October 16, 2013

What About Scandinavia?

By In Economics

To show that true Capitalism does not work, the critic will point to the calamities in the United States.  As the so-called representative of the free world, the United States is often labeled as a Capitalistic economy.  This is patently inaccurate.  Aside from the fact that in the last decade, the freedom index has shown the United States to be sliding quickly away from its status in the top ten free nations, it is important to realize that the substantial amounts of debt (which includes the never-discussed issue of unfunded liabilities- which place us above $222 trillion in the hole) coupled with one of the most manipulated currencies in the world, are two factors that are not given enough weight.

It is true that while the American economy is perhaps worse off than the dozens of countries below it on the freedom scale, it appears to be more prosperous because of decisions that were made decades ago; among them, the use of force worldwide to enforce American hegemony, the use of manipulation in the dollar currency exchange market, and also the several centuries of relative capital accumulation.

My point is this: the United States is far less free as an economy than people realize and this government entrenched economy is falling apart.  That is to say that, as it stands now, the United States will have tumbled before the end of the decade.  It is government, not capitalism that has caused this.  Centralized banking, corporate lobbying, warfare, welfare, and deficit spending have caused this.

As stated above, the United States is wrongly viewed as Capitalistic, when it should be seen as Fascistic (The United States notoriously destroys capital, not collects it!).  Contrarily, countries such as Denmark, Sweden, Iceland, Norway, and Finland are seen as the anti-Capitalistic places.  Those Scandinavian countries are often pointed to by the left, by the socialist leaning proponents, as a model for reform.  Among the themes which seem so attractive about those countries is the health care system.  Primarily because it is subsidized and socialized.

Therefore, the story line is misleading because it says this:  Capitalism = USA; Socialism = Scandinavia.  This entire blog dispels the first equation.  This specific post directs its attention to the second.

Firstly, just as the reason that America is still alive today is because it had spent hundreds of years accumulating capital and savings, the same applies to much of Scandinavia.  Economists and laymen alike seem to forget the power of accumulated savings and the long-lasting positive effect it can have on the economy.  America had built up enormous wealth before the early 20th century and the rise of Centralized Banking in 1913.  Even post-Federal Reserve, the United States spent the first half of the twentieth century collecting capital.  Of course since the 1970’s, we have been spending it all, refusing to go back to our “live-below-your-means” economy.  Our savings before our consumption years have lasted a long time.  The same is to be said of Scandinavia.

Although they started later, Scandinavian countries, Sweden especially, revolted from their government squelched ways in the 1860’s, and boldly embraced free-market reforms allowing them to take part in the glorious worldwide industrial revolution.  Their stunning levels of poverty were quickly eradicated by the capitalism that results from a more “hands-off” government.  In many ways, because of their more honest contractual law, which forbade the fractional reserve banking that harmed the American economy, they actually grew more smoothly than did the United States from 1870 to 1910.

Swedish Stefan Karlsson elaborates:

In addition, there were countless non-inventing entrepreneurs during that period: car manufacturers Volvo and Saab, and telecommunications company Ericsson. Indeed, with just a few exceptions, nearly all large Swedish companies were started during the late 19th and early 20th centuries, which was not only a period of strong growth, but also the time when the foundation for later economic growth was laid.

It is that final statement which is key.  Capital accumulation laid the foundation for later growth.  Unlike the United States, it refused to participate in the World Wars of the early twentieth century, therefore spending thirty years growing and saving, rather than spending and consuming.  The implications for today’s liberals and conservatives here are huge.  The liberals must note that refusing to massively spend was good for Scandinavia.  The conservatives today must note that war prevented us from growing.

At the close of the War, while the so-called capitalistic United States was thirsty for Communist blood in the USSR and other “Red” countries, the Scandinavian countries made their mistake:  they began, over the next three decades, to set up a massive welfare state.  If the United States was destroying itself with war spending, Scandinavia was making the opposite blunder: it was destroying itself with welfare spending.  The massive savings of pre-1950’s Scandinavia was about to be an asset of the past.

While before about 1960, countries like Sweden were among the freest nations on earth regarding regulatory rules, government spending, and even taxation, after the welfare state began its growth the harm was immediate.  These events caused “government spending to skyrocket to more than 50 percent of GDP.  At one point during the mid-’70s, the top marginal tax rate was an unbelievable 102 percent.”

In fact, the welfare disaster grew so quickly that by the 1980’s the economy had stagnated and wealth was fleeing the nation in order to be protected from the State.  When the economic environment becomes too harmful to wealth and capital, those with more means usually bolt.  This is true of any society.  This is why, in places like the United States and France, the State is trying to make this harder. It is crashing down on those wishing to flee tyranny to protect their savings and capital.

Desperate to save the sinking ship called Scandinavia, the countries as a whole again began to liberate the economy in the late 1980’s and 90’s.  Government monopolies were eliminated, private sector alternatives were allowed to pop up, taxes were cut, regulations were slashed, and the economies began to inch forward once again.  With the established central banking sector like the United States, its booms and busts became similar to what we are used to.  Rather than “socialism by taxation,” it turned into “socialism by banking” like the United States and the European Union.  In fact, these Scandinavian countries are part of the same trade and banking associations as other parts of Europe, proving that they are not some distant social utopia, but rather dependent on the activities of the rest of Europe.  The Freeman Online explains:

Denmark, Finland, and Sweden are members of the European Union (EU). Iceland and Norway belong to the European Free Trade Association (EFTA) and to the European Economic Area (EEA). The EEA covers the 25 member states of the EU plus Iceland, Liechtenstein, and Norway .

Today, these countries are on banking cycles, victims of the same type of boom-bust cycle the United States is in.  Any growth comes not from productivity, but from manipulated credit.  Which leads to a devastating boom, leaving the poor poorer and the bankers richer.  When the poor become poorer, welfare spending tends to be increased.  Therefore, the welfare spending is increasing rapidly and the health care system is highly subsidized.  This has the typical frustrations of socialized medicine.  Long waits, doctor shortages, poor quality, increasing costs (shifted to the governments of course), and inflexible medical practices.  Waits for operations can last up to 80 weeks.  The medical costs of the country are exploding due to lack of competition, the price mechanism (that von Mises talks about), and free market incentives.  Socialization continues to haunt the HC system.

However, aside from the disastrous health care system, some countries in Scandinavia are making brave strides toward economic liberalization (meaning more free).  Cutting income taxes, capping corporate taxation, and creating more loopholes is doing them a world of good.  If we say that the United States continues to fall on the freedom index, we can also say that Scandinavia is rising!  While the United States has the highest corporate tax rate in the world, Scandinavian countries are trimming their corporate rates.  Of course while they are moving in the right direction, their taxes are still very high and harming.  But it is vital to realize that they are recognizing these mistakes.

One of the points that most economists fail to mention is that there are three kinds of economic intervention.  Rothbard labeled them: Autistic (restricting the person’s use of his property. ie, drug laws); Binary (coerced exchange between victim and oppressor. ie, taxation); and Triangular (coerced or restricted exchange between two parties other than the oppressor. ie, regulation).  While Scandinavia is generally worse than the United States in the realm of Binary intervention, the United States has several hundred times the amount of Triangular intervention!  Most people only consider taxation but they don’t realize that all forms of economic intervention must be considered.

Every inflationary boom has an inevitable bust.  A bust that is painful, yet necessary.  But whereas the United States and the European Union bailed out their economies, Iceland famously let its banks default!  Now what?  Well, we are in recession.  And Iceland is growing!

Scandinavia is therefore in many ways freer than the United States.  They are learning to encourage capital accumulation and free market solutions.  And in those areas where it is less free (taxation and health care) it is struggling.  The United States is so unfree that even Scandinavia is gaining on us according to the freedom index.  How dreadful.  So should we be like Scandinavia?  In some ways yes, yes we should lessen the impact of government.  And should Scandinavia be like us?  In some ways yes, yes they should lessen the impact of government.  The State is the enemy of productivity and success, regardless of its style and systematic oppression.

Free markets are the solution everywhere.

In summary, the table summarizes my thoughts.  The “X” indicates which economy is generally more free.  They are not, as the establishment would tell you, on opposite ends of the economic system.  Even on healthcare, neither is more free.  Ours is more fascist, theirs is more communistic.

Example

United States Scandinavia
Banking X
Corporate Taxation X
Personal Taxation X
Regulatory System X
Government Spending X
Healthcare (X) -Corporate led soocialism (X) -State led socialism

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com