The Scandinavian Economy

I argue economics frequently, and there are two mistakes frequently made by the opposition: First, assuming that the US is a good representative of capitalism.  And second, assuming that Scandinavian countries are good representatives of socialism.

Neither holds true.

Conservative think tank The Heritage Foundation produces a very informative Index of Economic Freedoms, updated, I believe, annually; essentially they rank every country in the world on many factors which correlate pretty well with capitalism, although not perfectly - it better ranks one's freedom in operating a business in those countries than it ranks one's freedom to make one's own purchasing decisions, but again, it does correlate pretty well with capitalism generally.  I could write a post describing the flaws - the fact that Singapore's government runs the mandatory retirement scheme which owns the vast majority of the country's capital is pretty significant, but I can respect that it would be complex to model in a one-dimensional analysis of freedom.  (I don't even know how to classify Singapore - is it fascist, communist, socialist, capitalist?  In one sense the government can be said to own the means of production - in another, it has considerable economic freedom)

Getting back on topic - the so-called Scandinavian Economy is considered to be proof of the validity of socialism.  Sweden, Norway, Iceland, Switzerland, Finland - economies which have done quite well for themselves.  Do they prove that socialism works?

Well, it's not quite that simple.  First, we have to throw Norway out.  Its wealth is completely and totally dependent upon its oil reserves; valid comparisons either fail to be illustrative (What does a comparison of Norway and Russia, or Norway and Iran, tell us about capitalism versus socialism?) or doesn't say much conclusive about anything.  (A fantastic per-capita GDP by exchange rate vanishes once you figure in cost of living.)

It is notable that we threw Norway out - it ranks lowest on the economic freedom index, and would have been the best representative of socialism.  Which brings us to our other nations.

Switzerland has run a close game with the US for many years.  It's now slightly more free, as it was a decade ago.  Kind of useless for evaluating the merits of socialism versus capitalism; they're about equivalent.  Same with Iceland - it's been consistently slightly less than the US, but not by a wide margin.  Again, rather useless.

Finland, Sweden, and Denmark, however, share a slightly different history - they both started out quite low on the freedom index, and have climbed steadily over the last decade; they've all gained about a point a year for the last ten years.  Denmark now runs neck-and-neck with the US; Sweden and Finland are both quite a few points lower.

Sweden, over the past ten years*, has gone from ~400 billion real GDP to ~470 billion real GDP; approximately a 21% increase.  8.86 to 9.2 million people; approximately a 4% population increase over the same period, meaning about a 17% increase in per-capita GDP.

Denmark has grown less than 40 billion over that same time period, from a little over 300, to around 340; 5.34 million people have turned to around 546; total per-capita growth, 8%.

Finland, because I'm getting lazy, has grown by a remarkable 20% over the same timeframe.

The US has grown by about 10%.  So all three of these countries have done better than the US in terms of growth, but only Finland markedly so.

Well, that seems to pretty well suggest socialism wins.  Well, no.  We have a decent sample set for socialism - let's feed in some figures for capitalism by running the figures for countries more capitalist than the US as of the most recent Index:

Hong Kong scores 36%.  Singapore scores 27%.  Australia scores 16%.  (Yes.  Australia ranks more capitalist than the US.)  Ireland scores 23% (So does Ireland).  New Zealand 16%.  Canada - yes, Canada now ranks higher, although this is a relatively recent development - comes in close to the US at 11%.

Switzerland, if you are interested, managed 10%, and Iceland manages 21%.  Norway, which for the previously discussed reasons we dismissed, manages 20%.

Well, what does all this tell us?

Unfortunately, not a whole lot of anything; the US was outperformed over the last decade by most of the Scandinavian economies, but the Scandinavian economies were outperformed by the most laissez-faire economies.  The fact that economic freedoms change so much throughout these periods of time doesn't help, either.

My tip?  Don't get too involved in this argument.  Take the moral high ground, lay down a few facts, and demonstrate that things simply aren't so neat as presented.  The US is not the bastion of capitalism it is so frequently pushed as, and its performance no longer reflects on the performance of capitalism.

As an alternative option, if you feel the need to win an argument which is ultimately rather silly, you can just whip out Hong Kong and Singapore, which have grown so much now that the counterargument that their small economies make small growths in absolute terms deceptively term in relative terms - well, it is no longer valid, so if somebody whips it out, smear their faces in some data (namely, that Finland's per-capita GDP is similar to that of Hong Kong and Singapore's).  There's also Ireland, which us free-marketeers have a love affair with, on account of being such a wonderful test case of capitalism.  But if you drag Ireland into it, Australia and New Zealand have to come too, which makes the whole argument an inconclusive mess again, and Singapore is really itself quite messy.  Again, just don't get involved.

* My figures for the past decade actually end in 2008, as that is the last year Wolfram Alpha seems to have data for.  Yeah, I'm lazy.  Get over it.