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Bernie and I Gotta Tell Ya, the Swedish Way Works! (Part One)
Except I’m talking about the historical Swedish way. Bernie is talking about the modern Swedish fairytale. With Sweden back in the news, here’s Part One of a two part series from Dancing On the Edge of the Widening Gyre. We’ll look a bit at the “immigration and crime” controversy, among other things, in Part Two.
The Swedish system is the vaunted Socialist Third Way, proof that, done right, socialism works. Actually, by Mises’s classical liberal definition, the Swedish Way might more accurately be called fascism that works. That is, much of the Third Way is not state ownership of the means of production but private ownership under state planning and control. Whatever. If you wish to call it socialism, you could make that case. However, if it’s socialism, it’s nice socialism; no gulags, purges, or kangaroo courts. Likewise, if it’s fascism, it’s nice fascism; no death camps, government-sponsored mobs in the streets, or ultranationalism. Call it either. The point is, the Third Way works.
Jonah Goldberg, author of Liberal Fascism, explains that H.G. Wells advocated a nice form of fascism which he called “liberal fascism.” In other words, Wells might be called the father of the Swedish Way. Whether we go with “liberal fascism” or “liberal socialism,” it’s a gentler, kinder, egalitarian, and successful alternative to free markets. So believe democratic socialists, regular socialists, leftists, and progressives throughout the world.
Jonah Norberg (*not Goldberg) is one of a small but growing cadre of classical liberal economists from Sweden who question the standard interpretation of Swedish success and back up their classical liberal interpretation with extensive research. Norberg describes how, as a student, a history lesson pointed him towards the field of economics as a profession.
“Once upon a time I got interested in theories of economic development because I had studied a low-income country, poorer than Congo, with life expectancy half as long and child mortality three times as high as a developed country. That country is my own country, Sweden — 150 years ago.”
Norberg makes the logical case that modern Sweden’s Third Way is no model for underdeveloped countries because once underdeveloped Sweden itself did not develop by means of the Third Way. Limited government, low taxes, free markets, and classical liberal economic policies from roughly 1870 to 1970 made Sweden one of the richest countries in the world and one of the great economic success stories of history. That’s the model for underdeveloped countries. Though many have tried, there has never been an underdeveloped country (or at least none without oil) which has achieved even a tiny bit of Swedish-like progress through something like the Third Way. On the other hand, many have achieved success the same way Sweden did: through freedom.
So maybe we should revise the advice and say that Sweden’s Third Way can be a model for countries that have already achieved economic success? Rather unexpectedly, Sweden doesn’t prove a very good model for advanced countries, either. Here’s why. Sweden’s Third Way is a vampire economy which fed for several decades off the wealth — both physical capital and human capital — built up over the century from 1870 to 1970, and depleted that wealth surprisingly quickly.
By the early 1990s, it had become starkly apparent to Swedes, if no one else, that feeding off the wealth of the past and borrowing from the future was a policy rapidly approaching its limits. Swedes — commendably open-eyed and rational — recognized the unsustainability of their system and began a dramatic move back towards free marketism. It kept and keeps as much of the system as it can, since the Third Way is still tremendously popular within the country, and is, in fact, a point of national pride. But Sweden also radically cut back on spending, on government debt, on regulations (which were already low by American standards), and on interference in various parts of the economy, including education and the health system. If there’s a model for the rest of the West, that’s the model: recognize unsustainability and take radical measures to bring the system back into balance.
In 1763, Anders Chydenius — a young activist priest steeped in Enlightenment thinking — penned the first of several pamphlets and essays speculating on how to improve the lives of destitute Swedish farmers. His solutions were simple. Let people be free to make their own decisions about where to work and live, and how to run their lives. He advocated minimal government, war only for self-defense, and free trade. And he postulated that the Biblical commandment “Thou shalt not steal“ applies equally to government. This would be an 18th century version of the aphorism “Taxation is theft!” And finally, he explained, a decade before Adam Smith, how the profit motive and free markets would be self-directing, automatically leading the economy towards the most efficient solutions.
At the time of Chydenius and for the better part of the following century, Sweden’s economy was tightly controlled. Laws and customs protected guilds, foreign trade was strictly limited, immigration and emigration were largely forbidden, and freedom of speech and religion were minimal. Most Swedes were desperately poor farmers who lived short and pitiful lives.
The people of the nation, however, were not without positive attributes. Unlike most of the rest of Europe, feudalism had never taken hold, so Sweden had a tradition of free, fiercely independent farmers who were used to thinking and acting for themselves. To make a go of it in such a harsh climate, they had to work hard, waste nothing, save for the next planting season, and develop social structures of honesty and mutual trust. Independence, willingness to work, thrift, saving, and trust were precisely the attributes that would later flower when given scope by liberal free market policies.
Chydenius was only able to inspire relatively minimal changes in the system while he was alive, but his life was not without significance. He bequeathed to Sweden a movement. Over the following century, the Swedish intelligentsia he inspired built a case for classical liberalism and slowly chipped away at the power of the state. In 1865, Sweden joined a free trade pact with Britain and France. Then, in about 1870, the accumulation of incremental steps and the diffusion of liberal ideas among the people, especially farmers desirous of free trade, tipped the ponderous momentum of the state decisively towards freedom. Those liberals who were moderate, non-revolutionary, and willing to work with the king became part of a grand free-market coalition. Led by Johan August Gripenstedt, a follower of Bastiat, they passed the series of laws which made Sweden a classical liberal state.
By the end of the century, following an explosion in trade, a flowering of innovation, the creation of new industries, and the spontaneous development of the financial institutions necessary for a modern state, Sweden was one of the richest countries in the world, with a minimalist government devoted to freedom and democracy at home, and free trade and neutrality in foreign affairs. Gripenstedt had predicted it. Norberg tells us:
“In 1857 Gripenstedt gave two dramatic speeches explaining that with free markets, access to foreign markets, and modern infrastructure, Sweden, one of the poorest European countries, could become one of the richest. He was ridiculed by the opponents, who called the speeches naïve ‘flower paintings.’ But Gripenstedt had the last laugh. As noted, between 1850 and 1950, Swedish income per capita increased eightfold, as the population doubled. Infant mortality fell from 15 to 2 percent, and life expectancy increased by a whopping 28 years.”
In real world politics, perfection is a pipe dream. But Sweden after 1870 was as close to a perfect free market nation as we could realistically imagine. There were a few bumps along the road. In the 1880s, there was a minimally effective (and therefore minimally damaging) tariff on grain. The very success of classical liberalism meant liberals themselves fractured into different factions. But, for the most part, the various parties and factions worked together to protect the liberal agenda. Looking back, the most ominous of the liberal groups to split off might be the “social liberals,” as Norberg names them. They wanted to introduce Bismarck’s ideas on social welfare into Sweden, but found little success, as of yet.
A war in Europe in 1914 soon engulfed the entire world. Sweden stayed out, as it clearly understood that, according to the antiwar foundations of classical liberalism, only defensive war can generally be justified. As a result, not only the lives of a generation of young men but the physical capital built up over decades was preserved. Despite what Keynesians believe, war and destruction are not good for the economy. Bastiat’s Broken Window Fallacy explains why. Breaking windows does not help the economy by providing work for the glass man because, in addition to the destruction of a physical asset represented by the window, assets that would have gone to producing something new, go instead to window repair. Sweden emerged from the war with no broken windows and therefore a strong and healthy economy. It had no need to start over from square one.
In 1930, the dark clouds of depression rolled over the world. In the United States, President Hoover (engineer extraordinaire) and President Roosevelt (politician extraordinaire) did what no president had ever done before. They set out to engineer a recovery through the power of government. Congress, meanwhile, added its own bit of engineering: massive tariff barriers to protect American industries. Activist presidential policies hog-tied the domestic economy while congressional tariffs prompted tariffs abroad, precipitating a worldwide trade war that crippled trade. America’s greatest depression would continue for twelve years, sixteen if you count the war years (as you should and classical liberals do).
And what did Sweden do? It did what all U.S. presidents prior to Hoover and Roosevelt had done: nothing. All previous U.S. depressions, including a postwar downturn in 1920 whose indicators show it may have been systemically worse than the downturn of 1930, recovered on their own within one to four years. Sweden, dependent on the collapsed international trade system, and with a large influx of youth just coming into an economy which was losing hundreds of thousands of jobs, was in dire straights. Confident in liberal solutions, the government sat on its hands. There was little or nothing in the way of welfare, jobs programs, tariffs, spending, or borrowing. Companies and entrepreneurs in Sweden, unrestricted but also unhelped by government, responded the only way they could. They took initiative in finding their own solutions. They looked for new efficiencies and developed new products. As a result of the ensuing vigorous entrepreneurship, some of Sweden’s great companies were founded. Employment shot up. And Sweden pulled out of the downturn by 1934.
In 1938, war again erupted in Europe and, once more, engulfed the world. Once more, Sweden stayed out. Again, it preserved a generation of young men and its hard-earned physical capital. Some might dispute Sweden’s decision to stay out of the war on moral grounds, but that’s a different issue, and irrelevant to what we are discussing here. Economically, Sweden’s success proved once more that war is bad for both people and business.
In 1950, after eighty years of laissez-faire economic policies, Sweden was the fourth richest country in the world, with taxes lower and the public sector smaller than those of the United States. In fact, it had enjoyed the world’s highest growth rate from 1870 to 1950. However, the thirty year valley of darkness from 1914 to 1945, considered here as a single pivotal event, had convinced the world, including Sweden, that classical liberalism was the way of the past. Sweden, along with other advanced countries of the world, began to introduce welfare programs of the type started by Bismarck in Germany, and adopted between the wars by first Lloyd George and Churchill in Great Britain, and then Roosevelt in America. Now Sweden joined the new wave, but with typical Swedish good sense. Already government spending had crept up from six percent at the turn of the century to nineteen percent at midcentury, still lower than in the U.S. and the rest of the advanced world. Maintaining its traditional frugality, Sweden cautiously implemented its welfare policies in such as way as to preserve economic vitality. In other words, it maintained a “benevolent attitude towards business,” as Norberg quotes economist Johan Myhrman in describing it. In order not to hinder businesses, Sweden kept corporate taxes, regulations, and tariffs low, and stayed focused on protecting free trade. Benefits from the welfare state were configured so as to be proportional to the input of the individual. In other words, people who paid more in, got more out, thus preserving support for the system from the middle class. And the poor, who paid little into the system, got little out of it, so that they would not be incentivized to create a welfare lifestyle. Still, despite Swedish caution, government spending inched upwards until, by the mid-1960s, it was on a par with other western nations at about thirty percent.
In the late 1960s, Sweden, with the confidence born of success and the idealism born of the now dominant ideology of progressive egalitarianism, embarked on the great experiment that came to be called the Third Way. Government spending skyrocketed from thirty percent to sixty percent of GDP. Even if Sweden had abandoned small government, though, it didn’t totally abandon economic common sense. One part of the Swedish Third Way, a part overlooked by Third Way cheerleaders in America and elsewhere, is this: Sweden kept both corporate taxation and corporate regulation low, as it had always been. Unlike the rest of the West, it did not make demonization of corporations the base of its welfare state. Not to belabor the point, but in this it was more fascist than socialist, looking for unity rather than confrontation between labor and capital.
Sweden concurrently decided that it was time to become a multicultural society, a decision we will look at in more detail in Part Two.
By the early1990s, after twenty some years of the Third Way, Sweden had dropped quite a few places on tabulations of several important indicators of national well-being, such as per capita wealth and life expectancy. Though the rankings were lower, the numbers were historically still quite high, so the drop could easily be overlooked. What could not be overlooked by the ever realistic Swedes is that the Third Way was financially unsustainable.
Economic growth was stagnant throughout the period of the Third Way. Just one of Sweden’s largest fifty companies was founded after 1970. Private enterprise created a grand total of zero new jobs. The only job growth was happening in government, but the government financing which paid for government job creation was spiraling out of control. Despite taxation reaching fifty percent of earnings, government finances were speeding towards a brick wall of debt. In 1991, the economy smashed into the wall, precipitating a sharp recession. The currency was devalued five times in a desperate but largely futile attempt to maintain trade advantage. If it was not obvious that the Third Way was vampiring the wealth of the past, no reasonable person could deny any more that debt was vampiring the wealth of the future, and that the future was already reaching back to bite the present.
Instead of marching in the streets, or demanding new jobs programs or the like, Swedes set about cutting government spending and cutting personal taxes (corporate taxes, remember, were already low). It also deregulated and privatized right and left. Norberg tells us that,
“[M]arkets for finance, electricity, telecom, and media were deregulated; the central bank was made independent; the pension system was reformed partly with personal accounts; private providers in health care and elderly care were welcomed; and a school voucher system was introduced.”
The new policy was a resounding success.Taxes dropped from fifty-two to forty-four percent of GDP and government debt plunged from over eighty percent to around thirty percent. Reduced taxes and debt, and a return to free market solutions, revived the economy in the latter part of the 1990s. For the first time in decades, the private sector started adding jobs, and economic growth — which had lagged that of Western Europe for the entirety of the period of the Third Way — started leading Western Europe. With its newly solid finances, Sweden survived the 2008 financial crisis relatively unscathed.
In summary, the modern economic history of Sweden can be divided into three periods. Period One, from 1870 to 1970, was a period of phenomenal economic growth characterized by free market policies, low taxes, and small government. Period Two, the period of the Third Way from 1970 to the mid 1990s, was a period of economic stagnation in which Sweden lagged economically behind Western Europe and the industrialized world. Period Three, from the mid 1990s to the present, has been a period in which Sweden has partially dismantled the Third Way and replaced it with more free market policies, somewhat lower taxes, and drastically less debt. Period Three has seen a sudden reversal in the stagnation of several decades, with economic performance once more surpassing that of the rest of Western Europe.
Published in History
Get this to the main feed; I want to send a link to my kids.
I’m with Richard Finley. This is a fascinating and little known (at least in my experience) story.
Please promote to the main feed.
Would it be fair to say that Sweden has increased the efficiency of its public spending by privatising its implementation?
Fascinating.
I think the reality is that people do not want to live in a country with an average temperature of 3c and so you just don’t have enough poor, except your Elderly.
But don’t worry, you are getting them. The word is getting around that you are giving away $35 per day to anyone who comes there plus $91 a month for each child under 11 and $170 for each older child, plus rent assistance, and so on. So they are coming, don’t worry. The article I just read stated, “In 2016, Sweden received 28,939 asylum seekers… most asylum seekers to Sweden came from three Muslim countries in the Middle East: Syria (5,459), Afghanistan (2,969) and Iraq (2,758).”
What if that doubles in 2017? Triples? No sir, I fear your “perfect Socialism” only works because you don’t have enough poor to eat your rich… yet. Germany is already finding ways to deport as many as they can because the scales have been tipped and people are beginning to notice there.
Editors, apropos Richard’s comment number one on making this available outside the enlightened circle of Ricochetti, thx for the promotion, and thx for fixing the quotes to make them easy to read, a technique beyond my computer skills. (But I gotta tell ya, I still like “Me and Bernie” more than “Bernie and I”!)
Thanks so much. This is great info. It’s the kind of info that would be difficult to come by anywhere than Ricochet.
Very good post. The problem with the Left and the Bernie Sanders types in the US is that they only think they know Sweden. Sweden is not a socialist country. Yes they have more of a welfare and socialized medical state than the US, but the middle and upper middle classes pay for it. The US has a much more progressive tax system.
This phenomenon is the basis of all socialist takeovers.
I have only this year come to realize this fully, that this is always the progression of events. There’s no other way it can arise. And that’s why it doesn’t show up in developing or emerging economies–not enough wealth has accumulated yet for the government bureaucrats to live off of.
That socialism always follows a period of wealth creation is something I had heard about, but always in the context of long discussions of socialism, so it never jumped out at me as being of singular importance. This year, because something someone said on Ricochet (I don’t remember who), it has finally risen to the top of what I know about socialism.
It can only follow a period of wealth creation. That is the nature of this beast. It is completely parasitic.
Venezuela is the most recent victim. There was a lot of newfound oil wealth in the country when Chavez took over the country and confiscated savings and nationalized businesses.
Thank you for writing this post. It is fascinating.
That really is not what happened in China (or even most of Russia) – the two huge normative examples. The opposite, in fact.
You put a lot of work into this. Good job.
The Soviet Union and China were never socialist. They were/are communist, which is a very different thing. Socialism doesn’t have to be totalitarian, but communism does.
Russia and China were both very susceptible to communism in a way that most other countries can never be. Both had long histories of massive peasant populations with a strong central government and only weak intermediating social institutions. The communists came under the guise of socialism, but what it really meant was a continuation of the totalitarian systems just under new management.
This is very true. That said, there are idealistic social and economic reformers who dominate government.
I edited the translations into English of two books on education reform in China since World War II, and I learned a lot about how this change came about. The Russian and Chinese revolutions were about capturing the wealth from the top of the pyramid, which they did, and enslaving the labor at the bottom of the pyramid, which they also did.
The members of the Chinese government think of themselves as socialist and ardent followers of Karl Marx. (They come close to worshiping him–they take everything he wrote very seriously.) And they have looked to Russia on government and social matters, in addition to looking to Russia for guidance in all things Marxian. The author of the books, Zhu Yongxin, was a Christian-Socialist-Communist. He was actually looking to the United States for inspiration as time went on in his career. Socialism and communism are not doing well in China. The young people are just not enthusiastic. In fact, most of them dream of going to school in the United States.
Zafar, at the risk of misstating Marci’s thinking, I assume she means any apparently succesful socialist system, such as Sweden, can only be built on a period of free market wealth creation. Poor countries, such as Russia and China, remained poor until they ditched socialism. Marx and Engels, actually, said the same. First capitalism, then socialism. They just didn’t understand that socialism, rather than evolving into Utopia, would then proceed to devour the wealth created by capitalism.
Oh yes, I agree with her if that’s the case. In fact didn’t the Soviet Union have a preliminary year or so of state capitalism to get back on its feet post WWI.
Sweden seems to have a blended approach right now – not purely one or the other, which seems pragmatic.
Maybe. I don’t really know enough to answer that. But stay tuned for Part Two, along about next week. There will some evidence and speculation on how a modified Swedish system might (or might not) be successful.
EDIT. Just saw your comment 15. Again, stay tuned for Part Two!
We will also take a look at this and how it affects the Swedish system in Part Two.
I am going to be in Stockholm and Upsalla in July – never been over to Sweden before, and am very much looking forward to seeing how things work first hand.
Which book(s) of Norberg’s did you get this information from? I’m not sure I want to read his books so much as read his footnotes and bibliography to find out where he got his information about the factions in the late 19th century.
The last time I did a 100+ mile bicycle ride was in July 2011, the day I started to learn about Charles W. Brandborg, once (or more) a socialist candidate for governor of Minnesota. He was a Swedish immigrant, and farmed just outside of Henning MN. Brandborg Creek has its source next our old high school baseball field, and flows past his old home. I wrote here about the 4 July 1891 picnic in which some of the controversies erupted in riot, with Brandborg killing a man (he was acquitted).
tbc
Despite posing here as some kind of expert, I’ve never been. My son, though has spent several weeks there and loved it.
I got a lot of my information from Norwegian Americans and the Politics of Dissent : 1880-1924 (Lowell J. Soike, 1991) and Cooperative Commonwealth : Co-Ops in Rural Minnesota , 1859-1939 (Stephen J. Keillor, 2000).
Stephen Keillor is Garrison Keillor’s more talented brother, btw.
Since I wrote that blog article and a couple of others on the same subject, I’ve learned more about Brandborg from his family papers at the Minnesota Historical Society. One of his daughters wrote a lot about him that hasn’t been published anywhere that I know of.
Although he was a socialist agitator, he did not come from the lower strata of Swedish society. After he was established in America, he was able to make good use of money he inherited from his parents (or maybe it was his wife’s parents – I’m going by memory here).
His socialist ideas probably came with him from Sweden, too, as did those of so many of the immigrants from northern Europe at that time. So it would be interesting to learn more about these factions that Norberg told about, to see if it helps place Brandborg in context.
I hope to find something good in English or English translation.
Reticulator, fascinating info in #19 and #21. As for sources, I used Norberg’s How Laissez-Faire Made Sweden Rich, a long article at libertarianism.org . Or I may have gotten the info you’re looking for from Scandinavian Unexceptionalism by Nima Sanandaji, on Amazon. Sanandaji has a new one out (or maybe it’s the same one renamed) called Debunking Utopia: Exposing the Myth of Nordic Socialism. You can also go to YouTube and find a Norberg lecture called The Swedish Model: Myth, Reality and Lessons For the World, along with interviews with both of these authors as well as several others following the same line of research. I’ll get more deeply into Sanandaji’s take on this in Part Two, coming up next week.
And hey, I always love reading about your bike rides!
I sort of knew this but mostly by assuming that something like this had to be true, but this is simply outstanding, crisp and full of detail. I’m sending to everyone. Thanks.
Sweden is a remarkable story on what can happen in a society with high social trust.
This is a very interesting point. Unfortunately, it suggests that the Sweish model might not work in a country where the largest political party has spent the last decade (at least) undermining social trust.
I suggest people read The New Totalitarians. It’s a fascinating look at Sweden in the early 1970s.
Yes, one reason it worked to the extent that it did before crossing the limits of sustainablility is that Sweden is filled with Swedes.
Economist Gunnar Myrdal, instrumental in establishing the Swedish system, said of the experiment that if it couldn’t work in Sweden, it couldn’t work anywhere. Implication: even if it works it Sweden, it might not work elsewhere.
Americans certainly don’t want to rewire their psyches to become Swedes. Nor do other people. You have to grow into a society of social trust, and a welfare/bureaucratic state is not likely to be conducive to such growth. Rather it’s conducive to working the system for what you can get from it.
And institutions like the Sierra Club, etc. It is easier to hijack something already operating, than to start from new. We didn’t need government paid experts to help develop the West. It was afterward that the social workers came.
If we attempt to adopt the Third Way in the U.S., we are more likely to build something akin to Greece or Italy, than we are another Sweden. Add to that the cost of being “the indispensable democracy,” and you’re just piling on more debt to the already unsustainable fiscal gap.
I’m not sure that it’s fair to label Sweden’s approach fascist: after all, a key element of the fascist approach is tight state control of companies. Sweden’s business sector operates in a robust free market, far freer than the US it has to be said. For example, when informed that Saab, the Swedish car (and aerospace) company owned by GM was going to go bust with GM, the response was “so what”? There was no risk of a bailout.