Wednesday, 18 March 2015

Socialist state capitalism in Scandinavia

State capitalism is a form of capitalism in which the state holds a significant part of the means of production or regulates big companies, interfering directly or indirectly in the majority of the most significant businesses.

This interference is similar to that observed under the so-called crony capitalism, except that is carried out under the guise of the interest of the state. Another feature is that it rejects to be identified with the private sector and capitalism but does not disavow them in entirely. State capitalism exists in democratic or dictatorial regimes, as well as under right or left-wing governments.

In Western Europe there are two distinct forms of state capitalism - the Scandinavian and the Mediterranean. The first was made possible by the rise to power of social democratic parties in Sweden and England in the 1920s which would lead them to the government in the aftermath of World War II, with an extensive agenda of industry nationalization and social policies. The basic ideal of a broad welfare state was common to other political forces, including the Liberal and Conservative party in England, but has since been identified with social democracy.

The British experience with post-war nationalization was progressively abandoned after the Conservative electoral victory in 1951, but it continued in the Nordic countries with a golden age that lasted until the 1970s. For various reasons (namely windfalls) not all Nordic countries experienced a decline as pronounced as that of Sweden. However, we will use the case of Sweden to illustrate the initial success and subsequent decline of the Nordic model.

The Scandinavian initial success in combining strong equality with economic growth has been attributed to special features of their people, namely being ethnically homogeneous protestant societies, to their taxation policies and to a decentralized welfare system.

Some dismiss this golden era as being simply the result of the Western golden Keynesian period of the 1950-1960s compounded by a pragmatic continuation of the liberal policies that had transformed Sweden in a modern industrial country from 1870 to 1936. They reinforce this hypothesis by claiming that Sweden’s decline began in 1968 when the radicalised left wing Social Democrats attempted a ‘third-way’ approach trying to establish an economic system between a free market and a planned economy.

During this period the taxation of business financing was strongly discriminatory in favour of state pension funds and insurance companies. For instance, Henrekson (2007) estimated that in 1980 the maximum marginal tax rate on new share issues was 137% for private household investors but -12% for tax exempt public pension funds, while the rates for debt financed investments were 58% and -88%, respectively.

This attempt to create a market economy without individual capitalists and entrepreneurs proved disastrous. For instance, Axelsson (2006) points out that in 2004 among the top 100 Swedish firms in terms of revenue only 38 started as privately-owned businesses. Moreover, out of these 38, only 2 were created since 1970 while 21 were founded before 1913.

Not surprisingly, despite the initial success in upholding private property, free markets and the rule of law while avoiding the dependency culture often associated with extensive welfare systems, in the early 1990s Sweden went through a dramatic banking crisis with a cost for taxpayers equivalent to 2% of GDP. At the political level it also meant the break of the Social Democrats rule. Since 1991 the liberal conservatives have alternated in power and promoted the introduction of a liberalization program that initiated the end of the Nordic model of state capitalism in Sweden.

Personally, in 2012, I drove through Sweden to Gothenburg and could still feel an atmosphere of decay that was markedly in contrast with the energy I had felt in 1977 when I first visited the country. This was not an impression simply due to my aging. The OECD figures below for GDP per capita also confirm the relative decline until 2005 and a minor recovery thereafter.


There are two important lessons that one can draw from the Swedish experience. First, that there is a limit on how much the weight of the state in the economy can go. Using as an indicator the level of public expenditure as a percentage of GDP, that limit seems to set in when its value reaches 55%. Second, and probably most importantly, capitalism cannot dispense with the profit motive as a driver of innovation and entrepreneurship.

The attempt to socialize profits through state pension funds and the tax system might have contributed to a high level of equality in Sweden but its cost in terms of entrepreneurship was severe. In the end, the pursuit of profit motive always implies a certain degree of inequality. So, the challenge for Sweden, as it moves towards market capitalism, is to find a fair balance between a socially acceptable increase in inequality and the growth of the private sector initiative.

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