Denmark: The epitome of ‘innovism’?

Abstract

Why do some societies go from poverty to prosperity? This question should occupy all socially conscious social scientists, particularly as we have seen successful societies experience unprecedented growth in living standards all over the world, beginning in the West roughly around 1750 (McCloskey, 2010, 2021; Mokyr, 2008, 2016). This development has been called the ‘great enrichment’ and Denmark is a prime example of this (McCloskey, 2021). GDP per capita grew from $2,031 in 1820 to $52,133 in 2022 (in 2011 dollars; Bolt & van Zanden, 2020).

Why did the great enrichment occur when and where it did? Several explanations exist. Institutionalists such as Nobel laureate Douglass North (1990) hold good institutions to be the main explanation. Other theories emphasise exploitation of people and resources, both domestic and foreign. Modern trade theorists argue that free trade can create wealth, which can lead to liberty which again leads to further innovation. In Denmark, population homogeneity has been argued to explain it too. Recently, though, a new explanation, that of ‘innovism’, has gained momentum. This concept, coined by the economic historian Deirdre McCloskey, suggests that the root cause of the wealth of nations is creativity fostered by classical liberal ideas about dignity and liberty, rather than simply accumulation of capital.

McCloskey claims that while institutional arrangements similar to what can be described as capitalistic can be observed through time, the sheer magnitude of improvement observed in the period from approximately 1750 onwards, and particularly, in north-western Europe, calls for a new explanation: innovism. She highlights the implementation of ideals fostering human action with incentives for idea dissemination and entrepreneurship as the key explainer of the great enrichment, more so than materialism or state design. As she concludes: “Innovism, that is, is a matter of creativity, which depends on liberty” (McCloskey, 2023, p. 29). In other words, the accumulation of ideas, rather than capital, becomes the key factor. This article investigates whether Denmark's impressive enrichment is indeed best explained by innovism, especially when coupled with Paul Romer-style thinking about technological ideas as infinite resources (Jones, 2019), or by competing theories such as exploitation or institutional design.

Our article is based mainly on the research behind the book Danish Capitalism in the 20th Century: A Business History of an Innovistic Mixed Economy (Sløk-Madsen, 2022). We think that this piece is a necessary add-on to help better understand Denmark's narrative of economic development, but it is necessary for another reason too. If, as we argue, Denmark's remarkable success is indeed explained by policy choices supporting innovism, with very few pre-existing assets or advantages, there is potentially much to learn for other nations too.

At the end of the Napoleonic Wars in 1815, the kingdom of Denmark was in a desperate state. Betting on the wrong (French) horse, a state bankruptcy, and the seizure of the navy by the British put the once-proud Danish empire in real danger of ceasing to exist. Despite the loss of Norway, the kingdom was still spread very thinly over a vast distance spanning from India to the West Indies and containing dozens of languages and dialects. The only real assets the kingdom had were relatively high literacy rates from 300 years devoted to Lutheranism, a strong trading tradition, and a relatively stable state organisation.

The nation was under absolutist government and economically stuck in a mixture of feudalism and mercantilism. However, since the 1780s a growing enlightenment debate had taken hold (Bang et al., 1984). While originally focused on freedom of speech, the debate would mature over the following century to include free market principles and nationalism infused with inspiration from German romantic ideas, particularly in saloons such as those held at Bakkehuset (Sørensen, 2020), the residence of the Rahbek couple¹ who brought together the intellectuals of the time from science, literature and politics.

In the decades after the Napoleonic Wars new government reforms were initiated to incorporate and centralise Danish landholdings, especially in northern Germany, where the duchies of Schleswig and Holstein had been linked to the Danish monarch rather than the Danish realm since the late Middle Ages (Busck et al., 2011). The efforts to reorganise Denmark from a feudal vassal state to a centralised collective state are exemplified by some of the first truly democratic institutions in Denmark, namely the local estate assemblies, which managed to increase their political influence throughout the 1830s and 1840s, often by demanding revisions to Danish mercantilist trade policies and liberalising trade reforms, despite still being within the framework of a nominally absolutist state.

Danish efforts to further centralise and tighten Denmark's grip on the Danish German-speaking duchies inevitably provoked increased nationalist sentiment in the German Confederation, leading to the First Schleswig War in 1848. What had begun as the reluctant democratisation efforts of an absolutist regime to centralise its possessions had suddenly plunged Denmark into war with Prussia and Austria (Bjørn, 1999). While the war resulted in a reversion to the status quo after the intervention of Russia, France, and the United Kingdom in 1851, the immediate crisis led to a regime change from absolute monarchy to constitutional monarchy controlled by a democratically elected government led by the National Liberal Movement, which succeeded in adopting a national constitution in 1849 (Vammen, 1988).

The key political victory of the new constitution was the National Liberals' amendment to change the institutional framework for Danish trade, production, and manufacturing, which was finally implemented by the Freedom of Trade Act of 1857. The Act, in practice implemented in successive rounds of reform over four years, was a radical, fundamental, and rapid switch from guild-led mercantilism to a market-economy society. Historians have often overlooked the significance of the changes brought about by these reforms. However, their importance for Denmark's later economic success cannot be overestimated. The Act changed the conditions for merchants and craftsmen, who had enjoyed extensive privileges in Danish market towns since the Middle Ages through their guilds and associations. While in principle all citizens were entitled to trade, the privileges of the guilds had in practice restricted the ability to compete and innovate (Dübeck, 1983).

The reforms effectively abolished feudal mercantilism in Danish market towns and replaced it with free trade and competition, which in subsequent decades spurred much-needed innovation and entrepreneurship. However, the Conservatives' price for agreeing with the National Liberals was the introduction of national taxation (while the conservative aim was defence spending, they also inadvertently laid the foundations of later welfare spending growth). The national spirit was high, but it also ultimately led to a fatal underestimation of Prussia and the defeat in the Second Schleswig War in 1864, resulting in the National Liberals' loss of influence while the state apparatus was taken over by the Conservatives to the point of dictatorship. Furthermore, the populace in the cities increasingly turned to socialism in various forms. Despite political turmoil, the liberal reforms resulted in a booming economy, creating a group of urban, highly financialised global entrepreneurs like N. F. Tietgen and J. C. Jacobsen. These people used the fact, later pointed out by Paul Romer (Jones, 2019), that ideas are a truly infinite resource: good ideas could be taken from abroad and implemented at home in global scale, a strategy which successful modern Danish companies such as Lego, Maersk, and Novo Nordisk would also eventually follow.

Building on the economic and political reforms of the mid-nineteenth century, Denmark experienced a period of relative economic prosperity in the first few decades of the twentieth century. Some of this can be attributed to the aforementioned reform efforts of the National Liberal movement. But other global trends, such as industrialisation, also found a distinctive Danish expression. One example is the Danish cooperative movement, Andelsbevægelsen. It emerged in the early 1880s as a response to the challenges posed by liberalised market forces. Danish agriculture, as in most of Western and Central Europe, was faced with the threat of cheap American grain flooding European markets (Andresen & Agersnap, 1989). Danish farmers quickly realised that they could not compete with American production or prices and instead shifted their focus from arable farming to dairy production, which was less vulnerable to American competition.

To further increase their competitiveness, Danish farmers formed small cooperatives. These cooperatives collected milk production from the surrounding area and processed it together in communal dairies. Through the sharing of production costs, the cooperatives were able to reduce costs for local dairy farmers, who could then concentrate on the quality of their products. At the same time, the pooling of resources for processing had the effect of reducing costs, which in turn both lowered prices for consumers and increased profits for farmers; thus the movement was in the spirit of a commercial society. The Danish cooperative of dairy farmers, Andelsmejerier, quickly became a success and conquered the Danish domestic market within a few years (Christensen, 1997). The innovative organisational model in the form of cooperatives not only provided a competitive advantage in agriculture, but also quickly spread to a wide range of Danish industries, including retail and banking.

Another characteristic of Danish business in the early twentieth century, which lasted until the end of World War II, was both the idea and the practical implementation of what can be described as a kind of ‘patriotic’ corporate governance and trade, pioneered by entrepreneurs such as aforementioned Tietgen and Jacobsen (Sløk-Madsen, 2022). It was patriotic because Danish business in the first half of the twentieth century influenced, and to some extent replaced, the Danish government in key policy areas traditionally considered nation-state concerns, such as education, public housing, social welfare, trade, and even foreign policy.

After the end of World War II, new – and fundamentally foreign – ideas took hold. Ideas of redistribution inspired by Anglo-Saxon Keynesian and Bismarckian state ideas took hold across the political spectrum, fuelled by special interest groups from both the agricultural sector and the labour movement and a population seeking a new national identity akin to what Hobsbawm and Ranger (2012) describe. From the 1960s public sector, tax rates, and redistribution grew enormously, made possible by the 1956 abolition of the upper house of parliament (Landstinget) and a mandatory fully implemented social security system (CPR).

The system almost broke under its own weight by the very early 1980s, summarised by the notorious statement by the Social Democratic Minister of Budget Knud Heinesen that Denmark was looking into the (economic) abyss. This dismal prospect gave rise to a period of welfare state reform led by a Conservative–Liberal government and then a coalition of the Social Democratic Party and various small centre parties. For the purpose of this article, it is important to stress two things. The right wing in this reform episode never sought to fundamentally abolish or change the universal welfare state, only to make it more efficient. At the same time the Social Democrat Party accepted the market as the only means to prosperity.

The reform agenda was pursued into the new millennium until the outbreak of Covid-19, again by both sides of the political divide. Denmark rose from the rank of 12th highest per capita GDP in OECD countries in 2000 to sixth in 2022. Today, state finances are solid. In Denmark a significant and increasing part of the economy is made up by global but old companies, while new successful companies leave. Immigration was for decades a hotly contested issue between the left and the right, but the new divide seems to be about life's purpose: do you owe the welfare state your life and body, or are they yours? A fundamentally ideological divide has hence re-emerged.

In this rapid survey of Danish economic history, we can see that many things changed. Living standards grew tremendously, and institutions were transformed, including the whole political system. Ideas emerged; some took hold and some were pushed back – communism and fascism, for instance, never had a wide appeal in Denmark. To various degrees, universalism and classical liberal ideas such as property rights, freedom of association, speech, religion and trade remained as a constant. As we indicated earlier, we will now review the five explanations and the arguments for and against them in the Danish case. Table 1 sets out our analysis.

We do not doubt the importance of institutions for enrichment. But rather than being themselves causes, they are, in the case of Denmark as in the theory of innovism, more a manifestation of prevailing rooted political ideas. The fact that institutions changed and evolved in response to changing ideas in Denmark should be seen as testimony to this understanding. We should, however, note that it is crucial to remember the importance of trust as a potential institution or norm in itself. Danes trusted that ideas and motives could be pure and not just expressions of group interests or even lies. An example would be freedom of religious organisation – including largely within the state church itself from 1856 – which was widely seen as an ideal in itself, not a desire for special rules for a specific group. Therefore, trust levels probably grew as a result of the type of ideas innovism highlights as growth enhancers, but a good base level was likely present at the outset (Bergh & Bjørnskov, 2011).

The least likely explanation for Danish prosperity remains the exploitation of the less privileged, whether at home or aboard. The working class prospered mainly from growth, not redistribution. Today, the extensive pension systems are so successful that 2 per cent of the Danish population are dollar millionaires, compared with a world average of 0.3 per cent; and 1.6 million Danes are Danish krone millionaires (CEPOS, 2021b). As for colonies, it is questionable how much Denmark profited from these, especially if viewed as pure exploitation rather than trade. Ironically the current welfare state model arguably exploits the most productive, as 59 per cent of Danes are net recipients of transfers with 1 per cent of taxpayers paying for 10.2 per cent of public spending, and the top 10 per cent paying 31.8 per cent (CEPOS, 2021a). Furthermore, almost two-thirds of the voters are primarily paid from public transfers from either welfare or due to employment in the public sector (CEPOS, 2024).

Without free trade Denmark would not be rich. It is, for instance, uniquely placed to be a shipping nation and even a global top-ten shipping nation (Branch & Stopford, 2013). Denmark is a small open economy and the large successful companies, except public IT-vendors, banks and insurance, are all export- oriented. However, Denmark has been a trading region since the Stone Age (van der Sluis et al., 2020) and this alone cannot explain the enrichment. But liberalisation of trade to a high degree can, as with the 1857 Freedom of Trade Act. Yet market liberalisation was driven to a degree by classical liberal ideals, although it was also a response to increasing spontaneous commercial activity. But both the class of urban entrepreneurs and the farm side of the cooperative movement shared classical liberal ideas which motivated them in both business and politics.

Innovism therefore stands out to us as holding the greatest explanatory power. Denmark was blessed with high literacy rates and indeed promoted this extensively until the 1970s. An early, persistent and deep-rooted liberal debate around universal rights pre-dates both institutions and prosperity quite clearly in the history of modern Denmark (Bang et al., 1984). Liberal ideas inspired reforms which incentivised entrepreneurs to import and propagate business ideas with surprising success along the lines suggested by Romer.

Universalism also carried over into the design of the Danish welfare state. The argument for the welfare state did not purely relate to the needy, but was rather a statement that all should benefit. In that sense, Denmark also shows a less attractive side of innovism in that if ideas pre-date change, weak ideas can lead to unfortunate changes, and that might be part of the explanation of the sudden birth of the welfare state; weak but superficially attractive ideas were imported in a climate accustomed to listening to and implementing new ideas.

Finally, the last theory, the idea of a homogeneous population, is more difficult to disentangle. On some levels the population has been homogeneous, almost all being Lutheran for instance, but in terms of culture and language the picture is muddier. The Danish welfare state in its design certainly has elements of attempting to force sameness on people, as Hayek (2008) argued such systems would. However, today's heterogeneity in the Danish population has come from guest workers, immigrants, and refugees, and has occurred increasingly from the 1980s onward; and much of what is currently Denmark was created with the reforms after this date.

In this short essay our aim has been to present Denmark as a case to inspire. Denmark indeed appears the ideal type, the epitome of innovism. Denmark was not a consistently rich nation before a commitment was made to innovism. The country has barely any national resources, yet today it is one of the richest nations in the world. If the measure of innovism should be the accumulation of ideas, Denmark is very rich indeed; global Danish companies, such as Novo Nordisk, Lego, Carlsberg and others are all built on adapting and executing imported technological ideas. The richness of Denmark is the result of a dedication to universal ideas of human dignity and economic freedom. As such Denmark can also be a hopeful lesson for other nations. If you invest in human capital and conduct government while importing classical liberal ideas, there is precious little stopping a nation and its people from themselves setting out on the road to the ‘great enrichment’.

Denmark is not the only nation to outdo expectations; other nations like Botswana, South Korea, and Singapore also share a story of comparatively higher-than-expected riches. What such nations share is a degree of dedication to universal ideas of human dignity and economic freedom. This can be a lesson: if you invest in human capital, particularly basic reading skills, and conduct government trustingly while importing classical liberal ideas, there is precious little stopping a nation and people proceeding on the path to great enrichment.