In many aspects, the world of 1933 is disturbingly similar to the world of 2022. The stock market crash, worldwide economic contraction, and deflationary spiral of the 1930s match the scale of devastation of the global pandemic, climate emergency, and energy crisis of the 2020s.
However, one event of 1933—small in apparent significance, yet large in symbolic value—stands out in particular. On 30 January 1933, after several rounds of negotiations, the major political parties of Denmark reached what was later termed the Kanslergade Agreement. Set against the background of a spiralling economic crisis, the agreement laid the foundations for reforms that eventually led to the development of the Danish welfare state and the now-famous Nordic Model.
The Danish experience was by no means original in this sphere. Current conventional wisdom predicts that states tend to increase their capacity during crises and times of uncertainty. The 1930s affirm this theory: the Great Depression was marked by efforts of governments around the world to mitigate the negative impacts of the recession by expanding the economic and regulatory capacity of the state. In Weimar Germany, the US and many other countries the state, in an allusion to Margaret Thatcher, rolled forward its frontiers by becoming increasingly interventionist.
Yet, what distinguishes the Kanslergade Agreement in Denmark and almost identical developments in other Nordic countries was the sheer scale of social progress that followed.
In the years after World War II, Denmark, Sweden and Norway ended up as some of the most resilient, prosperous and equal societies in the world. To attribute this success solely to the creation of the welfare state or a single political agreement would, undoubtedly, be foolish. However, the timely and well-executed expansion of state capacity was still a significant factor. The success stories of the Nordics, therefore, hold the key to the reinvigoration of the argument for state capacity expansion in today’s world.
The Three Pillars of the Nordic Response
The development of the Nordic welfare state followed a broadly similar course in all three Scandinavian countries. What began as a series of political agreements and labour market reforms in the 1930s, progressed forward to a major expansion of social services and infrastructure in the 1940s and 50s, with state capacities reaching their peak by the 1970s.
While various factors can be seen as partially responsible for this development—from fortunate historical circumstances to the ethnic and social cohesion of these countries—three are particularly relevant from the perspective of state capacity. Economists Svenja Gärtner and Svante Prado point toward equality, institutions, and trust— noting explicitly that several causal interpretations linking these factors together are possible. Labour market agreements, which entrenched collective bargaining and reduced wage differentials, both contributed to and were sustained by social trust. The creation of social, economic, and political institutions further strengthened these changes and paved the way for their further development in the future.
In their book The Narrow Corridor: States, Societies and the Fate of Liberty, scholars Daron Acemoglu and James Robinson echo the importance of institutions, trust, and diminishing inequality when explaining the successful response of Sweden to the crises of the 1930s. They identify three pillars of the Swedish response which are also applicable to the other Scandinavian countries. First, society and the state’s reaction to the crisis was characterized by the formation of a broad coalition of workers, farmers, and businesses. This was evident both in the political agreements as well as the social ones. The Swedish equivalent of the Kanslergade involved a coalition between major socialist and agrarian parties. In a similar vein, the famous Saltsjöbaden Accords, which cemented the structured collective bargaining in the labour market, were a compromise between a major trade union and industry association.
Second, increases in state capacity were closely followed by increases in society’s ability to participate in politics and monitor the bureaucracy. This was achieved through the entrenchment of universal suffrage and a fair and proportionate electoral system. The Nordic states grew stronger, but so did the civil society—empowered by universal and egalitarian welfare policies and a consensus-striving culture.
Thirdly, and most importantly, short-term interventions of the state, targeted to mitigate the effects of the global recession, were followed by long-term policy and institutional changes. While fiscal interventions and redistribution policies were important, it was the structural reforms and initiatives in the spheres of education, healthcare, social security and industry regulation that created lasting improvements for the Nordic societies. Crucially, these improvements stemmed from and were implemented by the expanding Nordic state.
Expanding the State in the Age of Diminishing Human Agency
The lessons from the Nordic response to the crises of the 1930s are particularly important for the states of today, especially as governments around the world appear eager for economic interventions. To see this desire for state capacity expansion, it is enough to point toward the massive Covid relief stimulus package in the United States, the gigantic pandemic-related employment protection measures in Germany, and the costly energy price caps in the UK. Yet, what the success stories of the Nordics highlight is that temporary fiscal intervention is not enough. To achieve a lasting improvement, it has to be followed by structural and institutional changes.
Few policy measures could be a better example of this than the US’s temporary expansion of its child tax credit. Introduced as part of a pandemic stimulus package, the measure managed to cut child poverty almost by half —only for it to surge back after the temporary package lapsed. While one possibility was to continue extending the credit indefinitely, ultimately there is a limit to what tax benefits can achieve for child poverty in a country where a comprehensive social safety net is lacking.
The same lesson, but from the opposite side, is taught by Denmark’s flagship flexicurity labour market model. Building on the foundations of the Kanslergade Agreement and emerging from the high unemployment crisis of the 1990s, their labour market model combines generous income security support for employees with flexible hiring and firing rules and extensive active labour market policies. The flexicurity model does require extensive state spending; as a share of GDP, Denmark allocates significantly more to employment measures than other OECD countries. But the results more than justify this: Danish unemployment figures are one of the lowest in the OECD and when employees do lose a job, they find new one faster than almost anyone else in the world. Crucially, the difference in outcomes is made not by the amount of money spent, but rather by the efforts of the Danish state to design and upkeep policies that generate incentives for the people to seek employment, while at the same time ensuring their income security and providing retraining where needed.
This lesson can be generalized. Temporary fiscal stimulus, furlough schemes, and price capping may be necessary in the short term. But for these measures to constitute something more than a brief state splurge, they have to be complemented by investments in more resilient energy generation capacities, efficient labour market institutions, and social services system designed with an ageing population in mind. The danger is that with governments’ willingness and energy to act being limited, the response of the world’s states to the current crises may remain at the level of temporary splurges and bailouts.
The reasons to act, however, are even greater today than they were in the 1930s. The most compelling justification for the state capacity expansion is not that this process represents some intrinsic good. Rather, this justification can be uncovered by considering diminishing individual human agency. While humanity’s collective capacity to act—whether through scientific and technological advances or global trade—has been constantly increasing, the individual’s ability to deal with the repercussions of these acts on their own has been decreasing. These collective acts of humanity are acts in the broadest sense of the word; they are often uncoordinated and unintended. In this sense, both inflation and climate change are repercussions of collective acts of humanity, and so is the massive adoption of digital technologies or the growing popularity of platform work. In all these cases, the capacity of an individual to influence the course of these developments is tiny.
Furthermore, since the crises of the 1930s, individual human agency has decreased substantially. Two core factors contribute to this. One is that the world has become more globalized. This means that as the number of connections increases between economic agents, be it individuals, companies or countries, the ability of a single agent to isolate itself from the negative effects of the collective interactions diminishes. Each depends on all, but none can exert influence or protect oneself alone.
Another contributing factor is the fact that the economic power has been concentrating in the hands of large, non-state entities. With the help of digitization and the increasing embrace of economies of scale and scope, technology corporations have been increasing the influence they cast on the lives of individuals, whether as citizens, consumers, or employees. When these factors are taken together, individuals are left more vulnerable both to the unpredictable repercussions of collective acts of humanity and to the power asymmetry between themselves and large non-state entities. Although it may seem paternalistic, the preservation of the individual is a persuasive justification for the expansion of the state’s capacity to regulate the activities of large non-state entities, protect citizens from global uncertainties, and promote their well-being.
Comparing the UK and Denmark is a case in point. The effects of the crises of the 2020s on the average British and Danish persons are remarkably different, not merely because Denmark was dealt some lucky cards. It is also because external shocks and disturbances being equal, the effects felt by the average Danish person are to a greater magnitude mitigated by the state than those faced by the average Brit. In terms of the global pandemic, Denmark has benefited from a more robust and resilient health and social care system, led largely by the state. In terms of the energy crisis, while the country is affected, it has fared relatively better due to consistent, statebacked investments into green energy generation. In terms of costs of living and employment, it has built on collective bargaining frameworks and an extensive social safety net.
What State Capacity Expansion Is and What It Is Not
Finally, in arguing for state capacity expansion, it must be explicitly asserted what this expansion does not need to mean. Contrary to the rhetoric of Britannia Unchained, it does not inherently mean growth-restricting overregulation. As the Nordic countries have demonstrated, competition-enhancing regulation, a strong social safety net and an education system which guarantees greater equality of opportunity tend to be better engines for sustained and equitable economic growth than let-all-loose deregulation. Additionally, state capacity expansion does not need to mean cronyism and state power excesses as is sometimes, unfortunately, seen in several South American democracies, such as Brazil or Venezuela.
As for the concerns about state paternalism, it is important to acknowledge that the expansion of the state’s capacity is inevitably an expansion of its power over individuals and an increase in their dependence on it. However, it is equally crucial to recognize that, of all the large forces which individuals may depend upon including corporations, private organizations, and unpredictable global trends, the state is likely to be the most accountable through effective electoral policies and constitutional commitments to the upholding of individual rights.
State capacity expansion is not and has never in recent times been a new issue. Ninety years before the Kanslergade Agreement, in his magnum opus Democracy in America, Alexis de Tocqueville reflected on social changes he observed in the world at that time. What worried Tocqueville the most— perhaps as much as his famous concern for the tyranny of the majority—was the rise of a highly capable, yet ultimately despotic state administration. In light of this threat, Tocqueville emphasized the need to ‘preserve for the individual the little independence, force, and originality that remain to him.’
What appears to be paradoxical is that, today, expansion of state capacity appears to be the most feasible way for the preservation of an individual. That little independence, force, and originality that is left for the are being taken away by less and less predictable global disturbances, labour market inequalities, and increasingly powerful non-state entities.
Times of crisis, whether during the 1930s or the 2020s, are times for reflecting upon the position which the frontiers of the state should take. In today’s world— even more so than in the world of the Kanslergade Agreement— the outcome of that reflection should fall firmly to the side of rolling these frontiers forwards, not backwards.