The Rise and Fall of the Swedish Model

Author(s): Erik Lundberg

Source: Journal of Economic Literature , Mar., 1985, Vol. 23, No. 1 (Mar., 1985), pp. 1-36
Published by: American Economic Association

Stable URL: https://www.jstor.org/stable/2725542

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Journal of Economic Literature
Vol. XXIII (March 1985), pp. 1-36

The Rise and Fall of the Swedish

Model

By ERIK LUNDBERG
Stockholm School of Economics

I. Introduction based on great Swedish inventions during

earlier decades-had been preparing the
PHE CONCEPTION of the Swedish Model ground for more optimistic expectations.
has been used in a vague and unscien- As a symbol of the new Swedish mood,
tific way by economists, journalists and the big Stockholm exhibition in 1930 was
politicians since the 1930s. The expression significant. Here the new architecture-
has been loaded with value judgments of rooted in the ideals of functionalism-was
varying kinds-shifting with the passage widely held to express a new epoch of ra-
of time. tional planning.
We start with a brief historical sketch From the beginning of the 1930s up to
leading up to the 1930s which marks the the 1970s the Swedish Model was re-
beginning of the model. Sweden had been garded as something successful and pro-
a relatively backward country during the gressive with regard to the economic and
second half of the 19th century and up social development of a mixed economy.
to the 1920s, lagging behind the develop- We find expressions such as "Sweden: the
ment of many industrial countries-not middle way," "Sweden: the progress ma-
only Germany, UK and the USA but also chine," "Sweden: the prototype of mod-
Denmark and Norway. Industrial devel- ern society." People saw in Sweden a con-
opment had not been strong enough to tinuing social reform, the building up of
provide employment to the growing pop- a welfare state, and experimentation with
ulation. The heavy emigration to the stabilization policy, while preserving the
United States, which continued during the conditions of an expansive free-market
Twenties, was considered a serious indica- capitalist economy. There seemed to be
tor of backwardness and of pessimism much political agreement and harmony
about Sweden's development possibilities. between social democratic governments
The fact that emigration ceased after and the business community. According
1929, and even was replaced by the return to the prevailing view, such harmony also
of some Swedes during the American de- included the relations between trade
pression, was taken as signaling an im- unions and employer organizations. The
provement in Swedish development op- picture contained a minimum of social
portunities. Certainly the remarkable strife and labor unrest.
achievements of Swedish industry on in- This positive evaluation of the Swedish
ternational markets in the 1920s-partly Model was predominant most of the time

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2 Journal of Economic Literature, Vol. XXIII (March 1985)

until the 1970s. But critical attitudes also the model in a historical perspective-the
existed at the same time, both inside and rise and the fall. My description and analy-
outside Sweden. The tendencies to rapid sis will thus take the form of an account
growth of the public sector and to ever- of a development process, on several lev-
higher tax rates were considered warning els, starting with the 1930s. During that
signals. The ambitious goals of income decade, in fact, so much of the economic
equalization and full employment, and thinking, the policy experimentation, the
the means required to achieve the targets, shaping of political and institutional condi-
tended to endanger the working of the tions were started that it seems natural
model. The negative evaluations of the and necessary to begin the account with
Swedish developments included critical that decade.
observations as to the cumulative rise in The model is best conceived and stud-
state intervention and in selective regula- ied at several levels:
tion of the economy, implying distortions 1) The policy theories presented and
of markets and of the price system. During discussed by professional economists rep-
the later years of the 1960s critical voices resent one level. In the earlier years, pol-
became stronger, especially with regard icy models of the Stockholm School econo-
to the weakening of incentives to work, mists and the impact of their discussions
invest and save, as well as to start new on the political debate and on actual poli-
enterprises. Conservatives and liberals cies were unique to Sweden. Later on-
were united in criticizing the rising spirit say from the 1960s-this was no longer
of collectivism and in the evolving inter- the case.
pretation of the meaning of freedom, se- 2) The next level is to be found in the
curity and equality. current policy aims and in the measures
However, the Swedish economy seemed actually carried out by the Governmental
to function excellently according to most authorities. The shifts of ideologies, aims
criteria until the end of the 1960s. But and policies belong to this part of the
the disturbances and shocks to the econ- story.
omy in the 1970s put an end to praise of 3) The actual functioning of the Swed-
the Swedish Model. And rightly so. The ish economy, its stability, growth, unem-
cyclical instability appeared as relatively ployment, inflation, social reforms etc.,
large, structural imbalances became pro- certainly are part of the description of the
nounced, stagnation and inflation became model-comprising its success and failure.
serious problems. The political consensus 4) An account of the shifting political
disappeared, and confrontations between and institutional framework must be an
socialist and bourgeois parties became the important part of the characterization.
order of the day. At the same time, labor The Social Democratic Government that
market conflicts emerged as serious prob- took power from the fall of 1932 and
lems. The appearance of imbalanced eco- ruled, sometimes in coalition with other
nomic conditions did not fit in with our parties, up to the fall of 1976 was itself a
earlier conceptions and it is easy to inter- unique and basic feature of Swedish expe-
pret these developments as a fall of the rience. The uniqueness was determined
Swedish model. by the persistent objective of the Govern-
So far I have succeeded in using the ment to reform the economy pro-
term "Swedish Model" in a vague, loosely gressively, but to exclude revolutionary
descriptive way. And in what follows I changes. Characteristic of the Swedish
shall continue to do that. My intention is scene was the openness of the Govern-
to study the features and components of ment to new ideas as to stabilization policy

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 Lundberg: The Rise and Fall of the Swedish Model 3

and social reform. The gradual construc- useful to keep these levels of characteriza-
tion of the "Welfare State" is included. tion in mind because they are separable,
Another unique feature that made its ap- in principle. It is especially important to
pearance in the 1930s was the growing be clear about the distinct meanings of
strength and ultimate power position of "model," implied in the above presenta-
the trade union movement, and its cen- tion and in the following text: "model"
tralization and close cooperation with the as: (a) theory of policy, (b) a kind of ideal
government. This feature permitted the of performance, and (c) a generalized de-
achievement of peaceful conditions in the scription of the actual operation of the
labor market. A dominant consensus ruled Swedish economy of the time.
the relations between labor and employer And there is another intricate issue:
organizations, especially during the Fifties How and to what extent were the Swedish
and Sixties, the "Saltsjbbaden spirit." There policy models applied in practice?
was an intimate and successful coordina- And, if so, were the actual results in
tion of policy, primarily based on common close accordance with the implied norms?
models of wage determination in the
minds and the documents of the econo- II. The Swedish Model at Its Apex
mists in LO and SAF (the central workers'
and employers' organizations).' With reference to the last question, it
is of specific interest to take note of the
5) The ideological premises of the
model include the changing mixture of Swedish economy around the middle of
capitalism and socialism. We observe how the 1960s when it appeared to have
relevant attitudes and values have been reached a peak of model achievement. A
established and how they have been number of its features and properties at
changing, including views on the need for that time can be summarized as follows,
modifying or transforming the existing which is another way to characterize the
system. Swedish Model:
The propensity of Progressive Socialists
- full employment, the unemployment
to work for the transformation of the exist-
rate varying between 1.5-2.5 per-
ing mixed system in a socialist direction
cent,
has existed from the beginning. The domi-
- a relatively low inflation rate-around
nant pragmatic attitude of the Social
3 percent
Democratic Party and of LO has occasion-
- a high degree of cyclical stability
ally been overwhelmed by Socialist ambi-
- no balance of payment troubles
tions.
- a rapid rise of the public sector
These five levels of viewing the Swedish
- no visible structural imbalances
model have no clear demarcation lines.
- a satisfactory rate of growth of total
There is necessarily a lot of mixture and
output-about 4 percent.
interdependence. In spite of this it seems
The growth rate, although a little below
1 Representatives of LO ("Landsorganisationen"),
the central trade union federation and SAF the OECD-average, was satisfactory, hav-
("Svenska Arbetgivarf6reningen"), the central orga- ing regard to the fact that Sweden's GNP
nization of employers met in Saltsjobaden (outside
per capita already was on a relatively high
Stockholm) in 1938 and made general agreements
on the conditions of peaceful settlements of collec- level at the start of the postwar period
tive contracts. The agreements cleared away a num- because of its neutrality in two world wars
ber of controversial issues regarding the peaceful
and because it had relatively high growth
settlement of conflicts on the labor market through
negotiations and without intervention by the Gov- rates during the Twenties and Thirties.
ernment. These economic achievements were

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4 Journal of Economic Literature, Vol. XXIII (March 1985)

combined with rapid progress in labor gin with, became less so over the years.
market policies, social reforms and in- Looking at the climax in the 1960s, the
come distribution. Sweden was rightly re- Swedish economic position proper cannot
garded as a pioneer in active labor market be regarded as unique. Most small coun-
policies (including measures for increasing tries in Western Europe were on the same
labor mobility and for vocational training). track of welfare development and the dif-
These labor policies were intended to be ferences were only those of degree: Swe-
a basis for attaining full employment and den had gone further in most respects to
also for a solidaristic wage policy-aimed develop social reforms than other coun-
at squeezing wage differentials. Social se- tries, but by the mid-Sixties the differ-
curity had expanded rapidly during the ences were becoming quite small com-
two postwar decades. The biggest social pared with other advanced countries such
reform had been the introduction of an as Norway, Denmark, Holland and Aus-
ambitious pension plan (1960) guarantee- tria. The uniqueness of the Swedish devel-
ing decent pensions, generally to all citi- opment was more clearly apparent in the
zens regardless of their employment situa- policy arguments used and in the political
tion during their working lives; rising conditions marking the rise of the model.
progressivity of tax rates; extensive hous- The specific circumstances of the fall of
ing policy and educational reforms as well the model from the middle of the 1970s
as full employment. All this had implied is again distinctive.
progress towards equalization of incomes. It should be added-perhaps as a special
The high level of attainment in the feature-that the relative success of Swed-
1960s of these many goals was not taken ish economic and social performance, be-
to mean that the Welfare State had been ginning in the 1930s, sometimes created
fully realized. The steady appearance of among Swedes a kind of national hubris,
new targets and new demands for reforms built on a myth of political and economic
remained part of the picture. In fact, more superiority. In the international chaos of
advanced social measures continued to ap- the 1930s Sweden emerged as an out-
pear during the 1970s. This consciousness standing exception. The ideals of the wel-
of the dynamic character of social reform fare state were preached in moralistic ov-
targets was apparent. There is no final tar- ertones: "Sweden is the best and socially
get or equilibrium as to the socialist de- most advanced place in the world." The
sire for income and wealth equalization; example of Sweden was held up as a model
rather as each position of equalization was for other countries. Criticism was not al-
reached, the urge for reducing the re- ways well received by the Swedes them-
maining gaps became stronger. selves.
One special feature of the changing pol- From this point of view the deteriora-
icy patterns that was characteristic in the tion of the model in the 1970s came as
1960s (and of previous decades) was the a psychological shock, especially to the
leading role of LO-pushing the social earlier strong believers. The negative
democrats of the government to accept sides of the successes now gained atten-
their views. The emphasis of the LO-lead- tion just when the economic performance
ers and economists was steadily fixed on failed: the collective spirit, the bureaucra-
full employment, but at the same time tization, the deleterious effects on free-
they pleaded for stronger anti-inflation dom and individual incentives. The bad
measures as a basis for a solidaristic wage examples given by other countries with
policy. regard to the need for restrictive policies,
I have already hinted that the Swedish and for cutting down on social welfare had
Model, which was relatively novel to be- to be followed belatedly by the Swedes

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 Lundberg: The Rise and Fall of the Swedish Model 5

during the first half of the 1980s. Even Main attention was directed to the need
if the turn-around was slower and much for not spoiling the prerequisites of an up-
more hesitant than in countries such as swing. This implied, among other things,
Holland, U.K. and the U.S.A., the political a certain caution lest a minimum of public
and psychological shock seemed greater works and assistance to the unemployed
to the Swedes. should inhibit the free determination of
market wages; the wages paid on public
III. The 1930s works should not exceed the lowest rates
paid locally for the simplest common la-
The origin of the Swedish model must
bor. In fact, a tremendous wage deflation
be sought and can be found in the 1930s.
proceeded in a cumulative spiral. Wages
That is the time when, in many countries,
fell by 30-35 percent from the autumn
the possibilities of controlling the business
of 1920 to the middle of 1922. The. big
cycle came to be discussed intensively as
rise in unemployment, which reached 25
a policy issue. The background for the de-
percent according to the trade union sta-
velopments of the Thirties, however, must
tistics, and the collapse and bankruptcy
be sought a decade earlier.
of numerous firms, all this was regarded
During the 1920s the existence of de-
as the more or less inevitable consequence
pressions and booms had been taken for
of overinvestment and speculation during
granted as an intrinsic property of a capi-
the war years and in the following boom.
talist economy about which Governments
According to the prevalent view, the de-
could do little. Later in the Twenties-
flation and depression had the function
especially in the USA-there appeared a
of cleaning up the economy and creating
belief in the self-correcting properties of
the "equilibrium conditions" needed for
a market economy, the "prosperity for-
an upswing. At that time there existed nei-
ever" slogan.
ther the ideas nor the apparatus for the
This way of looking at the stabilization
Government to counteract the depression
problem was quite prominent in Sweden
or stimulate the recovery.
during the 1920s and stood in sharp con-
It is somewhat of a paradox that even
trast to the main trend of thinking during
Knut Wicksell shared this attitude. For
the 1930s. Let me just mention the preva-
him the main target of the postwar eco-
lent attitude of politicians and economists
nomic development was the restoration
as to the deep depression spiral of the
of the value of money to the 1914 level
early 1920s. The depression in Sweden
(Anders Ostlind 1945, Ch. X; Lundberg
was, in the main, taken to be a natural
1984, Chs. 1 and 2). For Wicksell it was
catastrophe. The strong deflation, the big
mainly a moral question, to restore the
decline of production (25 percent in the
badly distorted relationships between
volume of industrial output), and the tre-
creditors and debtors, to re-establish an
mendous rise in open and concealed un-
"honest money." It seems as if Wicksell
employment were generally considered
was so preoccupied with his model of the
unavoidable and a natural result of the
relationship between the price level, the
excesses of the postwar boom of 1918-
quantity of money, and the interest rate
1920. The policies of the Government
that he-like present-day monetarists-
were hesitant and lagging (for example,
could neglect, more or less completely,
as to changes in the discount rate).2

2 The main features of the 1919-1923 business cy- the Swedish crown, after substantial appreciation,
cle are presented in a recent study (Lundberg, 1983, appeared to be significantly undervalued. This
Ch. 2). The deflation spiral became so strong that was in sharp contrast to the course of the British
when Sweden returned to the gold standard in 1924 pound.

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6 Journal of Economic Literature, Vol. XXIII (March 1985)

the problems of fluctuations in production ports and manifested in relatively high in-
and unemployment. And yet Wicksell was terests rates. Even the social democrats
a radical, deeply concerned with ques- lacked an alternative explanation. In fact,
tions of poverty and income distribution, during that time, they were quite passive
in contrast to his rival Gustav Cassel, who and politically weak. Their thinking was
at this time had quite a conservative out- to some extent colored by Marxist ideolo-
look. But it was Cassel who questioned gies, looking for system changes (various
the deflationary policy of the Government forms of socialization and industrial de-
and asked if the aim of re-establishing the mocracy) but without any effective pro-
old parity to gold and to the dollar really gram of current policy action.
was worth all the suffering along the way. The first signals of a radical change in
In fact, Sweden became the first country attitude on stabilization policy came in
in Europe to return to the gold standard 1930. At that time a group of social demo-
at the old parity (in 1924). The deflation- crats made a proposal to the Riksdag about
ary process, however, had been so strong expansionary policies (in the form of pro-
in comparison with most other industrial ductive public works) in order to bring
countries that the Swedish crown appar- down the unemployment rate. This oc-
ently became significantly undervalued curred even before the depression struck
in relation to purchasing-power-parity Sweden's economy. The leading man of
norms. This result is confirmed by a persis- this group, Ernst Wigforss, had absorbed
tent tendency to run balance-of-payments the ideas in the late 1920s in the Yellow
surpluses during the vigorous export-led Books of British liberals, and of Keynes'
growth of the Swedish economy up to the famous pamphlet, "Can Lloyd George Do
summer of 1930. It?" (1929). Their receptiveness to theo-
In spite of this strong export-based ries about lack of purchasing power of the
growth of GNP (about 4 percent per year wage earners as a cause of unemployment
in real terms), the unemployment rate was was probably influenced by their acquain-
never brought down to the "full employ- tance with the underconsumption notions
ment levels" of 1920 and the years before of Marxian theory.
the war. It remained stuck at 10-12 per- The discussions during the first half of
cent even in boom times.3 the 1930s in a group of younger econo-
This type of permanent or structural un- mists-led by Erik Lindahl, Gunnar Myr-
employment existing in the Twenties was dal and Bertil Ohlin-concentrated atten-
intensively discussed by politicians and tion on the nature of the depression from
economists. The common explanation at a business-cycle point of view. It should
that time traced the lack of employment be possible, they thought, to elevate the
to the excessive level of real wage costs. bottoms of depressions and reduce the ex-
Economists generally relied on neoclassi- cessive heights of booms: i.e., even out or
cal models, stressing rapid substitution damp the fluctuations in activity. The em-
of labor for capital, "rationalization," phasis was then placed on fiscal policy: the
caused by the high wage rates. Cassel Government budget should not be bal-
would also mention the scarcity of the sup- anced during the depression. On the con-
ply of savings aggravated by capital ex- trary, expansion of public works and lower
taxes should deliver a stimulus to the econ-
3This figure of 10-12 percent is according to cur- omy, directly and indirectly via multiplier
rent trade union statistics. It might correspond to
effects. Restrictive policies during periods
about 6 percent according to modern standard calcu-
lations comprising the whole working population of good times would cut off the top of the
(Lundberg 1968, p. 32). boom and thereby also make the reac-

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 Lundberg: The Rise and Fall of the Swedish Model 7

tion-the following contraction-less pro- librium in the writings of the Stockholm

nounced. School.
Policy theories in many versions were There are, however, certain points of
presented by economists belonging to the originality in the policy message of the
Stockholm School.4 Certainly this devel- Stockholm School that Patinkin and other
opment of stabilization policy was not writers tend to neglect. In fact, the follow-
completely new and original. There were ing can be regarded as some principal
precursers in the 1920s and there were components of the Swedish policy model
parallel developments in other countries, as it originated in the Thirties.
especially in England with the beginning 1) Stabilization of the price level (con-
of the Keynesian School. The unique fea- sumers' prices) was taken as a primary aim
ture of the Swedish development was that of stabilization policy both by the econo-
the social democrats-in Government mists and by the Government. In a tradi-
power from September 1932-endorsed tion stemming from Wicksell, the con-
these views at once and made attempts stancy of the price level was regarded as
to carry out the expansionary policies a condition of equilibrium between sav-
which the model required. This attitude ings and investments (in ex ante terms).
towards the possibilities of stabilizing the Certainly the old arguments for a declin-
cycle by means of active fiscal policy ing price level (in proportion to the rise
should be regarded as a first component in productivity) were still alive in the de-
of the Swedish model. bate but played a secondary role. The sta-
It is not my intention to enter into the bilization of the price level was also taken
policy proposals of the Stockholm School to be an aim in itself by economists as well
and to compare them with the contribu- as by politicians. After the devaluation of
tions made by Keynes and the Keynesian the Swedish crown in September 1931,
school in the 1930s. All this has been this target was announced by the
treated in a number of studies, the latest Riksbank and thereafter accepted and
by Don Patinkin in his important contri- confirmed repeatedly by the Govern-
bution, Anticipations of the General The- ment. The remarkable fact was that this
ory? (1982 Ch. 2). His book includes an goal was successfully achieved; only dur-
interesting chapter on the role and posi- ing the international price inflation of
tion of the Stockholm School. The main 1936-37 did a deviation appear (a rise of
conclusion is that the theories and the pol- the cost of living of 4 percent).
icy models of the Swedish economists in 2) Stockholm economists-in contrast
the 1930s were in most respects both infe- to Keynes-directed their attention to
rior and secondary to Keynes' main ideas cyclical instability and disequilibrium eco-
in the General Theory. I shall not quarrel nomics (in ex ante terms). There was no
about Patinkins's main line of argument; concern about how and why the economy
he has good reasons for his conclusion that could be caught in stagnation and an un-
the Swedes had no integrated theory of deremployment equilibrium. Their main
output and neglected the equilibrating attention was on the possibilities of bring-
role of output changes. There is, indeed ing the economy out of the depression and
no conception of an unemployment equi- thereby reducing the rate of unemploy-
ment. The emphasis was on the expansion
4The older Stockholm School included Lindahl, possibilities of the economy. The risk of
Myrdal and Ohlin, and the younger generation: Dag an inflationary boom was discussed as well
Hammarskjold, Alf Johansson, Erik Lundberg and
Ingvar Svennilson. Their publications will be found as the danger that inflation might lead to
in Hammarskj6ld (1949). a new depression. The use of sequence

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8 Journal of Economic Literature, Vol. XXIII (March 1985)

analysis, pursuing development from one that term was not used). The budget defi-
period to the next, and thereby also pay- cits, they argued, would occupy space
ing attention to the variability of multi- within a more or less given volume of sav-
plier and accelerator coefficients, made ings and, therefore, squeeze out private
the models of the Stockholm School investment and employment. The ques-
clumsy and less general than the elegant tion of confidence was stressed. But the
Keynesian equilibrium approach.5 younger generation of economists-the
Expansion and growth perspectives, Stockholm School-had an enthusiastic
however, dominated the discussion in fighting spirit and a new and fresh attitude
Sweden-in clear contrast to the pessimis- about managing the cycle, by means of
tic visions of stagnation in the British and expanding public works and tax reduc-
American debate. This focus of interest tions, thereby giving a stimulus to total
seemed to run parallel with the actual effective demand. As with Keynes, the
strong expansion of the Swedish economy passive nature of the supply of savings was
from 1932 to 1933 (by 7 percent of real emphasized; investment created ex post
GNP) after a relatively shallow depression. the savings needed as long as there was
3) Policy orientation of theory was an elastic supply of money and much un-
much more pronounced in the Stockholm derutilization of resources. In the policy
version than in the General Theory. This, debates of the middle 1930s, there was
again, was an old tradition from the days little concern about inflation risks-not,
of Wicksell and Cassel. The stimulus of at any rate, until 1937, when impulses
actual policy issues became pronounced from an international price rise caused
beginning in the fall of 1931 when Eli some apprehension.
Heckscher and Myrdal, immediately after In his Appendix to the Government's
the devaluation of the crown, presented fiscal program of January 1933, Myrdal
their views about policy requirements. handled the confidence problem by pro-
The Social Democratic Government was, posing a rule to balance the Government
as mentioned above, open and receptive budget over the cycle: the deficits in the
to the economists' arguments for expan- depression should be about equal to the
sive policies. Myrdal was called upon by surpluses during the good times so that
the finance minister to work out a ratio- there should be no cumulative tendency
nale for the active fiscal policy program, for the Government net debt position to
presented in the beginning of 1932. rise (Myrdal 1934). In discussion, Heck-
The debate that followed became lively scher expressed strong doubts about the
and involved the typical arguments for political feasibility of this program. He
and against expansionary fiscal policies, ar- foresaw a kind of ratchet effect: there
guments that came to the fore again in would be a cumulative progression of pub-
the 1980s. Criticisms from the older gen- lic expenditures, and this would generate
eration of economists, led by Cassel and deficits or insufficient surpluses also in
Gosta Bagge, centered, as they do now, boom periods. He even made a long-term
on the "crowding out" question (although forecast that public expenditures and
Government activity would eventually at-
5This is one of Don Patinkin's points. However, tain such a high proportion of GNP that
the sequence models in my own work (1937) were
intended to demonstrate the cyclical instability of a free market economy would become im-
a closed economy by using a combination of multi- possible (Heckscher 1932, 1934).
plier and accelerator principles. This idea certainly 4) Another original feature of the
could not be presented as elegantly as Keynes' the-
ory of an equilibrium position. (See also Joseph Stockholm School-as compared with
Schumpeter 1954, pp. 1173-74.) Keynes' General Theory-refers to the

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 Lundberg: The Rise and Fall of the Swedish Model 9

treatment of international relations. It The combination of the relatively en-

was self evident to the Stockholm econo- lightened policy debate, the openness of
mists that the Swedish policy model the Socialist Government to the new ideas
should refer to the conditions of a small and the success of the Swedish economy
open economy. The autonomy issue, during the 1930s is often confused, in an
therefore, became dominant in the policy unwarranted way, with the performance
debate. The regimes of fixed versus free of an efficient Keynesian policy and gener-
exchange rates were compared. The econ- ally ex post-with the working of the
omists used the conception of "interna- Swedish Model. In fact the execution of
tional space" as a reminder, rather than stabilization policy was not impressive.
a measure, of the limited latitude the Fiscal policy-partly because of a labor
country might have for independent ex- conflict in the building industry-played
pansionary policies. They paid attention a secondary role. Monetary policy was pas-
to import leakages when discussing multi- sive and automatic: easy money, accompa-
plier processes; they considered interna- nied by the creation of much liquidity,
tional capital flows when studying what came to rule when the Riksbank acquired
scope there was for expansive monetary big exchange reserves due to the steady
policies, not least as to their effects on in- balance of payments surpluses. So the
terest rates. In these respects the views record low level of interest rates was
of the Stockholm School were clearly dif- mainly an automatic consequence of the
ferent from the analysis of a closed econ- undervalued crown. And the successful
omy in the General Theory. exchange rate policy was not deliberately
As a matter of fact the required "inter- chosen on rational grounds by the authori-
national space" was created by means of ties. The international exchange crises in
the big devaluation in September 1931. the summer of 1931, involving a big capi-
The crown became significantly underval- tal flight from Sweden, forced the
ued-and this position was apparently Riksbank to abandon the old gold parity
preserved during the whole decade.6 The and let the crown float-after the pound
strong tendencies to surplus in the current sterling had fallen. In fact, the Riksbank
balance of payments that prevailed during tried desperately to borrow from interna-
most years after 1932 supported the indi- tional capital markets in order to keep the
cation of undervaluation suggested by the crown at the old parity-but happily with-
measures of relative purchasing power out success, although it employed Swe-
parity. The driving forces behind rapid den's greatest expert on foreign borrow-
growth, beginning in 1933, were based ing, Ivar Kreuger.7
on a combination of export expansion and The merits of the stabilization policy ac-
an efficient import-substitution process. tually carried out, consisted fundamen-
And as mentioned above, the rapid mone- tally in the avoidance of backward or unin-
tary growth did not appear to generate telligent policy measures. Comparisons
internal inflation; a slow rise of nominal can be made with the deflationary policies
wage rates did not exceed the rise in labor in Sweden in the early Twenties or with
productivity. those of a number of countries in the Thir-
ties, where either the gold standard was
6See Lundberg 1983 diagram p. 103. The under-
maintained or where, as in the USA, un-
valuation of the crown, measured by real exchange
rates, is based on 1929. As mentioned above, the 7Ivar Kreuger was the Swedish "Match-King" and
crown was already in a relatively strong position in the financial genius of the 1920s. His financial empire
that year as evidenced by substantial capital exports collapsed in the beginning of 1932 (Bjorn Gafvert
and increasing exchange reserves. 1979).

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10 Journal of Economic Literature. Vol. XXIII (March 1985)

steady policies were pursued. The new the positive "purchasing power effects"
Social Democratic Government, in fact, of more generous assistance to the unem-
avoided socialist experimentation (such as ployed and to poor families with many
the Blum experiment in France) and ad- children. State interventions of this kind
hered more or less fully to the rules of a would elevate effective demand and sup-
capitalist economy. There was a minimum port the revival of the economy without
of protectionism. The Social Democrats causing disturbances to the economy at
accepted the rules of free international least on the scale actually carried out. The
competition as necessary conditions for underutilization of resources provided the
Sweden's economic welfare. The big ex- potential for rapid growth of production.
ception was agriculture, which was effec- The economy was far from the zero-sum
tively protected from the world depres- game situation of the 1980s. Thus, excess
sion. The international crisis and the capacity combined with the new thinking
severe difficulties of Swedish farmers were seemed to offer welcome space for expan-
the background to a political alliance be- sive social reforms.
tween the Government and the Peasants' The socialist finance minister, Wigforss,
Party, resulting in protection and price had first asked (at the beginning of the
stabilization. Another exception refers to Thirties): "Can we afford to work"? Then,
the clearing arrangements for trade and later in the Thirties: "Can we afford social
exchange dealings that Germany forced reforms"? The irony was directed against
upon her trading partners during the sec- the conservative and (pre-Ohlin) liberal
ond half of the 1930s. opposition, who maintained that Sweden
Liberal attitudes towards business, could not afford the expansion of Govern-
which favored and tolerated the condi- ment expenditures and the rise in taxes
tions needed for rapid revival and expan- to finance the social reforms. Indeed, the
sion, could be successfully combined with opposition-including the economists
reformist changes in the working of the Bagge and Gustav Cassel-did argue that
system. The Government presented am- the limits of taxation had been reached
bitious aims for social policy (including (around 1937).
housing policy and reforms of the labor Other important aspects of the new era
market). These were realized, to a consid- lay in the evolution of labor organization
erable extent, in the course of the 1930s. and its attitudes. The 1920s had been char-
The low level of interest rates (around 3 acterized by intensive struggles in the la-
percent) favored the rapid expansion of bor market. Sweden had a bad reputation
house building (which doubled in volume for the frequency of its strikes and lock-
during the decade). Total expenditures of outs, at that time, with 1920 and 1928 be-
the central government doubled from the ing years of exceptional labor unrest
beginning to the end of the 1930s. This (Bagge 1931). After the big building strike
unprecedented expansion of government of 1933 Sweden became known as a coun-
activity marked the beginning of the rise try of relatively peaceful and harmonious
of the Welfare State. employer-labor relations with a notably
There was at this time a clear element small number of working days lost. This
of consistency between the Keynesian (or happened at the same time that labor
Stockholm School) policy attitudes and the unions became increasingly strong and
desire for social reforms involving income the degree of unionization reached higher
equalization. It was easy for radical social- levels than in most other industrialized
ists, of varying degrees, to bolster their countries. The tendency towards centrali-
own populist arguments by reference to zation of the labor market organizations

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 Lundberg: The Rise and Fall of the Swedish Model 11

became more pronounced during the sec- position to the new development was
ond half of the 1930s. The development strong, in some quarters fierce. The actual
reached a kind of climax in 1938, when stabilization policies were under continu-
the central organizations of employers ous criticism. The opposition pointed to
and workers, that is the LO (the Central the risk of inflation arising from the expan-
Trade Union Organization), met in Saltsjo- sionary policies. As a matter of fact, the
baden and made a general agreement on Social Democratic Government demon-
the aims and means of peaceful collective strated its preference for a high rate of
wage settlements. (See footnote 1.) The employment rather than price stability as
famous "Saltsj6baden spirit" became a early as 1937 when it refused to appreci-
leading element of the Swedish Model. ate the crown as a means of neutralizing
It is easy to get an exaggerated impres- the international inflation. However, it
sion of the degree of political and social was not only, or not even mainly, the ac-
harmony, ruling under the auspices of tual policies carried out that aroused a
rapid and balanced economic growth, strong political reaction from the Conser-
during 1932-1939. A number of concep- vative Party as well as from the business
tions, half-truths and half-myths, flour- community. Their fears centered mainly
ished. One was a widely-held picture of on the trends toward socialism. These
excellent cooperation and agreement be- were aggravated by the many investiga-
tween capital and labor as well as between tions into the needs for structural change
a strong Social Democratic Government and long-term planning presented by
and private enterprise. Taxes on profits Government commissions during the sec-
were reduced, and a "free write-off" sys- ond half of the 1930s and by the ambitious
tem on capital investment was intro- programs they put forward.
duced. At the same time a start was made Clear and sharp ideological confronta-
on the investment fund system to encour- tions appeared. The thinking behind the
age firms to shift industrial investment Social Democrats' policy plans did not
from prosperous times to times of depres- stop with their concern with how to pull
sion. The market system of free enterprise the economy out of the depression. It har-
coexisted with the expansive policies of bored an underlying distrust of the effi-
a strong Social Democratic Government cient working of the market system. A
in a close association with the trade unions great number of public investigations
(LO). The vigorous development of the were started, aiming at structural reforms
consumers' cooperative movement (KF), of the economy and at more central long-
with its rapid expansion in trade and pro- term planning. Social Democrats gener-
duction, was also part of the picture. ally had considerable respect for the effi-
There seemed to be a good economic and cient working of the individual firm. But
social climate of tolerance and balance, the market system as such would not guar-
of acceptance of high profits and dynamic antee efficient coordination. The result,
change, as well as of the growing strength they feared, would be underutilization of
of the labor movement with its reform total productive resources and a tendency
policies. However, this common image of to new depressions as well as structural
a Swedish Model had a darker side, al- distortions. Expansionary policies would
though it contained an essential truth, have to continue, but they also thought
especially when contrasted with the more it would be necessary to have more gov-
open conflicts and confrontations of pres- ernment planning and intervention in or-
ent times. der to coordinate the activity and plans
As already mentioned, the political op- of individual firms. However, the Social

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12 Journal of Economic Literature, Vol. XXIII (March 1985)

Democrats were eager to stress that their their ambitious plans for reforming and
aims contained no plans for outright so- restructuring the Swedish economy. The
cialization and state ownership (apart Government announced a social reform
from exceptional cases). There was also pause and emphasized their search for
much discussion of the need for income consensus with the opposition parties and
equalization, and general visions of eco- especially with the private sector of the
nomic democracy were presented. economy. Conferences with various
All this meant that the Social Democrats groups were planned and started. It was
were putting increasing emphasis on the primarily the menacing pressure of the
structural problems of the Swedish econ- international political condition, the fears
omy, i.e., on the supply side. Selective pol- of war, that helped bring about a new at-
icies in the form of regional and industrial mosphere of cooperation and agreement.
plans and financial support were sug-
gested and applied to some extent. The IV. Convulsions of the Model-the First
big example was, of course, the regulation Postwar Period
and support policies in agriculture. At this
time (around 1937), the Government was After the war years, marked by politi-
looking for long-term consistent planning cal consensus and coalition government,
in this field instead of ad hoc protectionist there came a period of intense debate and
policies. Again it was Gunnar Myrdal who severe political confrontation. The con-
presented long-term strategies, combin- frontation involved both a conflict over
ing a strong long-term rationalization pro- policy alternatives and an ideological de-
cess in agriculture together with support bate about the choice of an economic sys-
for poor households of small farmers and tem. These years (1944-1949) were, in my
workers (Myrdal 1938). view, quite decisive and formative for
It is interesting to note that the argu- the further development of the Swedish
ments of the opposition were in many Model.
respects the same as in the 1970s. The The primary impulse to the debate
market system, they urged, was funda- came from the 1944 program of the labor
mentally stable if not interfered with by movement. Here the main policy issues
the government. There existed a fear of of the postwar period were defined and
the growing power of government and its generally quite radical solutions were pre-
long-term consequences. Tax rates were sented (the postwar program of the Labor
supposed to be so high already that the Movement, 1944). In the same and the
very foundations of savings and capital for-following year a Government commission
mations were shaken. This severe criti- on postwar problems, under the chair-
cism of the taxation policy of the Govern- manship of Gunnar Myrdal, presented a
ment was put forward at a time when total number of surveys and proposals to deal
tax payments represented about 15 per- with postwar problems such as investment
cent of GNP, compared to 50-60 percent control, structural imbalances and effi-
at present. On the Opposition side, Bertil ciency of the private economy.
Ohlin took a more moderate position. He Full employment was clearly named as
accepted the need for an expanded gov- target number one. The influence of the
ernment sector to provide a social frame- Beveridge Report of 1944 was evident,
work for the growth of the private sector but no exact unemployment figure was
(Ohlin 1936). adopted, at this time, as a goal. However,
However, from 1938 the Social Demo- when Bertil Ohlin, in a 1949 book, sug-
crats showed clear signs of moderating gested 5 percent as a reasonable target,

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 Lundberg: The Rise and Fall of the Swedish Model 13

he was severely attacked. The actual un- Strong emphasis was placed on the insta-
employment rate already achieved at that bility of private investment-fluctuating
time was around 2-3 percent. In fact there between times of speculative booms and
was clear evidence of an excess demand periods of pessimism and lack of enter-
for labor during the first postwar years, prise. Like Keynes' vision in the General
especially in the form of vacancies for Theory, social democratic thought stressed
skilled workers. The target for stabiliza- the unstable properties of the credit and
tion policy had clearly been radically financial system. The wartime experience,
changed from that of the Thirties. The in- especially from 1942, was a challenge: sub-
tention now was not only to stabilize the ject to much government regulation, full
economy by smoothing out the cycle of employment had been combined with
booms and depressions but rather to main- price and wage stability.
tain total activity steadily in the neighbor- Social democratic views, however, were
hood of a boom level. The full employ- not concerned only with demand instabil-
ment target was established as an essential ity. Indeed, the main emphasis was put
ingredient of the Swedish Model. Quanti- on the supply side and dealt with the in-
tative precision was afforded in the course efficiencies of production and trade. A
of time. Any number of government docu- number of investigations of the existing
ments suggested a target unemployment structural imbalances within the Swedish
rate around 2 percent. This proved to be economy were made by the "Myrdal Com-
consistent with actual achievements dur- mission." There were apparent ineffi-
ing the following decades, allowing for ciencies in a number of branches of activ-
small variations over the business cycle ity, in industry, trade, agriculture and fi-
(1-3 percent). The employment aims were nance. The Commission's studies found
sharpened again in the Sixties and Seven- branches burdened by overcapacity, un-
ties when they came to embrace the po- employment, too many plants and exces-
tential labor force (especially with regard sive costs, as well as by bottle-neck prob-
to married women), regional consider- lems. Many of these imbalances originated
ations as well as employment security in from the "artificial" boom of home indus-
individual firms. It is interesting to ob- tries during the 1930s, when the under-
serve that at this time (1944-1945), the valued crown had also provoked monop-
desire for full employment was not quali- olistic tendencies. The unbalanced and
fied by fear of inflation. The main consid- uncertain conditions in postwar Europe
eration was to prevent a postwar deflation meant uncertainty and difficulties as to
from going too far and depressing the foreign trade.
economy. The conclusions presented in the vari-
The central issue of the economic-politi- ous reports contained strong recommen-
cal debate concerned the means of attain- dations for Government intervention,
ing full employment-and stable growth. planning and the reform of existing insti-
The leading Social Democrats were con- tutions. Emphasis had now shifted away
vinced that the existing economy based from expanding public works for attaining
on a free market system was fundamen- and keeping full employment. In contrast
tally unstable. They foresaw a big postwar to the arguments of the 1930s, the reports
international depression, followed by called for stimulating private investment,
booms and recurrent depressions. There including production for the home mar-
was no guarantee whatever that a free en- ket. There was, in general, no support for
terprise system "by itself" would attain socialization of private corporations; the
and maintain full use of existing resources. slogan was rather "socialization of con-

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14 Journal of Economic Literature, Vol. XXIII (March 1985)

sumption" in the form of general social model, is mentioned as an element of jus-

policy reforms including expanded social tice, to bring up the wages and income
insurance schemes and enlarged collec- of women, the unskilled and farm work-
tive (public) consumption. But private in- ers, as well as small farmers. But one main
vestments had to be controlled. Invest- mode of reform would be to make produc-
ment plans should be coordinated in order tion more efficient by fostering new atti-
to avoid the big mistakes that would be tudes towards work.. The reports offered
a consequence of the free play of markets. radical ideas about the need for creating
Planning councils for the several branches job satisfaction, including workers' coop-
of production were suggested. The reports eration in the management of firms. There
recommended close control of the finan- was a strong demand for the democratiza-
cial system, including socialization of in- tion of economic life in Sweden.
surance companies as a necessary condi- There was much lip service to free in-
tion for improved functioning. High ternational trade as the basis for the favor-
interest rates as an expression of excess able development of the Swedish econ-
demand for savings during boom periods omy. But, according to Social Democratic
would be a bad solution. Myrdal's slogan blueprints, this pattern of potential advan-
(1944) of keeping interest rates low and tages from foreign trade had to be or-
tax rates high became almost a dogma of ganized by Government boards, which
the Social Democratic Government. In would plan and support the growth of ex-
part, this position reflected the needs of ports to, and imports from, a more or less
an expanded housing program that was chaotic outside world.
being planned. The criticism of the free market system
There was a marked contrast between included its negative effects on the distri-
the Social Democratic attitudes towards bution of income and wealth. High, pro-
the requirements for reform in the finan- gressive, direct tax rates, wealth taxes and
cial and investment markets and in the expanded social policies (including gen-
labor market. In the first case there was eral pension reforms) were among the so-
a minimum of reliance on market perfor- lutions suggested. Conservative ideas
mance; a lot of regulation and planning about the need for high profits and un-
was needed. With regard to labor, atten- even income distribution in order to gen-
tion was mainly focused on improving the erate enough savings were derided. Great
functioning of the markets, mainly by faith was placed in the supply of collective
means of "market-conforming" policies savings in various forms. Enlargement of
(i.e., policies that made markets work the public sector and of the social insur-
more efficiently). The 1944 program con- ance system with concomitant expansion
tained progressive suggestions for enlarg- of public savings were important ingredi-
ing and improving the existing labor ents in the program. These were regarded
exchange system and for supporting mo- as valuable reforms in themselves, and
bility of labor among both occupations also as built-in stabilizers over the cycle.
and locations. Occupational training was These proposals for planning and re-
proposed. Quite modern arguments were form provoked an intense debate and a
advanced for investment in human capital much more serious political confrontation
which, according to the report of 1944, than during the 1930s. The 1944 report
would be at least as profitable as conven- was quite outspoken in declaring that the
tional material investments. The concep- whole program implied a new organiza-
tion of a solidaristic wage policy, which tion of the economic system, a transforma-
later became a cornerstone of the Swedish tion in a socialistic direction. The opposi-

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 Lundberg: The Rise and Fall of the Swedish Model 15

tion parties used the occasion to mount the opposite-strong inflationary tenden-
a strong campaign against government cies and excess demand for Sweden's ex-
planning and against the trend towards port goods as well as for labor. The crown
socialism. Friedrich Hayek's book, The was appreciated in late summer of 1946,
Road to Serfdom, was a valuable tract in chiefly in order to check the inflationary
the counter-agitation. It portrayed the loss boom of exports and to damp the interna-
of freedom that Hayek associated with a tional rise of prices. But Government fiscal
planned economy. The efficient function- and monetary policies were kept expan-
ing of a market system which was able sive, preserving low interest rates which
to correct the structural imbalances of the were, indeed, negative in real terms. The
economy and to solve the problems of de- result was general excess demand and an
mand deficiency were, of course, the exchange crisis in 1947 when the country
themes of the Opposition. Their liberal lost nearly the total of its existing reserves
attitude and credo confronted the Social of foreign exchange. The measures used
Democrats' confidence in the efficiency by the Government came to be concen-
of government central planning. The at- trated on direct regulations of imports,
tacks on the socialist ideals and programs prices and investment.
came predominantly from politicians in Thus, from the fall of 1946 the Govern-
the opposition parties. But well-known ment's attention was absorbed by burning
economists, who were politically engaged, questions regarding current stabilization
also presented articles and pamphlets on policies. The opposition, as well as leading
the problems of individual freedom in a economists, were engaged in exposing the
planned economy (Lundberg 1953, Ch. failures of current policy. Keynesian cal-
9). culations of "inflationary gaps or excess
The ideas and plans of the Social Demo- of total demand" became a hobby of criti-
cratic Government for changing the exist- cal economists.8
ing economic system quite radically were, In the election campaign during 1948,
without doubt, seriously advanced. The the Social Democrats tended to soften
debate on the program-although not their "socialist ambitions." But the opposi-
many of the plans were actually adopted tion, led by Bertil Ohlin, kept hammering
in this period-was revealing because the at the socialistic plans of the Government
types of ideas then in question do, indeed, as a great menace to a free society and
reflect the basic thinking of leading social
democrats. They exist as visions of a better 8The technique of measuring the "inflationary
gap" or "excess demand" originated from Keynes'
system and return as actual propositions famous 1940 pamphlet, "How to Pay for the War,"
at times of political opportunity. As will which revealed the distorted British war economy.
be clear from the following text, these "so- The Swedish "Konjunkturinstitut" (The Govern-
ment Economic Research Institute) developed this
cialist tendencies" of Social Democratic type of analysis during the years 1945-1948, when
Governments, ruling during 44 years restricted supply conditions (GNP real growth and
(1932-1976), have put clear marks both limited import volume) were compared with excess
total demand for consumption and investment ex-
on the rise and fall of the Swedish Model. penditures. The difference was identified with ex-
It is of interest to understand why so pected inflation and/or increased deficit in current
little of the Social Democrats' program balance of payments. The needs for restrictive policy
could thus be given some quantitative precision. The
was realized during this first postwar pe- theoretical framework was worked out by Bent Han-
riod (1945-1949). In fact, unanticipated sen (1951), who referred back to Wicksell's original
economic and political change got in the approach in Geldzins and Giiterpreise (1898). In
Wicksell's model there was a clear distinction be-
way. Instead of a big postwar depression tween excess demand for labor ("wage gap") and
that had been anticipated, there appeared for goods and services.

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16 Journal of Economic Literature, Vol. XXIII (March 1985)

to the working of the Swedish Model. The was strengthened. The aim of price stabili-
attacks also included what was called zation was still there but it was weakened
the Government's mismanagement of the because of actual inflation experience and
Swedish economy during the crisis, in- the appearance of new, more ambitious
cluding the reintroduction of price and aims of full employment and rapid
import regulation as a bad beginning of growth. Targets for social reforms and in-
the planning envisaged in the social demo- come equalization were based on ideas
cratic program. The outcome of the 1948 from the 1930s, but enlarged in line with
election was a great victory for Ohlin ancd the socialist programs of 1944-1945. The
his Liberal Party and a serious setback for more progressive ideas appearing during
the Social Democrats. this period were appealing and operated
At that time, the fall of 1948, things as driving political forces. One main dif-
started to return to "normalcy" on several ference compared with the 1930s was the
levels. The main issues of the 1944 pro- completely new international environ-
gram seemed to evaporate. The Social ment. Since 1948 a strong, expanding
Democratic Party, which remained in world economy had replaced the world-
power, but with reduced majority, turned wide depression of the 1930s. Sweden's
away from the more ambitious parts of economic and technical position in the
its postwar program and started looking world seemed strong, with relatively high
for common ground and cooperation with productivity and a large capacity to pro-
the Farmers' Party. A period of coalition duce. Two world wars-with Sweden out-
government followed. The world outside side-added to the cumulative results of
Sweden became more orderly. Recovery the relatively progressive decades of the
in Europe came much more quickly and 1920s and 1930s. All this had brought Swe-
successfully than had been expected, den's GNP per capita and living standards
thanks not least to the Marshall Plan and to a top position.
the strong revival of Germany. The vol- There was ground for confidence and
ume of international trade started to ex- optimism as to the development of the
pand at a considerable rate. When the Swedish Model after the restoration of the
British pound was devalued in the fall of internal political balance at the end of the
1949 Sweden followed its example imme- 1940s.
diately and completely. The result was
again an undervalued crown.9 At last the V. The Consolidation of the Model-and
scene was set for a continuation of the the Beginning of Erosion
trends that had ruled in the 1930s.
The "Keynesian attitude" towards stabi- A new problem-as distinguished from
lization policy was preserved while the de- the 1930s-now came to the fore: how to
sire to engage in selective intervention combine full employment with a low rate
of inflation. The experiences of the first
9 Lundberg (1983, Ch. 4) "The crown devaluation" postwar years had dramatized this di-
of 1949 should be seen as a correction of the big
(mistaken) appreciation of 1946 that, due to the fol-
lemma of the stabilization problem that
lowing wage inflation, meant an overvaluation of the had only appeared as a theoretical possi-
crown. In contrast to the devaluation of 1931 the bility during the 1930s.
exchange-rate policy this time was planned and
based on comparative cost studies. The Korean War
It can be said as a generalization that
inflation (1950-1952) greatly complicated the analy- during the coming decades, up to 1975,
sis of the post-devaluation cost- and price-effects. demand stabilization during periods of re-
In any event, the- subsequent balance of payments
development remained close to equilibrium with a
cession was more successful than the re-
minimum of disturbances until 1974. straint of demand expansion during boom

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 Lundberg: The Rise and Fall of the Swedish Model 17

periods. As in most other countries the quently a general expansionary policy is

quick acceleration of demand and pro- regarded as a poor solution.
ductivity during the revivals made it diffi- Therefore, a different approach should
cult to control the development. Operat- be pursued. Overall fiscal and monetary
ing in close proximity to the ceiling of full policy should be kept sufficiently' restric-
employment and of capacity constraints, tive in order to prevent the appearance
stabilization policy was hampered by lags of excess demand and profit inflation in
in observation and in the time required the most exposed sectors and regions. The
for policy to take effect. Overheating ac- lowering of general demand pressure
companied by extra wage and price infla- would mean that there would appear "is-
tion appeared quickly. One distinctive lands of unemployment" in the weaker
and fortunate feature of these policy expe- sectors and regions of the economy. These
riences was that, until 1969-1970, bal- unemployment problems should not be
ance-of-payments troubles never forced solved by inflating the economy but by
Swedish authorities into any pronounced selective measures, designed to create jobs
form of stop-go policy. This may be ex- on the spot as well as to support the move-
plained by the fact that the revivals and ment of manpower (after vocational train-
booms were to a considerable extent led ing) to expanding sectors and firms.
by exports. There are several policy ideas built into
Against this background the objective and complementing this model that can
in new-model thinking was to find a way be illustrated by means of a Salter diagram
of reaching full employment goals with (W. E. G. Salter 1960). First, the share of
a minimum of inflationary impact. The gross profits should be reduced by means
Keynesian solution, calling for an expan- of indirect taxation. A general squeeze of
sion of total effective demand through profit margins should lead to a strengthen-
general fiscal and monetary policy could ing of employer resistance to wage in-
only be recommended in a major depres- creases, and thus there would be less wage
sion but not when a mild recession meant inflation. Second, squeezing the profit tri-
unemployment of 2-3 percent. angle by means of increased indirect taxa-
The difficulty just described was widely tion and wage cost pressure, together with
appreciated. In the years following 1949, subsidies to marginal firms and branches,
it formed the background for a version should, in combination have desirable ef-
of a social democratic variant of the Swed- fects on the functional income distribution
ish Model that is associated with Gosta (between capital and labor). And as a con-
Rehn. This version is based on the recogni- sequence, probably there would also be
tion that in the real world, the various re- some measure of greater equality in the
gions and sectors of the economy would distribution of individual incomes and
differ markedly in their distance from full wealth.10
use of capacity and full employment. Mo-
10 The LO-report "Fackforeningsrorelsen och den
bility of resources is very limited in the
fulla sysselsdttningen" of 1951 ("The Trade Union
short run. During the revival from a reces- Movement and Full Employment") was the "bible"
sion, an additional push on total demand of the new policy model. LO-economists Rudolf
Meidner and Gosta Rehn were mainly responsible
by means of a general expansionary policy
for the original version of the model which, in the
is likely to cause excess demand for labor literature, is generally referred to as the Meidner-
and real capital in various sectors and re- Rehn or the Rehn model.
There is a vast literature in the form of articles
gions. Inflated profits and substantial wage
and discussions between 1948-1953 as well as in re-
drift at these points will produce cost-push cent years. An original version (1948) by Rehn is
effects in other sectors and regions. Conse- available in English in Ralph Turvey (1952): "The

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18 Journal of Economic Literature, Vol. XXIII (March 1985)

Selective in the 1970s), financed by rising fees on

Production cost policies Price
per unit level at wage payments. The background-as a
expan- typical ingredient in the Swedish Model-
sive was a great social reform, namely the in-
troduction of a generous and general pen-
sion sch,eme for the whole people in 1959.
The lowered incentives for private savings
had to be compensated for by means of
public savings.
How the pressure on gross profit mar-

~~~~~I
gins following from this policy might lead
to increases in productivity was the sub-
ject of much debate. A number of ways
were proposed. It was said, first, that mar-
ginal plants are knocked out, thus raising
average productivity of all plants in a
Mobility stimulus
branch of activity. Next, employees are
The Rehn-Meidner Model transferred by means of active labor mar-
ket policies from abandoned plants as well
Such a policy should also mean a trans- from low productivity firms to expanding
fer of gross savings from the private (cor- firms with relatively high productivity.
porate) sector to the public sector when- Third, the pressure might also induce in-
as actually became the case-the general creases in x-efficiency as well as new in-
restrictive fiscal policy was carried out by vestment, embodying technical progress
successively increased indirect taxes in- and increasing capital intensity of produc-
cluding payroll taxes. "Excess profits" of tion. The accelerated rise in labor pro-
inframarginal firms were considered, by ductivity that actually occurred during
the proponents of the scheme, as a kind the 1960s (7-8 percent per year in the
of forced savings, privately determined manufacturing industry) was cited in sup-
and appropriated on very undemocratic port of this hypothesis.
grounds. From this point of view the pol- An important ingredient in the Rehn
icy mix looked to increased government policy scheme is its demand for solidaris-
power over the capital and credit markets. tic wage policy, which meant the same
As a matter of fact, on these grounds the pay for the same type of work regardless
LO-economists were able to persuade so- of profitability and productivity in the var-
cial democrats and trade union people of ious branches and firms. In this respect
the usefulness of indirect taxation. Indi- Swedish development has been success-
rect taxes need not have regressive end- ful-more so than in most other countries.
effects. The consequence has been especially se-
An outstanding practical manifestation vere pressure from rising labor costs on
of this approach was the creation of a rap- labor-intensive low-wage branches. One
idly growing government pension fund necessary condition for the successful pur-
(reaching the size of S5 percent of GNP suit of solidaristic wage policy was the cen-
Problem of Stability: An Analysis of Some Policy Pro- tralization and growing strength of the
posals." Further references to the model are: Lund- trade union movement. The power and
berg 1953, Ch. 14; Rehn-Lundberg (1962-1963), responsibility of the central organizations
Lundberg (1972), referring to the Rehn-Salter
model, Anders Bjorklund (1982), Meidner and Anna of labor-in agreement with the Social
Hedborg (1984, Ch. 6, 7). Democratic Government-certainly be-

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 Lundberg: The Rise and Fall of the Swedish Model 19

long among the ingredients of the Swedish became very lively after it was presented,
Model. especially in 1948-1953. I was among its
It is important to see that the productiv- opponents-not because of failure to un-
ity-raising structural transformation of derstand the logic of the model-because
Swedish industry occurred under the fa- of the long-term economic and political
vorable conditions of a liberal trade pol- dangers involved (Lundberg 1953, Ch.
icy. The relatively high and rapidly rising 14). There were several serious problems
wage costs hit hard at labor-intensive ac- connected with applying the policy.
tivities (such as textiles, clothing and foot- One important question was how the
wear industries). Domestic production was resources released by a general profit
successively replaced by imports while squeeze would, in fact, be employed. If
new jobs were created in expanding ex- the policy were aggressively applied, in-
port industries (especially engineering). volving substantial squeezing of profit
A central part of the Swedish Model is, margins (as in the diagram), the conse-
as mentioned above, the need for high la- quence might be such a reduction in ac-
bor mobility. This mobility should not be tual and expected profitability that the lib-
attained, according to the model, by high erated resources would be used only to
market-determined wage differentials a limited extent in expanding the activi-
(raising the risk of wage-wage inflation). ties of best-technique plants. There were
An active labor market policy-by means strong arguments against an extensive ap-
of an expanded information service about plication of the selective subvention poli-
job vacancies and labor supply, vocational cies envisioned in the scheme. There
training (for new jobs) and generous subsi- would be no clear criteria for the selection
dies for geographical transfers-should do of firms, branches and regions to be sup-
the job of filling the vacancies with availa- ported. Political decision makers would be
ble labor supply much more effectively exposed to the pressures of many private-
than wage incentives. There was some interest groups.
empirical evidence in support of this hy- The same type of criticism was directed
pothesis. towards the "socialization" of business sav-
The rapidly expanding active labor mar- ings contained in the model. It was admit-
ket policy was not only a strategic ingredi- ted by some opponents, including myself,
ent of the Rehn model; it actually became that a high degree of concentration of cor-
quite a unique feature of the Swedish porate savings in big, successful corpora-
Model. There was a remarkable expansion tions presented a perplexing issue given
of the public expenditures for labor mar- that markets for risk capital function im-
ket policies of all kinds-rising from about perfectly (Lundberg 1961, Ch. 10). But
1 percent of GNP in the beginning of the the failure of the capital market to allocate
1960s to about 4 percent in the 1980s. internal funds effectively-and to achieve
That represented a higher level than in equalization of prices or returns on invest-
any other country; moreover, only 10 per- ment-could not and should not, in my
cent of the expenses went for cash pay- view, be solved by means of a transfer
ments to the unemployed. It should be of funds to the public sector (partly in the
added that there was a clear tendency to form of government pension funds). It was
shift the emphasis from demand support again an apprehension about the concen-
(such as public works) towards supply-ori- tration of power in government and the
ented measures (such as vocational train- need for central planning that came back
ing and encouragement of mobility). as a crucial issue in the discussion.
The debate on the Rehn policy model It is always a difficult question to judge

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20 Journal of Economic Literature, Vol. XXIII (March 1985)
if and to what extent a given policy model Finally, there were doubts about the ef-
such as Rehn's, has really been applied- ficiency of the scheme in reducing the in-
and, if so, with what success. We may finc flation rate. Did high profits really mean
indicators in the policy debates and gel great risks of excessive wage rise? Was not
an impression of its impact. We may b( the low unemployment rate-resulting
impressed by elements of achievement from the application of the model-deci-
as indicated above, such as full employ sive anyhow? During the Sixties there was
ment attained, rising intensity of laboi a certain squeezing of profit margins and
market policy, a lot of selective fiscal pol, much active labor market policy, but the
icy measures, the squeezing of profit mar, rate of inflation in Sweden was about at
gins during the 1960s together with the the average of the OECD-countries and
creation of government pension funds tended to accelerate.
partial success of solidaristic wage policy As mentioned above, the model policy
and rapidly rising tax rates. All this woulc failed to keep down general effective de-
fit in with the Rehn policy model, and alsa mand during the booms. There have been
belong to the Swedish Model. Similar de. a number of studies in Sweden along the
velopments (including a squeeze of profil line of the Phillips relation. They were of
margins) can, however, be found in othei limited value and have not given much
countries. As to actual achievements dur. policy guidance. There has been much de-
ing the "golden decades" of the 1950s anc bate about how and to what extent an im-
1960s, Sweden is unique only in the de. agined Phillips curve may have been
gree to which it built up collective savings shifted towards the left-as it should have
and applied active labor market policies- been-thanks to an intensive labor market
and also as to its motivation for the policy policy. Superficially it seems so. The infla-
measures. tion rate in Sweden-a little below the
When looking at the actual develop. OECD average during the Sixties-was
ments, with the Rehn model in mind, we accompanied by a significantly lower open
find two apparent failures. By "failure" ] unemployment rate. Table 1 gives some
mean failure by comparison with the re. insight.
sults implied by the model. The rapid risE In the Swedish literature on the Phillips
in productivity, especially during the sec. curve (Bertil Holmlund 1982; Meidner
ond half of the 1960s, was achieved at thE 1984), one finds demonstrations of the hy-
cost of growth in total industrial produc. pothetical downward shift of the unem-
tion. Plants were shut down and the laboi ployment/inflation trade-off position due
thus released, together with labor saved to active labor market policies which op-
in existing plants, exceeded the rate of ca- erated to improve the match of labor sup-
pacity expansion so that total industrial ply and demand. But the actual shift is
employment declined beginning with the mainly due to the "concealment effect"
middle Sixties. The shifting of resources of active labor market policies which
out of industrial production and trade was tended to push down official unemploy-
matched by a rapid expansion of the pub- ment figures. The disequilibrium in the
lic sector. Full employment was main- labor market is poorly measured by means
tained but only thanks to the rise in public of official unemployment rates. Potentially
sector employment."
close to 70 percent of GNP while GNP in real terms
11 The volume of total public-sector expenditures was stagnating (1 percent growth rate). The share
(including transfer payments and gross investment of total employment in the public sector increased
expenditures by general government) was expand- from 20 percent to 33 percent between 1970 and
ing by 6 percent per annum (1970-1982), attaining 1983.

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 Lundberg: The Rise and Fall of the Swedish Model 21

TABLE 1

UNEMPLOYED IN PERCENT OF TOTAL LABOR FORCE

1960-1966 1967-1973 1974-1980 1983

Sweden 1.5 2.2 1.9 3.5

Small European countries 3.8 4.5 6.9 11.7
OECD total 3.1 3.4 5.4 9.0

Source: OECD Economic Outlook, Historical Statistics 1960-1980, 1983.

the lack of employment in "regular" busi- model and as an ingredient of the Swedish
ness and public activity might be as big Model.12 The essence of the EFO model
as in other comparable countries. The spe- is the disaggregation of the economy into
cial characteristic of the Swedish labor two main sectors, showing marked differ-
market is-in addition to the rapid expan- ences both as to productivity growth and
sion of employment in the public sector- as to the mode of price determination. A
its positive and humane method of taking number of export branches and activities
care of those who would otherwise be working under import competition have
counted as "unemployed" (in later years been aggregated into a competitive sector
representing around 4-5 percent of the (the C-sector of tradable goods) represent-
labor force) by means of public works, ing about one-third of GNP. The rest of
training programs, special, protected the economy, in the sheltered sectors (the
workshops, occasional support of inven- S-sectors), consists of branches such as
tory build-up, as well as measures for early building activity, retail trade, most private
retirement. Another specific feature of and public services, public administration,
Sweden's labor market is the outstanding etc. Here prices are determined by inter-
mobilization of women into the labor nal demand and supply conditions, with
force: in 1960 the labor force participation productivity and wage-cost developments
percentage of women was 50 percent and as determining factors. It is evident that
in 1980 it was about 75 percent, a record the distinction between these two sectors
within OECD countries where the overall must be vague near their borderlines.
average was 50 percent in 1980. The EFO model operates in the follow-
A realistic model of wage formation ing simple way. Price increase in the C-
must take account of the fact that Sweden sector (on the average about 1 percent
is a small, open economy with a large part per year in the 1960s) is taken as an exoge-
of its production subject to heavy interna- nous variable given by world markets. Sta-
tional competition, both on the export and tistical testing clearly verifies the hypothe-
the import side. From this point of view sis. With the "given" growth of sectoral
it is realistic to consider the development productivity of about 8 percent per year,
of export and import prices-at least in there was room for a 9 percent rise in
the long run-as independent of Swedish wage costs per hour (at given exchange
cost and productivity developments, and
12The EFO model was originally presented as a
rather as determined by world market joint study of the central employer and employee
conditions. organizations under the title Ldnebildning och Sam-
hdllsekonomi (1970). The responsible economists
In Sweden the Scandinavian or EFO
were G6sta Edgren, Karl-Olof Fax6n and Clas-Erik
model was given empirical content and Odhner. For a critical discussion of the model see
was actually conceived as a kind of policy Assar Lindbeck (1975, Ch. 8), Lars Calmfors (1978).

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22 Journal of Economic Literature, Vol. XXIII (March 1985)

rates and profit margins). In fact, wages of the price level in the longer run-say
rose somewhat more rapidly, about 9.5 over a 5-year period. As the authors of
percent per year, so that there was some the EFO model express it, it seems that
squeeze of profit margins. The price de- the price level is "structurally deter-
velopment in the sheltered sector is then mined." Only changes in exchange rates
determined by the given wage cost rise and policies affecting the growth of pro-
in a "cost-push" equation (cost mark-up ductivity and the distribution of activity
pricing). would be important in the longer run.
There is no doubt that the EFO model As a normative model for wage policy
is a great improvement over the old ag- the main implication is the steering role
gregative type of analysis (along the lines of wages in the industries exposed to inter-
of the Stockholm School). It brings out the national competition. Viewed in this way,
importance of the difference in productiv- it was the implicit acceptance of this re-
ity growth between the two sectors. The striction on wage increases by the trade
greater this difference-with a given aver- unions-an acceptance that as a rule was
age productivity rise-the more rapidly strongly supported by the resistance of the
the general price level must rise under employers' organizations to faster rates of
the stated equilibrium conditions and wage increase-that gave considerable
given the international rate of price in- stability to the price and wage develop-
crease ("structural inflation"). The most ment during the 20-year period up to
important conclusion is, if the difference 1973. The pertinent conditions were quite
in growth of productivity is given then stable and the deviations from the main
the rise of the price level is determined course were relatively insignificant. How-
by the exchange rate and the price devel- ever, the "structurally given" long-term
opments abroad. inflation rate of 3-4 percent (at constant
Serious objections have been made exchange rates) was accepted and did not
against the EFO model, both as to its ex- show any clear tendency to accelerate up
planatory power and regarding its mean- to 1970. But there was a longer-term shift
ing as a normative model. The model is in the operation of the model, perhaps
clearly a partial transmission model with- partly related to the Rehn program: a
out any demarcation of demand and sup- squeeze of profit margins and a relative
ply-side variables (and equations). It has decline in the industrial and C-sector
rather the character of an empirical law. share of the economy.
There is no clear analysis of a self-correct- The Rehn and the EFO models in
ing mechanism, no explanation of the kind some ways are complementary within the
of equilibrium forces that may serve to Swedish Model. But at the same time they
bring the short-term deviations back to are in conflict in other respects. The com-
the long-term path (the main course). mon denominator refers to the needs of
During the second half of the 1970s work active labor market policies in order to
has been done to synthesize Phillips- achieve efficient labor mobility. Both
type (short-term) analysis with EFO-type models are based on attainment of contin-
longer-term studies (Calmfors 1979, Franz uous structural change. This development
Ettlin 1977). is accomplished by means of market forces
From a policy point of view the most in the case of the EFO model but on the
radical implication of the working of the basis of a combination of general and se-
model is that short-term stabilization ef- lective fiscal policy in the case of the Rehn
forts do not matter much for the course model. Wages are, in principle, market-

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 Lundberg: The Rise and Fall of the Swedish Model 23

determined in EFO; in contrast, wage pol- on the average, only one-half of the total
icy is active and is partly applied as a fight wage increase is attributable to collective
against market forces in the Rehn model bargaining-the rest is market-deter-
(solidaristic wage policy). Potential and ac- mined wage drift.
tual conflict between these models is an
element in the process of erosion of the VI. The Fall of the Model
Swedish Model.
To readers who are not Swedish, it may The various ingredients in the Swedish
seem that one issue of stabilization policy Model that have been mentioned and dis-
has been left out of account: namely, di- cussed above have not been put into a
rect incomes policy. However, in Sweden systematic framework. Nor has a clear-cut
this question has not been central and cer- definition been presented. For reasons
tainly it is not a characteristic feature of given in the Introduction, I have only in-
the Swedish Model. Such conditions as a tended to offer an historical account of
record high degree of unionization (close the relevant development stages. I have
to 90 percent) and strong centralization tried mainly to describe the historical
of power in LO (and TCO for white collar shifts in policy aims, methods and theories.
workers) should be favorable factors for In some paradoxical way, it seems easier
attaining wage-policy agreements with a to clarify the erosion and partial collapse
Social Democratic Government. A wage- of something called the Swedish Model
stop agreement was, in fact, successfully than it is to establish its existence and de-
reached during the war years. But the fine its exact properties. We can discern
only serious postwar attempt at incomes clear failures of the Swedish economy
policy-as embodied in the prolonged col- from the 1970s, in a number of respects,
lective agreements for two years (1949 and give them a systematic appearance
and 1950)-became a complete fiasco. that may represent an ex post definition
During these years of wage-stop agree- of what the Swedish Model was or should
ment there was a marked and unevenly have been. The following, necessarily sche-
distributed wage drift, followed by gen- matic account of crisis phenomena will,
eral wage explosions in 1951 and 1952. at the same time, serve as a summary of
In fact, the trade union movement in our earlier presentation of the develop-
Sweden is completely against government ment stages of the Swedish Model.
interference in the process of collective The causes of the breakdown may be
wage bargaining. The movement is ada- divided into two general categories: first
mant about preserving its autonomy. the long-term trends that tend to erode
Even attempts of governments to per- and weaken the operation of the econ-
suade LO about restraints in wage de- omy; second, the severe shocks and distur-
mands or to present guidelines as to ac- bances that occurred during the 1970s,
ceptable wage increases have been badly which revealed the vulnerability of the
received, and neglected. The leaders and system. In the following, I shall present
the economists of LO have always been various aspects of the process under a
sensitive about their trust-relationship to number of headings, and I also try to draw
the union members. They regard it as attention to interrelations of the factors
their duty to work consistently for their mentioned under those various headings.
interests and not serve government pol- 1) The political background conditions
icy. The limited possibilities of central changed significantly. There existed-as
wage policy is revealed by the fact that, a fundamental characteristic feature of

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24 Journal of Economic Literature, Vol. XXIII (March 1985)

the Swedish Model-a kind of balance be- ployment before the 1970s (see above).
tween a relatively strong Social Demo- It is quite evident that the portion of an
cratic Government and a private or capi- active labor market policy that aimed
talistic entrepreneurial system. The Social merely at high mobility of labor was
Democrats were strong enough to tolerate pushed into the background. Instead,
the working conditions of a free enter- many government attempts were made
prise system. There was-after the evapo- during the crisis years (1970s) to preserve
ration of the planning ideas of 1944-no employment in those regions, branches
actual program of socialization, only of and firms that were hit by the crisis.
progressive social reforms, including a 3) The growth target as such, since the
smoothly-rising tax burden and expanding end of the 1960s, was coming into doubt.
government sector. As in so many other countries, issues of
The position of the Social Democrats environment-with regard to nature,
weakened from the end of the 1960s. Be- and the work place-came to be ever
tween 1973-1976 the Socialists (including more important as restrictions and were
the Communists) no longer had a voting thought to be costs of development. The
majority (exactly half the votes in the severe dispute over building atomic
Riksdag). For six years, 1976-1982, Swe- power plants was symbolic and it was a
den had non-socialist, bourgeois govern- revealing case in point; the 1979 referen-
ments for the first time since 1932. During dum meant strict limitation of nuclear en-
that period, the Social Democrats were ergy. The political decision to abolish the
radicalized under the leadership of Olof use of atomic power fromn the year 2010
Palme. The strong central trade union or- implied a stop to production in a promis-
ganizations also became politically aggres- ing branch of industry where the Swedes
sive and quite uncooperative with the had achieved a pioneering position. Atti-
bourgeois governments. There was much tudes towards industrial work, as well as
more confrontation between the political towards efficiency and productivity, be-
blocs than during the "golden decades" came increasingly negative within wide
of the Fifties and Sixties. circles, especially among the younger gen-
2) The general attitudes as to policy eration.
aims were transformed, beginning with The actual stagnation of real GNP, be-
the second half of the Sixties. The policy ginning in 1974 (an average GNP increase
ambitions were loftier: rate of one percent until 1983), and the
The concept of full employment be- declining trend of industrial production,
came more inclusive. There was increased since 1975, were certainly not intended.
antagonism to the considerable migration But the very fact that growth was inter-
of labor, especially from north to the rupted had serious implications for the
south. The human cost of high mobility working of the system. For more than two
was stressed. The demand for high re- decades a steady growth rate (around 4
gional employment intensified and so did percent) had been a basic assumption for
the demand for job security at a given the working of the model. From the mid-
work place. New laws were introduced, Seventies variability and uncertainty were
limiting the rights of employers to fire em-the rule.
ployees, and lengthening the warning pe- 4) The strong egalitarian spirit-a
riod before discharge. Full employment characteristic feature of the Swedish
came to include employment for a rapidly Model-actually tended to be strength-
rising group of married women who had ened when conditions for a zero-sum
belonged to the reservoir of hidden unem- game came into being. The demand for

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 Lundberg: The Rise and Fall of the Swedish Model 25

solidarity with lower income groups rates and fluctuating rates of international
meant that the burden of a declining con- inflation.
sumption standard had to be carried by A wage-cost explosion in the years
"the rich," while the relative wages of 1974-1976 implied a big overshooting in
lower-income groups were to be raised. relation to the EFO norm. The origin of
This demand for a more even income this is to be found in the extraordinary
distribution came in conflict with the boom of 1973-1974 which was accompa-
needs, which are stressed especially by nied by highly inflated profits and a record
economists, of improved incentives for wage drift. The strong imbalance so gen-
work and productive initiatives. In fact, erated was, of course, intensified by the
wage differentials were squeezed and di- supply shock caused by the rise in oil
rect tax rates were substantially raised prices. As mentioned above, deviations
during the 1970s (mostly as an automatic from the EFO longer-term norm had reg-
result of the inflation); when focusing on ularly occurred in earlier booms, but they
effects of income-related social benefits, were relatively small and more or less au-
marginal tax rates of the common worker tomatically corrected in the following
varied between 60 and 90 percent. years. But this time the overshooting went
As a result of these tendencies the flexi- too far. The resulting profitability crisis,
bility of the economic system became less which lasted for several years, had a se-
than it had been earlier. The adjustments vere impact on exports, production and
to changing price relationships slowed up, investment. The crown became clearly
at the same time that the need for big overvalued. Subsequent devaluations (in
structural changes became greater. The 1977) were defensive and insufficient-in
system continued-up to 1975-to pro- contrast to the devaluations of 1931 and
vide quite generous incentives with re- 1949. It was only with the offensive deval-
gard to profits and investment. The booms uation of 16 percent, which was the first
of 1969-1970 and 1973-1974 were accom- act of the returning Social Democratic
panied by large industrial investments. Government in October 1982, and which
But the result ex post were distortions in came on the heels of a 10 percent devalua-
industrial structure, as investments were tion in 1981, that an undervalued crown
concentrated, to a large extent, in such was once more attained.
industries as iron and steel, shipyards and A new feature in the wage-determina-
shipping, and petrochemicals. After the tion process is to be found in the position
twisted investment boom of 1973-1974, of the public sector and the government
the volume of investment fell sharply to tax policy. According to the old rule, the
a level 40 percent below the record in tradable sector, exposed to international
the beginning of the Seventies. The hous- competition, should lead the process of
ing investment boom also collapsed in the wage determination and indicate the
decade. By 1983 the general investment scope for wage increases. From 1975 on-
stagnation had lasted for nearly 10 years. ward, however, the Government and the
5) Under these altered conditions the public sector have on occasion tended to
normsfor wage determination-along the assume this role. The Government has also
lines of the EFO model-were lost. The tried to influence the conditions of wage
growth of productivity in the competitive bargaining by means of a flexible tax pol-
sector became highly uncertain and in icy: lowering direct tax rates in relevant
some years negative. The same was the income brackets and financing the mea-
case with the development of import and sures by increases in payroll taxes. This
export prices, due to variable exchange type of indirect income policy was not suc-

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26 Journal of Economic Literature, Vol. XXIII (March 1985)

cessful and was not consistent with the cession. The revival was nearly three years
Swedish Model. late (compared with the average OECD
6) To some extent-but rather as a pattern). This was, indeed, a new feature
parody-we may regard developments of the Swedish business-cycle model. On
during 1975-1978 as a realization of the earlier occasions (1922, 1932, 1952, 1958,
Rehn model. Profit rates were severely etc.) the revivals had been relatively early
squeezed and the Government poured and strong.
out large sums in selective subsidies to Failure of the stabilization policy during
support firms and branches in difficulties. the 1970s resulted from supply side dis-
Official unemployment was kept below turbances and restrictions-as in many
3 percent. That seemed to be a success, other countries-partly appearing in the
in accordance with the aims of the model. form of a price system in disequilibrium.
But the mode of application involved a Real wage costs that were too high and
kind of vulgarization of the old model, one a distorted exchange rate were factors
which had strong negative effects on the that made the expansionary policy inade-
structure of the Swedish economy. The quate and inefficient (taking the form of
support of employment-by means of sub- balance-of-payments deficits and infla-
sidies and soft loans-especially in the old tion). There were also signs of supply con-
"glamor" branches (iron ore, iron and straints, especially in regard to the supply
steel, shipyards, etc.) meant preserva- of skilled labor at points of expansion (in
tion of an inappropriate structure of pro- the period 1978-1979). The stabilization
duction, a slowing up of necessary ad- policy also failed with regard to inflation.
justments. Unemployment was also kept The rise of prices and wage costs was kept
down-more accurately, concealed-by above the OECD average.
means of expanding public works, many The issue of an accommodating stabili-
training programs and, above all, by a zation policy is new and serious (Calmfors
1979). The expectation that government
rapid enlargement of the public sector (by
6 percent per year in real terms, 1970- will guarantee full employment tends to
1980). The old Rehn model had envisaged create "irresponsible" wage demands and
efficient structural change within the pri- perhaps also weakens resistance from the
vate sector, where a sufficient volume of side of the employers' organizations. This
profitable opportunities was presumed to type of "rational expectations" by trade
exist. But that was not the case in the Sev-unions tends to prevent the necessary
enties. wage adjustment. Repeated devaluations
7) The aims and means of current stabi- are clear evidence of a dilemma that did
lization policy have been transformed not exist in the earlier periods. Fiscal (and
radically since the beginning of the 1970s. monetary) policy before the 1970s was
After the recession of 1971-1972, the pol- never constrained by considerations of
icy failed rather completely to dampen budget deficits. The fears of the early
the boom of 1973-1974. After that a tradi- 1930s were dissipated and (except for the
tional Keynesian "bridging" policy fol- war years), there never appeared a serious
lowed whose aim was to "j'ump over" the cumulative rise of government deficits
recession. In fact, production was sup- and debts before 1976. The sluggish econ-
ported (partly by means of expansionary omy-implying stagnant government rev-
policies, including government support of enues and rapidly rising expenditure-
inventory investment) and unemploy- brought with it a tremendous explosion
ment was stabilized at a low level. But of the deficit of the central government
the main result was a long drawn-out re- (from 1 or 2 percent of GNP to 14 percent

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 Lundberg: The Rise and Fall of the Swedish Model 27

in 1983), due mainly to the rising share should be observed. The new Social Dem-
of interest payments on the government ocratic Government maintains the prior-
debt. The deficits of general government ity of full employment. The rise of open
(including communes and government unemployment to nearly 4 percent during
pension funds) have changed from a sav- 1983-1984 is regarded as a very serious
ings surplus of some 5 percent (around problem, and labor market policies have
1975) to a deficit of 7 percent. been expanding. It is something new,
In the new international recession, be- however, when the government regards
ginning in 1980, the Government has not a low inflation rate as a necessary condi-
been able to pursue the traditional expan- tion for attaining a full employment tar-
sionary policy; the tremendous budget get. In a way it has the appearance of a
deficit with its implied danger of inflation- return to the policy climate of the 1930s
ary financing and its strong negative ef- when a stable price level was viewed as
fects on total savings has meant, this time a condition of economic balance. The
(in contrast to the 1930s), abandonment Government, however, refuses to accept
of counter-cyclical fiscal policy. Sweden a high unemployment rate as a means of
has had to accept the impact of recession attaining the goal of 3-4 percent inflation
from abroad. The bourgeois governments per year proposed for the coming years.
succeeded in retarding the growth of gov- Again the Government is relying on, or
ernment expenditures during the reces- rather hoping for, moderate wage de-
sion. The Social Democrats, who returned mands from the unions. But serious com-
to power in October 1982, had at first to plications have arisen because the big de-
increase expenditures in accordance with valuations were followed by a dramatic
election promises. In the main, however, rise of profits and declining real wages.
they accepted the aim of an improved 8) One further strategic condition of
budget balance by cutting expenditures the old model has disappeared: the "inter-
and raising taxes. The old trend, a rising national space" for policy autonomy. Swe-
share of public expenditures in GNP, den has been forced to conform to the
seems to have been broken. restrictionist policies of leading countries.
The fear of this enormous and, until The deficit of the current balance of pay-
1983, growing budget deficit is also dis- ments has mostly stayed around 3-4 per-
torting other parts of the Swedish Model. cent of GNP during the period 1974-
Concerns about the supply of money 1983. On earlier occasions (1920, 1931,
had hardly ever disturbed the pursuit of 1947, 1970) the deficits were cyclical,
Keynesian policies during earlier reces- eliminated in one or two years. On the
sions. Fiscal and monetary policies were present occasion, it has turned chronic or
relatively well coordinated. During more structural. Financing the deficit has not
recent years, however, the fear of a rapid met difficulties, yet (as in 1931) and, there-
rise in the quantity of money, stemming fore, has not forced the government, by
partly from the financing of the budget means of an exchange crisis, to take drastic
deficit, is, indeed, a new problem that has stabilization measures. The big devalua-
been discussed intensively. The high in- tion and an international revival has
terest rates of the 1980s, partly the result meant that, for the time being, the bal-
of deficit financing, are very much in con- ance-of-payments deficit is rapidly declin-
flict with the tradition of the Swedish ing.
Model. The postwar policy credo-the combi-
An important shift in emphasis as to the nation of rapidly expanding public expen-
goals of long-term stabilization policy ditures, low interest rates and high tax

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28 Journal of Economic Literature, Vol. XXIII (March 1985)

rates-thus could not be maintained. The stemmed badly functioning price and
dependence on foreign borrowing and the wage formation on micro levels. The fail-
need to prevent too much monetization ure of structural adjustment in the 70s is
of the government deficit has meant rela- probably, in good part, a reflection of
tively high nominal and real interest rates. distorted price signals. The Swedish Model
The time of a rapidly expanding public as such-whether that of the 1930s or the
sector is gone. With a social democratic 1960s-paid little attention to the impor-
government in power, however, the third tance of the micro underpinnings, the
part of the credo may not yet be utterly conditions for the efficient working of the
belied. The government will not shy away price and wage system. Instead the typical
from raising the total tax burden, although policy reaction came in the form of selec-
at a slower pace than in previous decades. tive fiscal and monetary policies.
One central issue refers to the weak in-
VII. A System Crisis? centive system that has been put in place
gradually over the years, arising cumula-
Again-as in the 1930s and the first post tively out of ad hoc solutions to short-term
war years-serious issues are arising about problems but never intended as a "master
the functioning of the present economic plan." How far income equalization has
system. This means that the problems been attained in Sweden and the prob-
seem to go deeper than is implied above lems with the incentive system are dis-
by the presentation of a number of model cussed by Lindbeck (1983). Indeed, it is
failures. a wonder that our economic system can
The experiences of disequilibrium in function as well as it does with the present
the 1970s and early 1980s have clearly high, direct marginal tax rates and a total
demonstrated that policy must now be for- tax burden which transfers about 75 per-
mulated in new and more complex cir- cent of gross income earned on the margin
cumstances. These had hardly existed dur- to the public sector-mainly for retransfer
ing the formative years of the Swedish back to the private sector. A yearly wealth
Model. In the 1930s as well as during the tax, drastically increased by the present
recessions of the Fifties and Sixties the set- Government, is additional to and on top
ting of expansionary policy problems was of the income tax (for which it is not a
relatively simple. Supply-side questions deduction). This easily makes the nominal
became central during a short period after marginal return on new savings negative,
the war when structural imbalances at- even at low levels of wealth. It should be
tracted major attention and remained as stressed that the private part of the eco-
a background consideration during the nomic system tends to work with a very
following decades. But the apparent fail- low expenditure multiplier, since the leak-
ures of macroeconomic policies since 1974 age to the public sector is as large as just
have clearly demonstrated the impor- indicated. When, in addition, the real ex-
tance of the functioning of the price and penditure from the public sector is stag-
wage system on microlevels. The big devi- nant, as at present, the secondary effects
ation from the earlier pattern of develop- of export expansion on GNP will tend to
ment of the Swedish economy was con- be much less than in the hey-day of the
nected with strong distortions of the price- Swedish Model. It is easy to imagine a vi-
wage system: too high real wages, "soli- cious crowding-out process: a tendency to
daristic" wage relations, an overvalued stagnation in the private home demand
crown, negative interest rates. From these sector will have to be met by public sector
distorted main price relationships, there expansion, to be financed by increased

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 Lundberg: The Rise and Fall of the Swedish Model 29

taxes and fees, implying still more con- omy (according to LO-economists; Meid-
straint on incentives to private enterprise. ner 1984).
For some years there has been a general One center of interest in the system-
consensus that direct tax rates are too crisis question may again (as in the period
high, not only because they weaken incen- 1944-1948) be directed to capitalforma-
tives to work, save and invest, but also tion problems. New tendencies have ap-
because they make the cost of being hon- peared. Incentives to expand production
est so high. In 1981 a political agreement and to invest have been disturbed, for a
was made to reduce the direct income tax long time (since 1975), by a combination
schedule successively over a 3-year pe- of negative factors: low capacity utiliza-
riod. But the reduction is very small, in- tion, insufficient profitability, high tax
deed, by comparison with what has hap- rates and great political and economic un-
pened in the USA and the UK, and its certainty. The results are clear: a record
extension is subject to severe constraints. low investment volume-within industry,
Any lowering of the progressivity of the 40 percent below the peak of 1975-1977.
tax scale will necessarily mean greater ad- As in other countries, a clear shift from
ditions to income for high-income groups investment in capacity expansion to ra-
than for poor people. The strong egalitar- tionalization and robotization has oc-
ian outlook creates political demands, es- curred. There is much evidence to suggest
pecially from labor unions, for before-tax that financial operations (buying and sell-
income equalization as a condition for re- ing of corporate stocks and real estate)
duced progressivity. It is, therefore, an have been much more profitable than
open question whether, and to what mi- long-term investment in new plant.
nor extent, an effective political solution The original conception in the Rehn
will be found. The same kind of strong model was that a declining share of pri-
political resistance stands in the way of vate savings (especially out of profits)
reducing the heavy burden of the social should be offset by increased collective or
transfer system (pensions, expenditures public savings. Just the opposite, however,
for unemployment, sickness, etc.). Retreat has now occurred. The financial crisis of
from generous social schemes, introduced the central government has meant a big
during times of steady economic growth, deficit in total public financial savings.
is nearly impossible in Sweden because This deficit has been accompanied by a
such a strong ethos of solidarity character- record low rate of household savings.
izes both the membership of well-orga- The net result for the beginning of the
nized interest groups and the relations 1980s is an extremely low level of net sav-
among them. ings as a share of GNP-4 percent com-
The present Government is, for the pared to a normal ratio of 12-15 percent.
time being, making great efforts to bring As mentioned above, the Social Demo-
down the share of total public expendi- cratic Government started its new period
tures from the present record level of in office with a big offensive devaluation.
around 70 percent of GNP. At the same In this respect it followed the tradition
time there are vigorous demands from of the Swedish Model of operating with
leading social democrats for continued ex- an undervalued crown. It is plausible to
pansion of the public sector as the only consider this as a new deal intended to
possible way to solve the long-term full stimulate recovery and to sustain the im-
employment problem. This attitude rests proved competitive position of Swedish
on a pessimistic assessment of the growth industry for a number of years. Savings
potential of the private sector of the econ- out of profits will then partly replace the

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30 Journal of Economic Literature, Vol. XXIII (March 1985)

deficiency of public savings-quite in funds will have to be made around that

conflict with the norms of the old Swe- time.
dish Model. Higher profits and lower real It is the social democratic motivation
wages is a slogan that only a socialist gov- for the introduction of these collective
ernment can afford. wage-funds that is of interest for under-
The successful operation of an econ- standing why central features of the old
omy-characterized by high profits and Swedish Model are not acceptable:
wage restraint at full employment-re- a) The funds are needed in order to cre-
quires some transformation of the present ate tolerance for high profit rates. The big
system. The creation of collective wage rise of profits since 1981, especially after
earners' funds should be viewed as one the latest devaluation, has contributed to
element of such a change according to of- a tremendous boom in share values, en-
ficial LO declarations. During the last ten riching a minority of the population. With
years a number of proposals have been substantial collective ownership this prob-
presented on the initiative of LO and the lem of equity would be reduced.
Social Democratic Party.13 At the end of b) There is an unproven hypothesis that
1983 the Government and the Riksdag de- the union push for higher wages will abate
cided to introduce such a system, to start when in a wage-fund system the issue is
from 1984, against the strong opposition no longer so much one between private
of the bourgeois parties and the business capital and labor.
community. About the same time, the op- c) The goals of solidaristic wage policy
position parties announced that they will be made easier. The "excess" profits
would eliminate the system at the first of high productivity firms and branches
opportunity: that is, after an election vic- will be less of an issue and to that extent
tory. not disturb "the fight against the market
The financing of the funds rests upon forces" that solidaristic wage policy other-
a combination of an excess profits tax and wise implies.
a general payroll tax. The collective funds d) The supply of savings, especially risk
have no connection with individual own- capital, would be improved as compared
ership and will be used for buying shares to the old system. That follows from the
of Swedish corporations. In some earlier long-run prospect under the conditions of
versions of the proposal the ultimate aim the fund system of achieving and main-
was to attain a dominating ownership posi- taining higher profitability and lower la-
tion in most corporations within 10-15 bor costs and thereby eventually preserv-
years. The 1983 decision is of a more mod- ing the undervaluation of the crown.
est and uncertain character; there will be e) Much emphasis is placed on the ar-
a period of experimentation until 1990. gument that the increased influence of
A new decision about the future of the employees on the boards of the companies
under stable ownership should create a
spirit of consensus as to long-term views
13 There is a big supply of books, articles and politi-
about the development and productive
cal pamphlets on the wage-earners' fund question.
The original proposal was written by Meidner at the investment of the firm. According to
request of the LO Congress (Meidner and Hedborg declared intentions, profitability criteria
1975). The most objective analysis, especially with
would be protected as necessary condi-
regard to the relations of the scheme with solidaristic
wage policy, has been written by Berndt Ohman tions for rising productivity and therefore
(1969, 1981, 1982). The most outspoken criticism of also for the preservation of employment.
the establishment and extention of the fund system,
But naturally narrow employment aims
from a political point of view, has been given by
Assar Lindbeck (1982). at individual enterprises would be made

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 Lundberg: The Rise and Fall of the Swedish Model 31

stronger than under the present system. wage fund proposal is limited only to a
Central planning and coordination of in- clear minority (even of trade union mem-
vestment, if needed, would be made eas- bers). It is mainly a group of intellectuals
ier. within LO and the party who have been
f) The last and, to many socialists, the pushing and arguing and writing the doc-
most important argument looks to the uments. This fact, that a minority of intel-
gradual introduction of economic democ- lectuals and visionaries have constituted
racy, as an extension of political democ- the driving force is of course true about
racy. Sometimes the economic argument most big reforms in history. The long,
is added that under a regime of economic drawn-out process of decision making, in-
democracy of this type productivity will volving a great number of board and con-
rise because of a more complete and gress meetings within the labor move-
meaningful engagement of human re- ment to consider resolutions, has had a
sources, "working for the whole of the en- binding effect on the Government.
terprise and of society, not for the profits There is no doubt that a number of So-
of capitalist owners." cial Democrats in top position, inside and
The arguments presented for the intro- outside the Government, regret the
duction of wage funds "speak for them- added political discord and animosity cre-
selves." It is not my intention to appraise ated by this dominant question. The criti-
the arguments for and against the consid- cal current problems of the Swedish econ-
erations presented here. There is a rich omy, in the tradition of the Swedish
Swedish literature on this. My intention Model, should have evoked pragmatic at-
is only to show that the motivations be- titudes, pushing more ideological issues
hind the wage-fund scheme represent into the background for consideration in
clear tendencies away from the concep- the future. The rather modest beginning
tions of the old Swedish Model. During of fund establishment in 1984 will perhaps
most of the earlier periods reviewed here remain modest if economic and political
there was a strong attitude of pragmatism reality turns out to be different than the
within the Social Democratic Party. Radi- proponents of the funds expect.
cal ideas of socialization or central plan- As mentioned above, the bourgeois par-
ning that appeared were abandoned ties have refused emphatically to accept
rather quickly. At the present time the the proposal for collective funds in any
socialist goals are more serious and, form. The Opposition includes the entre-
against the background of the crisis in the preneurial organizations of private corpo-
functioning of the Swedish economy, the rations, as well as those of small firms.
plans are more appealing, at least to a Their antagonism is complete. In recent
strong minority of Social Democrats. years a reaction in the form of private
One remarkable feature of the wage- profit-sharing arrangements coupled with
fund question is its abstract nature, which employee ownership of shares has ap-
helps explain why there has not been peared. However, such a growth of pri-
much general public support or enthusi- vate ownership is fundamentally against
asm, not even from the side of white- and the collective spirit of the social demo-
blue-collar workers. The fund propositions crats.
have not been coupled with a big social The fall of the Swedish Model is, at bot-
reform-giving some hard benefits (as tom, a political development. The present
with the general pension-collective sav- political crisis, which has involved an in-
ings deal of 1959). In fact, according to tense confrontation between the socialist
a number of Gallup polls, support for the and nonsocialist parties, since the middle

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32 Journal of Economic Literature, Vol. XXIII (March 1985)

Seventies, has created a stage of uncer- isfying collective needs and continuing
tainty and bewilderment. Nobody can be the process of income and wealth equal-
certain that Sweden is really entering a ization. They oppose tax ceilings but favor
stage of "fund-socialism." It is impossible more efficient enforcement of tax pay-
to know exactly what that would mean ments. And, of course, solidaristic wage
if it came into being. It is, as said, still policy as well as collectivization and de-
possibOle that a combination of a good re- mocratization of the private sector of the
covery and growth in the other industrial economy should be continued by means
countries, together with the stimulus of of the wage funds. One finds no real long-
an undervalued crown, will result in a term pessimism in this group as to the
strong economic upturn in Sweden and possibilities of solving employment and
be followed by balanced growth. This, in- growth problems along these lines. Ac-
deed, was the experience of 1931 and cordingly, they hold that unemployment
1948. In this way some of the arguments problems should not be solved in a defeat-
for the collectivization of the economy ist way by means of shorter working time.
might lose their force again. Political com- More leisure should be an aim in itself.
promises may be found, implying rela- In recent years, however, a strong-
tively innocent additions to existing col- voiced group of "liberal socialists" has
lective funds without fundamentally trans- emerged within the social democratic
forming the mixed economy of Sweden. party. The group does not consist only of
Even so, the experiences of a decade of young economists and journalists. Influen-
crisis and the many changes of attitude tial party people share their views in vary-
and policy mean that there will be no re- ing degrees. Many good Socialists have
turn to anything very similar to the old split minds, not least the present finance
Swedish Model of the mid-sixties. minister, who seems to enjoy immensely
his success so far with the big devaluation
VIII. Concluding Remarks of 1982. Reliance on market forces, imply-
ing high profits (creating a number of
Behind the critical political develop- young millionaires) and lowered real
ments discussed above there are changing wages, is accepted as a pragmatic way out
ideological currents as well as the shifting of the economic crisis. For the longer run
strength and positions of various interest as well, the "liberal socialists" argue for
groups that are strongly organized in Swe- giving greater scope to market forces, for
den. Let me make some brief observations relief from government regulations, and
on these matters, especially with regard a smaller public-sector share. They also
to welfare ideology, in order to illustrate concede that high tax rates may have seri-
the complexity of the present situation. ous negative effects.
The Social Democratic Party seems to This relatively liberal group works with
be more split than ever over the transfor- the serious handicap that they receive
mation needed in the economy and the support and applause from the strong
Welfare State. The core of the party, in- Conservative Party, who preach the gos-
cluding the leading LO people, are strong pel of the "new liberals" and of the mone-
in their support of old dogmas and in con- tarists inside and outside Sweden. Indeed,
tinuing the trend towards socialism. They it is hard to judge, even from a social dem-
hold that the public sector (in the wide ocratic point of view, how the transforma-
sense of the concept) should continue ex- tion of the Swedish economy, which began
panding for all the pertinent reasons: at- in the 1970s, should proceed. The present
taining and keeping full employment, sat- short-term policy success might be fol-

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 Lundberg: The Rise and Fall of the Swedish Model 33

lowed by a severe setback in the second conditions have made the old Swedish
half of the Eighties, if there were an ero- Model (of 1965) unworkable in many re-
sion of the present undervaluation of the spects. These conditions include a number
crown and a new international crisis. Then of factors discussed already, such as the
the influence of the core of "conservative" drastic change in the international envi-
socialists described above will again be ronment, an altered political background
stronger. Alternatively, if the good start and changed institutional conditions, new
recently made is followed by good, bal- and severe policy restrictions, as well as
anced growth, a successful Social Demo- other factors contributing to the stagna-
cratic Government and the majority of the tion and structural imbalances of the econ-
party might consider this as a material omy.
basis for renewing the trends towards so- Needless to say, these factors involve
cialism-the country could afford it. Given complicated interdependent relations
a return to balanced growth, however, I over time which are associated with the
rather anticipate a consolidation of more working of the policy model (including the
liberal policies and a postponement of So- rise of the Welfare State). It would be un-
cialist plans, including the extension of scientific however, to attribute the near
wage earners' funds. That would be a rep- cessation of economic growth during
etition of what happened after 1948. The 1974-1983 to the establishment of the
political and ideological trends are made Swedish Model as a cause. This would be
still more complicated and uncertain by wrong also with regard to the rapidly ris-
the fact that the voters, since the Seven- ing public sector and to increasing tax
ties, have become much more mobile and rates. Until the mid-Seventies there was
less loyal to their parties. The appearance no significant deviation of Sweden's
of grass-root movements (including the growth performance from the OECD av-
environmentalist, anti-nuclear and peace erage. It may be argued, of course, that
movements) are dividing voters, espe- these developments operate only with a
cially women voters, across party lines. long lag and that the results of the rela-
Weak governments with short mandates, tively rapid expansion of the public sector
although dominated by social democrats, have appeared only later, in the Seventies
may continue to be the way of Swedish and Eighties. Such a statement, however,
politics. cannot be proved, and it belongs rather
Still there are some basic elements of to the metaphysics of wishful thinking.
the Swedish Welfare State (an important The inverse proposition seems as plausi-
part of the old model) that will resist politi- ble: the retardation of growth and the
cal disturbances. My 8-point account, stagnation after 1974 caused a strong ac-
above, of the factors that have brought celeration of public expenditures for rea-
about the fall of the Swedish Model, might sons discussed above.
have given an unintended impression of The argument of this paper is, rather,
collapse or complete breakdown. Critics that Sweden's ambitious application of the
of the Welfare State of the ambitious Welfare State ideology and the policy per-
Swedish type might even entertain the formance along the lines of the Swedish
thought that the model contained the Model made the Swedish economy espe-
seeds of its own destruction. Such a broad cially vulnerable to the external shocks
generalization contains some elements of of the Seventies and Eighties. The large
truth. But it is not my main message. The deviations from the previous trends then
account given above tells us only that a experienced should be attributed to this
number of new and radically changed vulnerability, which, in that sense,

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34 Journal of Economic Literature, Vol. XXIII (March 1985)

"caused" the crisis of the economy and The crisis of the system and the political
implied the failing applicability of the old confrontation to which it has led reflect
policy model. rather a break in trend. Confidence in
The "fall" of the Swedish Model, there- high economic growth is gone and so is
fore, implies its deterioration but not its confidence in the continued growth of the
collapse and total disappearance. Al- public sector. The precarious state of gov-
though the limitations of Keynesian policy ernment finances that now seems to be
are now accepted, this does not mean that persistent sets narrow limits to new social
the central policy aims of full employment reforms. Serious questions are raised re-
and employment security have been garding the real effectiveness of the pres-
abandoned. Here Sweden stands out and ent Welfare State, including the tax sys-
probably will continue to stand out as an tem, to promote equality. There are flaws
exception (together with a few other in the Welfare system and people are
countries) in a world of high unemploy- aware of that. People in higher income
ment. Old and new measures of labor mar- brackets are better able than low-income
ket policy continue to be carried out. The earners to evade the high progressive tax
strong aims of solidaristic wage policy are rates, even legally, and the former are also
being relaxed somewhat under present more alert in making use of the govern-
conditions, but this has not gone nearly ment transfer system. At the same time
so far as in other countries where open it has come to be widely appreciated that
unemployment is higher and where labor the private market economy cannot func-
unions are not as strong as in Sweden. The tion well with the big distortions that Swe-
strong central positions of LO and SAF den's tax system generates.
have been weakened since the 1960s and General awareness of these types of
tendencies to more decentralized wage problems satisfies one positive and neces-
bargaining have appeared. sary condition for success in finding a new
The fundamental targets contained in model of development. Sweden, however,
the conception of the Swedish Welfare must now operate without the benefit of
State are being preserved together with a broad political consensus ruling under
the main structure of the social insurance earlier conditions of high growth and rap-
system built up since the 1930s. An under- idly expanding public expenditure. The
lying egalitarian spirit, a "passion for need to shrink the public sector, at least
equality," lies behind the successful poli- relatively to GNP, (for example, by pri-
cies leading to the abolition of poverty and vatization of some public services) and to
to reduced tensions among social classes. reduce direct taxes will necessarily be in
That the age-old fear of poverty has been conflict with short-term egalitarian norms
replaced by a new-found social security and will provoke political conflict. Weak
is a fundamental achievement in Sweden governments, probably dominated by So-
as in the other Scandinavian countries. cial Democrats, will grope towards unsat-
This achievement has lessened social and isfactory compromise solutions with some
political strains, labor conflicts and resis- bias towards public sector expansion. Al-
tance to technological change. Present cri- though far from the old Swedish model,
sis and bewilderment will not change the they will hardly signal a new one. It will,
fundamental bases of the economic and in any event, require some decades for
social structure. This means that whatever economists to reveal the outlines of a new
changes of the existing Welfare State and model. In a world of so much policy mis-
the social security system that are now in management, Sweden might come out
prospect will be marginal. relatively well after all. It continues to en-

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 Lundberg: The Rise and Fall of the Swedish Model 35

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