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Hayekian welfare states and viking economics

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What (if anything) can other countries learn from Sweden?
Slides from a talk for students at the Stockholm School of Economics, Oct 29, 2019.

Published in: Economy & Finance
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Hayekian welfare states and viking economics

  1. 1. Hayekian welfare states and Viking Economics – What (if anything) can other countries learn from Sweden? Andreas Bergh
  2. 2. “The Swedes themselves are not entirely sure what they have done right.” Paul Krugman
  3. 3. • How exactly? • Can you really? • Some economic history • Some (Hayekian) theory
  4. 4.  In 1840, Sweden was poor: 40% of UK’s GDP/capita  Severe starvation in 1868 and 1869, other European countries giving aid to Sweden Sweden’s history as a developing country
  5. 5. Achieving prosperity and income equality ▪ 1870-1970: Sweden became 4th richest in the world ▪ …and in 1980, Sweden (probably) had the world’s most egalitarian income distribution
  6. 6. Explaining growth ▪ Standard explanations: Export driven growth (timber, iron ore), avoiding the world wars. ▪ Better explanations: Property rights, low corruption.
  7. 7. Explaining Swedish income equality ▪ Equality increased before peak welfare state ▪ The policies of the 1970s are not the explanation ▪ High taxes, progressive taxes, progressive social policies, labor market regulations. Rather: ▪ Land reforms ▪ Unions & central wage bargaining ▪ School reforms ▪ Early social insurance reforms ▪ Female labor participation (1960s-70s)
  8. 8. The three phases of Swedish economic history ▪ 1870 - 1970: Fantastic! ▪ 1970 - 1995: Horrible. ▪ 1995 - ??: pretty good
  9. 9. In the early 1990s, no country wanted to copy Sweden… Sweden: FromCapitalist Success to Welfare-State Sclerosis by Peter Stein Cato Policy Analysis No. 160 (10 sept, 1991) ”Worse and worse” The Economist on Sweden, 1993 0 50 100 150 200 250 1970 1975 1980 1985 1990 1995 2000 2005 USA Swe EU15 Real gpd/capita, USA1970 = 100
  10. 10. After the 2008 financial crisis, things changed (again)…
  11. 11. So… does the case of Sweden show ▪ …that high taxes and a generous welfare state is the way forward? ▪ or that big government leads to decline and stagnation? ▪ No! ▪ Big government has caused problems in Sweden – but Sweden has learned from its mistakes
  12. 12. What is meant by ’big government’? ▪ Fiscal: requires high taxes and public expenditure ▪ Hayekian: requires a lot of central knowledge
  13. 13. The knowledge problem Hayek (1945)The Use of Knowledge in Society, American Economic Review Knowledge is decentralized, discovered through experimentation (trial & error). A central decision maker is likely to make mistakes due to having insufficient knowledge (even a well-meaning and benevolent one).
  14. 14. Different types of government size Knowledge needed to succeed Fundsneeded more more Keynesian Stabilization policies Low basic income Means tested welfare Swedish pension system 1960-2002 Encouragement of entrepreneurs Swedish pension system 1999 -
  15. 15. In summary ▪ Swedish policies failed when they required a lot of public expenditure and a that decision makers had lot of knowledge ▪ If policies make use of decentralized knowledge among households and firms, having a big government in a fiscal sense is much less of a problem ▪ Lessons for other countries: learn from experimentation, aim for policies that do not require that politicians know things that they cannot reasonably know
  16. 16. Read more: Bergh 2014, New Political Economy Bergh (2019), ”Hayekian welfare states” (J of institutional economics) English blog: https://tcw.postach.io/ Swedish blog: https://bergh.postach.io/

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