Image: BRUCE GILBERT/EARTH INSTITUTE
One of the great challenges of sustainable development is to combine society's desires for economic prosperity and social security. For decades economists and politicians have debated how to reconcile the undoubted power of markets with the reassuring protections of social insurance. America's supply-siders claim that the best way to achieve well-being for America's poor is by spurring rapid economic growth and that the higher taxes needed to fund high levels of social insurance would cripple prosperity. Austrian-born free-market economist Friedrich August von Hayek suggested that high taxation would be a "road to serfdom," a threat to freedom itself.*
Most of the debate in the U.S. is clouded by vested interests and by ideology. Yet there is by now a rich empirical rec-ord to judge these issues scientifically. The evidence may be found by comparing a group of relatively free-market economies that have low to moderate rates of taxation and social outlays with a group of social-welfare states that have high rates of taxation and social outlays.
Not coincidentally, the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post¿World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries.
Friedrich Von Hayek was wrong
On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance. Poverty rates are much lower there, and national income per working-age population is on average higher. Unemployment rates are roughly the same in both groups, just slightly higher in the Nordic countries. The budget situation is stronger in the Nordic group, with larger surpluses as a share of GDP.
The Nordic countries maintain their dynamism despite high taxation in several ways. Most important, they spend lavishly on research and development and higher education. All of them, but especially Sweden and Finland, have taken to the sweeping revolution in information and communications technology and leveraged it to gain global competitiveness. Sweden now spends nearly 4 percent of GDP on R&D, the highest ratio in the world today. On average, the Nordic nations spend 3 percent of GDP on R&D, compared with around 2 percent in the English-speaking nations.
The Nordic states have also worked to keep social expenditures compatible with an open, competitive, market-based economic system. Tax rates on capital are relatively low. Labor market policies pay low-skilled and otherwise difficult-to-employ individuals to work in the service sector, in key quality-of-life areas such as child care, health, and support for the elderly and disabled.
The results for the households at the bottom of the income distribution are astoundingly good, especially in contrast to the mean-spirited neglect that now passes for American social policy. The U.S. spends less than almost all rich countries on social services for the poor and disabled, and it gets what it pays for: the highest poverty rate among the rich countries and an exploding prison population. Actually, by shunning public spending on health, the U.S. gets much less than it pays for, because its dependence on private health care has led to a ramshackle system that yields mediocre results at very high costs.
Von Hayek was wrong. In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness.
*Because of an editing error, an earlier version of this essay misattributed the date of Hayek's suggestion.
Already a Digital subscriber? Sign-in Now
If your institution has site license access, enter here.
See what we're tweeting about
24 Comments
Add CommentI wish I lived in one of those Nordic countries, and if I ever get the chance, I'm outta here.
Reply | Report Abuse | Link to thisHe is so right! The anarchic capitalilsts so much mispeak! They mislead about history. They just gloat over selfishness.
Reply | Report Abuse | Link to thisThis is a joke right? Hayek wrote reams on this subject, and Sachs, a guy who thinks foreign aid to Africa would lift it into the first world if only it were increased by 100 times, writes a few hundred words and picks a few choice stats that fit his biases and declares Hayek wrong. This would be sent back as "incomplete" in a high school econ class.
Reply | Report Abuse | Link to thisJeremy S, feel free to offer other stats to complete the picture. To me the fact that Nordic countries have higher 'income per working age population' is compelling in itself. And this is all assuming that economic indicators are the best measure of a successful society. Nordic countries blow English-speaking countries out of the water when it comes to issues of justice and equality of opportunity.
Reply | Report Abuse | Link to thisTaxation is not the one and only dimension of economic freedom. If you have a look on other parameters, you will see that the Nordic states are not more statist societies than the most English-speaking ones:
Reply | Report Abuse | Link to thishttp://www.heritage.org/Index/Country/Finland
vs.
http://www.heritage.org/Index/Country/UnitedKingdom
An important fact missed is the Nordic countries have thrived while capitalism has been driving the world economy, just as the tolerance of socialism is esy when economies are doing great...let's see what would happen if the world's economy falls into severe recession caused by government planning! They do well when the can ride on the coattails of capitalism, but without it they would be done!
Reply | Report Abuse | Link to thisThe articles author also over simplifies socialism; the Nordic countries have a national socialism where the wealthy and corporations are not vilified (eg. I worked with a unionized Swedish tool company that tried to expand into the US but had to shut down after a year or two due to very uncooperative unions). National socialism also breeds racial intolerance, and is more than likely different than North American socialism due to their monarchist history (the North American settlers where ones strongly opposed to monarchist governments, not those who stayed). Note that in Nordic countries corporations, the generators of wealth, carry a much lower share of the tax expropriation. North American socialism is especially greedy and appeals to the less intelligent through resentment of those who have what they don't, even though more often than not those who have what they want worked hard for it. This leads to a guiltless expropriation of wealth from any one with it, where as the Nordic countries may take more from the wealthy, but don't vilify them!
From Willy boys rebuttal, which just rubbed me the wrong way:
Reply | Report Abuse | Link to this"the skeptical reader (probably an ideologue) might wonder if the poverty outcome in, say, the U.S., with its tortured history of a black underclass"
So WILLIAM EASTERLY is not only blaming the poor blacks for being poor, he's also denying that extremist capitalism has anything to do with that, HAD anything to do with that, or WILL HAVE anything to do with that???
Yeah................ rrrrrrright.
In situation where one group or person is powerless and the other has pretty much all the power, it's rather stupid to blame the powerless for ..... pretty much anything.
That's why (oh big surprise) we hardly EVER blame 5 year old if their parents abuse them in anyway.
(Yes, I DO realize the ReichWingers will all now massively start to mock African Americans as 5 year olds. But then again, that's what people like that do who aren't capable of much abstract thought. Or recognize the meaningful elements of an analogy. In this case it's about power, not a mental or development state.)
About the supposed racism: Are white Swedes more racist than white Americans? Having lived in Sweden and being an African-American, I can say emphatically NO to that. Yes, there are some problems with ethnic minorities. But they are NOTHING compared to the complete underpriviligisation of blacks in 2009 America. Where even crippled black college professors get arrested for essentially 'contempt of cop'. Admittedly, that's more because Swedish cops don't demand this kiss-ass mentality from the citizenry.
"Protect and Serve" must be one the most dishonest statements uttered by any Western govt agency. Unless it's read as: "We protect our own asses no matter what, and you citizens are there to serve them .... by licking them HARD!
In short, to declare that white Swedes are MORE racist than white Americans .... baseless. I can advise against getting arrested in America, as a black man. But in Sweden there's a tiny chance you will NEVER be arrested unjustly. And HIGH chance that you will get off if you're innocent.
Nordicism was disproven in the early 1900's. This article is from 2006! Reuters, in 2009, had this to say about Scandinavia. "Financial crisis slams Nordic economies." I can't even begin to go into the details. Basically it boils down to this, massive economic bubble, and extravagant social programs.
Reply | Report Abuse | Link to thisDenmark's Sterling Airlines, which was Denmark's second-largest carrier in terms of fleet size, declared bankrupt and failed to find a buyer.
Sweden's GDP was the worst GDP reading since SCB began publishing seasonally adjusted quarterly data!!!!
Sweden's industrial sector, which includes top-flight manufacturers such as world number two truck maker Volvo and carmakers Saab and Volvo, has so far been hardest hit, resulting in the loss of thousands of jobs.
The Danish economy led their worst GDP since 1955.
FINLAND IN RECESSION
Norway has been the least affected, but will soon fall pray to their own social policies.
AND I just barely skimmed the surface; I'm too tired to continue. Since these are small indigenous countries, they will collapse slower, and show rapid signs of a false recovery.
Uh! Wow I guess I'm done.
Austrian economists are also curious about this question and find that the data is not actually in support of the nordic model (typically Sweden):
Reply | Report Abuse | Link to thishttp://mises.org/story/1230 (many metrics show that the poor in the US have a better standard of living than the income numbers would suggest)
http://mises.org/story/2259 (the Swedish economy has some fundamental troubles)
"Austrian economics" are based on neither science nor math, have absolutely no real-world evidence to back them up; just because "Hayek wrote reams on this subject" doesn't mean his reams amount to anything. A short article utilizing verifiable real-world evidence is infinitely more valuable than reams of fantasy based on worthless maxims and platitudes mixed with delusions. I'd like to see one, JUST ONE, peer-reviewed study demonstrating actual real-world evidence supporting the claims of "Austrian economics". Such a thing would be a rare find, since actual economists utilize math and science in their studies, along with the testimony of history.
Reply | Report Abuse | Link to thisDear Jeffrey Sachs,
Reply | Report Abuse | Link to thisIt would be wise to hamper down on your definition of what exactly is a laissez-fare economy. You put up a pretty sad straw-man that anyone can tear down with a little pursuit of some knowledge. Mr. Sachs you don't even properly state Mr. Hayek's argument. No Austrian economist, the school of economics that Hayek belonged to, would argue that we've ever had a compete laissez-fare economy. We came close between the end of the Jackson presidency up to the Lincoln presidency but there was still a fractional reserve system in place. Freedom in the marketplace is virtually subjugated by the federal government through the issuance of a money substitute. Federal Reserve notes are nothing more than a piece of paper signifying debt. Someone is paying interest on the notes you carry with you and that are in your bank account. So how can there be a laissez-fare economy when you let an institution, which is backed with the monopoly of force, issue currency?
There are amples amount of evidence! The reason why you won't ever find a peer-reviewed study outside of liberty publications of Austrian economists because they base their economic laws from human action. This is comprised of an individuals action and his motivation. All current main stream economists ranging from different economic schools of thought (e.g. Classical, Neo-Classical, Chicago, Keynsian, Neo-Keynsian) use positive economic analysis. This is why economics gets known as the dismal science. It's the premise that economics plays off of how things should be. In the past 90 years, economists from Mises to Rothbard have made accurate economic forecasts that vindicate them. There Austrian Business Cycle Theory has been the best contribution to economic study and is starting to be accepted in some textbooks, finally.
Reply | Report Abuse | Link to thisUse google to more of your advantage. Check out sites from mises.org and econlib.org. The first website lets you download free books and critiques. I challenge you to go through them. Economists who denounce the austrian school of thought almost always use that special strawman to beat down. Check out this article by Robert Murphy.
http://www.economicpolicyjournal.com/2009/12/applicability-of-austrian-theory-of.html
Hayek was not talking about the welfare state in the road to serfdom. Hayek made a distintion between socialism and welfarism. This guy is just another kretin who decides to write about somthing he does not understand. Hayek complaind himself that ''people talk about my book but no one actually READS IT''. Looks like that is still true after all these years.
Reply | Report Abuse | Link to thisIt's impossible to be more racist than the American rightwing. Scandinavian racism is more directed towards muslims and Bangladeshis, since they had an influx of refugees of them in the 80s. It amounted to less than a percent of the population. But Scandinavians are just as xenophobic as regular folks. Racist political parties get about 15-25 % of the vote, just like anywhere else in Europe. In the US, that number is likely to be far higher.
Reply | Report Abuse | Link to thisBut African-Americans ... there are very few, and you would be seen as an American first, then as a Cool American, and if there were a lot, they might see you as a problem.
And (white) Americans DO in fact emigrate to Europe and Canada ... for healthcare reasons. These health care refugees are the biggest Western immigrant group now.
We simply got a better system than you have. We are healthier as a population and less poor because of it. We're doing economically better than you.
Listen, surely the US system is viable, what with the disappearance of the middle class, I just wouldn't wanna live there. I am lucky enough that I don't have to.
And hey, if you wanna live in a country with 80 percent poor people and 20 percent as rich as Donald Trump, while the 80 percent killing each other for a few remaining jobs, just stay put. Your choice.
have you seen on Swedes GDP, it matches the same GDP they have in asia...Sweden is ranked as the second most competitive country in the world of "world economic forum"
Reply | Report Abuse | Link to thisSweden's GDP matched Asia... go in and look at OECD...Denmark's competitive ability is suffering because our currency is tied to the euro...and because the EU is trying to control everything we do
Reply | Report Abuse | Link to thiswe like black, yellow, red, white, whatever ... But we've had some problems with immigrants from Arab countries who have been poor to integrate into society, we have problems with 2-generation immigrant gangs ... So we have created stricter regulations...and increased efforts to get better integration..plus we are targets for terrorists, and we have problems with Eastern European robber gangs , so we are closing our borders... but if you're black and you're a good citizen in Denmark, so we love you for what you are a humanbeing and you are treated equally with all Danes...If you are white and if you do not want to be a part of our community, so we are not going to have you in the country ... we do not look at skin color, but on how people want to be integrate into our society
Reply | Report Abuse | Link to thislook at denmark
Reply | Report Abuse | Link to thishttp://www.heritage.org/Index/Country/Denmark
Youngest son lives in Sweden. Been there 10 years. Here's the real scoop. The Swedish economy is doing quite well. So are the Swedish people. The weather in Stockholm sucks, but the social climate is excellent. If it wasn't for the weather and family here we'd move to Sweden.
Reply | Report Abuse | Link to thisHey Null: I suggest you don't know anything about economics, let alone austrian economics. The positivist methodology is wrong for the social sciences. Ludwig von Mises established that profoundly in his work, Human Action. The fact that you all point to Hayek's road to serfdom as their best rejection of the welfare state shows how little you know about anything. This article: http://mises.org/daily/2259 was far more intelligible than what passes for rabble in this rag. Rather than relying on ad hominems like Marx (I suppose you would think Marxism is "scientific" lol) perhaps you could simply argue the premises in the article that deals with the myth of the social welfare state in the nordic countries head on. Unbelievable how uneducated people are around here. The scientific american. Right.
Reply | Report Abuse | Link to thisAccording to Stefan Karlsson who has written a few articles about this Nordic "myth", "Sweden during its most free market oriented era, from 1870 to 1950, had the highest rate of per capita economic growth in the world. After massive tax and spending increases during the 1950s and 1960s, Sweden stopped outperforming other countries, and after a dramatic leftist shift in economic policies implemented by Socialist Olof Palme after he became prime minister in 1969, Sweden started to seriously lag other countries. However, free market reforms implemented in the 1990s, and in recent years, have enabled Sweden to once again outperform other Western countries in growth."
Reply | Report Abuse | Link to thisIn other words, Jeffrey Sachs failed to write history accurately. He makes it sound as if the right balance between the free market and the welfare state is the recipe for prosperity. But he is lying with statistics.
As usual with socialists they discount history and the fact that an enormous amount of capital was accumulated between 1870 and 1950 in Sweden. Without this, and the return of free market policies in the 1980's and 1990's, the Nordic welfare states would never have experienced the present rates of growth cited in the above article.
Any 15 year old can tell that increased taxation does not produce economic growth, and yet that correlation exists in the data, and some socialists make that claim much like the claim above about the Nordic states. The truth in both cases is that growth occurs DESPITE the extra burden of the welfare state. It is the power of the free market that has enabled the author above to lie with data.
This is why, as the Austrian economists point out, the empirical "facts" can neither prove nor disprove a theory - it is correct or not based on its a priori construction.
http://www.economist.com/content/global_debt_clock
Reply | Report Abuse | Link to thisThe Social Welfare State looks like it's going bust. Plus, Europe, including the Nordic countries, depends on the US for global stability, via our military spending. What if we just brought our troops home and let the world fend for itself. Mmmm.... no more free lunches.
Sachs is an idiot.
You think Austrian Economics is not credible? Well two prominent Austrian Economists Fredich Hayek and Ludwig Von Mises accurately predicted the Great Depression while most other economists didn't even see it coming. Our recent economic crisis was also predicted by two people who follow Austrian Economics Ron Paul and Peter Schiff. They were both laughed at by professional economists when they made there predictions but they were 100% correct. The funny thing is Paul and Schiff didn't even major in economics in college there not professional economists they have just read Austrian Economic books and taught themselves and all these pro Ph.D economists laughed at them and had no clue what was going on. Austrian Economics has also been right in many other predictions.
Reply | Report Abuse | Link to thisTHE NORDIC COUNTRIES HAVE POPULATIONS OF AROUND 5 MILLION PEOPLE. HAHAHA THIS AUTHOR IS A MORON! GET A LIFE....
Reply | Report Abuse | Link to this