A Scandinavian economist once stated to Milton Friedman: “In Scandinavia we have no poverty.” Milton Friedman replied, “That’s interesting, because in America among Scandinavians, we have no poverty either”. At first glance, this exchange of words might not seem very exciting. But in fact, it can teach us much about the limits of politics, and how culture and markets can co-operate to create widespread wealth.
In most if not all societies, a key political goal is to reduce poverty and social exclusion. In this regard, northern European countries – and particularly so the Scandinavian ones – are often seen as the ideal. The reason is of course that they have low levels of poverty. On the other hand, the US has a quite high poverty rate. Surely, this shows that the more market oriented American model, whilst creating more prosperity, also fosters more poverty. The policy choice thus seems obvious: to go for growth, opt for a US-style small government model, to go for social justice and low poverty, adopt a Scandinavian Social Democrat model. Milton Friedman cleverly questioned this idea, by pointing out that culture matters. Let’s for a minute explore Friedman’s idea in greater depth.
The descendants of Scandinavian migrants on the other side of the Atlantic live in a very different policy environment compared with the residents of the Scandinavian countries. The former live in an environment with less welfare, lower taxes and (in general) freer markets. Interestingly, the social and economic success of the descendants of Scandinavian migrants in the US is on a pair with or even better than their cousins in Scandinavia. The explanation does not lie in policy, but rather in culture.
Nordic societies have for hundreds of years benefited from sound institutions, a strong Lutheran work ethic and high levels of trust and civic participation. These cultural phenomena do not disappear when Nordic people cross the Atlantic. On the contrary, they appear to bloom fully. Close to 12 million Americans have Scandinavian origins, that is to say are individuals whose ancestors largely or in some cases entirely migrated from Scandinavia and who today identify as having Scandinavian origins. This group is characterised by favourable social and economic outcomes. According to the 2010 US Census, the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as “Scandinavian Americans” in the US Census. The median household income for this group is even higher at $66,219.
As shown in the picture below, the living standard of the descendants of Scandinavians living in America is considerably higher than their cousins in Scandinavia. We cannot draw definitive conclusions from these figures, since household composition may differ, but there is prima facie evidence that Scandinavians who move to the US are significantly better off than those who stay at home.
It is worth bearing in mind that those Scandinavians who migrated to the US, predominately in the nineteenth century, were not elite groups. In fact, it was often the poor Nordic residents who ventured abroad to seek fortune in the New World. The success of Nordic immigrants in the US shows the pervasiveness of norms and low level social institutions. The comparison with Scandinavian Americans illustrates that the pursuit to create “social good” through welfare state policies has hindered economic prosperity. More surprisingly, the US-system hasn’t only allowed for higher living standard, but also lower poverty.
Economists Notten and Neubourg have calculated the poverty rates in European countries and the US using equivalent measures. They have shown that the absolute poverty rates in Denmark (6.7 per cent) and Sweden (9.3 per cent) are indeed lower than the US level (11 per cent). For Finland however, the rate (15 per cent) is somewhat higher than in the US. At the same time, Nordic nations have for long, even before the rise of large welfare states, been characterized by low levels of poverty. Nordic descendants in the US today have half the poverty rate of the average of Americans – a consistent finding for decades. In other words, Nordic Americans have lower poverty rates than Nordic citizens.
Milton Friedman was right. Scandinavian culture coupled with US-style policy translates to low levels of poverty, in the same way that Scandinavian culture coupled with large welfare states translates to low levels of poverty. This does not disprove that welfare policy can create social good, but does point to the limits of policy. The big question is thus not how to copy Social Democracy, but rather how to strengthen the Individual responsibility, social cohesion and working ethics that creates social success for Nordic citizens – not least in the capitalist US-system.