Why Sweden Isn’t an Example of Socialism

When I meet Americans who self-identify as “socialists,” it is quite uncommon for them to advocate the abolition of private property and the “collective or governmental ownership and administration of the means of production and distribution of goods”–which is the dictionary definition of socialism.

Instead most of the American “socialists” I meet favor a more expansive set of government benefits, including national health insurance, government-provided day care, more generous unemployment insurance, and the like. They favor what they perceive to be policies that are common across the European Union, especially the Scandinavian countries of northern Europe, and perhaps especially Sweden.

But Sweden, like many countries that had a geographically nearby seat to watch the activities of the Union of Soviet Socialist Republics, does not view itself as “socialist.” Johan Norberg tells the story in an extended essay “The Mirage of Swedish Socialism: The Economic History of a Welfare State” (Fraser Institute 2023). Norberg describes Sweden’s patterns over the long-run like this:

Sweden has a tradition of sticking to the path it has chosen and ignoring problems until they become too big to deny and everybody changes their minds at the same time. Then Swedes move fast in the opposite direction. Far from following the famed “middle way,” Sweden has often been a country of extremes. It liberalized the economy more than other countries did in the mid-1800s, socialized more than others in the mid-1900s, and then reversed course and liberalized again faster than others in the late 20th century.

As Norberg tells the history, what most Americans think of as Sweden’s “socialism” is a set of policies Sweden enacted in the 1970s, and then rethought and revised extensively in the 1990s.

I will skip over Nordberg’s discussion of the pro-democracy, pro-market reforms in Sweden that happened between 1840-1870, and their evolution in the decades that followed, and jump to the state of Sweden’s economy in 1950. From being a poor country in 1870–GDP per capita about 40% of Great Britain–Sweden’s market-based economic development had been a great success. Nordberg writes (citations, footnotes, and references to figures omitted):

In 1950, … Sweden had achieved the fourth highest per capita GDP in the world, just behind the United Kingdom to that point. Sweden was by then a success story, the envy of the world. Between 1870 and 1950, life expectancy had increased from 45 to 71 years. Child mortality declined from 22.1 to 2.7 percent. Maternal mortality declined by over 90 percent ….

In 1950, Sweden was the third freest economy in the developed western world, after the United States and Switzerland, according to attempts to extend the Economic Freedom index retrospectively … Public spending as a share of GDP … was below 20 percent, well below countries like Britain, France, and West Germany. Taxes as a share of GDP were slightly lower than in the United States, and the highest marginal tax rate was 20 percentage points lower than in that country. In other words, Sweden was one of the richest, healthiest, and most successful societies the world had ever seen—and that was before it was a generous welfare state and had started experimenting with socialist ideas.

In the 1970s, Sweden decided that it was time for a major shift to larger government, higher taxes, and bigger social benefits. While the government did not literally take over companies, it imposed extensive price controls and took control of labor rules that had previously been negotiated between unions and firms. Norberg writes:

In the 1960s Sweden was on top of the world. The country had globally admired companies, an educated workforce, and an open and competitive economy that delivered high growth, decent profits, and higher wages. … and West Germany. The conclusion many drew was that now the economy could afford a very big government indeed. The time for patience was over. … In just 20 years, public spending more than doubled, from 25.4 to 58.5 percent [of GDP] between 1965 and 1985. This came primarily from a rapid expansion of social services like health care, elderly care, and child care, and transfers like pensions and housing allowances. The marginal tax rate for blue collar workers increased from less than 40 percent in 1960 to more than 60 percent in 1980, and for white collar workers to above 70 percent. The payroll tax rose from 12.5 percent in 1970 to 36.7 percent in 1979. Capital gains were taxed as income, at progressive rates. In a series of steps, the corporation tax increased to almost 60 percent in the 1980s, even though it also offered generous deductions.

At the same time, the government raised the costs of doing business with a whole battery of regulations aimed at solving every conceivable problem and inequity. In 1970, Sweden introduced an opaque system of price controls, which forced businesses to negotiate price changes with business groups and government authorities. When Sweden devalued its currency it often implemented temporary bans on all price increases. Now it also gave up on the traditional Sweden model where labour market affairs were left to negotiations between business organizations and trade unions. Starting in 1974, the government regulated labour protection substantially, defining lawful reasons for termination and requiring that workplaces needing to fire staff for redundancy do so according to seniority (“last in, first out”).

Thus, Sweden appeared to outsiders in the 1970s and into the 1980s to be an example of a high-income country that had made a transition from a small-government capitalist orientation to a large-government welfare state with a socialist orientation. There was talk of Sweden as the “middle way” between capitalist United States and communist USSR.

But when you set aside the happy talk and looked at economic statistics, Sweden’s experiment was leaking from the seams almost immediately. The combination of high labor costs and inflexible regulatory control basically took down Sweden’s steel, shipbuilding, textile, and mining industries by the late 1970s. Investment sank, productivity gains dropped. Norberg: “Fewer companies were created in Sweden and the ones already in existence did not expand. In fact, by 1990, the Swedish economy had not created a single net job in the private sector since 1950, even though the population had increased by one and a half million people.” Sweden became more equal by subtraction: “Many of the country’s most important companies, entrepreneurs, and individualists left the country, primarily because taxation was suffocating and often made it impossible to pass family companies on to the next generation.”

Attitudes toward the generosity of Sweden’s welfare state also shifted. An earlier generation had welcomed greater security, but also had strong feelings about only using the safety net when needed. A newer generation had less guilt about exploiting the system.

In the early 1980s, 82 percent of Swedes said it was never justifiable to claim government benefits to which you are not entitled. Thirty years later just 55 percent agreed with that statement. After generous sick leave benefits were implemented, Swedes who were objectively healthier than any other population on the planet were suddenly “off sick” from work more than almost any other population. As early as 1978, one of the founding fathers of Sweden’s welfare state, the economist Gunnar Myrdal, complained that the traditionally honest Swedes were obsessed with escaping tax, and were turning into “a population of cheats” …

By the early 1990s, Sweden’s economy was in a crisis: think three years of severe negative growth, high inflation, and nominal interest rates that at one point hit 500 percent. Unemployment rose to over 10%, where it remained for years. Government budget deficits rose to more than 10% of GDP.

It was time for another major set of reforms, and the prominent Swedish economist Assar Lindbeck was chosen to head a commission that would set an agenda. (Lindbeck wrote about the experience in “The Swedish Experiment” in a 1997 issue of the Journal of Economic Literature.) Sweden did not return to its pre-1970 model, but the changes were substantial. Here’s a partial list from Nordberg:

[D]uring the next few years, Sweden cut public spending substantially, moving both expenditures and revenue closer to the OECD average. The country also reduced the benefit levels in its social security systems. Nineteen state-owned companies were privatized and public investment funds that had interfered with the investment decisions of private businesses were abolished. Private and commercial radio and television stations were permitted for the first time. Railways, buses, and domestic aviation were deregulated. The telecom and energy sectors were opened up to competition. Private employment agencies were permitted, and unemployment benefits reduced. The last vestiges of the price control system were abolished, with the infamous exception of rent control, which has continued to make it very difficult to get a rental apartment in growing cities like Stockholm. The central bank was given an explicit inflation target of 2 percent annually.

In 1992, Sweden initiated an ambitious opening up of public services when it created a national school voucher system, which gave families the freedom to choose independent schools for their children’s education. Private alternatives in government-subsidized childcare, elderly care, and health care started to proliferate. … In 1994, parliament decided to introduce a new pension system, which replaced defined benefits with defined contributions and included a “break” that automatically reduces payments in bad times. It also included individual accounts, which can be invested according to personal preference.

In this most recent shift, Sweden remained a country with a welfare state that is large by US standards, although not especially large by western European standards. However, this welfare state operates along-side an economy that is quite deregulated and open to international trade–my common measures, more so than the US economy. As part of this change, Sweden gave up the idea that it could pay for its welfare state by sticking corporations and the rich with the tax bill. Instead, the middle classes pay the bulk of taxes (for example, through a value-added tax), but also receive the bulk of benefits. Nordberg writes:

In the 1990s, Sweden also gave up the pipe dream of making the wealthy pay for it all. Swedes learned that you could either have a big government or make the rich pay for it all, but you couldn’t have both. High earners and successful businesses are too few and too important for the country’s economy to deter or chase away with high taxes. Scaring off high earners and successful businesses had not just hurt innovation and risk-taking, it had also threatened the long-term financial basis for the welfare state. Now Sweden relies more on consumption taxes and flat payroll and local income taxes than it did before the reforms, which means that most citizens pay for most public services out of their own pockets and that the country is once again a more attractive place to do business … The overall effect is that Sweden’s tax system is now one of the least progressive in the OECD …

Nordberg offers considerably more detail on Sweden’s evolution over time, but I hope my encapsulated description here makes the main point. There’s a lot to reflect on and to admire about how Sweden’s system manages tradeoffs between social equity and economic efficiency. But it’s not socialism: indeed, it explicitly focuses on supporting market-based energies of capitalism as a method of funding the welfare state. For a sense of Sweden’s attitude toward “socialism,” Nordberg starts his discussion by quoting an exchange with Göran Persson, who was Sweden’s Prime Minister from 1996-2006, and a member of the Social Democrat party:

“What do you think of socialism?”
“I’m a Social Democrat.”
“Not a socialist?”
“No, if you call yourself a socialist, they confuse you with a lot of
crazies.”