Improving Our Standard of Living (Wattpad Edition)

Chapter 5: Nordic Model

The Nordic countries have similar political and economic policies. They also have the best scores on the Standard of Living Index and the World Happiness Report.

According to an analysis by the Research Institute of the Finnish Economy: "A common finding of cross-country comparisons is that the Nordics succeed better than other countries in combining economic efficiency and growth with a peaceful labor market, a fair distribution of income and social cohesion." [1]

In other words, the Nordics have strong free markets and small income gaps between rich and poor. They aggressively redistribute income via taxes, welfare, and unions. Yet they're among the most capitalistic countries in the world.

The Nordics are commonly called welfare states. In this context, "welfare state" doesn't mean that the government provides all goods and services. It means it provides enough financial support to the poorest demographics to prevent them from falling into poverty. A welfare state has a strong social safety net, but everything above that net is hardcore capitalism.

A social safety net means that a government provides tax-funded services to its working class citizens and to the poor. It may, for instance, provide free healthcare, generous food stamps, low-cost public housing, public schools, free tuition for public colleges, etc. But the state doesn't ban businesses from providing private versions of those goods and services.

Take public schools for instance. They're immensely useful to families with low incomes. But the state doesn't prohibit private schooling. Parents can send their kids to private school, which often costs a lot of money. But the option of public schooling is available for families with a modest income. That's an example of a social safety net provided by a welfare state. Without public schools, working class parents would have to allocate a larger share of their income toward schooling for their children. Thus, many of them would fall below the poverty line.

The goal of a welfare state isn't to replace capitalism. It's to help prevent working class people from falling into poverty. A social safety net makes capitalism work more effectively than having no welfare at all. When too many people are poor, a nation will have a harder time generating businesses. A modest amount of income redistribution is an improvement to the capitalist design.

Note that the working class doesn't pay the bulk of tax revenue for the social programs that it benefits from. Most of the revenue for welfare programs comes from the richest 10% or so of the population.

However, most of the income received by the richest 10% is originally created by the working class. What this means is that welfare is a re-redistribution of wealth back to the demographic that does—and always has—produced most of the world's wealth.

Ideally, a government shouldn't take over the function of businesses. Instead, it should give enough tax money to people to keep them above poverty. Those that receive welfare would continue to buy goods and services from the private market of competing businesses. The government wouldn't produce anything beyond bare essentials.

More commonly, though, the government provides its own products. Public schools, healthcare, and housing are a few examples. But the state shouldn't do this in a way that prevents people from starting businesses. For instance, no one should be banned from founding a private school, even though public ones already exist.

The Nordic countries do a good job of this. It's easy to start a business in Scandinavian nations "despite" their extensive welfare programs. That's because they don't ban people from starting private firms, even though there are often public counterparts already in existence.

The most effective type of welfare state is the kind that keeps income inequality from getting out of hand without making it harder—in aggregate—for its citizens to start businesses.