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.