5 October 2015

Free Market Success Stories #3: Nacka, the municipality that challenged public monopolies


Nacka is a municipality just south of the Swedish capital of Stockholm, with less than a hundred thousand citizens. It is also the place where Milton Friedman’s ideas of welfare vouchers found their testing ground, through a surprising revolt against social democratic hegemony. The story of the Pysslingen revolution in Nacka teaches us that an activist approach, where reformist local government side-steps a statist central government, can sometimes pave the way for innovative ideas. Here is the story of how market-reformers in Nacka changed the country through a revolutionist approach.

Nobel Prize–winning economist Milton Friedman, a champion of free-markets, argued for the introduction of vouchers in welfare services already during the 1950s. This vision became popularized through Friedman’s book Free to Choose, published in 1980 and accompanied by a television series (ten years later, the same TV-series was rebroadcast with celebrities such as Arnold Schwarzenegger, Ronald Reagan and Steve Allen introducing the various episodes). Friedman’s idea was simple: The idea of the welfare state is to provide services such as education and health. But why must public monopolies carry out these services? Why not give each citizen a voucher that they can spend at an alternative, private or public, service provider?

Vouchers weren’t an entirely new idea. Already during the late 19th century, some towns in Vermont and Maine did not have public schools, but nevertheless provided their young citizens with the opportunity to study. This was accomplished by giving vouchers which could be used to attend public schools in other towns or in non-religious private schools. With time vouchers in provision of welfare services have spread also in modern welfare states. Perhaps surprisingly, a country which early on adapted vouchers to various welfare services was Sweden – known for its large welfare state and (failed) experiment for introducing a third-way alternative between free-markets and planned economy. Why would this country, for long run almost as a social democratic one party state, implement Friedman’s vision?

This new way of organizing public programs relied on what we might call an “exit strategy”. In the 1970s some university students began parental co-operatives for child care in Sweden, an unusual practice in a time and place dominated by public monopolies. The Swedish Employers’ Confederation asked two individuals with policy experience, Bert Levin and Thomas Berglund, to write a book about how private initiatives could go further in order to strengthen publicly funded welfare. The pair, who both had political experience from the Liberal Party of Sweden (a social liberal party), however decided that the best course would be to test the idea in reality rather than on paper.

Thus the two entrepreneurs replaced the strategy of voice (writing a book) with that of exit (leaving the comfort zone of the system by challenging the state monopoly). The day-care centre formed by the entrepreneurial pair, dubbedPysslingen, needed support from a municipality, since day care is funded through municipalities in Sweden. The municipality of Sollentuna, which forms a part of the Stockholm region, welcomed the initiative. The state, run at the time by a Social Democratic government, had a wholly different attitude. Soon new legislation was implemented to stop the innovative venture. A new law called Lex Pysslingen meant that the state would stop giving financial support to municipalities that opened up the welfare sector to private firms: this could have been the end of the project.

However, Erik Langby, a young politician leading the small municipality of Nacka which also forms part of the Stockholm region, realised that Pysslingen could continue if it were merely contracted by the municipality to lead the work in a public childcare centre. The private welfare venture could thus survive. In 1991 a centre‑right government came to power and formally allowed municipalities to use private firms in the provision of welfare services. Since then, most Swedish municipalities have opened up welfare services to private providers within the frame of public financing.

It is notable that Nacka has opened up a number of different activities – ranging from running libraries to local labour market programmes – to voucher systems. The policy has been marked by a desire to experiment, as the municipality has sought out various new forms of activities suitable for voucher systems and attempted to see if they can be reconciled with existing legislation. This small municipality has thus become an experimental workshop for the ideas pioneered by Milton Friedman. The citizens of Nacka have a strong leave us alone attitude, in that they resist both local politicians who want to take away their choice and also state politicians and bureaucrats who desire to meddle with local decisions.

Nacka, although perhaps not well-known outside of Sweden, deserves international recognition. Here, the legacy of Erik Langby (who lead Nacka between 1983 and 2012) continue to live on also during new leadership. Together with a few other noteworthy policy-entrepreneurs – such as Patrik Engellau, who introduced vouchers in another Stockholm municipality and founded a think-tank promoting this new way of welfare delivery – Langby statist structures and prevailed. Evidently, taking the revolutionary approach can be a good idea for local center-right politicians.

Dr. Nima Sanandaji is a research fellow at CPS, and the author of Scandinavian Unexceptionalism. The entire book is available through the Institute of Economic Affairs (IEA) which has published it. The IEA has also published "A U-turn on the Road to Serfdom" (2014) where Nima first wrote about Nacka's voucher reforms.