The capitalist welfare state

"Sweden and the Revival of the Capitalist Welfare State" describes how Sweden became rich and discusses reasons for Sweden’s high level of income equality. It summarizes the consensus on why Sweden was lagging behind other countries from (approximately) 1970 to 1995, and describes the far-reaching reforms of the 1980s and the 1990s which resulted in Sweden today being a country with sound public finances with good growth performance while retaining a relatively generous universal welfare state.

The book draws on research in economics, sociology and political science, with emphasis on new insights from institutional economics. It argues that Sweden grew rich as a result of well functioning capitalist institutions that were successfully combined with social insurance reforms and political measures to produce a period of 100 years, during which Sweden developed from one of the poorest countries in the world, to the world’s fourth richest country in 1970.

The first version of the book – in Swedish – was published by the Ratio institute in 2007. An updated and revised version was released by Norstedts förlag in 2009. The Swedish version of the book is currently published by Studentlitteratur.

1st edition 2007 (173 pages)

2nd edition 2009 (172 pages)

3rd edition (172 pages, same as v2, but with a different cover and publisher)

The closest thing to a free version of Sweden and the Revival of the Capitalist Welfare State is the following working paper:

Bergh (2011). The Rise, Fall and Revival of a Capitalist Welfare State: What are the Policy Lessons from Sweden? IFN Working Paper Series No 873.

Download it here!

The paper “What explains Sweden’s success?" (Bergh, 2011), which was presented at the 2011 Legatum Prosperity Symposium, is available for download here.

Other recommended readings

The following a list of papers that are useful for anyone seeking to understand politics and economics in Sweden, and what it means for other countries. The list is aimed towards social scientists and contains some publications that require a subscription or access to a university library, but the aim has been to post links to freely accessible versions as well.

On the origin of social insurance in Sweden, a nice piece is Edebalk (2000),Emergence of a Welfare State-Social Insurance in Sweden in the 1910s. Journal of Social Policy, 29:537-552.

On the problems during the 1970 – 1995 period, a very good source is Lindbeck (1997), The Swedish Experiment. Journal of Economic Literature, 35:1273-1319. (link)

The use of social science in policy making and the pragmatic political culture in Sweden has been called “policy making Swedish style" after Anton (1969),Policy-Making and Political Culture in Sweden. Scandinavian Political Studies, 4:88-102. This is hard to find even in Swedish libraries, but a decent OCR-version is available.

A newer paper on the same theme, discussing the many reforms implemented in Sweden during the 1980s and 1990s, is Bergh and Erlingsson (2009),Liberalization without Retrenchment: Understanding the Consensus on Swedish Welfare State Reforms. Scandinavian Political Studies, 32:71-94. (Official link)

In 1976, Social democrats lost power in Sweden for the first time in 44 years. The right-wing governments that remained in power until 1982 did not change policy very much, but rather continued to expand the welfare state. On this, see the dissertation by Garme (2001). Newcomers to power: how to sit on someone else’s throne: socialists conquer France in 1981; non-socialists conquer Sweden in 1976: Statsvetenskapliga föreningen Uppsala. Available at a library in Uppsala(and possibly from the author).

Podcast from the 2011 Legatum Prosperity Symposium on trustworthiness and the Swedish Welfare state here.

A new paper by Acemoglu, Robinsson and Verdier has an interesting idea…

under plausible assumptions, the world equilibrium is asymmetric: some countries will opt for a type of “cutthroat" capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism. Paradoxically, those with cuddly reward structures, though poorer, may have higher welfare than cutthroat capitalists; but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism

The are two good texts on Sweden and the nordic countries in The Economist, feb 2nd:

The Next Supermodel and The secret of their success (where I am actually cited – wohoo!)

The lessons from Sweden’s success are debated once again.

From the Washington Post:

TC [Tom Coburn]: Go look at Sweden. Here’s what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And they’re the fastest growing with a decline in their debt-to-GDP ratio.

EK: But correct me if I’m wrong, but if I recall, Sweden’s monetary policy went towards a very sharp devaluation, they’ve been driven by export growth, and alongside Israel, they’ve been more aggressive than any other central bank in the world. They’ve done stuff that if we did it here, people would lose their minds.

TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now they’ve moved back. And it’s not a perfect example, but it’s an exception to the Krugman story.

Krugman comments:

But Ezra didn’t challenge Coburn on the claim about spending cuts; why don’t we look at what Sweden has actually done, as opposed to the official right-wing line? Look, in particular, at actual government consumption — purchases of stuff.

So, who is right?

In terms of the facts, they are both right: Sweden did lower taxes and expenditure and did increase economic freedom a lot, especially from the late 1980s to the mid 1990s. Importantly, budget rules were reformed.

As a result of these reforms, Sweden ran a large budget surplus and had low public debt when the financial crisis came in 2008. Because of this, Sweden could afford a more expansionary policy during the crisis (as indicated by the graph in Krugman’s post).

Does the expansionary policy during the crisis also explain why Sweden did reasonably well? Maybe. It is hard to know.

The important (and politically more tricky) part, however, was to implement the reforms before the crisis.