If you have ever been involved in debate regarding socialism’s worth, you will no doubt have come across some rhetoric alluding to the success of socialism in the Scandinavian countries. This alone is intended to prove a correlation between standards of living and the use of socialism and progressive taxation. Ignoring the fallacy, or simple foolishness, of implying that there exists only one factor to a country’s success, there are plenty of flaws to be found in comparisons to Norway, Sweden, Iceland, Finland, and Denmark.
Note: Whilst Finland and Iceland are not part of Scandinavia in certain definitions, this post will be using the terms Scandinavia and the Nordics interchangeably.
Firstly, describing the Scandinavian countries as ‘socialist’ in character is dubious. Whereas income taxes are notoriously progressive, with top rates in the 46 – 57% range, capitalistic qualities are incredibly prevalent. Indeed, Denmark, Sweden, and Finland have greater business freedom, monetary freedom, property right enforcement and financial freedom than the United States, the supposed embodiment of capitalism. Furthermore, the Scandinavians comprise of corporate tax rates comparable to unashamedly capitalist countries, whilst also sitting considerably below the United States’s 40% rate. At 20%, Finland enjoys the same rate as the United Kingdom, whilst Norway, which has the highest rate of the five countries, enjoys only a 27% rate.
Moreover, since 2006, in which time the UK has seen a 30% corporate tax rate, the rate in Scandinavia has never been above 28%. It is remarkably clear to the casual observer that vibrant capitalism is not just present in the Nordic model, rather integral to it. Low interference in markets by the government, scarce nationalisation, almost no protectionism and a low level of regulation embody capitalist features. The fact that each and every Scandinavian country adheres to these four qualities surely prompts confusion and necessitates scrutiny as to why it is held up as some socialist utopia.
Though socialism is quite evidently not a prominent feature of Scandinavia’s markets and competitive business environment, to say that the region’s redistributive policies and welfare state smell strongly of socialism is an understatement. Truly, much of my Finnish family have seen half of their income taken in tax for their entire working life. In keeping to disputing myths regarding Northern Europe’s supposed socialist paradise, it is important to consider just how much their few socialist policies do fuel a utopian ideal.
As The Economist once famously put it, you would like to be Scandinavian under the condition you were born “a person with average talents and income”. Last year, uproar was provoked when it was discovered that Finland’s richest man, Björn Wahlroos, had changed his residence from Finland to Sweden in order to take advantage of a more “lenient” tax system. This is a pattern all too common amongst high earners globally, and, assuredly, many choose to leave the Scandinavian region altogether in search of less punitive government. Indeed, the Nordic obsession with egalitarianism has provided cities such as London with thousands of talented young Swedes, Finns, Danes, Icelanders, and Norwegians.
Of course, equality does not typically come with negative connotations; however one must consider the sacrifice that accompanies punishing success with high tax rates and worshipping mediocrity. Competitiveness is affected by excessive government and one cannot deny that many in Scandinavia have come to learn this. One such example is Sweden’s ex-Prime Minister Carl Bildt, who has referred to socialism as being a “failure”. Sweden’s 1993 financial crises, following government spending at 67% of GDP, eventually saw reforms necessitated. The subsequent privatisation spree and halved government spending as a percentage of GDP enabled budget savings, higher total factor productivity and a more resilient economic structure. This particular response of Sweden’s government not only saw some liberalisation of the market but also establishment of a budget surplus target of 1% of GDP, austerity being the enabler of the eventual slight surplus. This programme of fiscal austerity was commenced by a centre-left Party in 1994. Whilst Sweden’s recovery was largely export-led, this was attributed not only to the depreciation in the floating krona currency but facilitated by wage moderation and improvements in productivity. The notion that it was in fact a pragmatic adjustment and sweeping reforms which saved Sweden, and not socialism, is something to consider when a shrine is created of Scandinavian-style ‘socialism’.
What is more, OECD estimates show that potential output growth rose significantly across Sweden, Norway, and Finland in the decade after supply-side reforms by the three. In spite of the state’s typical largeness, decreases in its size have naturally transferred resources into the private sector, where productivity is higher. This has unsurprisingly yielded growth dividends. A bold question of whether Scandinavia is more successful in times of supply-side emphasis therefore arises.
Another interesting argumentation to consider in analysis of the Nordic model is that which suggests it is in fact the Nordic people that make it flourish and not redistributive policies. That Scandinavians are hard-working and disciplined is a common argument. Evidence for this can be derived from the example of Sweden. Despite disincentives to work due to a large welfare state, its labour force participation rate happens to be one of the highest in Europe. The same of which cannot be said for all countries with generous welfare systems. Low poverty rates make up another line of argument in support of the notion that government has bred the Nordics’ high standards of living. However, looking at Scandinavian populations elsewhere in the world, it appears that Scandinavians living under U.S-style capitalism actually also have remarkably low poverty rates. Consequently, it is difficult not to assume a strong work ethic lying beneath healthy labour markets.
A Scandinavian economist once put it to Milton Friedman that “in Scandinavia we have no poverty.” Friedman’s reply sums up this case; “That’s interesting, because in America among Scandinavians, we have no poverty either.”
Furthermore, it should be addressed that admirably low poverty rates are not exclusive to Norway, Sweden, Iceland, Finland and Denmark. Capitalist Switzerland, which of course cannot be mistaken for a socialist country and which has a population similar to that of Sweden, has lower poverty rates than these Scandinavian ‘utopias’.
Finally, and perhaps most importantly, the greatest myth that observations of Scandinavia provoke is that which implies their model would work successfully elsewhere. Numerous ongoing debates have frequently highlighted Norway as an example of an independent, socialist country that is flourishing. This was, for example, prevalent throughout the Scottish Independence ‘Yes’ campaign’s justifications for an independent, socialist country. It often follows that people cannot conceive as to why others would not emulate the Norwegian system.
Simply looking at the facts is enough to counter this fallacy. Of 241 states listed, Norway ranks 213th in terms of population density, with a population only slightly above five million. Despite this, it is the largest oil producer and exporter in all of Western Europe. Producing 200 barrels of oil per person per year has placed Norway 5th in the entire world for per capita oil production. Its pragmatic ideology and business-friendly environment also favour its economic standing.
Most economists will agree that the Scandinavian economic model is near impossible to emulate. This is especially the case in poor nations that cannot afford to impose the high taxes needed to prop up an expensive welfare state. The model of including high taxes and generous welfare support within a system of relatively free markets might not be a disaster in small, resource-rich countries with homogeneous and well-educated populations. Relatively homogenous small states can operate larger welfare systems in a way bigger economies, like the UK, cannot. However, transferring the Nordic model to altogether different economies, demographics, cultures and geographies would without a doubt fail to bear the fruit the Nordics enjoy. As Milton Friedman (again) put it:
“What works for Sweden won’t work for France or Germany or Italy … in a homogenous culture, they are willing to pay higher taxes in order to achieve commonly held goals. But common goals are much harder to come by in larger more heterogeneous populations.”
All things considered, it is evident that, firstly, Scandinavia does not replicate socialist theory (to which social ownership of the means of production is integral). It only takes quick investigation into their thriving corporations, deregulation, private sector and entrepreneurial culture to establish this fact. Secondly, historical evidence suffices to make an argument that the Scandinavian countries could be more prosperous with even larger embrace of free market economics and classical liberalism. High taxes do not help the poor; economic growth does. Finally, much economic success in Norway, Sweden, Iceland, Finland and Denmark can be confidently attributed to things unique to those countries and thus out of the realms of government policy. One can therefore firmly offer a case that the extent to which Scandinavia has achieved prosperity so far is despite high income taxes, not because of them.