I am quite fond of this article, written by Karl Ove Moene, who isProfessor at the University of Oslo from l987, scientific Advisor at the Center of Applied Research in Oslo and was an editor of the Scandinavian Journal of Economics from 1992 to 1999.I have the feeling that this view of the Nordic Model, well documented, is caoturing the essence of what the other countries see as the Nordic Model.

Michael Wallerstein had a long-term research interest in social democracy in the Nordic countries, a theme that we worked on together for many years. Our first paper on the topic praised the Nordic achievements, but claimed that social democracy was in retreat. As we saw it, -both the egalitarian distribution of income and the security of income that distinguished social democratic societies from other capitalist democracies are declining‖ (Moene and Wallerstein 1993a: 231-232). As time went on and we continued our work, we became less certain that the era of social democracy was actually over, and more certain that whatever the future of the social democracy in Europe, the Nordic lessons were highly relevant for social reformers in other parts of the world, including developing countries.

The societal model of northern Europe goes under many names. While the Swedes call the system the -Swedish model, the Danes and Norwegians insist on the -Scandinavian model. More recently, representatives of the European Union have started to use -Nordic model, which now seems to be the most popular term. Outside Europe the model is best known simply as -social democracy, a term that most Europeans associate with specific political parties and ideologies rather than with an economic and political system.

Social democracy in the Nordic countries is strong evidence for the achievements of unions as opposed to workers’ ownership. The success of unions may seem obvious today, but to many early leaders of the labor movement in the nineteenth century, worker cooperatives were as relevant a goal as extensive union membership – and just as distant. But while unions grew to become important actors in the labor markets of northern Europe and elsewhere, worker cooperatives remained on the margins.

One of the first joint papers that Michael Wallerstein and I wrote explored why worker cooperatives are so strikingly absent where unions are particularly strong. We emphasized that without unions able to enforce a floor on wages throughout the economy, competition and free entry would drive the returns to labor down to their competitive level whether firms are owned by the employees or the shareholders. Thus, unions provide a smaller share of a bigger pie, and union leaders consider workers’ cooperatives as a threat to union solidarity (Moene and Wallerstein 1993b).
A comprehensive union movement is indeed an important characteristic of the Nordic model of social democracy. Yet one should not underestimate the importance of strong employer associations to the system. Together the two parts of the labor market tend to take wages out of competition by way of centralized wage negotiations. The role of employers is often forgotten by the critics of the system. If the employers so desired, they could easily dissolve the system by withdrawing from central wage negotiations.

In addition, the Nordic model is distinguished by a large welfare state and a system of routine consultation among government and representatives of interest organizations. Its policies include wage leveling through -solidaristic bargaining, the provision of basic goods for all citizens as a right of citizenship, and a government commitment to full employment.

Wallerstein and I wanted first of all to explain how the Nordic countries achieved the most egalitarian wage distribution and the most generous welfare states in the world without obvious macroeconomic costs. We focused on the key institutions and policies that have dominated northern Europe since the Second World War. We wanted to emphasize the general lessons and to resolve the many puzzles that are associated with the Nordic model of social democracy.

The lessons for mainstream economics may be particularly harsh. The Nordic countries of Denmark, Finland, Norway, and Sweden seem to violate what the economics profession has long viewed as necessary requirements for an economy to prosper. Their wage differentials are too small, their taxes are too high, their public sectors are too large, their welfare states are too generous, and their unions are too strong. Despite these violations, the Nordic countries have for decades done extremely well. What most economists see as a recipe for serious economic trouble seems, in the Nordic countries, to be consistent with high growth, low unemployment, low inequality, and a fairly efficient allocation of resources.

So, has economics got it wrong? Or are the Nordic countries just a special case? Clearly, economics cannot have gotten it universally right, and the Nordic experience may be a good example of why and how. But the Nordic lessons should be interpreted with caution. The lesson is not that there is a universal positive relationship between equality and economic performance. The lesson is that under some institutional arrangements, equality and prosperity go together and reinforce each other. Under other institutional arrangements this is not the case. A narrow economic approach, however, that neglects institutional complementarities and social spillovers does not capture such mechanisms and may easily misinterpret the Nordic experience.

The full article on the Oslo University website