"Hayek was wrong" says Jeffrey Sachs. For decades classical liberals have relied on Friedrich Hayek’s 1944 book The Road to Serfdom to warn that tax increases lead to tyranny. But in a recent article for the Scientific American, Sachs argues that high taxing Nordic countries outperform low taxing Anglo-Saxon ones on most measures of economic performance.
Peter Boettke — a professor of economics at George Mason University — admits that "Sachs raises an important empirical puzzle that we must explain". And perhaps the most interesting of Boettke’s suggestions is that Hayek never said that social democracy was the road to serfdom. Instead he argued that socialism was the the road to serfdom. To argue against social democracy liberals should turn to economists like James Buchanan (pdf).
Classical liberals tend to be less worried about rule-governed transfers than they are about other attempts to correct market ‘unfairness.’ For example, Cato’s Will Wilkinson suggests that, "The cause of classical liberalism as a really existing possibility for political reform has been harmed by bundling free markets with a ban on transfers" because it made makes enemies of those who supported transfers on the grounds of justice.
Is there room for a compromise here? Probably not in the near future. The trouble is, most social democrats equate justice with things like labour market regulation and the size of the public service. And most classical liberals just can’t come to terms with the idea of government taking their money and handing it out to poor people. Different views about how the world works mean that debates about taxes, transfers and poverty can get heated.
In the web version of his essay ‘The Social Welfare State, beyond Ideology‘ Sachs says that:
…the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post–World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries.
On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance. Poverty rates are much lower there, and national income per working-age population is on average higher. Unemployment rates are roughly the same in both groups, just slightly higher in the Nordic countries. The budget situation is stronger in the Nordic group, with larger surpluses as a share of GDP.
Commenters at Boettke’s blog offer a variety of explanations for Sachs’ empirical puzzle. One suggested that it was unfair to compare Scandinavian countries to the United States because the US had such a high proportion of Hispanic immigrants and a persistent underclass.
At Marginal Revolution, another classically liberal GMU professor, Tyler Cowen, writes "Sweden (or should I say Stockholm?) remains one of the best places in the history of the world to date, and we are fooling ourselves if we don’t recognize that."
Update: Oz at Decomposing Trees has some thoughts on social democracy. He links to this post and to Mark Bahnisch’s ‘Is social democracy the end of history?‘. Oz also mentions Clive Hamilton’s Quarterly Essay ‘What’s Left?: The Death of Social Democracy.”