See also Julian L. Garritzmann, Silja Häusermann and Bruno Palier, “Social Investment,” in Oxford Handbook of the Welfare State, edited by Daniel Beland, Kimberly J. Morgan, Herbert Obinger, and Christopher Pierson, Oxford University Press, 2022; Mikko Kautto and Kati Kuitto, “The Nordic Countries,” in Oxford Handbook of the Welfare State, 2022. ↩︎
  5. Walter Korpi, The Democratic Class Struggle, Routledge, 1983; Adam Przeworski, Capitalism and Social Democracy, Cambridge University Press, 1985; Gøsta Esping-Andersen, The Three Worlds of Welfare Capitalism, Princeton University Press, 1990; Sheri Berman, The Primacy of Politics, Cambridge University Press, 2006; Francis Sejersted, The Age of Social Democracy, Princeton University Press, 2011. ↩︎
  6. Madsen, “How Can It Possibly Fly?”; Morel, Palier, and Palme, Towards a Social Investment Welfare State?; Hemerijck, ed., The Uses of Social Investment. ↩︎
  7. A household at the tenth percentile isn’t quite the least well-off, but below that point in the income distribution we worry about data quality. ↩︎
  8. David Card, Jochen Kluve, and Andrea Weber, “What Works? A Meta Analysis of Recent Active Labor Market Program Evaluations,” Journal of the European Economic Association, 2018. ↩︎
  9. Peter Gal and Alexander Hijzen, “The Short-Term Impact of Product Market Reforms: A Cross-Country Firm-Level Analysis,” Economics Department Working Paper 1311, OECD, 2016; Tito Boeri, Pierre Cahuc and André Zylberberg, “The Costs of Flexibility-Enhancing Structural Reforms: A Literature Review,” Economics Department Working Paper 1264, OECD, 2015. ↩︎
  10. Esping-Andersen, The Three Worlds of Welfare Capitalism, pp. 153, 156. ↩︎
  11. Some argue that the emphasis on high employment came earlier. Walter Korpi, “Political and Economic Explanations for Unemployment: A Cross-National and Long-Term Analysis,” British Journal of Political Science, 1991; Pontusson, “Once Again a Model.” ↩︎
  12. Lane Kenworthy, “Employment,” The Good Society. ↩︎
  13. This reasoning underlies arguments for an unconditional basic income. ↩︎
  14. Isaiah Berlin, Two Concepts of Liberty, Oxford University, 1958; Amartya Sen, Development as Freedom, Oxford University Press, 1999; Sen, The Idea of Justice, Harvard University Press, 2009; Martha C. Nussbaum, Creating Capabilities, Harvard University Press, 2011; Rod Hick and Tania Burchardt, “Capability Deprivation,” in Oxford Handbook of the Social Science of Poverty, edited by David Brady and Linda M. Burton, Oxford University Press, 2016; Ingrid Robeyns, Well-Being, Freedom, and Social Justice: The Capabilities Approach Reexamined, Open Book Publishers, 2018. ↩︎
  15. Chris Renwick, Bread for All: The Origins of the Welfare State, Allen Lane, 2017. ↩︎
  16. Anu Partanen, The Nordic Theory of Everything, HarperCollins, 2016. Partanen draws from Henrik Berggren and Lars Tragardh, The Swedish Theory of Love: Individualism and Social Trust in Modern Sweden, translated by Stephen Donovan, University of Washington Press, 2022 (original version 2006). See also Carly Elizabeth Schall, The Rise and Fall of the Miraculous Welfare Machine: Immigration and Social Democracy in Twentieth-Century Sweden, ILR University Press, 2016, ch. 3. ↩︎
  17. Another measure of opportunity isw intergenerational mobility, and social democratic capitalism correlates positively with this too. See Kenworthy, Social Democratic Capitalism, ch. 2. See also Zachary Parolin, Rafael Pintro Schmitt, Gøsta Esping-Andersen, and Peter Fallesen, “The Intergenerational Persistence of Poverty in High-Income Countries,” 2023. ↩︎
  18. Jeremy Bentham, The Complete Works of Jeremy Bentham, volume 10, Online Library of Liberty, 1843; Richard Layard, Happiness, Penguin, 2005; Charles Murray, Coming Apart: The State of White America, 1960-2010, Crown Forum, 2012; Richard Layard and Jan-Emmanuel De Neve, Wellbeing: Science and Policy, Cambridge University Press, 2023. ↩︎
  19. Benjamin Radcliff, The Political Economy of Human Happiness, Cambridge University Press, 2013; Christopher J. Anderson and Jason D. Hecht, “Happiness and the Welfare State: Decommodification and the Political Economy of Subjective Well-Being,” in The Politics of Advanced Capitalism, edited by Pablo Beramendi et al, Cambridge University Press, 2015; Kelsey J. O’Connor, “Happiness and Welfare State Policy Around the World,” Review of Behavioral Economics, 2017; Richard A. Easterlin, An Economist’s Lessons on Happiness, Springer, 2021. ↩︎
  20. For countries, the best way to identify causality is via quasi-experimental (“difference in differences”) analysis. (See Lane Kenworthy, “Step Away from the Pool,” Newsletter of the American Political Science Association Organized Section for Qualitative and Multi- Method Research, 2011; Kenworthy, “How Do We Know?,” The Good Society; Kenworthy, “Is Income Inequality Harmful?,” The Good Society.) We measure countries on the hypothesized cause and the outcome at a point in time. Then some countries change more than others on the hypothesized cause; for instance, some countries expand their public insurance programs more than others. Then we compare across the countries to see whether changes in the outcome correlate with changes in the hypothesized cause. This isn’t foolproof evidence, but it gets us as close as possible to an experimental design. Unfortunately, much of the change in public insurance expansiveness and generosity in the world’s rich democratic nations occurred prior to the 1980s, and data for many of the outcomes we want in a good society aren’t available that far back in time. What we need for a difference-in-differences analysis is sustained, unidirectional changes over time in social policy and differences across countries in the magnitude of that change. It isn’t especially helpful to examine year-to-year fluctuations in social program generosity because noteworthy effects on outcomes such as poverty are likely to take a while to show up, and because many things influence short-run changes in outcomes. Instead, we want changes that are large, that are in a single direction (rather than back and forth), that persist for some time, and that vary in size across nations. The 1930s and the 1960s and ’70s fit the bill when it comes to public insurance. (Kenworthy, “Social Programs,” The Good Society.) But we don’t have cross-nationally comparable data for those periods on the key outcomes. The best available option in this circumstance is to turn to other analytical strategies such as static comparison across countries and comparison over time in individual nations. ↩︎
  21. John Rawls, A Theory of Justice, Harvard University Press, 1971. ↩︎
  22. John Rawls, Political Liberalism, Columbia University Press, 1996. ↩︎
  23. Wikipedia, “Loss Aversion.” ↩︎
  24. Richard Layard, Happiness, Penguin, 2005, p. 168. ↩︎
  25. These effects persist when adjusted (in ordinary least squares regressions) for several other things that are likely to contribute to better economic security, higher incomes for the poor, and more equality of opportunity — country affluence, the foreign-born share of the population, and collective bargaining coverage. ↩︎
  26. Lane Kenworthy, Social Democratic Capitalism, figure 2.4. ↩︎
  27. A regression of relative poverty on public insurance and employment yields statistically significant coefficients for both variables and an r-squared of .70. A regression of p10 household income on public insurance and employment yields statistically significant coefficients for both variables and an r-squared of .64. A regression of material hardship on public insurance and employment yields statistically significant coefficients for both variables and an r-squared of .49. A regression of income decline on public insurance and employment yields statistically significant coefficients for both variables and an r-squared of .65. A regression of intergenerational mobility on early education and employment yields nearly statistically significant coefficients for both variables and an r-squared of .49. A regression of freedom to make life choices on public insurance and employment yields statistically significant coefficients for both variables and an r-squared of .60. In all instances the estimated effects are substantively large. See Kenworthy, Social Democratic Capitalism, ch. 2. ↩︎
  28. Kenworthy, Social Democratic Capitalism, ch. 2. ↩︎
  29. Kenworthy, Social Democratic Capitalism, ch. 2; Kenworthy, “Is Big Government Bad for the Economy?,” The Good Society. ↩︎
  30. Yuval Levin, “The Real Debate,” Weekly Standard, 2012. See also Murray, Coming Apart; Levin, The Fractured Republic, Basic Books, 2016. ↩︎
  31. Kenworthy, Social Democratic Capitalism, ch. 2. ↩︎
  32. Milton Friedman, Capitalism and Freedom, University of Chicago Press, 1962; Milton Friedman and Rose Friedman, Free to Choose, Harcourt Brace Jovanovich, 1979; Charles Murray, Losing Ground: American Social Policy, 1950-1980, Basic Books, 1984; Murray, Coming Apart: The State of White America, 1960-2010; Vito Tanzi, Government Versus Markets, Cambridge University Press, 2011; Levin, “The Real Debate”; Levin, The Fractured Republic. ↩︎
  33. Kenworthy, Social Democratic Capitalism, ch. 4; Kenworthy, “Is Big Government Bad for the Economy?,” The Good Society; Kenworthy, “Is Big Government Bad for Freedom, Civil Society, and Happiness?,” The Good Society. ↩︎
  34. Henrik Christoffersen, Michelle Beyeler, Reiner Eichenberger, Peter Nannestad, and Martin Paldam, The Good Society: A Comparative Study of Denmark and Switzerland, Springer, 2014. ↩︎
  35. Leo Panitch, “Europe’s Left Has Seen How Capitalism Can Bite Back,” The Guardian, 2014; Panitch, “The Long Shot of Democratic Socialism Is Our Only Shot,” Jacobin, 2020; Bhaskar Sunkara, The Socialist Manifesto, Basic Books, 2019; Erik Olin Wright, How to Be an Anticapitalist in the Twenty-First Century, Verso, 2019, ch. 3; Thomas Piketty, Capital and Ideology, translated by Arthur Goldhammer, Harvard University Press, 2020, ch. 11; Robert Kuttner, “Capitalism vs. Liberty,” The American Prospect, 2021; Kuttner, “The Agony of Social Democratic Europe,” The American Prospect, 2021. ↩︎
  36. Kenworthy, Social Democratic Capitalism, pp. 66-69. ↩︎
  37. Low-end income trends in the Nordic countries also matched or bettered those of other rich democratic nations. See Kenworthy, Would Democratic Socialism Be Better?, ch. 2. ↩︎
  38. Employment trends in the Nordic countries also matched or bettered those of other rich democratic nations. See Kenworthy, Would Democratic Socialism Be Better?, ch. 4. ↩︎
  39. Life satisfaction trends in the Nordic countries also matched or bettered those of other rich democratic nations. See Kenworthy “Happiness,” The Good Society. ↩︎
  40. Bruno Palier, ed., A Long Goodbye to Bismarck? The Politics of Welfare Reform in Continental Europe, University of Chicago Press, 2010; Anton Hemerijck, Changing Welfare States, Oxford University Press, 2013; Hemerijck, ed., The Uses of Social Investment, Oxford University Press, 2017; Christopher J. Anderson and Jason D. Hecht, “Happiness and the Welfare State: Decommodification and the Political Economy of Subjective Well-Being,” in The Politics of Advanced Capitalism, edited by Pablo Beramendi, Silja Hausermann, Herbert Kitcschelt, and Hanspeter Kriesi, Cambridge University Press, 2015; Simon Birnbaum, Tommy Ferrarini, Kenneth Nelson, and Joakim Palme, The Generational Welfare Contract, Edward Elgar, 2017; Diamantopoulou et al, The Future of Social Protection and of the Welfare State. ↩︎
  41. Lane Kenworthy, “Social Programs,” The Good Society; Kenworthy, “Toward the Good Society: An American Path,” The Good Society. ↩︎
  42. Wolfgang Streeck, How Will Capitalism End? Essays on a Failing System, Verso, 2016. ↩︎
  43. Torben Iversen and David Soskice, Democracy and Prosperity, Princeton University Press, 2019. ↩︎
  44. Christian Welzel, Freedom Rising: Human Empowerment and the Quest for Emancipation, Cambridge University Press, 2013; Ronald F. Inglehart, Cultural Evolution, Cambridge University Press, 2018. ↩︎
  45. Peter S. Goodman, “The Robots Are Coming, and Sweden Will Be Fine,” New York Times, 2017. ↩︎
  46. J. Bradford DeLong, “The Scary Debate over Secular Stagnation,” Milken Institute Review, 2015; Lawrence H. Summers, “The Age of Secular Stagnation,” Foreign Affairs, 2016. ↩︎