Talking of political culture, people in Eastern Europe are still characterized as having less personal autonomy, less responsibility as citizens and members of a global community. In some cases, people also struggle with seriously disturbing national and social identities.

Source: PEW FORUM

As far as economic efficiency is concerned, east European countries have made remarkable progress in the past years, but this progress isn’t enough. The differences in per capita income, productivity and efficiency, output, capitalization, savings, investment, integration into global networks are still huge.

Trading and Colonisation

One historical factor in the development of west European nations is the influx of wealth associated with its sea trade and exploration. Their favourable locations on the Atlantic and Mediterranean gave them advantages in trade and exploration through the sea route with minimal cost. The colonization of lands in America, Africa, Asia and Oceania by several Western European countries brought a huge influx of wealth and resources, which stimulated the economies of these countries. These resources made them global superpowers as early as the 16th century. The effects of colonisation are still being felt in these countries.

Division of Germany

In the aftermath of World War II, defeated Germany was divided into four zones by the allied powers. The Soviet Union occupied the east, while the rest of Germany was divided amongst the United States, Britain and France. With hundreds of thousands of wealthy American soldiers posted in West Germany and spending their American currency, the area flourished. The Deutsche Mark was introduced in 1948 which added to the region’s growth. In the 1950s and 1960s, West Germany experienced industrial growth and low inflation contributing to their prosperity. The security of private property rights and reliance on the price mechanism also contributed to the success of these economies.

Much of the European side of the Second World War happened in Eastern Europe, in today’s Poland, Ukraine, Belarus, the Baltic countries, the Balkans and Russia. These countries were utterly ravaged. Russia and Germany stole many assets. The Soviets literally dismantled many factories and took many industrial machines East. In addition to this, East Germany inherited highly specialised industrial districts, which were cut off from their major suppliers of inputs as well as their market which was in western Germany. This caused a departure of skilled labour and a number of small and medium-sized firms.

Communism

East Germany, under the authoritarian rule of the Soviets, saw much worse conditions than its Western counterpart. When the rest of the world experienced strong economic growth after World War II, the nations of eastern Europe suffered due to socialism which caused shortage of resources, a highly politicised system and a regressive attitude to progress. Soviets neglected the economy and focused on military power causing an economic crisis. Western Europe, not being the vassal state of the USSR for 40 years probably made a difference.

To start with, Eastern European nations weren’t that developed as they have mostly been the borderlands between various empires. Apart from some exceptions like Hungary, they were Russian hinterlands, not real centres of development, industrial or otherwise.

Communism was ultimately very inefficient. There was no incentive for work as individuals knew that the reward will be the same. Accumulating wealth was not really possible. It led to stagnation in economy, technology and culture. It was the mix of the intense poverty, injustice and the presence of absolute anarchy that crippled these economies.

Marshall Plan

America supported western European countries with aid to stop communism from spreading during the years of the cold war. Dollar aid enabled recipient nations to eliminate raw material shortages in exchange for trade liberalisation. The resource funds allowed governments to finance public projects without the need to cut back on welfare spending.

The U.S. provided $13.3 billion in assistance between 1948 and 1951 to 16 Western European countries through the Economic Cooperation Authority. The Marshall Plan helped in reviving the western economies by controlling inflation, reviving trade, restoring production and rebuilding infrastructure. The Soviet Union rejected the aid on behalf of eastern Germany.

When the Marshall Plan ended in 1951, industrial production, trade and exports had increased far above pre-war level. Employment and standard of living were rising. Politically, communist parties lost influence everywhere.

It encouraged the economic integration that led to the creation of the European Coal and Steel Community among six nations in 1950. It took a leap into a more integrated European Economic Community (EEC) after eight years. It finally became what is called the European Union today. This integration helped the nations to revive their economies through trade.

Demographic Dynamic

The population density in the 19th century was much more in Western Europe more than Eastern. In addition to that, across Western Europe, the casualties of war were offset by natural population growth and post-war mass migration. The impacts of the war and the post-war settlement were different for the eastern and western regions. The population growth was scanty in Eastern Europe which deprived it of flexible labour supply that has been recognised as an imperative factor in western reconstruction and development.

In the Eastern Front, millions fled west, running from the advancing Soviet troops. The effect of war casualties combined with the post-war settlement was devastating. The populations of Hungary, Romania, and Yugoslavia stagnated in the 1940s. Czechoslovakia, Poland, and the Soviet Union faced a population decline over the same period. The shortage of skilled labour proved to be detrimental. The province of Prussia was temporarily depopulated resulting in its industrial districts losing their pre-war labour force level.

The war left a distorted demographic structure with a shortage of able-bodied young men. Conventionally, they were the one who constituted the backbone of the industrial workforce. It all brought the region an excess of industrial and commercial enterprises without their original owners, the necessary skills and managerial know-how required to operate them.

The Fall of the Berlin Wall

The Berlin Wall was a concrete barrier that cut across and divided the city of Berlin from 1961 to 1989 and was constructed in the aftermath of World War 2. The fall of the Berlin Wall symbolised the fall of the ‘Iron Curtain’ that divided the Eastern countries from Western Europe during the Cold War.

East Germany was provided with aid of around €1.6 trillion by the government and private German businesses to bring it at par with the West. The dismantling of the wall had a profound impact on the neighbouring economies as well. Hungry and Czechoslovakia opened up their borders and allowed East Germans to take refuge in Austria. The influx of people meant the economies of neighbouring countries took a hit.

Shortly after the collapse of the Wall, the German Democratic Republic (GDR), the party which was in power in the East also came to an end. Unemployment escalated to extremely high level and the economy was thrown into uncertainty. Those who had government jobs found themselves suddenly out of work. The GDR economy also faced bankruptcy due to the change of currency. Before the reunification of the two regions, 1 Deutsche Mark was the equivalent of 4.5 GDR Marks.

When eastern countries joined the EU, it made it easier for the Western companies to buy up assets in the east. Some also took advantage of the cheap labour market and started companies. Eastern European companies found it challenging to compete with gigantic Western corporations who could afford to undercut prices. In certain industries, prices were set for a certain amount of time so that Eastern European companies could not undercut Western companies which took away their advantage and eventually many Eastern European companies went bankrupt.

Agrarian Economy and Raw Material Exporter

When Western Europe started on the path of capitalist development, the Eastern part of the continent was transformed into an exporter of raw material for the West and an importer of finished goods. The result was a never-ending loop that strengthened Western industries and system that promoted capitalism. Specifically, as the West became more urban, there was a growing demand for agricultural goods, animals and other raw goods. East European people satisfied this need by transforming their domains into farms that exported for the Western market. With the exception of what became the Czech Republic, most of Eastern Europe became more agrarian and therefore poorer than much of Western Europe.

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Academics have been seeing this region as a role model for making policies and providing social security. These countries are unique in the sense that they have adopted a socioeconomic model which combines the features of capitalism like free markets and efficiency with social benefits like free education, healthcare and pension payment for retirees. These social welfare schemes are financed through the taxpayers’ money and are administered by the government keeping in mind the interest of all the citizens. This system essentially minimises the gulf between the rich and poor through redistributive taxes. The model is popularly known in the world as the Scandinavian Model or the Nordic Model.

Social Democracy or Democratic Socialism?

The prevailing sentiment in the world is that the Scandinavian nations achieved what they did by adopting socialism. The truth is far from that.

• The only element of socialism which seems to exist in the Scandinavian model is the rampant presence of welfare schemes provided by the state. Apart from that, the means of production are owned by private individuals and the resource allocation takes place through the forces of demand and supply, not through central planning.
• It is important to point out that the Scandinavian nations developed their current economic system after years of free economy and trade. They were economic successes even before they built their welfare states. It was not the government benefits that created wealth, but it was the wealth of people that allowed the luxury of such generous programs by imposing high tax rates.
• In contrast to the general perception about the Scandinavian economies, there is actually an absence of government interference. None of these Scandinavian countries have minimum wage laws. Instead, wages are decided by collective-bargaining between unions and employers, and not through government-imposed floors. In fact, the Nordic nations have some of the highest unionization rates in the world.
• Sweden has complete school choice as the government provides its citizens with education vouchers. The vouchers provide funding to a student at any school whether public or private. This choice benefits the citizens and the future of the nations. If these nations were to be socialist, they wouldn’t have promoted free choice.

In addition to these facts, the Scandinavian countries rank quite high on the index of economic freedom given by the Fraser Institute. All the countries are in the top quartile in the rankings. In fact, all the three Scandinavian nations are among the top ten countries to start a business according to the Ease of Doing Business Ranking, 2020 given by the World Bank. The best proof of the free-trade background of Scandinavian countries might be Volvo’s buyout by Geely of Hong Kong in 2010 and the bankruptcy of Saab in 2012, in which the Swedish government did not interfere in any way even though they were two of its most iconic companies.

The Nordic countries offer government-paid healthcare, tuition-free education, and generous social safety nets for all. It is allowing businesses to be productive without interfering which in turn produces the high incomes that support the tax collections. The system prevalent in these nations is actually social democracy in which the government aims to promote the public welfare through heavy taxation and spending, within the framework of a capitalist economy. This is what the Scandinavians practice.

Is it Sustainable?

Though it is working wonderfully for the time, it is losing ground due to many reasons. There is two fundamental phenomena which come into play namely the “Wagner’s Law” and the “Baumol’s Law”. Wagner’s Law says that the demand for welfare services tends to increase faster than income. According to Baumol’s Law, productivity in the production of welfare services tends to increase at a lower rate than that in the production of goods and services. If we assume equal wage growth across all sectors, costs must increase faster in the production of welfare services than in the economy as a whole. These two taken together imply that the total spending on welfare services rise faster than GDP over time. As these services are tax-financed, the tax burden must also rise continuously with GDP. Starting from an already high tax burden, further increases in tax wedges will eventually cause serious harm to employment and growth. This is particularly imperative in view of the consequences of globalization and demographic change.

Globalisation is in general beneficial to economic growth as it provides an opportunity to increase the returns to factors of production through the international exchange of goods and services and factor mobility. Nonetheless, increasing international mobility of labour can jeopardise the welfare state and the Scandinavian model. As social welfare schemes belong to all citizens, it becomes increasingly possible for them to benefit from the services without paying the taxes (bearing the cost) due to international factor mobility. For example, citizens who have spent most of their working lives abroad may return to their home country after retirement to collect the benefits of free hospital care and care for the elderly.

The most serious challenge to the Nordic model is caused by the changing demographics given the extensive role of the public sector in providing age-dependent social services and benefits. The age composition of the population in most European countries have changed dramatically in recent years. The shift is driven by two factors: a “baby boom effect” as the generation has reached retirement age, and a continued increase in life expectancy. As a consequence, dependency ratios have been increasing since 2010 in all the Scandinavian nations and now stands at 57% in Denmark, 53% in Norway and 61% in Sweden. The balance between those contributing to and those benefiting from the welfare state is shifting to such an extent that the financial sustainability of the system is in danger.

How it evolved?

Till the 1950s, Nordic countries were the top free-market, competition-based nations in the world. In the ‘70s, however, intense social government and regulatory systems were put in place with high tax rates. All of the economic growth came to an end in the early ‘90s with the burst of the housing bubble and the advent of a recession. Sweden’s economic growth fell to 1% lower than the rest of Europe and 2% lower than in the United States of America.

By the ‘90s, government spending was up to 70% of GDP, and the debt to GDP ratio was 72%. Even the unemployment rate rose by 5%. The Scandinavian states were strained and were forced to increase taxes drastically to keep their model alive. As soon as policymakers saw the socialist approach failing, things changed. In 1991, parts of health care were privatized, schooling vouchers were first introduced, and some welfare programs were cut back. In 1993, the collapse of the housing bubble forced the Swedish State to scale down their generous welfare system in a context of lower growth, growing unemployment, and to manage public accounts. Between 1995 and 2000, the debt-to-GDP ratio was dropped down to 50%, and citizens earned more income owing to the new 28% tax rate. As of today, Sweden’s public spending has decreased to 49.3% of their GDP, and their corporate tax rate is 22%, below the OECD’s average of 23.9%. Denmark and Norway allow private firms to run public hospitals and Sweden has privatized part of its retirement system.

Conclusion

Are the Scandinavian countries a model for the rest of developed countries? We may answer in affirmation by looking at the top rankings achieved by them for most of the elements that make a country successful: education outcomes, health and life expectancy, happiness index and economic development. But a large part of the Scandinavian system is unique and reflects the Scandinavians’ long tradition of governance which emphasizes on consensus, compromise and trust. Also, the Scandinavian nations raised the taxation rate only after their economy grew and the citizens had high incomes. A government should never begin with enormously high rates and expect its citizens to keep pace. The population of the region is merely 21 million which is fundamentally homogeneous and thus any big and multi-ethnic state might not be able to adopt the Nordic model. Instead of adopting the model, nations should view it as an inspiration and customise their policies according to their needs and demographics.

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This is a complete peculiarity, as the substantiation of successful ideas is shown through their implementation and not through their theoretical analysis. Every idea seems to be the perfect and unique solution when having been only applied on paper but being introduced in society is a much different thing.

Cooperation or Oppression?

Marx severely criticises the State to, later on, justify the dictatorship of the proletariat, which means building up a new and renovated State, but now in hands of the ones Marx considers should govern. Through this system, the proletariat will end up being the high class of society just by following the State’s structure, as it is a monopoly that benefits consistently those who are in in the Administration.

Marx portrays capitalism as an inhumane ideology that has been promoted by a lack of knowledge. How can an ideology that is based on shared knowledge and distributed information for the correct and efficient function of markets be based on a lack of knowledge?

Capitalism in brief

Capitalism is just the free Exchange of good and services following the wills of households without the State intervention, but with the State protection through the enforcement of the rule of law, which provides security for contracts and allows freedom of transaction and trade to be protected from fraudulent external agents.

One of Marx’s greatest lies is that which says that “merchants and entrepreneurs are expropriating wealth from workers through the concept of capital gain or surpluses”. The reality is that this exploitation really doesn’t exist, as contracts are voluntary and previously negotiated but never enforced. Those poverty conditions and high costs of living which sometimes force workers to accept a salary below their needs are created by the same socialist thinkers and politicians that impose capital gain tax or wage tax of over 40% or 50%. It is true that governments can’t raise wages, but they can increase disposable income and purchasing power, how? By slashing taxes.

Marxists in their capital gain theory don’t take into account investment in real capital, either fixed or circulating, which needs to be done by the entrepreneur and has an implicit risk in it, as any kind of investment. A large part of the revenue generated by a firm is due to capital expenditure and not so much due to workers and their added value. For example, in a denim factory, without a machine to wash, dry and transform fabric, it will be impossible for the workers to produce denim at the volume and speed they actually do.

In this case, the cost of capital (investment) which is confronted by the entrepreneur, will have a risk of not being returned and even generate losses, which is why all revenue and profits generated by capital (capital productivity) is usually reinvested in the firm’s future operations or just enjoyed by the entrepreneur due to the risk implicit in the investment, which is usually called return of investment (ROI), or risky return in high-risk operations.

Marxists in the today’s world employ a concept that never matches with reality. To what Marxists are referring with the term “neoliberalism” is really to mercantilism, which is an ideology that was widely put into practice from the 16th-18th century in Europe, based on interventionist State policies in the economy, which lead to the creation of monopolies and autarchies, through subsidization of unproductive sectors which are considered of “national relevance”, and through tight control of monetary policy and outflow of fiat money, to control inflation. It is necessary to bear in mind, that what Marxists normally criticise as capitalism is really “neomercantilism”.

Price controls are an important Marxist measure. Price controls were one of the main proposals of Marx to “abolish capitalism and lead to the dictatorship of the proletariat” from the State. The argument that Price fixation could work is based on the false Intrinsic theory of value, that sustains that each fair price, independently if it is intrinsic or objective, should be fixed by the State based on the amount of labour that has been put into its production.

To simply argue this theory, it is valid to say how these rules will cause enterprises to look forward to a capital-intensive model, reducing prices and being more competitive in the market, and as communists tend to don’t like this, they will finally end up performing several expropriations of private firms and premises, ending up as Cuba or Venezuela sunken in misery.

The failed Utopia

Marxism has shown in various different ways that it is a utopian ideology which promotes economic inefficiency which leads to poverty and hunger. His theories are based just on subjective forms and never on practical studies which have resulted valid when applied to reality. Marxism has caused hundreds of millions of deaths throughout history. It has been estimated that at least 150 million people may have died (more than that of in WWII) at the hands of Marxist regimes around the world. (source) Every communist regime in the 20th century strived or succeeded in imposing cruel and comprehensive dictatorship over the societies under their power, what they call rights of proletariats. Mind control through agitprop, restraint, and persuasion were rigorously put into effect to inculcate “socialist values” and destroy bourgeois, capitalist thinking.

It is not just that Marx failed as an economist by not being able to create a system of efficient growth and progress, but instead, he depicted a system of starvation, death and misery. As a futurologist, he was even less successful, as he predicted the end of capitalism based on his theory of dialectic materialism, but even nowadays in 2020, capitalism is still alive and stronger than ever. We have had to pass through several hard crises, but capitalism has always survived.

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