The Sweden Myth
Recently, the so-called Swedish model — that is, the Swedish economic system with high taxes and a big welfare state — has been celebrated again in the press.
The alleged recent success of the Swedish economy has allowed welfare statists both inside and outside of Sweden to argue that high taxes and an extensive welfare state are good for the economy. To fully understand this fallacy, we should review Sweden’s economic history.
Until the second half of the 19th century, Sweden was fairly poor. But far-reaching free market reforms in the 1860s allowed Sweden to benefit from the spreading Industrial Revolution.
And so, during the late 19th and early 20th centuries, Sweden saw its economy rapidly industrializing, driven by the many Swedish inventors and entrepreneurs.
During that time, Sweden produced extraordinarily many inventions, given its small population, including: dynamite, invented by Alfred Nobel (who established the Nobel Prize); the self-aligning ball bearing, invented by Sven Wingquist (who used this to create the SKF company); the sun-valve, invented by Gustav Dahlén (who used it to found industrial gas company AGA); the gas absorption refrigerator, invented by Baltzar von Platen (which was later used by Electrolux).
In addition, there were countless non-inventing entrepreneurs during that period: car manufacturers Volvo and Saab, and telecommunications company Ericsson. Indeed, with just a few exceptions, nearly all large Swedish companies were started during the late 19th and early 20th centuries, which was not only a period of strong growth, but also the time when the foundation for later economic growth was laid.
Another factor which continued Swedish prosperity was the fact that Sweden was able to stay out of both World Wars, and indeed all other wars as well. Sweden is, in fact, the country with the longest consecutive period of peace, having fought no war since 1809, when Sweden was invaded by Russia, losing Finland to the invader.
Sweden has thus enjoyed 5 more years of peace than Switzerland, which participated in the Napoleonic wars in 1814. As a result of its free market policies, the resourcefulness of its people, and its successful avoidance of war, Sweden had the highest per-capita income growth in the world between 1870 and 1950, by which time Sweden had become one of the world’s richest countries, behind only the United States and Switzerland, and Denmark (who have since also fallen behind because of high taxes).
But the foundation for future trouble had already been created. In 1932, the Social Democrats rose to power in the face of the Great Depression. And like FDR in America and Adolf Hitler in Germany, they started to expand government power over the economy. Until 1932, government spending had been kept below 10% of GDP in Sweden, but the Social Democrats, under their leader Per Albin Hansson, wanted to change this and remake Sweden into a “folkhem” (“people’s home”), a term Swedish Social Democrats adopted from the Fascists in Italy.
Even in the early 1950s, Sweden was still one of the freest economies in the world, and government spending relative to GDP was in fact below the American level.
But between 1950 and 1976, Sweden experienced an expansion in government spending unprecedented during a period of peace, with government spending to GDP rising from about 20% in 1950 to more than 50% in 1975. Virtually every year, taxes were increased while the welfare state expanded relentlessly, both in the form of a sharp increase in the number of government employees and ever more transfer payment benefits.
During the first 20 years, this relentless government expansion took place seemingly without ill effect, as Sweden benefited from rapid global growth — although Sweden’s growth had already started to slip in relative terms, from well above average to just average. This changed in the 1970s after Olof Palme, from the left wing of the Social Democratic party became Prime Minister. Palme stepped up the socialist transformation in Sweden, rapidly increasing anti-business regulations and sharply increased payroll taxes.