Global media (especially in the US) likes to portray Norway and Scandinavia as socialist. But “cuddly capitalism” is a much more accurate term. Let's take a look at the truth of the Nordic model.
Depending on where you get your political news, you’ve probably heard of Scandinavian socialism as either the beacon of hope for the world or the worst thing imaginable. So, which is it?
The truth, as always, is a little more complicated than a simple good or bad. All systems have positives and negatives and Scandinavian countries are no exception.
One thing’s for sure though, Many commentators have clearly never set foot in the Nordic region and barely understand the Nordic way of doing things. So, let's set a few things straight!
Is Scandinavia socialist?
Actually, to start with, what do we mean by socialism?
Socialism is a political, social, and economic philosophy encompassing a range of economic and social systems characterised by social ownership of the means of production and workers' self-management of enterprises.
That’s pretty much what Marx and Engels came up with in the 19th century. If you’re looking for a country that matches this definition, your search won’t take you to northern Europe. The simple fact is that Scandinavian countries are not, by any reasonable definition, socialist.
In 2015, in fact, the Prime Minister of Denmark, in a lecture at Harvard’s Kennedy School of Government, addressed the issue directly.
I know that some people in the US associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.
Yet the idea persists. So, what exactly do people mean when talking of Scandinavian socialism?
Social democracy explained
Scandinavia and the Nordic countries can be best described as social democracies. Effectively, they’re democratic countries in which its citizens are well cared for.
Some refer to this as democratic socialism, though this is far from correct. Some economists refer to it as cuddly capitalism, contrasting with what is seen as cut-throat capitalism in other Western countries.
While the Scandinavian countries are in many ways very different, they share a lot of common history. The styles of government aren’t identical either, but they do share some common features. The ways in which they’re similar are enough that we can talk about them collectively – scholars call this the Nordic Model.
Firstly, they are all free market capitalist countries. This fact gets missed by a lot of people, but their economies are fully open and trade globally like most countries in the world.
The way they differ is mostly in their welfare state. Social security in Scandinavia is more generous than pretty much anywhere else. Why? Well for that we need to delve into the history books.
The grand compromise
The Nordic Model traces its origins back to a 1930s compromise between workers and employers. It was spearheaded by farmers—which was how most people in the region, and indeed most of the world, made their money back then—and the workers parties that represented them.
The key feature of the Nordic Model is the social partnership. That's centralised coordination of wage negotiation and rights between employers and workers.
Agreements such as the Danish Kanslergade Agreement in 1933 and the Swedish Saltsjöbaden Agreement of 1938 set out a means for employers and unions to bargain on matters such as wages. In addition, both employers and workers have a framework to lobby the government to come to an arrangement on legislation affecting employment in terms of conditions and regulation.
One outcome of this, that certainly diverts from the left-wing playbook, is that there is no national minimum wage in Sweden, Denmark or Norway.
Instead, each sector has wages negotiated according to what the job is actually worth. Looking across the board, the average minimum wage in each country tends to be much higher than those that are mandated by other governments that have taken a blanket approach.
Aspects of the Nordic Model
We can characterise the model as a number of key points:
- Generous social safety net and public pension system with well-funded public services in a relatively high-tax economy
- Strong property rights and contract enforcement coupled with an overall ease of doing business
- Free trade combined with collective risk sharing, allowing the benefits of globalism while protecting against many of the risks
- Low levels of regulation on product markets
- Low levels of corruption – in 2015 five of the top ten spots were taken by Norway, Sweden, Denmark, Finland and Iceland in the Corruption Perceptions Index
- High levels of unionisation – 51% in Norway up to 88% in Iceland compared with the levels of 18% in Germany, 11% in the US and 8% in France
- A partnership between government, businesses and unions leading to everyone feeling invested in a system that works well for all
- A relatively high personal tax burden. At 45.9%, Denmark has one of the highest tax burdens in the world. Tax rates are also fairly flat so even medium and lower income households pay relatively high levels of tax compared with the progressive systems in most Western countries
Perhaps the most important factor in all of this is the two-way trust between the government and the population. The government trusts the people and gives them the freedom to do what they feel is right. In turn the people trust the government to act according to the national interest.
So, we’ve looked at what the model is, and it all sounds great, right?
Employees are well looked after and paid well for their work. The unemployed are also well looked after and supported in their attempts to find work. Retirees are thanked for their years of service with a generous pension. Taxes are high but so are wages. For the most part, people can afford whatever they need.
So, everyone’s a winner, right? Well, there are a few issues to cover, too.
Problems with the Nordic Model
A few problems arise from the Nordic model that are inevitably going to cause changes over the coming years. The post-war Baby Boom produced a large generation that’s currently retiring or retired. This was then followed by a decline in the birth rate caused by more people working longer and thus having fewer children.
Populations are getting larger but the percentage of people working and paying taxes is in a slight decline. This is not unique to the Nordic countries – it’s a problem that every country is facing.
Current projections are that by the end of this century the global population will have started decreasing. Economists are not sure how to solve this problem, but they all agree it needs to be solved.
Another problem, arising from the region’s pro-globalisation stance, is that as economies in the East and in South America grow, they will continue to take on more and more jobs as their labour markets will operate more cheaply than they do in the West.
The Nordic countries are slightly shielded from this by their investment in R&D that allows the countries to excel in more technical fields.
What about Norwegian oil and the Wealth Fund?
It’s true that Norway has a higher degree of state-ownership of ‘the means of production’ than most countries, thanks to its oil economy and the state-owned energy company.
It’s important to note that even though it’s majority-owned by the government, Equinor is run as a for-profit concern in the same was as other non-state oil companies around the world. The government is effectively a major shareholder that leaves decision-making to the board.
As for the Sovereign Wealth Fund, it’s certainly true that having a massive amount of money in reserve helps back up a generous welfare state and it’s not an option for most countries.
It’s also true, however, that the SWF is mostly a fund for the future. It might help ease the transition to an older population and the outsourcing of labour but for now, it’s not the reason that makes the Nordic Model work in Norway!
Another thing that detractors of the Nordic Model like to point to is that the system might actually be getting in the way of the people. Maybe it’s not the Scandinavian systems that are working well, but the people themselves.
Looking at Scandinavian Americans shows that their productivity is higher than average, their wages are higher than average and, because taxes in the US are lower, they get to keep more of the money than their homeland counterparts!
The argument, therefore, is that if Scandinavian countries adopted a more US-style of capitalism with smaller government, they would be even more productive and richer.
There could, of course, be many reasons for this. It’s clear that the Scandinavian people share a high, productive work ethic. It’s impossible to put this down to simple genetics. It could well be that this is fostered by the system that made them.
Proponents of the Nordic Model would argue that productivity and economic growth are not necessarily the be all and end all of society. This is probably best indicated by one of the most confounding aspects of Scandinavian societies – happiness!
Scandinavians people are Happy people
The World Happiness Report ranks countries according to how happy their citizens say they are. It’s the most reliable and reproduceable estimate of happiness. Every year, half of the top ten is taken up by Norway, Sweden, Denmark, Iceland and Finland.
There’s no doubt that Scandinavians are happier with their lives than most of the rest of the world. In spite of high taxation, relatively cold weather and longer darker winters they’re happy people. It’s not due to the fact that they’re ‘born happy’ either. Surveys of immigrants shows comparable levels of happiness to the native population.
The report puts it mostly down to the fact that there’s high trust in government, low levels of corruption, low income inequality and high feelings of personal freedom. In other words, the things that many countries are pursuing are direct results of the Nordic Model.
So, could countries around the world reproduce these levels of happiness simply by adopting the Nordic Model? Probably not. Or at least, it wouldn’t be easy.
The virtuous circle
Nordic countries foster a kind of virtuous circle. High levels of trust in the government aren’t necessarily caused by low-corruption and low corruption is not necessarily caused by high levels of trust in the government.
Instead, they feed into each other, and the other factors, to create a virtuous circle – everyone’s happy and everyone trust everybody else to keep doing whatever they need to do to keep things happy!
Many countries have the opposite problem. Low levels of trust in government and high corruption feed into each other to lower trust and increase corruption. Cycles like this are almost impossible to break. It’s difficult to build high-quality, trusted institutions when the people don’t trust the government.
And that’s probably the biggest thing that people on the right and the left fail to grasp. The Nordic Model works in Scandinavia because it’s in Scandinavia.
It’s a whole system, not just a few policies, that makes life in Scandinavian countries more like a shared journey. There are, no doubt, things that the rest of the world could learn from the region. But if you just take the Nordic Model and place it down somewhere else it simply wouldn’t work in the same way.
And that’s why arguing for or against the Nordic Model misses the point completely. The system always works for the people who run the system. In Scandinavia, that’s the population rather than the elite. So maybe, in that respect, it gets closer to the aims of socialism than actual socialism ever has!