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Labour Market
Economics
21 November 2025
Society and Culture
https://iea.org.uk/wp-content/uploads/2025/11/Welfare-State-Myth-Interactive-1.pdf
Before I started working full-time at the IEA, I wrote a dissertation on poverty in developed economies. At the time, the state of the social policy literature was easily summarised. Developed economies could be grouped into three or four different socio-economic models. The clear favourite of the authors was what they called the model of Nordic social democracy, which they described as a restrained form of a market economy where high, progressive taxes fund generous, encompassing and universal welfare states. Their bête noir, on the other hand, was what they called the model of neoliberal or Anglo-Saxon capitalism, of which they saw the US as the purest example. This was described as an almost unrestrained form of capitalism, where low taxes fund only a minimalistic, stringently means-tested welfare state.
There was some acknowledgement that, purely in terms of economic outcomes, the latter system had a slight edge. GDP per capita was higher in America than in Sweden or Denmark. (Norway, with its oil wealth, was a bit of a special case.) In terms of social outcomes, however, the (presumed) Nordic model was presented as vastly superior. The implication was that Americans paid a very high human price for a few extra dollars of GDP. There was an acknowledgement of an equity-efficiency trade-off of a sort, but it was presented as essentially a no-brainer. Moving from the low-tax/small-state end of the spectrum to the high-tax/big-state end would entail minimal losses in economic output in exchange for vast social gains.
The rest of the developed world was presumed to be somewhere in between.
The UK was presented as more American (with the NHS as a redeeming feature), Germany and the Netherlands as more Scandinavian.
One could find more scholarly versions of this idea in the academic literature. One could find simpler, more openly political versions in the publications of inter-national organisations such as UNICEF, and in the cam-paign materials of left-wing charities such as Oxfam or the Child Poverty Action Group. At its most basic, it was the subject of countless Guardian articles, where it was boiled down to ‘Sweden good, America bad’. The Spirit Level, probably the most influential political book of the period, tapped into it as well. (Although the authors did not see themselves as ‘Big Government’ advocates: their aim was equality, and they said they were agnostic with regard to how it was achieved.)
This was the conventional wisdom at the time. The market economy, the thinking went, can produce material wealth, but it cannot provide any of the other things that we value, such as poverty relief, social inclusion, education, affordable housing or healthcare (let alone immaterial goods such as fairness or community cohesion). The market economy can produce material wealth, but everything else has to be provided by the state. The larger and more encompassing the state, the better the social outcomes will be, and if this leads to a high tax burden, that is a price more than worth paying.
I did not find it terribly persuasive even at the time. For a start: is the size of the welfare state really the only difference between America and Sweden? Would America really be just like Sweden if they adopted a Nordic-style welfare state?
And why focus so much on this small sample of countries? It was quite clear that this pattern did not hold across the board. There were other welfare states of near-Scandinavian proportions which failed to produce anything like Scandinavian social outcomes, and there were welfare states much smaller than the American one which did not experience America’s social problems.
Nonetheless, while I had my doubts, I could see where people were getting the idea from. It really was quite remarkable how often the Nordic countries topped ranking lists of social indicators. They were quite clearly doing something right. My impression was that the standard social policy literature was not telling the full story, but my impression was not that the literature was completely wrong, or baseless.
The term ‘replication crisis’ was not widely used yet: it would take off in the mid 2010s. Today, one wonders how much of the social policy literature would survive a replication check. How much of it was just a fluke, based on a snapshot analysis at a particular time?
Quite a lot of it, apparently. In this book, Nima Sanan-daji and Stefan Fölster reexamine the relationship between tax levels and social outcomes, using a broad range of social indicators for the latter. Their conclusions differ radically from the conventional wisdom. They find no positive relationship between tax levels and social outcomes whatsoever. It is quite often the comparatively low-tax/small-state models which excel when it comes to social performance, and it is often the high-tax/big-state models which struggle.
The authors make it very clear that they are not claim-ing that there is a causal relationship here. They are ex-plicitly not saying that low taxes ’cause’ positive social outcomes, or that high taxes ’cause’ negative social out-comes. The only times that they mention causality at all, it is in reference to relationships established elsewhere in the economic literature.
The claim they make is a much more modest one. It is that it is possible to achieve positive social outcomes without a large state, and that a large state does not guarantee positive social outcomes. For this more modest claim, showing correlations is good enough: demonstrating causal relationships is not necessary. They describe various plausible mechanisms that might explain why high-tax nations often fail to achieve their desired goals, but that is as far as they will go, and no further.
Nonetheless, even without a causality claim, this book is a game-changer that casts serious doubt on the conventional wisdom.
Proponents of the conventional wisdom are not simply saying that, other things equal, progressive taxation and comprehensive welfare provision improve social outcomes somewhat, compared to what they would otherwise be. They claim, or at least heavily imply, that the size of the welfare state is the key determinant of social outcomes. This is a much stronger claim, which is therefore more open to challenge.
In this book, Nima Sanandaji and Stefan Fölster are finally providing that long-overdue challenge. The conventional wisdom does not come out well.
Editorial Director, Kristian Niemietz
Welfare State Myth Interactive (1)
Foreword
Before I started working full-time at the IEA, I wrote a dissertation on poverty in developed economies. At the time, the state of the social policy literature was easily summarised. Developed economies could be grouped into three or four different socio-economic models. The clear favourite of the authors was what they called the model of Nordic social democracy, which they described as a restrained form of a market economy where high, progressive taxes fund generous, encompassing and universal welfare states. Their bête noir, on the other hand, was what they called the model of neoliberal or Anglo-Saxon capitalism, of which they saw the US as the purest example. This was described as an almost unrestrained form of capitalism, where low taxes fund only a minimalistic, stringently means-tested welfare state.
There was some acknowledgement that, purely in terms of economic outcomes, the latter system had a slight edge. GDP per capita was higher in America than in Sweden or Denmark. (Norway, with its oil wealth, was a bit of a special case.) In terms of social outcomes, however, the (presumed) Nordic model was presented as vastly superior. The implication was that Americans paid a very high human price for a few extra dollars of GDP. There was an acknowledgement of an equity-efficiency trade-off of a sort, but it was presented as essentially a no-brainer. Moving from the low-tax/small-state end of the spectrum to the high-tax/big-state end would entail minimal losses in economic output in exchange for vast social gains.
The rest of the developed world was presumed to be somewhere in between.
The UK was presented as more American (with the NHS as a redeeming feature), Germany and the Netherlands as more Scandinavian.
One could find more scholarly versions of this idea in the academic literature. One could find simpler, more openly political versions in the publications of inter-national organisations such as UNICEF, and in the cam-paign materials of left-wing charities such as Oxfam or the Child Poverty Action Group. At its most basic, it was the subject of countless Guardian articles, where it was boiled down to ‘Sweden good, America bad’. The Spirit Level, probably the most influential political book of the period, tapped into it as well. (Although the authors did not see themselves as ‘Big Government’ advocates: their aim was equality, and they said they were agnostic with regard to how it was achieved.)
This was the conventional wisdom at the time. The market economy, the thinking went, can produce material wealth, but it cannot provide any of the other things that we value, such as poverty relief, social inclusion, education, affordable housing or healthcare (let alone immaterial goods such as fairness or community cohesion). The market economy can produce material wealth, but everything else has to be provided by the state. The larger and more encompassing the state, the better the social outcomes will be, and if this leads to a high tax burden, that is a price more than worth paying.
I did not find it terribly persuasive even at the time. For a start: is the size of the welfare state really the only difference between America and Sweden? Would America really be just like Sweden if they adopted a Nordic-style welfare state?
And why focus so much on this small sample of countries? It was quite clear that this pattern did not hold across the board. There were other welfare states of near-Scandinavian proportions which failed to produce anything like Scandinavian social outcomes, and there were welfare states much smaller than the American one which did not experience America’s social problems.
Nonetheless, while I had my doubts, I could see where people were getting the idea from. It really was quite remarkable how often the Nordic countries topped ranking lists of social indicators. They were quite clearly doing something right. My impression was that the standard social policy literature was not telling the full story, but my impression was not that the literature was completely wrong, or baseless.
The term ‘replication crisis’ was not widely used yet: it would take off in the mid 2010s. Today, one wonders how much of the social policy literature would survive a replication check. How much of it was just a fluke, based on a snapshot analysis at a particular time?
Quite a lot of it, apparently. In this book, Nima Sanan-daji and Stefan Fölster reexamine the relationship between tax levels and social outcomes, using a broad range of social indicators for the latter. Their conclusions differ radically from the conventional wisdom. They find no positive relationship between tax levels and social outcomes whatsoever. It is quite often the comparatively low-tax/small-state models which excel when it comes to social performance, and it is often the high-tax/big-state models which struggle.
The authors make it very clear that they are not claim-ing that there is a causal relationship here. They are ex-plicitly not saying that low taxes ’cause’ positive social outcomes, or that high taxes ’cause’ negative social out-comes. The only times that they mention causality at all, it is in reference to relationships established elsewhere in the economic literature.
The claim they make is a much more modest one. It is that it is possible to achieve positive social outcomes without a large state, and that a large state does not guarantee positive social outcomes. For this more modest claim, showing correlations is good enough: demonstrating causal relationships is not necessary. They describe various plausible mechanisms that might explain why high-tax nations often fail to achieve their desired goals, but that is as far as they will go, and no further.
Nonetheless, even without a causality claim, this book is a game-changer that casts serious doubt on the conventional wisdom.
Proponents of the conventional wisdom are not simply saying that, other things equal, progressive taxation and comprehensive welfare provision improve social outcomes somewhat, compared to what they would otherwise be. They claim, or at least heavily imply, that the size of the welfare state is the key determinant of social outcomes. This is a much stronger claim, which is therefore more open to challenge.
In this book, Nima Sanandaji and Stefan Fölster are finally providing that long-overdue challenge. The conventional wisdom does not come out well.
Editorial Director, Kristian Niemietz
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Welfare State Myth Interactive (1)
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