Cato Policy Analysis No. 160 September 10, 1991

Policy Analysis

From Capitalist Success to Welfare-State Sclerosis

by Peter Stein

Peter Stein is a Swedish economist and secretary of the Privatization Task Force of the International Chamber of Commerce.

Executive Summary

In 1936 the American award-winning journalist Marquis Childs published a book that would shape outsiders' perception of Sweden for a long time, Sweden: The Middle Way. According to Childs, Sweden, a laboratory of social and rational democratic decisionmaking, had achieved an optimal middle way between collectivism and individualism. Many others thought so too.

From the mid-1930s to the 1980s, many observers perceived Sweden, or what has become known internationally as the Swedish model, as proof that a vibrant free-market economy, characterized by competitive allocation of resources and private ownership of the means of production, could harmoniously coexist with an ambitious and successful egalitarian welfare state.

The statistics are indeed impressive. Between 1870 and 1970 Sweden progressed from an underdeveloped country to a country with one of the highest per capita incomes in the world. During that period, only Japan had a higher per capita growth rate.(1)

Sweden also built the most comprehensive cradle-to-grave welfare system in the West. The Swedish system features a steeply progressive income tax and measures aimed at equalization of incomes and opportunity. A broad political consensus supported creation of the system. Sweden seemed to present an intellectual challenge to those who argued that high tax rates and extensive state intervention would hamper economic growth.

Sweden no longer presents such a challenge. Few would now consider the Swedish system worthy of emulation. Sweden is shaken by economic crisis. Since the late 1960s its industrial competitiveness has deteriorated sharply. For two decades Sweden has had one of the lowest economic growth rates of countries that are members of the Organization for Economic Cooperation and Development.

Sweden's inflation rate (today around 10 percent) has for some time been twice as high as that of its main competitors. For a long time Sweden had a relatively low unemployment rate (1.5 to 2.5 percent), but it has recently risen to 3.5 percent.

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1991 The Cato Institute
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