October 25, 2013 essays

How Laissez-Faire Made Sweden Rich

Sweden often gets held up as an example of how socialism can work better than markets. But, as Norberg shows, Sweden’s history in fact points to the opposite conclusion.

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 infant mortality three times as high as the average developing country.

That country is my own country, Sweden—less than 150 years ago.

At that time Sweden was incredibly poor—and hungry. When there was a crop failure, my ancestors in northern Sweden, in Ångermanland, had to mix bark into the bread because they were short of flour. Life in towns and cities was no easier. Overcrowding and a lack of health services, sanitation, and refuse disposal claimed lives every day. Well into the twentieth century, an ordinary Swedish working-class family with five children might have to live in one room and a kitchen, which doubled as a dining room and bedroom. Many people lodged with other families. Housing statistics from Stockholm show that in 1900, as many as 1,400 people could live in a building consisting of 200 one-room flats. In conditions like these it is little wonder that disease was rife. People had large numbers of children not only for lack of contraception, but also because of the risk that not many would survive for long.

As Vilhelm Moberg, our greatest author, observed when he wrote a history of the Swedish people: “Of all the wondrous adventures of the Swedish people, none is more remarkable and wonderful than this: that it survived all of them.”1

But in one century, everything was changed. Sweden had the fastest economic and social development that its people had ever experienced, and one of the fastest the world had ever seen. Between 1850 and 1950 the average Swedish income multiplied eightfold, while population doubled. Infant mortality fell from 15 to 2 per cent, and average life expectancy rose an incredible 28 years. A poor peasant nation had become one of the world’s richest countries.

Many people abroad think that this was the triumph of the Swedish Social Democratic Party, which somehow found the perfect middle way, managing to tax, spend, and regulate Sweden into a more equitable distribution of wealth—without hurting its productive capacity. And so Sweden—a small country of nine million inhabitants in the north of Europe—became a source of inspiration for people around the world who believe in government-led development and distribution.

But there is something wrong with this interpretation. In 1950, when Sweden was known worldwide as the great success story, taxes in Sweden were lower and the public sector smaller than in the rest of Europe and the United States. It was not until then that Swedish politicians started levying taxes and disbursing handouts on a large scale, that is, redistributing the wealth that businesses and workers had already created. Sweden’s biggest social and economic successes took place when Sweden had a laissez-faire economy, and widely distributed wealth preceded the welfare state.

This is the story about how that happened.2 It is a story that must be learned by countries that want to be where Sweden is today, because if they are to accomplish that feat, they must do what Sweden did back then, not what an already-rich Sweden does now.

The Father of Swedish Liberalism

In 1763 Anders Chydenius, a young priest from Österbotten in Finland (then part of Sweden), sat down to write his contribution to an essay contest. The question he would answer was the most important in Sweden at the time: “Why do so many people leave Sweden?” Emigration had increased and was seen as a big problem. The common interpretation was that people were lazy and greedy, and instead of assuming responsibility and working hard, they were tempted by promises of an easier life abroad.

Chydenius’s response was the opposite. There is nothing wrong with emigration, he wrote. The problem is the oppressive and corrupt system that makes it impossible for people to stay in Sweden and build a good life there. In detailing all the abuses, regulations, and taxes that destroyed opportunity, Chydenius outlined a radical laissez-faire critique of the Swedish government. He showed that privileges, license requirements, and trade prohibitions protected a small lazy aristocracy and stopped hard-working people from making their own luck. High taxes confiscated whatever they managed to create; a corrupt justice system made it impossible for them to win against the powerful; and restrictions on the press made it illegal for them to complain about it. “Fatherland without freedom and merit is a big word with little meaning,” he pointed out.

Chydenius was a modern priest, steeped in Enlightenment ideas. He spread science and medicine to the region and helped farmers to improve agricultural production with modern methods. He was also familiar with the French Physiocrats’ economic ideas. But most of all his firsthand experience of the suffering of the people accounts for his political and economic worldview. Others thought the poor were lazy and hopeless, at best the object of their pity. Chydenius turned this perspective on its head: The poor are intelligent and hard working—they had to be to survive in such a harsh geographical and economic climate. The problem was that they had to devote most of that energy and hard work to avoiding regulations, taxes, and corruption. Therefore one thing he struggled persistently against was class legislation, which forced the poor to work for the aristocrats and big farmers, and prevented them from changing employer or negotiate over wages.

Chydenius looked at particular cases of oppression, extending this belief in human liberty to new areas and universalizing it to create a consistently libertarian system of ideas. He wanted a minimal state that guaranteed the “security of our lives and properties,” with its only task to being prevention of “foreign violence and domestic oppression.” Apart from that, the government shouldn’t intervene. The size of government and taxes should be drastically reduced. Markets and trade should be completely free. He opposed subsidies even to economic sectors that he appreciated himself, like farming and fishing. According to Chydenius, even government had to abide by the Seventh Commandment—not to steal. Farmers should be given complete property rights to their land, and even the poorest peasants should be given control of their own labor. The country should open its borders and allow people to move freely to and from Sweden/Finland. People should be free to discuss ideas and make up their own minds. Even in matters of religion, he thought that the government should be liberal and give the same rights to all beliefs. “I speak exclusively for the small, but blessed word, freedom,” he concluded.3

Drama in Parliament

What made Chydenius a pivotal figure in Swedish political history was that he was an activist and not just a theoretician. His defense of local farmers’ right to trade freely made him popular, and his region’s priests elected him to parliament. In 1765-66 he traveled to Stockholm, where he made a lasting mark on his country. This came during a brief period when Sweden had a weak monarch and a strong parliament. In 1765 the anti-Russian “hat party” lost power to the “caps,” who were a bit more interested in peace and restraint in government spending, but had no coherent ideology. Chydenius was about to give them one. (The mercantilist, pro-war camp in parliament derided their opponents as “nightcaps”, and in contrast they started calling themselves “hats”. The names stuck.)

Because of his political talent and several well-formulated pamphlets that he published while in parliament, Chydenius became a leader for the non-aristocratic wing of the cap party. This led to successful parliamentary votes for trade liberalization, reduced subsidies, and lower taxes. Most important, Chydenius managed to win support for a freedom-of-the-press statute, abolishing censorship in Sweden. As a result, the authorities’ decisions and documents were made public. That was unique to the world in 1766, and Sweden earned a reputation for being a country where debate was free.

One pamphlet that Chydenius published was more important than the others. The National Gain was a short but forceful argument for economic freedom. Chydenius explained why a free market is self-regulating because the profit motive and the price mechanism keep us all in check and stimulates us to help others by producing the kind of goods and services they want most:

[E]very individual spontaneously tries to find the place and the trade in which he can best increase National gain, if laws do not prevent him from doing so.

Every man seeks his own gain. This inclination is so natural and necessary that all Communities in the world are founded upon it. Otherwise Laws, punishments and rewards would not exist and mankind would soon perish altogether. The work that has the greatest value is always best paid, and what is best paid is most sought after.…

This conception of the National gain, however hard it may seem to be on our new enterprises, is nevertheless the simplest and easiest in itself.

It gives liberty to all lawful trades, though not at the expense of the others. It protects the poorest business and encourages diligence and free trade.

It weighs everybody in the same scales, and gain is the right measure that shows who should have the preference.

It relieves the Government from thousands of uneasy worries, Statutes and supervisions, when private and National gain merge into one interest, and the harmful selfishness, which always tries to cloak itself beneath the Statutes, can then most surely be controlled by mutual competition.

It allows a Swede to exercise the dearest and greatest right in Nature the Almighty has given him as man, i.e. to support himself in the sweat of his brow in whatever way he thinks best.

It snatches away the pillow of laziness from the arms of those who, thanks to their Privileges, can now safely sleep away two-thirds of their time. All expedients to live without work will be removed and none but the diligent can become well-off.

It makes a desirable reduction in our Lawsuits. The numerous Statutes, their explanations, exceptions and applications, which fetter trades in one way or another, will then be unnecessary and grow silent, and when the Law is annulled, its breach will amount to nothing.4

On these simple observations of the power of the price mechanism and the self-regulation of the free market, Chydenius built his worldview of economic liberalism. It was the invisible hand 11 years before The Wealth of Nations, and Chydenius has indeed been called “the Nordic Adam Smith.” According to Eli Heckscher, one of Sweden’s most famous economists in the 20th century, the pamphlet would probably have gained an impressive international reputation if it had been translated into a major language at that time.

Chydenius’s radicalism alienated the nobility within his own party, and he was actually thrown out of parliament by the party because he criticized their monetary policies openly. But his influence continued to grow, partly because the monetary policies led to a crisis, just as he had warned. Several of the most important figures in the cultural elite, who were close to the King Gustaf III, were heavily influenced by Chydenius’s thoughts. That goes for Nils von Rosenstein, an enlightenment proponent who led the Swedish Academy; and the famous poet Johan Henrik Kellgren, who attacked religious mysticism and conservatives in his plays and poems, and explained why the market should be liberalized in economic essays. Von Rosenstein and Kellgren even started an organization, with themselves as the only members, to mock the occult and superstitious organizations of late 18th-century Sweden. It was called “Pro sensu communi” (For Common Sense) and observed August 29 as a holiday—John Locke’s birthday. Their view was that human beings were rational creatures who need to think for themselves to understand the world and decide how to live; therefore coercion should be abolished since it forces us to act against our own rational conclusions.

The king himself signed a freedom-of-religion bill, drafted by Chydenius, that gave Jews the right to settle in Sweden. He also gave farmers more control over their land and liberalized agricultural trade. But the king also ended the era of strong parliament and centralized power in himself. After he was murdered in 1792 by a strange conspiracy between nobles’ who fought for their privileges and some who were inspired by the French Revolution, his son, Gustaf IV Adolf, used these powers to censor political debate and suspend parliament. But liberal ideas weren’t dead. Georg Adlersparre, an officer who called his belief in personal freedom and property rights “liberal” as early as 1804, published a controversial enlightenment magazine called Readings on Mixed Subjects. And it was mixed, indeed. Poems and philosophical studies were published next to articles about the need to liberalize the alcohol industry and the first Swedish translation of Adam Smith’s The Wealth of Nations. Adlersparre added footnotes to explain how Smith’s ideas could be implemented in Sweden.

A New Opposition

When the king’s policies led the country to stagnation and conflicts with Russia, Denmark, and France, Swedes grew increasingly hostile to his rule. Taxation and inflation put even heavier burdens on the people. In late 1808 the Swedish military had to abandon the eastern half of the country—Finland—to attacking Russian troops. The resentment against the king who couldn’t wage war but refused to make peace grew even in military circles. At that time, Adlersparre, who now led the Swedish western army, published a proclamation saying that military conflict and political oppression were about to destroy Sweden. It was a revolutionary manifesto: To save the country, the army should move against the king. Adlersparre and his troops began a popular march toward Stockholm. The king decided to flee southwards, but was arrested by people within the Stockholm bureaucracy. To make sure that this also led to real political changes, Adlersparre continued the march and the army occupied Stockholm until a new parliament was assembled and reforms began to be implemented.

This was the Revolution of 1809—the only violent revolution in Sweden’s modern history, and it was initiated by a liberal officer and publisher inspired by Adam Smith.

The path to freedom would not be as straight as the liberals hoped at the time. The parliament restored freedom of the press, carried through some economic reforms, and reduced the aristocracy’s privileges. But the liberals, now united in the Liberal Party, were disappointed—and even more so when Sweden got a new king. Always eager to make friends with the strongest powers around, the Swedish Parliament chose one of Napoleon’s generals, Jean-Baptiste Bernadotte (soon to be Carl XIV Johan), as the new king. He surprised everybody by making peace with Russia (he abandoned Finland but took Norway from Denmark) and also by being hostile to enlightenment ideals and further reforms. The liberals were once again in opposition. However, the fact that the revolution had restored Chydenius’s free-speech statute meant that debate was relatively free and that a genuine liberal movement could be formed.

Influences from France and England continued to build support for libertarian ideas in the early 19th century. Land reforms had given farmers property rights to their land. Agricultural production grew more efficient, while many people had to leave the land. The unemployed and the poor moved to the cities, only to find that the industries with the potential to grow and provide jobs were stopped by antiquated policies. Local guilds controlled the urban professions and made all decisions about who had the right to work and what to produce of which quality and at what price. Rules and regulations stopped the iron and forest industries from expanding, and a lot of imports and some exports were simply forbidden. As a result, opposition to economic controls grew by the day.

A growing group among the nobles also began to see the problem with a society built on privileges and hierarchies. At the same time, a middle class began to emerge. Farmers who grew richer with increased production, urban merchants who began to make some progress, and civil servants who were neither nobles nor merchants did not feel at home in the old structure or in the corporatist parliament with its four estates: nobles, priests, merchants, and farmers. Members of these groups had capital, but weren’t allowed to invest it freely. They had ideas, but weren’t free to implement them.

The Architect of Change

These groups began to find one another in the early 19th century. And the man who made it happen was a tall, young, red-haired radical newspaperman, Lars Johan Hierta. Hierta was a successful businessman, always fascinated by the latest technologies, and in the end he became one of the richest men in Sweden because of his business ventures. He was also a politician, always trying to build an opposition alliance in the parliament. But most important, in 1830 he founded Aftonbladet (the Evening Paper), the first modern Swedish newspaper, a bastion of Swedish laissez-faire liberalism and the first publication to attack not just abuses of power, but political power as such.

Hierta launched Aftonbladet with the last of his money—had it failed he would have been ruined. But it was a stunning success. The revolutionary Adlersparre was the first supporter and sponsor. It was the first Swedish newspaper to combine news and advertising, and as an evening paper, it could report on the news that arrived with the morning mail. Because of Hierta’s sense of humor, the paper was satirical and fun to read amidst all the serious criticism. In Aftonbladet, the growing middle class could read the first real “social reports” on how the country was doing: the destitution in rural areas, the horrible conditions in the crowded urban centers. But they could also read about the solutions—liberalization and industrialization. Aftonbladet pointed to more liberal countries as positive examples: Norway, England, France and the United States. On his wall, Hierta had a copy of Trumbull’s painting of the signing of the American Declaration of Independence—a declaration Hierta called “the most beautiful truth and foundation for a society”.

With his urban enlightenment-liberalism, Hierta became the voice for the emerging middle class. His first proposal in parliament—dealing with public drinking—says a lot about his worldview. At that time it was illegal to be drunk in public. Hierta thought that this was class legislation, since only the poor were ever caught by the police. He argued that being drunk shouldn’t be illegal as long as the drinker threatened no one’s life or property. Hierta’s political career was dedicated to extending that libertarian principle to new spheres. He believed in total freedom of speech, the general franchise, and equal rights for women. His basic principle was that no group should be allowed to “take money out of others’ pockets,” and he always tried to reign in government spending. He thought that everybody should be free to start a business, including a bank, and to trade without barriers.

This phrase about not taking money out of other people’s pockets was often repeated in liberal circles. Chydenius had a similar expression : No one should be allowed to stand on the shoulders of others. It summed up the liberal ideology’s central point—equality before the law, government should not take sides. All privileges that guaranteed or denied certain people a position or trade should be abolished. Everybody should have the same rights and should be treated the same. This also set a natural limit to the kind of government intervention they could accept. Anything that benefited a group at the expense of others was ruled out. The government should instead deal with the kinds of public goods that benefited the entire society. Law and order was something everybody agreed upon. Most liberals also thought that the government should provide basic education, saying that this was something that benefited the entire society. Some infrastructure was also included. Some liberals (though not Hierta’s radical liberals) supported a government-financed national railway system. But even those who did so said that this was only because it benefited the entire country; the local train routes that benefited particular regions or cities should be financed and built privately.

Hierta’s liberalism was founded on natural rights espoused by John Locke and the French and American revolutions, but he frequently combined this approach with utilitarian arguments from Jeremy Bentham and the classical economists. Authors who combined those two traditions, like the French economist Frédéric Bastiat and Richard Cobden and John Bright of the Manchester School, were especially popular with Hierta, and he introduced their ideas in Aftonbladet. Swedish liberalism is distinctive in that it brought together different traditions and ideas rather than following one line of thought all the way. (Some would argue that this is characteristic of the Swedish mentality.)

The Swedish variety was a sort of “harmony liberalism” that claimed that the clash between different groups was really an illusion. All groups and classes could make progress together as long as privileges were abolished and people were allowed to make a living and a profit only by serving one another in the free market. This was the political version of the Enlightenment idea of progress, and it got help from classical economics. When Adam Smith explained that it is not from the benevolence of the butcher that we expect cheap and good meat, but from his self-interest, it was more than an economic statement; it was a worldview, a way of saying that the butcher is not my enemy. If all trade were voluntary we wouldn’t enter any deal unless both parties expected to benefit. Together, we can make progress and improve the world.

Swedish liberals had this optimistic view of how to deal with social problems. The old safety nets of the guilds had only given security to a small group of people. When they were abolished, the liberals wanted to see self-help groups in which workers and families voluntarily organized education and savings for sickness, unemployment, and pension funds. That would not merely help people materially, but also develop a sense of responsibility and an ability to manage one’s own affairs.

Other opposition newspapers could be threatened or bought into silence, but the regime understood that Aftonbladet was something different, a potential leader of the formerly dispersed opposition forces. In the parliament farmers and merchants used arguments from Aftonbladet to push for reform. As a result, in 1835 the government used an old law from the last war to shut it down. But with the help of other individuals, Hierta had acquired permission to start more newspapers, so when Aftonbladet closed, he simply opened The New Aftonbladet. And when that was shut down, he created The Newer Aftonbladet. That was followed by The Fourth Aftonbladet, the fifth, the sixth, and so on.

The episode gave Aftonbladet a huge boost, and Hierta became a celebrity and a hero to many. The hard conservatives said that the only way to beat him was to strike down hard and outlaw new papers, but the government didn’t dare to do that in the light of Hierta’s popularity. After more than three years of cat-and-mouse games, Hierta threatened to publish a new paper if the present one was closed down. Fearing a violent reaction from the public, the government silently dropped the old law without even a decision in parliament. Freedom of the press was reinstated, and everybody could see that the government could be beaten.

A Movement

Step by step, the strength of the opposition grew. It got support from popular poets and authors like C. J. L. Almqvist, who also wrote aggressive liberal articles for Aftonbladet; Fredrika Bremer, who explained that Jesus was the first liberal, since he was in favor of individual rights; and E. G. Geijer, the famous conservative who abandoned his friends in 1838, explaining that the modern world, with its trade, industrialization, and open debate, seemed like a miracle, which through more democracy and freer markets could be brought it to everybody. Authors like Bremer and Geijer introduced religious values into Swedish liberalism. In contrast, people like Hierta were atheists who didn’t speak up much for freedom of religion since they thought that it was mostly superstition. The next generation of liberals saw freedom of religion as one of the most important reforms.

Libertarian views were always strong among the farmers in parliament. In fighting for a more democratic system, secure property rights to the land, and the freedom to trade, they naturally ended up on the liberal side. For a time, opponents called the majority in the farmer’s estate “the political economists,” accusing them of being more interested in theoretical economic liberalism than practical politics.

In the merchant estate the picture was mixed. A new group of businessmen who wanted economic freedom to compete and to create challenged the old establishment, which wanted to protect their trades from competition. As time went by, the new group grew and soon controlled of the estate.

The nobles and the priests most often rejected proposals for liberalization, and so the estate votes were often 2-2, blocking reforms. But among the nobles the mood was also beginning to change. A group of “moderate liberals” got more influence as opinion in the country shifted and as Swedes learned about the positive results from industrialization in other countries. Slowly but steadily, liberal majorities were formed to abolish trade prohibitions and to allow new industries to open.

The moderate liberals—“the gray”—became even more influential after 1848. The revolution in France scared the king, Oscar I, and the nobility. It helped them to understand that the problems of development were pressing and that something had to be done to avoid a revolution in Sweden as well. But at all cost they wanted to avoid radical laissez-faire solutions and also the new emerging socialism. They found their solution in the moderate liberals, who believed in liberalization to modernize the country, but they advocated reform not revolution and were not hostile to the king as such. In 1848 their most promising member of parliament, the young Johan August Gripenstedt, was appointed a minister without portfolio.

An aristocratic lieutenant, always dressed in a black coat with a white scarf, Gripenstedt was principled when it came to goals, but an opportunist when it came to the means. He had been to France and discovered Bastiat’s ideas, which became an important influence in his struggle for free trade and free markets. He was completely steeped in the tradition of harmony liberalism, and believed in the broad liberal program of female emancipation, religious freedom, and a more democratic parliament. But he was a tactician. When the climate shifted in a conservative direction, he didn’t press for his ideas and didn’t complain publicly when liberal friends were forced to leave government.

But Gripenstedt was biding his time. He was a skilled politician, who knew how to build alliances and deal with difficult events. He made himself indispensible for the government and the king, and the stronger the liberal movement grew, the more important it was for the establishment to have a strong liberal politician in the government. Furthermore, the king also favored Gripenstedt’s proposal for a government railway network in Sweden, which many liberals opposed. In 1856 the next king, Karl XV, promoted Gripenstedt minister of finance.

The liberals worked on two fronts. In government Gripenstedt pushed reforms whenever he had a chance. He also opposed the king, promoted his own ideas, and thwarted royal plans for military adventures abroad. The stronger Gripenstedt got, the more risks he could take. He had strong support from the popular Handelstidningen (the Trade paper) in Gothenburg under the effective editorship of S. A. Hedlund. At the same time, outside government, Hierta and the more radical liberals constantly pushed for more and complained that Gripenstedt and the government didn’t liberalize further. That gave Gripenstedt more room to maneuver, using the threat from outside as an argument against the king and the more conservative forces in government. Mild reforms led to an improved economy and more jobs, which led to acceptance of more reforms. Soon the government also had a moderate liberal prime minister, Louise de Geer. Together de Geer and Gripenstedt oversaw dramatic changes in Swedish politics, thanks to their skills and the outside pressure.

It is no exaggeration to say that Sweden experienced a nonviolent liberal revolution between 1840 and 1865. The guild system was abolished, and anybody could now start a business and compete freely. The regulations that had stopped the development of the timber and iron industries were lifted. Sweden got a joint-stock company law as early as 1848. Banks were allowed and interest rates were deregulated. Free immigration and emigration were instituted (and more than one million Swedes soon left for America). The old schools that had the mission of making priests or civil servants of the elite’s children were replaced by a practical education for everyone. Freedom of the press and religion were dramatically expanded. Women won the rights to own and inherit property, get an education, and make a career.

And just before Gripenstedt had to leave the government because of health problems (probably malaria), he assured that his reforms would be long-lived. After the free traders had managed to abolish the trade prohibitions and lower the tariffs dramatically, Gripenstedt arranged for Sweden to join the free-trade treaty between France and Great Britain in 1865—a treaty with a most-favored-nation clause, which gave each participant maximum access to the others’ markets. Trade barriers all over Europe fell. Gripenstedt was also instrumental in abolishing the old parliament based on the four estates and creating a new, more democratic parliament.

The Result

When Gripenstedt left the government, his critics said he was a coward who got out just when people would begin to see the destructive consequences of his liberal policies. They predicted that foreign competitors would ruin Swedish industry and that without government control of business, there would be enormous problems with quality and coordination. When people in rural areas were allowed to open shops, the critics of liberalism said, the cities would be doomed because farmers would have no reason to go there buy things.

Rarely has a forecast been so embarrassingly wrong. Two hundred years after Chydenius’s first public appearance, Sweden was one of the richest countries on the planet, and the moment Gripenstedt stepped down was the precise moment when this economic transformation got going. The real earnings of male industrial workers increased by around 25 percent per decade between 1860 and 1910, and life expectancy increased by 12 years. In total the real earnings increased by 170 percent in those fifty years, much faster than the 110 percent in the next fifty years. And as late as the turn of the century, central public expenditure in Sweden was around 6 percent of national income.5

Liberalism had transformed Sweden completely. A society that used to be rigorously controlled—in which all occupations were thoroughly regulated and trade with other countries was practically forbidden—suddenly opened the floodgates of creativity that had been pent up for centuries. Creativity was now rewarded, not penalized. Open markets and a minimum of regulations meant that capital could flow to the best ideas and that companies were free to hire and fire. The old trades were mechanized, and Sweden could now export what it did best to Britain and other countries in exchange for imports that Sweden couldn’t produce as well.

Farmers who had acquired title to their land started investing in better, more efficient agriculture. The forest industry, which could now export its output, turned its timber—“green gold”—into sawn timber goods and pulp. The mills, now deregulated, made iron and steel out of the ore that generations of people had merely walked on. Craftsmen, liberated from the ancient guild system, began competing by means of new solutions, new goods, new designs, and lower prices. Production was electrified in factories that could now mass-produce goods that even the poor could afford. When banks and corporations were permitted, capital was channeled to the most efficient producers, and Swedes started to invest in new machinery and methods capable of producing more and better goods.

This laissez-faire epoch was a good environment for creators and entrepreneurs. It engendered one of the loveliest words in the Swedish language: snilleindustrierna—the “genius industries,” meaning businesses founded on an ingenious invention, or the development of one, producing on a massive scale and largely for export. Once the way was clear for borrowing, hiring, producing, and selling, the road from idea to idea-based enterprise, from genius to genius industry, became very short.

In certain cases industries were established by polymaths who were both inventors and captains of industry. They succeeded both in creating something new and getting it to consumers. Lars Magnus Ericsson invented an automatic telephone exchange and founded L. M. Ericsson. Sven Wingquist invented the self-regulating ball bearing and created SKF. Alfred Nobel invented dynamite and built up Nitroglycerin AB (later Dyno Nobel), and Gustaf Dalén invented a flashing apparatus for lighthouses and founded AGA. Some entrepreneurs commercialized other people’s inventions: Axel Wenner-Gren, for example, built up Electrolux by introducing vacuum cleaners and refrigerators into Swedish homes.

It was at this stage that the wheels began to spin on which Sweden rolled into the future. One success came hard on the heels of another. The country now had growth and could do more. Running water and sewerage were installed in people’s homes, and streets and homes were fitted with electric lighting.

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.6

“Everybody Is a Liberal Nowadays”

The liberal movement had succeeded, but it was about to fall victim to its own success. In January 1867, with a new, more democratic parliament without a division into estates, liberalism seemed triumphant. Lars Johan Hierta, the oldest member of parliament, delivered the welcome speech in which he celebrated the reforms and warned the members not to come up with new ideas on how to take money from the people. One commentator said: “Now there are no parties. Everybody is a liberal nowadays.”7

But in a way, this posed problems for classical liberals. It seemed as though they had finished their agenda. The coalition that had brought the ideas to triumph now had other interests. This could be seen in the new parties that were formed in parliament. People around the old liberal government started a Ministerial Party, with the goal of defending the reforms but not to go much further. A smaller group started the Neoliberal Party, which was economically liberal and wanted to go extend their principles to cultural and political issues, including more rights for women, more extensive rule of law, and more democracy. The dominant new party was the Rural Men’s Party, a party for farmers that had liberal elements and wanted to reduce taxes and give more power to those outside the Stockholm establishment.

Ominously, the liberals split up among all those parties. Gripenstedt and moderate liberals joined the Ministerial Party. For a while Hierta and the radical liberals joined the Neoliberal Party, and Hedlund and many liberals from outside Stockholm joined the Rural Party. This meant that all parties were influenced by liberalism, and a liberal government still called the shots—but it also meant that liberalism was no longer one coherent, effective force working for one common goal.

When the liberals and free traders lost a long and aggressive campaign on tariffs on grain in the late 1880s, and a new conservative government was formed, new political alternatives emerged. Economically, the tariffs didn’t mean much. They were not adjusted for inflation and so became smaller every year in real terms, and the continued reduction in transport costs more than offset the loss from the tariffs. Sweden’s exports and imports continued to grow every year. But the tariffs had more serious political consequences.

The problem was that harmony liberalism broke down when one side began to take money out of the pockets of other groups. Everybody then had an interest in trying to get rewards and privileges for himself. Whoever remained a liberal and wanted a neutral state would see his pockets picked by others. A recent commentator explained that “After the victory for protectionism, the parliament was drowned by a wave of suggestions that had in common that they all wanted the government to be active both here and there.”8

The liberal movement began to change as a result. The natural sympathy of many was with the poor and the workers. Now that the government had betrayed them by increasing the cost of their bread, they must strike back. It now seemed more important to extend the franchise since the people wanted free trade, but had lost in an undemocratic parliament. Some liberals, however, drew another conclusion: Since the government benefited producers with tariffs, it was now time for a counterattack on behalf of consumers. Some wanted to import Bismarck’s social-security ideas and became “social liberals.”

At the same time, the conservative alternative, which had been seen as dead for more than 20 years, was reborn in a more modern, pro-business, pro-tariff version. Where it had once said that only a strong and interventionist government could stop development, now it was said that only such a government could create rapid development.

What the Social Democrats Did

But the strongest new force was the socialists, and interestingly they were organized on a free-trade platform. In 1889 the Social Democratic Party was founded, and one of its demands was “No to hunger tariffs.” It complained that the elite had called on the government to destroy equality before the law by helping business and farms, and therefore the workers shouldn’t be content with just waiting for the rewards of economic growth. They should also ask the government to step in on their side.

These diverse interests meant that, on the whole, the liberal system lived on. Conservatives and social liberals fought for private property and fiscal discipline, and they collaborated to steer Sweden clear away from socialism. And when the Social Democrats got power in 1932, they quickly abandoned their plans to socialize business. Their leaders thought that an increase in production was essential to pay for their reform programs and became impressed with the liberal economy’s ability to deliver. They were also heavily influenced by a generation of independent liberal economists like Gustaf Cassel and Eli Heckscher, who considered Anders Chydenius an intellectual forefather. Interestingly, a few prominent Social Democrats were actually among the most consistent economic liberals and free traders in Sweden.

More than other countries, Sweden held on to free trade, which was necessary for a small economy dependent on both imports and exports. The Social Democrats and the trade unions allowed old sectors like farming, shipping, and textiles to pass away as long as new jobs were created. They settled for a more cautious policy of keeping the market free to create wealth, allowing the process of creative destruction to do its work, and only later distribute (a growing) part of that wealth. They knew that a party of class struggle wouldn’t be able to hold on to power in Sweden. Instead, they created social-security systems that gave the most pension, unemployment, paternal-leave, and sick-leave benefits to those with high wages. Most benefits were proportional to the amount paid in, so the wealthy middle class would have an interest in supporting the system.

Regulations were adapted to benefit the biggest industries—for example, as labor regulations were introduced, exceptions could be made as long as the trade unions agreed, which they often did when it came to the biggest export businesses. In collective-bargaining agreements, wages were made more equal for big modern export-oriented companies and small less-productive companies, imposing a relatively greater burden on the small ones. When taxes were raised they were often on consumption and hence regressive so as not to interfere with the incentives to produce.

It began as a cautious policy. In 1950 Sweden was one of the richest countries in the world. The total tax burden was still just 19 percent of GDP—lower than in the United States and in other European countries. It did not surpass 30 percent until 1965. It was an open economy with a small government that produced these amazing results, with a little help from having stayed out of two world wars.

In his history of economic policy in Sweden, economist Johan Myhrman concludes that despite a growth in government, these policies continued:

Under this period (1950-70) Sweden had a liberal trade policy, which meant low tariffs and a benevolent attitude to business, for example with a tax policy that admitted very generous deductions for capital costs.9

Yes, Sweden today has another reputation. But that came later. In the 1970s, with coffers filled by big business and heads filled with ideas from the international turn to the left, the Social Democrats began to expand social assistance and regulate the labor market. Public spending almost doubled between 1960 and 1980, rising from 31 percent to 60 percent of GDP, and high taxes accompanied them.

For a while Social Democrats could travel the world and talk about how they were able to have both big government and high incomes—but only for a time, because this was also the moment when the model began to run into problems. The average growth rate was halved to 2 percent in the 1970s, declining further in the 1980s, and that was before the big crisis in the 1990s. The currency had to be devalued five times to keep industry competitive, by a total of 45 percent. In 1990, the year before a serious economic crisis in Sweden, private enterprise had not created a single net job since 1950, but the public sector had increased by more than a million employees.

While the knowledge and service economy made it more important to invest in human capital, high marginal tax rates on personal income reduced individuals’ incentives to invest in their education and skills. Generous benefits for those not working eroded the work ethic, and a country with one of the healthiest populations became one of the countries with most people off sick from work.

The alliance among big government, big business, and big labor made Sweden less flexible. Encouraging investments in big industry worked well, as long as there was little need for innovation. Once that changed, the system ran into trouble and the lack of growing small- and medium-sized businesses became a real problem. The companies that did exist didn’t grow, partly because of the risks and costs of rules that prevented the firing of workers.

The most important Swedish companies are still those that were born during the laissez-faire period before the First World War. In 2000 just one of the 50 biggest Swedish companies was founded after 1970. Meanwhile, services that could have become new private growth sectors, like education and health care, were monopolized and financed by the government.

From 1975 to 2000, while per-capita income grew by 72 percent in the United States and 64 percent in Western Europe, Sweden’s grew by no more than 43 percent. In 1970 Sweden was the fourth richest country in the OECD’s ranking by per-capita income. In 2000 Sweden had fallen to 14th.

As the Social Democratic finance minister Bosse Ringholm explained in 2002:

If Sweden would have had the same growth rates as the OECD average since 1970, our common resources would have been so much bigger that it would be the equivalent of 20,000 SEK [$2,700] more per household per month.

Epilogue

It was not socialist policies that turned Sweden into one of the world’s richest countries. When Sweden got rich, it had one of the most open and deregulated economies in the world, and taxes were lower than in the United States and most other western countries. The Social Democrats kept most of those policies intact until the 1970s, when they thought that those excellent foundations—unprecedented wealth, a strong work ethic, an educated work force, world-class exports industries, and a relatively honest bureaucracy—were so stable that the government could tax and spend and build a generous cradle-to-grave welfare state on them.

They couldn’t. At least not without costs. Because that welfare state began to erode the conditions that had made the model viable in the first place. And the fourth richest country became the 14th richest within three decades.

Things have looked up a bit since for this small Nordic country. In the 1990s Sweden had another important reform period in response to sluggish growth and a severe banking crisis. Both Social Democrats and center-right parties contributed when marginal tax rates were reduced; markets 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. During the last few years, Swedish governments have reduced taxes substantially, from 52 to 44 percent of GDP, and abolished taxes on gifts, inheritance, wealth, and housing.

Sweden has yet again increased exports, created private-sector jobs, and seen economic progress that has outpaced the rest of Europe. Sweden has managed the financial crisis much better than most other countries, and public debt is around 30 percent of GDP. But that’s another story—though not entirely, because present-day Swedish liberalization and liberalizers have often been inspired by the history of Swedish individuals, reforms accomplished 150 years ago, and the unprecedented prosperity that they produced. A statue of Lars Johan Hierta has been erected in central Stockholm and a Social Democratic speaker of parliament has proclaimed Anders Chydenius one of the greatest pioneers in the history of the Swedish parliament. On the wall of Finance Minister Anders Borg’s office hangs a portraits of Gripenstedt and Chydenius—“the father of Swedish wealth,” according to Borg.

When Sweden liberalizes again, it will be going back to the future. That background—and that future—are the most important lessons from Sweden to the rest of the world.

As Anders Chydenius wrote almost 250 years ago, in the essay contest entry that got Swedish liberalism off to an impressive start: “That which our time tramples on, posterity will pick up, and that which is now called boldness will be honored in the name of truth.”

This essay was syndicated by AtlasOne, a project of the Atlas Network.

 

Notes

  1. Vilhelm Moberg, Min svenska historia, 1971, p. 72.
  2. For the whole background, see my history of Swedish liberalism, Den svenska liberalismens historia, Timbro, 1998.
  3. A collection of his most important essays have recently been published as Anders Chydenius, Anticipating the Wealth of Nations (ed. Maren Jonasson & Pertti Hyttinen. Routledge, 2011).
  4. Anders Chydenius: The National Gain, London: Ernest Benn Limited 1931. Translator unknown. <http://www.chydenius.net/historia/teokset/ekansallinenkoko.asp>
  5. Mauricio Rojas, “Sweden After the Swedish Model,” Timbro, 2005, p. 17.
  6. Anders Johnson: Entreprenörerna : Sveriges väg till välstånd. Stockholm: Svenskt Näringsliv, 2002.
  7. Gudmar Hasselberg: Rudolf Wall – Dagens Nyheters skapare. Stockholm: Bonniers, 1945, p. 232.
  8. Svenbjörn Kilandet: Den nya staten och den gamla. Stockholm: Almqvist & Wiksell International, 1991, p. 205
  9. Johan Myhrman, Hur Sverige blev rikt. SNS, 1994, p. 160.