The Copenhagen Consensus

Reading Adam Smith in Denmark

Robert Kuttner

From Foreign Affairs, March/April 2008

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Summary:  Denmark has forged a social and economic model that couples the best of the free market with the best of the welfare state, transcending tradeoffs between dynamism and security, efficiency and equality. Other countries may not be able to simply copy the Danish model of social democracy, but it nonetheless offers important lessons for governments confronting the dilemmas of globalization.

ROBERT KUTTNER is Co-Editor of The American Prospect, a Senior Fellow at the think tank Demos, and the author of The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity. He conducted the research for this article as a German Marshall Fund Journalism Fellow.

Adam Smith observed in 1776 that economies work best when governments keep their clumsy thumbs off the free market's "invisible hand." Two generations later, in 1817, the British economist David Ricardo extended Smith's insights to global trade. Just as market forces lead to the right price and quantity of products domestically, Ricardo argued, free foreign trade optimizes economic outcomes internationally.

Reading Adam Smith in Copenhagen -- the center of the small, open, and highly successful Danish economy -- is a kind of out-of-body experience. On the one hand, the Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum's Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark's financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development).

On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world's second-highest tax rate, after Sweden; strong trade unions; and one of the world's most equal income distributions. For the half of GDP that they pay in taxes, the Danes get not just universal health insurance but also generous child-care and family-leave arrangements, unemployment compensation that typically covers around 95 percent of lost wages, free higher education, secure pensions in old age, and the world's most creative system of worker retraining.

Does Denmark have some secret formula that combines the best of Adam Smith with the best of the welfare state? Is there something culturally unique about the open-minded Danes? Can a model like the Danish one survive as a social democratic island in a turbulent sea of globalization, where unregulated markets tend to swamp mixed economic systems? What does Denmark have to teach the rest of the industrial world?

These questions brought me to Copenhagen for a series of interviews in 2007 for a book I am writing on globalization and the welfare state. The answers are complex and often counterintuitive. With appropriate caveats, Danish ideas can indeed be instructive for other nations grappling with the enduring dilemma of how to reconcile market dynamism with social and personal security. Yet Denmark's social compact is the result of a century of political conflict and accommodation that produced a consensual style of problem solving that is uniquely Danish. It cannot be understood merely as a technical policy fix to be swallowed whole in a different cultural or political context. Those who would learn from Denmark must first appreciate that social models have to grow in their own political soil.

COMPASSIONATE CAPITALISM

At the center of the current Danish model is a labor-market strategy known as flexicurity. The idea is to reconcile job flexibility with employment security. The welfare state is often associated with rigid job protections: laws and union contracts ...

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