Seven answers: Social democracy

9 minute read

Overall scores in the Heritage Foundation Index of Economic Freedom for the United States and Nordic countries from 1995 to 2018. (Click for a higher-resolution version.) New Zealand, currently the highest-scoring country, is included for comparison. (Hong Kong and Singapore have higher scores, but they are city-states, not countries.) The Heritage Foundation considers scores from 60 to 70 to indicate “moderately free” countries, 70 to 80 to indicate “mostly free”, and 80 and above “free”. Source data is from the Index of Economic Freedom “Explore the Data” page.

tl;dr: What is social democracy? My preferred definition is dynamic capitalism plus liberal democracy plus an effective social safety net.

I promised to give my own answers to the “Seven Questions” posed by Jason Booms. Here’s Jason’s second question:

What are your thoughts on social democracy?

My answer: First, I really wish Jason had asked, “What are your thoughts on socialism?”, because I had a snappy answer already written and ready to post on that particular topic. But no matter: once I answer this question, I’ll answer that other one in a special bonus post.

So, “social democracy”. Wikipedia defines it as

a political, social and economic ideology that supports economic and social interventions to promote social justice within the framework of a liberal-democratic polity and capitalist economy, as well as a policy regime involving a commitment to representative and participatory democracy, measures for income redistribution and regulation of the economy in the general interest and welfare state provisions.

The Wikipedia article then goes on to give as real-life examples of social democracy the “socioeconomic policies that became prominent in Northern and Western Europe—particularly … in the Nordic countries”.

Couched in those terms there is little I would disagree with and much to approve of, especially concerning the desirability of looking at Denmark, Sweden, etc., as possible models. But—and this is a big but—we have to be very clear on what a workable and sustainable “social democracy” might mean in practice, and especially clear on what the “Nordic model” really consists of.

Many people seem to dislike market-based economies on principle, and lament the pervasive presence of markets in our lives. Some seem to use the term “social democracy” as a synonym for “socialism” (or at least a sort of “socialism lite”), with the general idea that it’s a possible and desirable alternative to “capitalism”. To my mind this is very much not the case.

In particular, some people speak of our present economic system as “late capitalism”, seemingly in the hope and expectation that capitalism is on its last legs and will soon be replaced by a presumably kinder and gentler system, whether we call that system “socialism” or “social democracy” and something else. But it makes no more sense to speak of “late capitalism” than it does to speak of “late agriculture”.

Just as there is no viable alternative to basing an advanced human society on intensive agriculture, there is no viable alternative to basing an advanced human society on a market-based economy in which the vast majority of economic decisions are made via a price system, in which some form of capital-based finance exists, and in which—except for certain limited exceptions—everyone secures their daily bread through a combination of capital investment in productive ventures and selling their labor (or the fruits thereof) on the open market. Venezuela is but the latest example that supposed alternatives to capitalism simply do not work in practice.

However, the agriculture of today is not the agriculture of the past: thanks to (among other things) capitalism, almost all of us are freed from being tied to the land and working the fields from sunrise to sunset. Likewise, the agriculture of today is not necessarily the agriculture of the future: changes in social attitudes drive changes in agricultural practices (for example, preferences for organic produce and meat from more humanely-raised animals), and innovations in technology may expand our ideas of what it means “to farm” (for example, industrial production of “synthetic meat”).

Similarly it’s possible to imagine a system that is very much capitalistic in nature without at the same time exposing us to the ravages of a predatory capitalism “red in tooth and claw”. Moreover, we have actual existing societies to point to as examples of this.

So, Frank, do you mean that (for example) Sweden is not a “socialist” country? Yes, that’s exactly what I mean. The key point about today’s “Nordic model” is not that it demonstrates the viability of “socialism”, it’s that it combines measures many think of as “socialist” (high taxes and redistributionist measures) with a capitalist system that in many respects is significantly more unrestricted than what we have in the U.S.

Don’t believe me? Let’s take a look at the “Index of Economic Freedom” produced by the Heritage Foundation, generally thought of as a conservative think tank. As you might expect, the index prioritizes government policies friendly to businesses (including those that increase the power of employers over employees) and penalizes countries with high levels of government spending.

But even with that thumb on the scale, in the 2018 index “socialist” Sweden is ranked #15, three places above the U.S. (#18), and at #12 Denmark is six places above the U.S. (Norway and Finland are ranked #23 and #26 respectively.)

How can this be? The answer is simply that at present the Nordic countries are not in fact “socialist” by any reasonable definition. They do have extensive social insurance schemes and redistributive policies, but they combine those with a commitment to economic liberty and a capitalist economy. (Most notably, Sweden’s ranking in the Index of Economic Freedom increased from #26 in 2009 to #15 in 2018.)

For example, in the U.S. many politicians have promoted laws to require that employers pay their employees a “living wage”. But in Denmark, Sweden, and other Nordic countries there is no statutory minimum wage. If an employer wants to offer an employee the equivalent of $1 per hour, and the employee is willing to take it, as far as I can tell the state will not intervene to prevent it.

Does that mean that employees in these countries are at the mercy of greedy capitalists? No, because in practice most employees are covered under collective bargaining agreements negotiated within the various industry sectors between companies and unions. (What is thought of as the “minimum wage” in those countries is simply an average of negotiated base wages across sectors.) Thus we shouldn’t automatically assume that “living wage” legislation is an absolutely necessary component of a “social democracy”.

(On the flip side, both progressives and libertarians should push back hard on the idea that so-called “right to work” laws have anything to do with freedom and liberty. They are simply government restrictions on the freedom of private companies to enter into exclusive arrangements with suppliers of labor, no different in principle than laws that would prohibit private companies from entering in exclusive arrangements with vendors providing other goods and services.)

At the heart of the discussion about “social democracy” are two independent but related propositions:

First, that social insurance schemes and redistributive measures in general are conceptually separate from government regulations on economic activities. It is possible to both provide a robust social safety net (funded by relatively high taxes) and at the same time significantly loosen regulations imposed on businesses.

Second, that a robust social safety net and an invigorated capitalist economy are not just compatible, but rather are each necessary for the continued success of the other. Without strong economic growth governments do not have the fiscal base needed to fund a safety net, and without a robust safety net people are reluctant to let capitalist innovation work its magic.

Policy advocate and commentator Will Wilkinson sums things up nicely:

A sound and generous system of social insurance offers a certain peace of mind that makes the very real risks of increased economic dynamism seem tolerable to the democratic public, opening up the political possibility of stabilizing a big-government welfare state with growth-promoting economic liberalization.

(He goes on to note, “This sense of baseline economic security is precisely what many millions of Americans lack.”)

Now, for reasons I go into in a future post I think such a “grand bargain” between progressive advocates of “social justice” and conservative and libertarian advocates of “business friendly” policies is extremely unlikely at the national level, and will remain so for some time to come.

Could progress be made at the local level? Maryland has more than its share of government regulations that are arguably unnecessary or at least overly restrictive (case in point: why can’t I buy beer and wine at my local Giant Food store?). One can make the case that we’d be better off economically, and no worse off otherwise, if many of these regulations were repealed or revised.

Maybe there’s a possible deal that could be struck at the state level: maintain or even expand the current tax base and use it to provide a comprehensive program of health care and other social provisions for Marylanders (making up for shortfalls at the national level), in exchange for a thoroughgoing review and reduction of Maryland regulations affecting businesses and their employees.

I’ll leave it to local political experts like Jason and others to tell me whether this is just a pipe dream. However as a Maryland voter and taxpayer this is a policy approach I’d be more than willing to sign up to.

Further exploration

The folks at the Niskanen Center, a libertarianish1 think tank, have been at the forefront of promoting the synergy of capitalism and economic liberty with a system of comprehensive social insurance. See for example the following articles by Will Wilkinson:

See also the following:

Finally, for the calculations and data behind the graph above and other statements in this post, see “Index of Economic Freedom Comparisons” and the source code for that article in the seven-answers code repository.

  1. Some people use the neologism “liberaltarian”, others are trying to resurrect the term “classical liberal”.