Sweden, Capitalism, and the Welfare State

by Nima Sanandaji
by Nima Sanandaji

Supporters of the welfare state around the world have for many decades pointed out the Scandinavian countries, particularly Sweden, as proofs of how this system can generate both wealth and social equality. Sweden is in fact one of the best examples of how economic freedom fosters development and individual responsibility, whereas big government destroys the foundation for economic growth and personal accountability.

"From the 1950s until the early 1970s, the Swedish social democratic model managed to successfully deliver on its promises of low unemployment, low inflation, and a relatively egalitarian distribution of wealth.  But during the course of the past 25 years, the Swedish model has seemed to be headed along a path of slow disintegration, culminating in the disastrous economic recession of the early 1990s." 

~ Jason Coronel. "Foundations, Decline and Future Prospects of the Swedish Welfare Model: From the 1950s to the 1990s and Beyond." DePaul University Spring 2002

During the 1870s Sweden was an impoverished nation, occasionally plagued by starvation. All this changed as capitalism was introduced in the country. Free markets, property rights and the rule of law created an environment where the Swedish people could achieve a long period of rapid economic development. Between 1870 and 1970 Sweden had the second highest economic growth in the world, second only to Japan.

Socialism had played an important role in Swedish politics, where the social democrats and the labour unions had become the most important political force. But Swedish social democrats were pragmatic and had during the first half of the twentieth century maintained an economy that was one of the freest in the world. The fact that Sweden did not take part in the world wars meant that our economy had a better chance to develop than those of many other western nations. The Swedish people also had a very strong work ethic. Also, Sweden’s Lutheran religion encouraged industriousness and good work ethics.

During the 1960s the social democrats radicalised. They abandoned their traditional pragmatic policies and started a large-scale expansion of the welfare state. Between 1970 and 1990 taxes increased by almost one percent point each year. Income taxes doubled between 1960 and 1990, rising from approximately 30 to 60 percent. During the 1970's the political left viewed Swedish policies as a success. The massive expansion of the public sector reduced unemployment in the short run. Few questioned if this expansion was a sustainable policy.

"The Swedish system is in serious trouble. The Swedish economy is no longer creating jobs – private sector employment has been shrinking for decades, and the public sector can no longer absorb more workers… Many Swedes are pessimistic about the future, in large measure because they cannot imagine how their system can survive, yet cannot overcome the political obstacles to changing it."

~ Virginia Postrel, Reason Magazine November 1999

As the cost of regulations and big government grew, entrepreneurship dropped. In the 2002 Global Entrepreneurship Monitor survey Sweden ranked in the 31st place among 37 countries when it came to start-up of new companies. None of the large Swedish companies were established later than 1970. It is not a coincidence that Sweden has gone from being the fourth richest country in the world in 1970 to being the fourteenth richest in 2002. Today the average American has 37 percent higher purchasing power and almost twice as high private consumption as the average Swede. More than 30 percent of the Swedish population falls below the American poverty line.

P.J. O’Rourke once wrote that no American would work if they lived in a system such as the Swedish welfare state, where government is "generous" with benefits to the unemployed, those on sick leave and those that have retired. What makes Sweden interesting is that for a long time people were very reluctant to take advantage of the system. The Swedish population had a strong tradition of entrepreneurship and hard work and continued to work hard even though they now had the option to live off government. But people do adapt their morality to maximize their benefits in the economic system in which they live, although this might take a generation or so.

During the last few years the number of Swedish citizens that are being supported by unemployment, sick leave or early retirement has increased dramatically. Is there a major epidemic that is keeping people from going to work and causing young unemployed people to retire? The social democrats certainly seem to think so, maintaining that Sweden is still a country where most people are willing to accept any full time job if offered.

This denial goes deep in Swedish mentality. Recently Jan Edling, an economist from Sweden’s largest labour union, LO, wrote a report where he explained that it was the welfare system that caused people to go on sick leave or early retirement. According to Edling, Sweden had a de facto unemployment rate of 20–25 percent. As LO refused to print the report Edling resigned after 18 years of service.

Telling the truth might not be popular, but I wish that Edling's report would be translated and sent to all fans of the welfare state around the world. It shows that the Swedish welfare state has systematically destroyed personal responsibility and work ethics. There is a point where so many people start taking advantage of the system that each individual understands that they will be on the losing side if they don’t maximize their own utility. A system that pays people not to work eventually creates a mentality where many people choose not to work. In the coming years the citizens of the European welfare systems will probably wake up to this reality.

June 8, 2005

Nima Sanandaji [send him mail] is 23 years old and will soon start graduate studies in biochemistry at the University of Cambridge. He is the president of the Swedish pro-market organisation Captus and the editor of the Captus Journal.

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