Sweden is often held up as a role model for those wishing to expand the size of government around the world. But rather than being proof that socialism works, the Swedish experience is in fact evidence for the benefits of free markets, limited taxation, strong societal norms and robust financial institutions.
Sweden historically pioneered many aspects of modern market economics. The copper mine in Falun, the most important business in the economic history of the country, evolved to become the first company in the world with shares in the 13th century. The earliest bank that opened in Sweden, Stockholm Banco, printed the first European credit notes, and thus set the foundation for the modern Western financial system. Later, the same bank became Sveriges Riksbank – the world’s first central bank. Sweden combines being the birthplace of companies with shares and central banking, with having a tradition of free wage setting without minimum wage.
Thanks to free markets, Sweden even rebounded rapidly from the Great Depression
Sweden and other Nordic countries have since the Viking era had strong ownership rights for women and were among the first places in the world in which modern Western capitalism was fully opened up to women in professions and enterprise. Additionally, Sweden has contributed to the intellectual understanding of economic liberty. Anders Chydenius’s booklet ‘Den Nationella Vinsten’ (‘The National Gain’) was printed in 1765, 11 years before Adam Smith’s ‘The Wealth of Nations’.
Between 1870 and 1970, Sweden combined free markets with limited government. Property rights, free markets and the rule of law in combination with an increasingly well-educated workforce created an environment in which Sweden enjoyed an unprecedented period of sustained and rapid economic development. Thanks to free markets, Sweden even rebounded rapidly from the Great Depression. Famous Swedish companies like IKEA, Volvo, Tetra Pak and Alfa Laval were all founded during this period, aided by business-friendly economic reforms and low taxes. The economic and social success of Sweden and the other Nordic nations, including income equality, in fact developed largely during this era of free markets.
After 1970, Sweden shifted to raising taxes and increase the size of government. Due to this, the country went from being the growth leader in Europe to falling behind. Today, Sweden is in many ways the leading knowledge economy of Europe, and a highly organised society, but high levels of taxation and government expenditure limit economic growth, and lead to a culture of public dependency.
In 1970, before the shift to higher taxation, Sweden had the highest lifespan in the world, when comparing developed economies with countries with an adult population of at least 1 million. After 50 years with shifting to high taxes and a generous welfare state, Sweden had slipped to eighth globally. Other high-tax countries such as Denmark and Belgium had fallen out of the top-10 list. Instead, five new countries had climbed to the top-ten list. All these five nations – Japan, South Korea, Australia, Ireland and New Zealand – were characterised by low taxes. The Swedish and international experience is in fact that low-tax models with good system design can deliver the best welfare outcomes.
Sweden has since the 1990s partly compensated for the high taxes by introducing numerous market reforms. In 2004, the Swedish government, then led by Social Democrat Göran Persson, abolished inheritance and gift taxes. The same year, new rules for simplification of the rules surrounding taxation of operational shareholding were introduced. The new rules that were introduced meant that profits from the sale of shares owned by other companies for purely ownership and control purposes, rather than smaller investments in diversified share portfolios, remained tax-exempt as long as they were retained in the corporate sector and not distributed. This allowed funds to flow into start-ups, giving rise to many rapidly growing companies. It was after these reforms that Sweden again became home to many successful multinational firms, with Stockholm experiencing an entrepreneurship renaissance and growth in capital investment.
Another example of tax reductions introduced during Social Democratic governments is when from the start of 2020, the top 5% marginal tax rate on incomes was abolished. This occurred under the rule of Social Democrat prime minister Stefan Löfven. A study by the Confederation of Swedish Enterprise found that this reform was between 206% to 237% self-financing. This is to say that as the taxes for the rich were reduced, incentives to engage more in work and entrepreneurship increased, leading to tax revenues more than doubling, with the top rate abolished.
A pattern among all developed economies, and also evident in Sweden, is that governments that increase the level of economic freedom tend to be those that are re-elected. This pattern is equally evident among governments on the Left as on the Right.
In Sweden, for example, Persson’s Social Democrats were re-elected after a first mandate period in which the level of economic freedom was increased substantially, but ultimately lost after a second mandate period with limited economic reforms. Similarly, the centre-right government of Fredrik Reinfeldt was re-elected after a first mandate period with substantial increases in the level of economic freedom, but lost after a second period with limited market reforms. The current centre-right government in Sweden focused on crime-reform, but relatively little on increasing economic freedom when they came to power. Following the pattern of past Swedish governments, they are likely not to win re-election, since while voters appreciate increased safety and controlled immigration, the lack of economic reform makes it difficult to win voter support.
The international Left uses an idealised vision of Sweden and other Nordic societies to push for socialism, but in fact the lessons from Nordic nations are about how sound institutions, limited taxation and free markets create progress. Stockholm is not only today, but also historically, an important centre for the evolution of the free market model. The pattern in Swedish politics, much like in other OECD nations, has since the mid 1990s – when the level of economic freedom started being measured – been that governments that increase economic freedom also are likely to be re-elected.
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