Laissez-faire with welfare, or the Scandinavian model
There is a fundamental difference between government intervention and welfare transfer.
Intervention is a state directly interfering with the functioning of markets. Think minimum wage, environmental laws, or nationalising industries. It tells markets what to do.
Transfer is a state taxing and distributing income or wealth, often with a social purpose. Think public schools, unemployment benefits, or social security. It tells markets how to distribute some of what they produced.
Both interfere with markets, but by lumping intervention and redistribution together, we fail to distinguish the ways in which states can interfere. Yet, that dimension is crucial.
Let us compare two small European countries : Denmark and Belgium. Both have well-developed welfare states — i.e. their redistribution is high. In 2022, public social spending was 26% of Danish GDP and 29% of Belgian GDP.
Yet turning to intervention, we see that Denmark is far more liberal than Belgium. According to the World Bank, Denmark ranks 4th globally in ‘ease of doing business’, ahead of the United States (6). Belgium ranked 46th, ahead of Armenia (47) and behind China (31).
To illustrate the difference, we may compare the two countries’ labour markets. Belgium, like France, has rules aplenty intending to protect workers. It is hard to fire and consequently costly to hire. Meanwhile, Denmark’s model, called ‘flexicurity’, lets employers hire and fire at will but offers up to two years of unemployment benefits along with retraining. Denmark offers a safety net in between jobs but intervenes little while on the job.
The result : Denmark has a higher labour participation rate, lower unemployment rate, higher social mobility, and significantly higher GDP per capita than Belgium ($68k vs. $50k). In short, it is wealthier and fairer.
Welfare with laissez-faire. The Scandinavian model is a subtle and often misunderstood mix that only seems contradictory if we fail to distinguish between intervention and transfer. Instead of opposing markets to welfare, the Scandinavian model lets markets create wealth and uses some of it to fund welfare programs. The relationship is symbiotic, not parasitic.
Marc Andreessen, professional baller and all-round mensch, offers a different but comparable framing in his Techno-Optimist Manifesto:
We believe markets are the way to generate societal wealth for everything else we want to pay for, including basic research, social welfare programs, and national defense.
We believe there is no conflict between capitalist profits and a social welfare system that protects the vulnerable. In fact, they are aligned — the production of markets creates the economic wealth that pays for everything else we want as a society.
When some talk about a ‘neoliberal order’ emerging in the 1980s with Thatcher and then Reagan, we can now appreciate that it primarily focused on reducing intervention rather than transfer. Industries were privatised and deregulated but welfare spending has gone one way only: up.
Social spending seems to rise inexorably. Meanwhile public finances are strained across much of the developed world. If we are to spend on welfare, let us at least do so efficiently and without destroying our ability to generate wealth. The Scandinavian model offers a third way between free markets and socialist utopias.
Sacha Meyers.
