If Social Democracy Is So Great, Why Is the US Richer Than Nordics?
A look at the reasons for the higher American GDP per capita
When preaching the virtues of social democracy, there is always some libertarian or neoliberal who will champion the virtues of capitalism by pointing out the fact that on average Nordic countries have lower GDP per capita than the US. In fact, people of Nordic descent make more money on average in the US than in Nordic countries.
Social Democracy really got started after WW2 in the Nordics. So if social democracy was bad for the economy compared to American capitalism, you would see Nordic economies growing slower than the American economy. Except if you look at relative growth from 1950 to 2018 that is not the case. In that time period the US economy grows 269% while Finnish and Icelandic economies both grow over 400%.
This is a point I have often made, but my neoliberal Twitter friend-foe Mark will always point as this is to be expected because Nordic countries started at a lower base. And Mark is absolutely right. Poorer countries tend to have stronger growth because of the so-called catchup effect. That is part of the reason China had insane double-digit growth for many years.
So, the question then is: Why does the US start at a higher base and how much richer was the US in 1950 exactly?
As you can see, the difference was substantial. US GDP per capita was nearly 80% higher than the GDP per capita of my native Norway, and a staggering 230% higher than Finland. In 2018, you can see that picture change a lot. The American advantage over Finland has been narrowed down to 40% since Finland has grown rapidly. My native Norway has, of course, surpassed the US, but that may be less interesting to compare since Norway is a big oil exporter.
Hence, to understand why the US is so much richer than most Nordic countries, we have to dig deeper into history. The US has simply had a massive head start and despite growing faster, it takes time to catch up. Did the US grow much faster than the Nordic countries before WW2? No, in fact, from 1900 to 1950 the Nordic countries still outperformed the US in growth.
Thus, the American advantage actually began much earlier. In fact, it goes so far back we cannot get good data for it. We don't have good data to derive GDP until around 1800. You can see the US grew strong in the period 1800 to 1900, but already in 1800 in started out much richer than any Nordic country.
We can pick a year when we have a decent amount of data, such as 1820. That is shortly after Norway has become an autonomous country in a union with Sweden. At this point, American GDP per capita is about 190% higher than that of Norway. The US is about twice as rich as Norway.
Let me give you a sense of just how large this difference is. Countries with half the GDP per capita of the US today are countries like the Bahamas and Panama. That was the relative difference between the US and Nordic countries like Norway and Finland.
So blaming socialism, social democracy or not enough capitalism doesn't really cut it. Neither socialism nor social democracy played any role in Nordic countries until the 1920s. The US was far ahead long before that. One cannot blame a big government and high taxes because Nordic countries actually tended to have lower taxes than the US. Nordic tax rates did not start to go higher than the US until the 1960s.
So, where did the massive economic difference come from, which was present already in 1800? Were the Americans just so much smarter at industrializing, building factories and industries? Hardly, as the American industrial revolution began in 1790, and the US was already way ahead at that time. Looking at which Nordic country was the richest actually gives a little hint.
The Importance of Agriculture for the Economy
Today when people think about valuable resources they think of oil, coal, iron, gold and silver, but before industrialization these were not really the resources that mattered. What mattered more than anything else in any economy was agriculture. In fact, many contemporary analysts are always puzzled by the preoccupation of what many see as the father of capitalism, Adam Smith, with agriculture in his great work, "the Wealth of Nations", published in 1776. Why was he not more concerned with steam engines and factories, which began around that time in Britain? Simply because the economic importance of manufacturing completely paled in comparison to the importance of agriculture to the economy.
Rich countries back then were countries with a lot of rich soil and well cultivated crops. That is why Denmark was so much richer than other Nordic countries. Denmark has no natural resources to speak of. No mines, forests, coal, or iron to speak of. However, around 70% of Denmark is arable, vs only 2.5% of Norway.
European colonialists were not primarily concerned with the US because of timber, gold, silver, or anything like that. They came to grow tobacco, cotton, grain, and other agricultural products. It was the vast, rich American soil which attracted them. It was the agriculture which powered American growth, and a lot of that agriculture was powered by slavery. As pointed out by the Guilder Lehrman institute of American history, the main export of America was produced by slaves:
In the pre-Civil War United States, a stronger case can be made that slavery played a critical role in economic development. One crop, slave-grown cotton, provided over half of all US export earnings. By 1840, the South grew 60 percent of the world's cotton and provided some 70 percent of the cotton consumed by the British textile industry. Thus slavery paid for a substantial share of the capital, iron, and manufactured goods that laid the basis for American economic growth.
Let us put that in context. Cotton was as big part of US export in the 1800s as oil is to Norwegian exports today. In other words, slaves were the American oil. Slaves were a considerable part of the American economy, especially in the South, which was until industrialization picked up the richest part of America. From NPR interview:
South Carolina and Georgia and some parts of North Carolina, it was almost a black majority of the population. Close to 50% of the population was enslaved Africans or African Americans.
For a country wanting to modernize and industrialize, exports are essential. That is how you get foreign currency to import machines and equipment. You needed cash to buy machines and raw materials from the British.
Why the Catchup-Effect Did Not Kick in For Nordics
Catchup-effect works when the economy is mainly manufacturing and services, as you can import ideas from countries ahead. But when economies are mainly agriculture and raw material based, you cannot work wonders. You cannot import pieces of farmland from other countries. Nordic countries simply lacked the vast agricultural land accessible in North America.
The average farm in Norway at the time was just 20 acres. In the US with the homestead act they gave you farms of 320 acres for free. Not only that, but the soil was of much better quality. Norway, Finland, and Iceland all have rather poor soil and climate. Without incomes from a profitable agricultural sector, one could not build up capital to finance factories and other industrial activity.
Denmark had more potential, but lacked raw materials such as coal and iron. It also lacked rivers to power water wheels. Until 1820 the industrial revolution in Britain was powered primarily by water wheel. The water wheels powered the bellows in the big smelters and the machines in the textile mills. In fact, none of the Nordics had coal and importing a bulk product like coal was not cheap. Hence, any factory setup in a Nordic country could not easily compete with the British.
The US, however, had coal, rivers, iron and plenty of capital from agricultural production and slavery to make an industrial revolution happen. Cotton could be shipped along the coast to the Northern states, such as Massachusetts, with plenty of rushing streams to power water wheels driving cotton mills.
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