Institutions Matter Except When They Are Socialist

Robert Solow once remarked:

Every discussion among economists of the relatively slow growth of the British economy compared with the Continental economies ends up in a blaze of amateur sociology.

This is the final move of right-wing economists whenever the assumptions of their ideologically-infused policy prescriptions end up contradicted by observed reality. After a few forays into some exotic economic indicators, they eventually propose strange half-assed sociological theories that, quite remarkably, end up concluding that laissez-faire capitalism is still definitely the way to go. As with most things, the conclusions never change, but the rationales radically shift from moment to moment.

Given the more than respectable performance of Nordic economies over the last century and half-century especially, they are now natural targets for the amateur sociology of cynical peddlers of laissez-faire.

The descendants of Scandinavian migrants in the US combine the high living standards of the US with the high levels of equality of Scandinavian countries. Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. This suggests that pre-existing cultural norms are responsible for the low levels of poverty among Scandinavians rather than Nordic welfare states.

What’s funny about this analysis is that it is, in a sense, right. It just seems to totally misunderstand how the causal arrow functions here. The Nordics have long had a very egalitarian cultural tradition. And this is arguably why they opted for social democratic institutions to handle the set of technological shifts related to industrialization. And this opting for social democratic institutions is why they’ve managed to keep things more equal and less impoverished than other countries that responded to industrialization in a more sadistic manner in keeping with their garbage cultures (like the US and the UK).

But crucially, it is the institutions that are doing the proximate work of achieving egalitarianism. The cultural point can help to explain why they went for those institutions when others didn’t, but it doesn’t negate the fact that those institutions are what’s doing the work. This is an identical point as the one about so-called “homogeneity.” Certainly the fact that the white majority in the US hates black people a lot makes it hard for us politically to get good egalitarian institutions, but that doesn’t mean that if we got them, they wouldn’t work. It just means we wont get them because of racism.

Both the racism and cultural egalitarianism point are very good reasons to be skeptical that the US has what it takes to get egalitarian institutions going. But it does nothing to say that those institutions don’t work. It’s a political point not a policy point.

We know, of course, that Nordic-like institutions that non-Nordic countries have do, in fact, work very similarly. The US has a solid old-age pension scheme in Social Security and it has wiped out the vast majority of old-age poverty in the country. The UK, under Blair, dramatically ramped up transfer payments to parents with children and cut child poverty in half in a decade. Because these countries are broadly shit countries, they may very likely unravel these programs. In fact, the Tories are gearing up to unravel the child poverty gains as we speak. There is no doubt a cultural explanation for why a country like the UK is willing to blow up child transfer payments while most Nordic countries aren’t, but it’s the child transfer institutions that’s doing the proximate work of securing low or high child poverty in the various countries.