The Swedish Brains Behind the Welfare State

Welfare capitalist policies are often touted as a means of addressing inequality in developed nations. A prime example of this would be the presidential campaign of Bernie Sanders, which has energised many American voters with the prospect of universal health care and free college tuition. The term welfare capitalism loosely describes an economy operating under a capitalist framework, that also provides welfare to its citizens through welfare distribution policies such as taxes. Australia, for example, has initiated welfare reforms such as Medicare in the past, which today benefits a large number of Australians.

However, welfare capitalism tends to be more frequently associated with the Scandinavian and Nordic countries in Europe, such as Sweden and Denmark. These countries typically provide extremely generous welfare programs such as free education, funded through high tax rates. Scandinavian economies have performed surprisingly well over time, despite a high level of taxation and government regulation. Indicators such as high GDP per capita, strong global competitiveness and low-income inequality have contradicted mainstream economic theories, baffling many. The Scandinavian and Nordic models remain a subject of debate, ridiculed by classical economists whilst lauded by some progressives as a path towards equality.

Scandinavia’s continuing prosperity raises an abundance of questions. How has this economic model, often tied to socialism, stood the test of time? Which economic theories underpin the welfare state? And will Scandinavia be able to maintain the status quo into the future, or is it likely to implode?

Though the development of Scandinavian economics can be attributed to a number of thinkers, it was during the 1930s in which welfare policies and intervention practices really began to gain traction in Northern Europe.[1] This of course was during the midst of the Great Depression, and the decade in which the famous John Maynard Keynes developed his demand-side economic model. In Sweden in particular, government policies had been based on theories presented by the ‘Stockholm School’, a group of Swedish economists who independently formed similar views to Keynes.

Among the Stockholm School was Gunnar Myrdal (1898-1987), a Nobel-winning economist who held a strong interest in the relationship between social science and economics. Myrdal was a frequent critic of the classical school of thought, often advocating and developing arguments for further demand-side economic policies.[2] Myrdal’s work on social policy and his 1930s literature are often considered to have formed the building blocks of today’s Scandinavian model.

Inspired by a fellowship to the United States and the effects of the Great Depression, Myrdal began to propose policies he believed would restore prosperity and full employment in Sweden.[3] His 1932 article “The Dilemma of Social Policy” argued against the perception of social spending as costs, but rather investments in human capital as a means of improving social and economic outcomes.[4] Welfare spending has of course helped in narrowing the income gap, but the economic payoff from investing in citizens remains debatable.

Myrdal’s most influential text during the 1930’s was Crisis in the Population Question, co-authored with his sociologist wife. Though the book wasn’t heavy on economics, it delivered some compelling insights into how social policies could be implemented to address the economic threat posed by declining fertility in Sweden. The authors outlined a rationale behind implementing bold economic policies, such as passing the financial burden of parenthood onto the community. The book sparked the establishment of a Swedish Population Commission in 1935, with policies such as parental subsidies coming to fruition shortly afterwards.[5] Sweden became perceived as a leader in Scandinavia, and similar policies were eventually adopted throughout the region.

The Stockholm School and Myrdal’s early work are seldom discussed in economics today. The group’s influence waned after the 1930s, and prominent members such as Myrdal pursued other interests such as politics. Their failure to remain relevant globally is often attributed to the lack of a general, unifying model capable of describing their many theories.[6] Language was also a barrier – theories presented by English economists such as Keynes were more widely accessible.[7] Regardless, the Stockholm School certainly made an impact within the Scandinavian region, laying the foundations for a welfare state during what was probably one of Sweden’s most significant transitional periods.

Many explanations have been tossed around as to how Scandinavia has managed to prosper. The view on the left is reminiscent of Myrdal’s – decades of investment in education and health has contributed towards economic growth. An educated population implies a more valuable labour force, and a healthy population results in more people being physically able to work.

Skeptics of the model believe there is more to the story. Milton Friedman, the famous Chicago School economist, cited the small and homogeneous populations as major contributors to Scandinavia’s prosperity.[8] Citizens of Scandinavian populations such as the Swedes do indeed tend to share similar cultural values and a common purpose, but how does this relate to economics? Scandinavians have a high level of social trust, and economically unproductive activities such as corruption are frowned upon.[9] A willingness to pay taxes, absence of unscrupulous behaviour, and trust within the population ensures resources are used efficiently and that transactions are conducted swiftly.

Looking ahead, an ageing population and influx of immigration pose the greatest threat to the sustainability of Scandinavia’s economic model. Refugee inflows are likely to place initial pressure on welfare spending, since many arrive poorly trained and educated. However, countries such as Sweden have undertaken efforts to train and employ refugees with moderate success.[10] An ageing population may be more troublesome, as more Scandinavians will be exiting the workforce with care needs. Nonetheless, the Scandinavians have demonstrated that balancing government regulation with capitalism is far from impossible. Future economic success will rely heavily on social cooperation and the ability to adapt to demographic changes. Only time will tell whether welfare capitalism should remain Scandinavia’s economic model of choice.

[1] Musial, K. (1998). Tracing Roots of the Scandinavian Model. Image of Progress in the Era of Modernisation. Berlin: European University Institute.

[2] Carlson, B. (2013). Gunnar Myrdal: Ideological Profiles of the Economics Laureates. Econ Journal Watch, 10(3), 507-520.

[3] Jackson, W.A. (2014). Gunnar Myrdal and America’s Conscience: Social Engineering and Racial Liberalism (Rev. ed.). North Carolina: UNC Press Books.

[4] Eliaeson, S. & Kalleberg, R. (2009). Academics as Public Intellectuals. Newcastle: Cambridge Scholars Publishing.

[5] Jackson, W.A. (2014). Gunnar Myrdal and America’s Conscience: Social Engineering and Racial Liberalism (Rev. ed.). North Carolina: UNC Press Books.

[6] Jonung, L. (1991).  The Stockholm School of Economics Revisited. Cambridge. Cambridge University Press.

[7] Jonung, L. (1987). The Stockholm School after Fifty Years: A Conversation with Lars Jonung. Eastern Economic Journal, 13(2), 93-97.

[8] Friedman, M. (2006). Free Markets and the End of History. New Perspectives Quarterly, 23(1), 37-43.

[9] Kommunekredit, Kommuninvest & MuniFin. (2012). The Nordic Model – Local government, global competitiveness in Denmark, Finland and Sweden. Retrieved from https://www.munifin.fi/invest-munifin/nordic-model

[10] International Monetary Fund. (2016). The Refugee Surge in Europe: Economic Challenges. Retrieved from https://www.imf.org/external/pubs/ft/sdn/2016/sdn1602.pdf

Image: ‘Flags of the Nordic countries’ by Hansjorn available at https://commons.wikimedia.org/wiki/File:Nordiske-flag.jpg