Lesson 5: Denmark – The Free Enterprise Welfare State

Introduction

This lesson examines the Danish economic model, including its origins, and draws some important lessons from the experience, including how economic freedom underlies the high standards of living Danes enjoy, how its welfare state is financed with very high taxes on middle-income workers, and how Denmark’s experiment with unsustainably large government did not go well and had to be (largely) undone.

Key Terms

Entrepreneurship
A characteristic of people who assume the risk of organizing productive resources to produce goods and services

Economic Growth
An increase in real output as measured by real GDP or per capita real GDP.

Gross Domestic Product
The market value of all goods and services produced in a nation in a calendar year. 

Inflation
A general increase in the price level.

Protectionism
The economic policy of restricting imports through methods such as tariffs or quotas. 

Socialism
A society in which the state controls resources and makes decisions about production and equitable distribution.Stagflation A situation where high inflation and high unemployment occur at the same time.

Objectives

Students will be able to 

• Identify examples of how Denmark’s experiment with large government was unsustainable.
• Describe how Denmark’s welfare state is different from socialism.
• Explain how Denmark’s welfare state is funded by high taxes on middle-income workers.

Voluntary National Content Standards in Economics

CONTENT STANDARD 11: Money and Inflation

Money makes it easier to trade, borrow, save, invest, and compare the value of goods and services. The amount of money in the economy affects the overall price level. Inflation is an increase in the overall price level that reduces the value of money. 

• Benchmark 5: In the long run, inflation results from increases in a nation’s money supply that exceed increases in its output of goods and services.

CONTENT STANDARD 16: Role of Government and Market Failure

There is an economic role for government in a market economy whenever the benefits of a government policy outweighs its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also have direct or indirect effects on people’s incomes. 

• Benchmark 9: Governments often redistribute income directly when individuals or interest groups are not satisfied with the income distribution resulting from markets; governments also redistribute income indirectly as side-effects of other government actions that affect prices or output levels for various goods and services.

Time Required

45 minutes