The case for the Scandinavian model

I got somewhat inspired to write this based on a recent article in the dutch newspaper metro, which suggested that the dutch are looking into replacing their beloved polder model with the scandinavian model.

When ordinary people talk about preference for a political system it usually seem to boil down to what they consider is right or wrong. Or rather it is about ideology. Economists might frequently argue in favor of a liberal economic system since that in theory produce the best economic results. Never mind that these theories have some basic assumptions about human behavior which is plain wrong. But for now I leave the discussion about what is best from an economic perspective to the economists (I already argued a lot in favor of flat tax on this blog so nobody needs to accuse me of being a pinko ;-) )

In Scandinavia people would regularly argue in favor of the scandinavian model with arguments like "It is not right for businesses to make money on sick people. Public transport (or insert any other important industry) is too important to be left to the whims of the market forces."

Proponents of the anglo-saxon model (or simple the american model) would say things like "I don't want government to tell me what I can and can't do. People on welfare steal money from people who work. Things are best left to businesses because government is inefficient and bloated"

Now I must confess, I don't actually like any of these ideological arguments in favor of any system.

To the leftys in my own country:

1. Companies making money on people being sick or miserable (private health care), is just a rephrasing of companies making money on helping sick and miserable people. It is all a matter of perspective. You could also say that nurses and doctors also make money on sick people.


2. Wether health care is run by private or public should be irrelevant. What matters is who pays. If government pays your hospital bill, does it really matter to you wether you were treated on a private or public hospital?


3. I have never really seen any examples of what terrible things could happen if strategic industries is on private hands. Of course it makes sense to have certain industries under more state regulation because of the market situation

Anyway this was not supposed to be about more of the scandinavian model. Sure I think scandinavian countries could be more liberalized. But I still believe in the core ideas of the scandinavian model.

I believe in a generous but demanding state. I think everybody should have access to quality health care and education regardless of income. And I believe that employees should enjoy a certain level of job protection.

Private enterprise is not inherently more efficient than government
So let me address some of the arguments usually leveled against these ideas. "Private business is more efficient and better at organizing things than government, and thus health care should be provided by private business, not government".

This kind of argument displays completely lacking understanding of market economy. The reason why we usually let business take care of things rather than government is for more complicated reasons. It is not really about private enterprise vs government but free market vs monopoly. A free market can more efficiently allocate, use and distribute resources than a monopoly. So it is preferable. Thus multiple companies operating in a free market to provide a service will give better result than a monopoly run by the government.

But it is important to note, here that it is not because the businesses are privately run that they are better. In fact a private business might be performing far worse than a government controlled one. However the free market makes sure that such businesses are killed in competition.

But what happens when there is a business with a natural monopoly? E.g. railroad companies, water works etc? Then a private business is no better than a government controlled one, because there is no free market to shape it up.

So it is not that private business is inherently better than government, but that the free market is better than a monopoly.

Tax payers money
Then we have the "tax payers money" argument which comes in all shapes and sizes. "If I am not sick, why should I pay for people that are sick all the time?" or "Why should I pay for people that just live on welfare and are too lazy to work?"

Problem is that people seem to think that it is only when they pay to government that they pay for free riders. Or when tax money goes explicitly to social programs.

Let me elaborate. When you pay for any kind of insurance: car insurance, health insurance etc, you are also paying for someone else that crashes more than you or is sick more than you. If you never have a accident with your car your entire life than all the money you spent on your insurance is essentially lost to profit for the insurance companies and the ones who do have accidents. So instead of complaining about tax payers money one could complain about insurance payers money.

In fact I think tax and insurance serve very similar purpose, at least in welfare states. One can imagine a system were you pay a certain amount of money each month as unemployment insurance. What this basically means is that should you be unlucky and loose your job, you still get some money to live off. The funny thing is that I doubt that people who are such strung advocates against spending tax payers money on these kind of things see much problems with this insurance scheme. After all you are paying the insurance yourself.

Except it is no different. Some people will be lucky an never need to take out the unemployment insurance while other will often. The latter will spend the insurance money of the first. Or in a welfare state, the others tax money.

So in a sense tax money to welfare is the same as money to insurance. Which means paying higher taxes for welfare, is in a lot of ways like paying for security. There is nothing inherently wrong about paying for security.

One might however argue that insurance unlike taxes is voluntarily. You can choose to be left with more money in your pocket or have more security. However a market for insurance suffers from the problems of a market with imperfect information. The result of this is that insurance companies will expect those that get insurance to be very likely to need it. That is why they get it. So they charge more. This makes it even less desirable for those who are less likely to need it, so they opt out. Leading to a vicious circle were insurance gets more and more expensive.

This is essentially what happened to American health care system. Which is why it is extremely expensive, has only partial coverage and performs quite poorly.

What this means is that if one wants a well working insurance system for health care or unemployment, one simply can't have a system were you can choose to be in it or not. This is why the health system that are privately run and actually work, use a mandatory system were everybody has to have insurance and nobody can be denied it. Thus breaking the vicious circle.

So if one wants good job security, individual choice is not really possible. Either everybody gets it or nobody. In Scandinavia the choice is that everybody gets it.

The price of crime
While allowing unequal distribution of wealth can have good effect on economic growth both according to practice and economic theory, it has a number of side effects which are not included in normal economic theories.

A wealth of statistics show that unequal distribution of wealth cause crime and social problems. This is also firmly rooted in research done on happiness. While happiness is affected by absolute wealth it is also affected by relative wealth. Thus the old economic argument, that by allowing inequality, the poor will become richer faster and thus their absolute wealth will thus soon equal what it would have been under a more equal distribution regime.

So there are several factors that affect crime: police force, punishment and wealth distribution. Of these statistics seem to support most strongly that large police force and more equal distribution of wealth both lower crime significantly.

In America people are willing to pay more money to be "tough on crime". But they are not willing to pay money for a better life for poor people. Despite the fact that by and large, but areas are ways to fight crime. Somehow the ideology, that one should not pay money to lazy or unsuccessful people is so strongly rooted, that they rather pay money for a larger police force, although that actually doesn't add value to anybodies life.

So as far as I see it welfare economics is a lot about choosing to pay for a more harmonious society. It might sacrifice economic growth in the short run, but over long time I believe it creates a more stable society that is able to grow for a longer time.