Denmark is not socialist, and its own prime minister said so at Harvard

Whenever an American politician wants to sell socialism, he points across the Atlantic and says: look at Denmark. It is a clever move, because Denmark is a pleasant, orderly, wealthy country that few Americans would want to attack. The trouble is that the one authority who ought to know what Denmark is has said, in public, in America, that it is not what the salesman says it is.

In October 2015, the Danish prime minister, Lars Lokke Rasmussen, spoke at Harvard's Kennedy School and said, in words that were widely reported, that Denmark is far from a socialist planned economy and that Denmark is a market economy. He was responding to the American habit of using his country as a talking point. That should end the discussion. It will not, because the habit is useful. So let us do the work.

The claim and the terms

My thesis is this. The Nordic countries are not socialist in any meaningful sense of the word. They are market economies, with free trade, strong property rights and flexible labour markets, that pay for large welfare states through broad and heavy taxation of the middle class. The welfare state was built on wealth created first by markets, and where those countries tried more socialism, they retreated.

Definitions matter here, because the entire debate is a fight over one word. Socialism, in the classical sense used from the nineteenth century onward, means collective or state ownership of the means of production, the factories, farms, banks and utilities, and the replacement of market prices with planning. A welfare state is a government that redistributes income and provides services such as health care, pensions and education, funded by taxes. A market economy is one in which prices, set by voluntary exchange among private owners, direct the use of resources.

The two ideas are different. A country can have a large welfare state and a market economy, and the Nordic countries do. A country can also have socialism in the classical sense and no welfare state worth the name, as many communist countries showed. When American advocates say "democratic socialism" and point to Scandinavia, they are usually using the word for a high-tax welfare state. That is a legitimate thing to argue for or against. But it is not socialism in the classical meaning, and the difference matters for what the policy would do.

The Nordic-model argument at its strongest

Fairness first. The case for the Nordic model is serious, and its best version runs like this.

The Nordic countries, Denmark, Sweden, Norway, Finland and Iceland, consistently rank near the top of international comparisons of well-being, trust, health and happiness. They offer universal health care, generous parental leave, free or low-cost education and strong unemployment protection. Their labour unions are powerful and cover most workers through collective agreements. Income inequality is lower than in the United States, and economic mobility is, in some comparisons, higher. The defenders conclude that these countries have shown that a society can tax heavily, provide generously and still prosper, and that the label "socialist" is a fair shorthand for the approach, because it describes a society that puts collective provision ahead of the pure market.

That argument deserves respect, because the facts it cites are real. The Nordic countries are wealthy, orderly and, by many measures, pleasant places to live. A conservative should not deny it. The question is what produced it and what it implies for America. Here are the answers, point by point.

Answer one: Denmark's own prime minister says it is a market economy

The first and simplest point is the one the Harvard remarks made. The leader of the country described does not recognize the description. Rasmussen's point was that Denmark has a market economy, with a high-tax welfare system on top of it. He was concerned that the label "socialism" would give the wrong impression of what Denmark's economy rests on, and that Americans were borrowing his country's name to argue for something he did not recognize.

Look at what the Nordic economies actually do. Denmark and Sweden are members of the European Union, which is built on free movement of goods, services, capital and labour. They are among the most open trading economies in the world. Their large companies are privately owned; the great Swedish industrial groups are controlled by private shareholders, in some cases families. Prices are set by markets, not by a planning board. In the language of the definition above, that is a market economy.

Answer two: Sweden tried more socialism and retreated

If any country is held up as the proof that big government works, it is Sweden. The history is more interesting than the slogan.

Sweden had, from the 1970s, expanded its public sector and taxes to very high levels, with very high marginal tax rates in the top brackets. In the 1970s and 1980s, growth slowed and the country struggled with inflation and devaluations. Then, at the start of the 1990s, it suffered a severe financial and banking crisis. In September 1992, in the middle of a currency crisis, the Swedish central bank raised a key interest rate to extraordinary levels for a brief period in a desperate effort to defend the krona. The country went through a deep recession, unemployment rose sharply, and the budget fell into large deficit.

The response, across the political spectrum, was reform. The economy was deregulated, competition law was strengthened, and public services were opened to private providers. Government spending as a share of the economy was brought down from its peak in the early 1990s, and fiscal rules were adopted to restrain borrowing. A long-awaited reform of the old-age pension system took effect in 1999. Sweden today taxes neither wealth nor inheritance.

That is not the history of a country that embraced socialism and was rewarded. It is the history of a country that went too far, hit the wall, and then deliberately moved toward markets and fiscal discipline. The Sweden that Americans admire is the Sweden after the reforms.

Answer three: the school-voucher revolution

If you wanted to design an experiment in whether markets can improve a public service, you could hardly do better than Sweden's 1992 school reform. Beginning in 1992, Sweden allowed parents to choose among schools and let public money follow the child to the school of the family's choice, including independent schools run by private organizations, some of them for profit. It is, in American terms, something close to a universal school voucher system, and it is a system that many American conservatives have advocated for years.

This is exactly the opposite of a socialist approach to education, in which the state owns and runs every school and assigns children to them. The Swedish system retains public funding and a public role, and it has been controversial in Sweden itself, with debate about quality and results. A fair account says so. But it shows that the Nordic model is willing to use competition and choice in the service of public goals, which is a long way from the classical socialist idea. For the American debate over school choice, which the Founders' tradition of local control and parental authority supports, see the education pages of this site.

Answer four: no statutory minimum wage

Here is a fact that surprises many Americans. Sweden and Denmark have no statutory minimum wage. There is no national law that sets a legal floor on hourly pay. Instead, wages in many sectors are set through collective bargaining between unions and employers' associations, and those agreements set the minimums for the workers they cover.

This tells you something about the model. It is not government fixing prices in the labour market by statute; it is an arrangement in which labour and employers negotiate, within a flexible framework. There is no statute to say that an employer cannot hire a worker at a particular wage, and the Nordic labour markets, Denmark's in particular, are known for relative ease of hiring and firing, paired with generous but time-limited unemployment benefits and an expectation that the unemployed will look for work and retrain. The Danes call the combination "flexicurity." The security is real, but the flexibility is what an American conservative would recognize as a free labour market.

For the American debate over a statutory floor and who it shuts out, see the minimum wage's 1938 birth and the workers it was meant to shut out and seattle raised its minimum wage, and a city-funded study counted the hours.

Answer five: who pays for it

Now to the thing the American advocates tend to skip. How do these countries finance their large welfare states? Not mainly by taxing the rich.

Denmark and Sweden both have a value-added tax, a VAT, at a standard rate of 25 percent. That is a broad consumption tax on most goods and services. It is paid by everyone, including the poor, at the register. Denmark's income taxes reach high rates, above 50 percent at the top, but they also apply at relatively modest income levels, so that a large share of the burden falls on ordinary workers. In the Nordic countries, the middle class pays for the welfare state. There is not enough income at the top to fund a system of that size, and the Nordic governments know it.

That is the key difference from the American advocates' proposals. The slogan in the American version is "tax the rich," and the claim is that it would pay for Nordic-style benefits. The Nordic reality is that the benefits are paid for by high taxes on everyone, through income taxes, payroll taxes and consumption taxes. A policy of taxing only the highest earners would raise only a fraction of what is needed. For a look at who pays the American income tax and what the arithmetic says, see Who actually pays the federal income tax, read straight from the IRS tables, and for the history of one attempt to tax wealth directly, Tax the rich more? The wealth tax failed across Europe and was repealed. For a comparison of consumption-tax options, A flat tax, a national sales tax and a VAT, compared for one family.

Answer six: the welfare state was built on wealth created first

The last point is the one that matters most. The Nordic countries became rich before they became generous. In the late nineteenth and early twentieth centuries, they industrialized under market economies, with strong property rights, openness to trade, and entrepreneurs who built firms that became global names. The big expansion of the welfare state came in the middle of the twentieth century, after those economies had grown wealthy enough to pay for it.

That sequence is the lesson. A welfare state is a way of spending wealth. It is not a way of creating it. A country that tries to spend first and create later finds, as Sweden did in 1992, that the bill comes due. Venezuela is an example of the extreme case, and Venezuela was once Latin America's success story, and then came socialism shows what happens when a country spends a resource boom and dismantles the machinery of production at the same time.

What it means for the American debate

None of this is an argument that the American system is perfect, or that conservatives oppose every form of public provision. The honest conservative position is more precise. The questions that matter are about means: who should run a program, at what level of government, funded how, with what incentives, and under what limits. Those are questions the Nordic example can inform, and its lessons are mixed. School choice and flexible labour markets are lessons conservatives can embrace. High taxes on the middle class are the cost that the advocates for the Nordic model rarely mention.

It is also worth remembering a difference of scale and character. Denmark has a population of under six million people, and Sweden about ten million. They are small, relatively homogeneous nations with high levels of social trust, which makes it easier to run a system that depends on voluntary compliance. The United States is a continental republic of more than three hundred million people with fifty states, and the Constitution was designed to allow those states to try different policies. If a state wants to try a Nordic-style programme, the Tenth Amendment lets it. What the Founders would not have accepted is a single national model imposed on every state by Washington.

The comparison also shows why it is a mistake to let one word carry so much. When a candidate says "Denmark," he is invoking an image of orderly comfort and attaching it to a particular tax proposal. Ask him instead for the specific policy and the specific bill, and the image will have to give way to arithmetic.

For the broader record of countries that did adopt the classical form of socialism, see Two Germanys and two Koreas, the natural experiments that socialism lost, Britain's postwar socialism, from nationalized coal to the Winter of Discontent and eight socialism myths tested against the countries that actually tried it. The difference between those cases and the Nordic one is the difference between a country that owns its economy and a country that taxes it.

Measure it against the Founders

The Founders' own insistence on property rights, free exchange and limited powers is closer to the Nordic market economy than to any socialist model. The Tenth Amendment says that "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." That is the answer to anyone who says that America must copy a foreign model in a single stroke: the republic was built so that the states could experiment and the people could compare results.

And the Declaration of Independence says that governments derive "their just powers from the consent of the governed." A tax system that falls heavily on the middle class has to win that consent. The Nordic voters gave it for their own system, after debate and reform. American voters are entitled to hear the real price, and to say yes or no with the facts in front of them.

The case in brief

1. Socialism in the classical sense means state ownership of the means of production, and the Nordic countries are market economies with free trade, private firms and flexible labour markets, as Prime Minister Rasmussen said at Harvard in 2015.
2. Sweden's history shows a retreat from the high-tax, high-spending model after the crisis of the early 1990s, with deregulation, fiscal rules and no wealth or inheritance tax today.
3. Sweden's 1992 school-choice reform, the absence of a statutory minimum wage in Sweden and Denmark, and Denmark's flexible labour market are market features, not socialist ones.
4. The Nordic welfare states are paid for by broad taxes on the middle class, including a 25 percent VAT, not mainly by taxing the rich.
5. The welfare state was built on wealth created first by markets, and the lesson for America is to argue about specific programmes and specific bills rather than a word.

What you can do: look up your own state's budget, find the largest programme in it, and ask your state legislator how it is paid for and who bears the cost.