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The Logic Behind the Coexistence of Welfare State and Free Market: The Scandinavian Dream

Author: Alen Alexander Klarić, Svetilnik
Date: November 18, 2015

There is a tendency in the time that we live in, especially in academia, to go with the middle way. It is often one hears that since we are unsure of which extreme solution is better, it is the middle road we should take. Such suggestion is usually accompanied by a certain laziness of the mind and quite quickly we slide into the grey area of decision making, benefiting no one but the decision maker, relieving them of a burden of a tougher and more meaningful decision. All things in moderation and moderation in all things is the saying that applies here and for which I believe should rather be shaped with the words of the famous cook Juliao Child, who as a wife of an ambassador also spent some time in Sweden, claiming all things should be in moderation, even moderation itself.

Logic is quite an inflexible instrument. Although we try to twist and turn our thoughts to fit into a concept, there a certain rules to abide, if we want to be successful in concept creation. Moderation not being one. While building a concept, we must take into account the nature of all the compounds and see whether they are negating each other, supporting, or at least not excluding one another. If we for example ponder on the existence of a welfare system and a free-market in the same country, there is a line of thought to be followed, so we can reach the right conclusion. In fact, no macro analysis is needed. The question lies with the individual, since the individual is the recipient of taxes, welfare support and the creator of business.

By mere giving it a thought it is clear that the two – welfare and free market – can coexist: we have a relatively unregulated business sector in terms of business creation, operating, internationalizing, employing, firing employees etc. and on the other hand evolve a complex taxing system with high tax rates in order to furnish a fat tampon of security for every citizen indiscriminately of their status. Sure, we can argue that such a free market is not really free and it would be true, but if we judge comparatively, and since there is no real free market, the thesis would hold.

One step further would be analyzing the coexistence itself. And this is crucial. Since we are not dealing with chemical elements, the processes of creation, fusion and destruction are not really visible. Political phenomena as the two under a microscope here, are able to coexist as well as undermine each other at the same time, since political systems are not spiritually homogeneous formations, rather fractions of agreements and disagreements on crucial civic matters, forced into execution through a single office. The fact that an abundant welfare system and a loosely regulated market are operated by the same government does not give proof to their harmonious existence and a beneficial impact of their supposed fusion. The latter is practically impossible.

If there is to be a free market, there is to be private ownership, consequently virtually all payments must be issued as acts of individual free will. If there is to be benefits from the free market, incentives for job creation must be boosted, which can only happen if there is a guarantee that the personal interest of an entrepreneur shall be protected and grounds for profit making unhindered. Every new claim of the welfare on the property of an individual thus becomes a lesser chance of a wealth-producing individual. In other words, every new claim of the welfare on the property of an individual, is another individual on welfare. The equation is horrifically clear: welfare reproduces itself with every additional enlargement. Every job lost because of a tax too high put on the employer is an employee on welfare. Coercing some to provide for welfare is coercing others to be on welfare.The dependency cycle between high and low income individuals is thus unnecessarily given birth with the state as its sole beneficiary. Not least in terms of providing grounds for wealth growth or prosperity, but in its much more primal role of the ruler. It is now becoming increasingly clear that welfare and free-market are necessarily excluding themselves and that it is hard to imagine a possible scenario making them coexist harmoniously.

There is quite a precedence in the field of freer markets creating bigger equality. Remember the British industrial revolution? Markets always tend to destroy the cultural convention which is set in stone by mere possession of property by a scarce elite. Before the revolution, the aristocracy, endowed with vast amounts of land could set the rules for their tenants, who were the majority of the population and would continue the upstairs – downstairs relations for as long as the industrial sector did not start emerging and the businessmen getting a larger and larger share of ‘new money’. The enormous percentage of people employed as servants to elite families, started pursuing different occupations and freed themselves of eternal servitude. The flow of money and capital slowly started reacting not to inheritance, rather to merit and genius and the outdated conventions of class division slowly diminished.

Scandinavia’s path to equality also did not happen after, but before the expansion of the welfare state. The expansion of public sector and high taxation predominantly came after. The social democratic era promoting the welfare state after 1970s resulted in employment loss. Sanandaji (2015) explains:

In the hundred years following the market liberalisation of the late 19th century and the onset of industrialisation, Sweden experienced phenomenal economic growth. /…/Famous Swedish companies such as IKEA, Volvo, Tetra Pak, H&M, Ericsson and Alfa Laval were all founded during this period, and were aided by business-friendly economic policies and low taxes. /…/The rate of business formation during the third-way era was dreadful. In 2004, 38 of the 100 businesses with the highest revenues in Sweden had started as privately owned businesses within the country. of these firms, just two had been formed after 1970. None of the 100 largest firms ranked by employment were founded within Sweden after 1970. Furthermore, between 1950 and 2000, although the Swedish population grew from 7 million to almost 9 million, net job creation in the private sector was close to zero.”

Sweden’s rise to wealth was due to an industrial revolution – led by important Swedish businessmen and investors in the direction of free market policies. The late 19th and early 20th century’s liberal markets provided Sweden with the title of one of the richest countries in the world. It was only the Great Depression which made the people turn to social democratic leadership – i.e. tax growth and an ever bigger government spending until the fifty percent expenditure on government per GDP. The 1970s were especially critical by imposing extensive business regulation, thus strangling production and job creation. As is often the case, the socialist experiment ended in inflation due to aforementioned reforms and ever higher labor union pressure. The next step was taken in the right direction; the end of 1980s brought further free-market reforms, slowly bringing Sweden back to life, however not without turbulence throughout the early 1990s, accompanying the harsh financial medicine it needed to survive. However, the pre-socialist jobless rate of only 2% was never acquired again.

Despite the big welfare states, Nordic countries are characterized as possessing a high level of economic freedom; business freedom, investment freedom, financial freedom, property rights, freedom from corruption, monetary freedom, and trade freedom. These are all crucial aspects which make their economy grow in spite of welfare states. However, there were episodes in Nordic history which when limiting these freedoms, created complete annihilation of businesses and entrepreneurship. Magnus Henrekson (2007) writes: ”/…/ that the individual would actually lose money by making a profit once the effect of both taxes and the inflation of the original investment were taken into account.” Such was the gloomy prognosis for a Swedish entrepreneur in the 1980s. The maintenance of the state by function of few large companies is also very well known to Finland – NOKIA contributed a quarter of Finnish growth from 1998 to 2007, according to figures from the Research Institute of the Finnish Economy (ETLA). The company was also founded in the era of higher economic freedom, i.e. in the year of 1865.

Our inquiry into the coexistence of a Scandinavian welfare state and the free market seems to bring us to the same conclusion as the logical thread suggested: the two necessarily hinder one another, yet the countries benefited – in terms of wealth creation – from periods when taxation and welfare have not yet played a major role. However, there is one more important variable at stake and that is the cultural impact on people’s perception of markets, work, welfare, ethics, etc.

Often enough it is theorized, that Protestantism and scarcity of population per square kilometer play a crucial role in understanding the steady well-being enjoyed by Nordic countries (with the exception of those few misfortunes as the Swedish recession mentioned above, which we usually tend to leave out quite effortlessly). To speak plainly, Protestantism would be translated into pragmatism and efficient work ethics while weak density of farmhouses operated by individuals or isolated families would translate into individualism. Both would boost reliance on self-preservation, which if put in formula, would equal rationality/pragmatism + private ownership. Some authors would consequently prescribe strength of character as a basic attribute of the endurance of Nordic wealth creation even through times of enlargement of state apparatuses at a relative measure.

Such conclusions may or may not hold, but what must be true is that ownership combined with appropriate usage, is rewarding, and the people of the North have had historical experience. What we should learn from such phenomena, is that concepts are not to be confused and merged just for the sake of simpler understanding. They are to be split apart and put into perspective, so that we can understand the causalities at stake. This short writing offers only a brief introduction into the causalities of welfare and free-market in Scandinavia, but the thread of logic used, can be applicable to in-depth research.

The article appeared at on November 17, 2015.