Nordic Economics Explained: The Difference Between “Compassionate” Capitalism and Socialism

It's true that Sweden, Finland, Norway, and Denmark have notable economic successes. It is false that they have been achieved through socialism.

“Compassionate” capitalism: a better name for what Nordic countries practice. It is certainly true that Sweden, Finland, Norway, and Denmark have notable economic successes. It is certainly false that they have been achieved through socialism. Nordic countries focus on combining a free market system with several social programs.

This nexus gives way to programs such as free education, free health care, and a guaranteed pension program for retirees. For this to take place, the citizens must place an enormous amount of trust in their government and their policymakers. The economy, work, and welfare must work hand-in-hand. Policymakers must address ever-changing social challenges and then pass solutions through a democratic process.

Many Different Derivations of Socialism

Places like Sweden and Norway have cut the gap between the rich and the poor while still preserving the basic benefits of capitalism. This type of capitalist model is reliant upon creative destruction, a term coined by Joseph Schumpeter in 1942: the

process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

Nordic nations seem to flawlessly use this system, and progressives continue to say this is socialism: “My policies most closely resemble what we see in the UK, in Norway, in Finland, in Sweden,” Rep. Alexandria Ocasio-Cortez told 60 Minutes. But where does it fall under American standards? Can we learn anything from this derivation of socialism? There is a lot behind the Nordic model and a lot more behind why it so greatly praised.

Capitalism is a dynamic system, constantly changing and evolving because of opportunities for profit and property. This ideal seamlessly fits with many other economic systems that naturally evolve—much like the Nordic model. Progressives like to believe that America is in need of such an economic evolution. The poor are so far away from the rich that socialism—of all things—is a necessity. Americans, we're told, need equality across all sectors, all markets, and all classes.

Economic Models

Frankly, Schumpeter did not have equilibrium in mind when he philosophized creative destruction. Instead, he wished for a paradigm where inventors and entrepreneurs would improve, creating a type of disequilibrium that would actually benefit the constituents of the system. A socialist ideal where all are equal on all grounds was not the backbone of creative destruction, nor that of any Nordic model, nor that of any common sense economy. Why would anyone want to kill the goose that lays the golden egg?

But there are myriad other differences that the Nordic model holds when compared to socialism. The government benefits didn’t create the wealth of these nations—the wealth of the populous created the government benefits.First, the beginning: Nordic nations developed their current economic system after years of a free economy with free trade. They would be nothing without this foundation. The wealth previously created allowed the government to begin its social programs by imposing high tax rates. Never should the government begin with extensively high rates and expect its citizens to keep pace.

The Economist magazine describes the Nordic countries as “stout free-traders who resist the temptation to intervene even to protect iconic companies.” Does this sound like socialism? Certainly not. What’s more, both Norway and Denmark are easier places to do business than the United States, according to DoingBusiness.org. The government benefits didn’t create the wealth of these nations—the wealth of the populous created the government benefits.

Government Interference

Second, government interference: a staple of labor laws in the US is not found in Nordic governances. A minimum wage set by the federal government does not exist in Nordic or Scandinavian nations—and yet they still survive! Unions and organizers help to set wages, but the government does not get involved in the negotiation process. This decentralized system is arguably the best way to do things. Businesses are free to pay less for unskilled work (apprenticeships/internships) and unskilled workers.

Samoa did not need the minimum wage; politicians simply wanted to feel good about their actions and not look at the consequences.

Having a minimum wage is almost suicide for small businesses. They cannot hire the workers they need because they are not making enough profit, so those businesses will continue to stay small. The minimum wage makes it difficult for a business to grow. For example, US politicians recently enacted our minimum wage on all of the US territories, including American Samoa. In Samoa, the largest employers on the island were tuna canner factories.

Once the minimum wage was enacted, it destroyed the competition on the island, the factories closed down, and the unemployment rate skyrocketed. Samoa did not need the minimum wage; politicians simply wanted to feel good about their actions and not look at the consequences. The lack of government involvement allows for people to be paid according to their worth, not by what Big Brother deems their worth to be.

Education

Third, education: The Nordic economy is the ultimate "zip codes should not define a child’s future" supporter. While education is free, the choices citizens have are impeccable. This could be because it is extremely similar to the libertarian point of view (as defined by economist Milton Friedman in his 1955 essay, “The Role of Government in Education”). Nordic governments gift their citizens with voucher-like education coupons. These vouchers can be redeemed for schooling anywhere, whether public schools, government-run charter schools, or private schools.

According to the Institute for the Study of Labor, this privatization of schooling “improved average educational performance both at the end of compulsory school and in the long run in terms of high school grades, university attendance, and years of schooling.” This school choice benefits the citizens, children, and the future of the nations. Just as Turning Point USA promotes school choice, so do Nordic and Scandinavian nations. Socialists, however, are not the ones promoting free choice.

Sweden’s economic growth fell to one percent lower than the rest of Europe and two percent lower than America.

Lastly, how it evolved: Nordic nations have not always been so progressive; in fact, they are beginning to take a step back. Until the 1950s, Nordic countries were the top free-market, competition-based nations in the world. In the 1970s, however, intense social government and regulatory systems were put in place with high tax rates. All of the economic growth came to a sad end. For example, Sweden’s economic growth fell to one percent lower than the rest of Europe and two percent lower than America.

By the 1990s, government spending was up to 70 percent of GDP, and the debt to GDP ratio accumulated to 80 percent. Even the unemployment rate rose five percent. As soon as policymakers saw this socialist makeover gone wrong, things changed. In 1991, legislatures privatized parts of health care, introduced schooling vouchers, and cut back on money-wasting welfare programs. Between 1995 and 2000, the debt-to-GDP ratio was cut by 40 percent, and citizens earned more income thanks to the new 28 percent income tax.

Inflation and Taxes

In fact, that tax was lowered to 22 percent in 2013. So countries like Sweden took an extremely progressive stance, realized it didn’t work, then converted to an even more free-market philosophy.

Why make the US learn for itself that socialism doesn’t work when we can simply trust Sweden’s experiment? The lesson learned is not what the Left teaches. Due to deregulation, Sweden has actually exceeded economic growth compared to all other European peers by at least one percent per year. This is not a result of progressivism or socialism. It is the opposite.

They need something, anything, to justify their position and prove that socialism all-of-a-sudden works. The truth is: it doesn’t.

Progressives grossly overuse the comparison of Nordic nations to socialist ones, but the Nordics are actually a poor example because they practice a predominantly free market system. The only likeness between the two is the social programs. To add insult to injury, the Nordic economies don’t completely fall apart—and kill millions of people on the way down—like socialist systems do.

So here’s why progressives claim this is a product of socialism: They need a good example. There are zero, none, no good examples of socialism—anywhere. As soon as a progressive system is somewhat close to—yet so far away from—a socialist state, progressives will take credit and proclaim it is socialism. They need something, anything, to justify their position and prove that socialism all-of-a-sudden works. The truth is: it doesn’t.

No One Size Fits All

And nations that try it end up destroying any advantage they had in the world and return to a system of freedom or suffer the consequences. Look at Venezuela: 1,600 percent inflation, -17 percent GDP growth, and 44 percent unemployment (expected in 2020). It is through willful ignorance that opponents of capitalism continually propose this economic model but can’t tell the difference between an insolvent economy and a prosperous one. 

The Nordic model is not a be-all and end-all system. Neither is capitalism, nor socialism.

Most economies develop, change, and become better over time. History is the best teacher for guidance in the evolution process. The left does not deserve to take credit for the glamours, the accomplishments, and the benefits of a free market system and slap the socialist sticker on it. They define Nordic and Scandinavian models as progressive, but this is no longer an argument of definition.

This is about whether the left will stop lying to the American people and making socialism appear beneficial. Younger people in particular are prone to this rhetoric: Everything important to them is “free” under socialism, thanks to Sen. Bernie Sanders and others like him. The young do not know because they have not been told the consequences.

It is time they were told the truth. 

Further Reading

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