Quote of the Day (Citát dna)

„I don´t want an african labour law, which we´ve had till these days. Not even latin-american, I want european one. We have´ve had such law until 2003, when the former government changed it. It haven´t been european already after adopting it´s novel,“ said Slovak prime minister Fico. „We have to see people also, not only employers.“

Great! We´ve lived in the Antarctica continent maybe. Yes, when Mr. Fico talks about people he really means people. People in labour union who voted for him.

Slashing the Barriers for Competitiveness and Growth

By Rok SPRUK

Chris Edwards’s article in the National Review entitled Emerald Miracle nicely outlined the nature of Irish economic miracle widely known as a result of sensible economic policy friendly to capital creation, job growth and economic growth above all. Quite a few observers have claimed that Ireland simply had luck which no other country in Europe had. This assumption has no correlation with real empirical research and economic policy output that galvanized the Irish economy on the path from rags to riches. Competitiveness, which defines the ability of the economy to absorb real competitive advantage compared to other countries, can be measured in several directions, depending on the structure and content of the methodology and undertaken analytical approach. Nowdays, competitiveness is frequently taken as a task needed to be achieved by the goals of macroeconomic policy. Macroeconomic policy mostly relies on ensuring the stability of the public finance to avoid external shocks caused by high spending rates, marginally growing progressive tax rates and expansionary fiscal policy which is usually aimed to expand the redistribution of wealth and income created by productive behavior. Competitiveness can thus be broadly expanded on several areas depending on the use of its factors and variables. As competitiveness depends on the ability of entrepreneurial sector to sustain its ability to respond fluctuations through innovation and strategy performance, the responsibility relies on the role of government and the entrepreneurial sector. Both branches share its part.

As the basis of spontaneous coexistence, well enforced property rights and the functioning of the judicial system is crucial in this respect. Besides saving, investment is essential for economic growth. But if the governance of the institute of property rights works very weakly, no investment and saving can helpfully stimulate the economic growth. The case of Soviet Union explains this relationship very clearly. Soviet Union indeed had one of the biggest GDP shares of investment but, as well all know, it failed due to its inefficiency and the tyranny of central planning. The impossibility of the socialist calculation was thoroughly proven in the works of Milton Friedman and Friedrich August von Hayek. In Slovenia, the weakness of the institute of property rights is one of the foremost disadvantages that causes huge compliance costs to the economy. World Bank’s Doing Business showed that it takes approximately 1350 days in Slovenia to fully enforce commercial contracts. Hence, the judicial system doesn’t function properly. The number of delays is skyrocketing. In principle this seriously endangers the rule of law as justice delayed means justice denied. Contract enforcement is measured through the evolution of payment dispute, and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. The inefficiency of judicial system can triple the entrepreneurial compliance costs because investment, saving, work and fulfilling obligations becomes more risky as externally caused uncertainty increases the probability of the so called “damaged business”. In consequence, a dysfunction of the rule of law chains a bulk of persisting problems with a heavy impact on productive dynamics which is supposedly the main engine of competitiveness in a global match.

A further question that comes up in judging the guideline of competitiveness is the role of the government. It is a matter of empirical evidence that private sector allocates resources much more efficiently as the government intervention is actually able to. Every freshman student of economics knows that government subsidies (“neighborhood effects”) and handouts can be justified if positive externalities are empirically proven including a solid and dynamic grounding in economic theory, not least in analytical tools. For example, assume that there’s a dispute wheatear the government should subsidize military or should the financing of military services be left to private sector. If cost-benefit analysis, the forefront guideline in decision making, shows that there’re actually positive externalities in financing a military by budget outlays, then the whole action is legitimate and justified. The problem comes up when the government wants greater involvement in business sector. In this case, the macroeconomic policy model is crucial. Tax competition around the world has importantly influenced macroeconomic policymakers in terms of reducing the GDP tax burden through cutting tax rates on corporate and individual income. Government is usually not aware of the consequences of high spending exercised through a vast redistribution of income and wealth. The main problem in the context of macroeconomic policy is how to establish a mechanism of long-term stability of public finance. Because nowdays, budget outlays such as social security and health care expenditure are becoming higher as the population is getting older, the question and the analysis of the long-term macroeconomic projections plays an increasingly essential role. The costs of ageing population and growing GDP spending on such schemes pose a serious risk that seriously threatens the stability of public finance in the long-run. Sweden efficiently avoided the risk of long-term instability of public finance by introducing a private pension accounts wherein individuals contribute nearly a half of total pension contribution. Thus, an important part of burden was replaced by choice options in individual contribution replacement of saving for the old-age. In terms of competitiveness, the decision-making in macroeconomic policy pertains the question of taxation, burden pressure, public debt, and inflation as the monetary phenomena. An environment in which high-tax wedge penalizes businesses for productive behavior is usually globally uncompetitive. Italy is a “case study” in this particular field. High taxation of capital gains, dividends and interest can seriously threaten the propulsive nature of entrepreneurial competitiveness in a global competition. As the abovementioned resources are usually the main driver of future investment, highly pressurized taxation can cause the reduction of investment influx while the economy simply doesn’t benefit from it. The macroeconomic policy is tightly connected with government policy towards the competitiveness. The lack of foreign direct investment in transition countries could be a fatal punch for long-term GDP convergence. When a business sector is usually lacking the resources, the aim of the government to protect domestic investors against foreign direct investment results in a lack of technological development and much needed restructuring in a direction of higher value-added and knowledge-intensive economy which is essential in global competitiveness race. There’s essentially no empirical and practical reason for regulating the market entry point for foreign investors through barriers and administrative obstacles. Another relevant area in which government possesses a very strong role is the regulation of employment. Implemented rigid employment rules supported by collective bargaining between monopoly trade unions and employers again strongly increase the compliance costs and reduce the length of time which individuals are ready to absorb the human capital and adapt it to the productive trajectory in the market. Hence, rough employment regulation represses the flexibility in the labor market as we know that flexibility is defined as a time in which individuals are able to find a job when they lose it.

Competitiveness is of course a microeconomic phenomenon that government cannot achieve through explosive spending and high level of corporate and individual taxation. We should know that innovative and propulsive business models pursue the miracle of competitiveness. The marketing strategy, the supply-chain, the digitalization of business (e-commerce), joint ventures, value added, risk management, market growth, knowledge insensitivity and service quality are some of the fields from the area list of competitive engines that drive the business models ahead of global competition. In the period to come, innovative capacity of business models will fatherly play evenly greater role in the field of international competitiveness. Government intervention, regulation and fiscal planning can’t!

A concluding remark for the government to promote competitiveness is quite simple: “privatize, deregulate and don’t hesitate!”

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Rok SPRUK is a supply-side economist and a classical liberal. He lives in Slovenia where he studies economics and business. His fields of professional interest and research are economic growth, international economics, macroeconomics, tax reform, international competitiveness, free trade and globalization. In the field of business he is focused on strategic management, financial markets, business models, marketing and innovation. Rok works for economic freedom, individual liberty, free enterprise and a free society. His ideas, writings and observations are posted on his blog Capitalism & Freedom. You can contact Rok by sending an email to rok.spruk@gmail.com
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Pascal Salin v Bratislave

V stredu 21. marca 2007 o 17.00 vystúpi v Bratislave na pozvanie Konzervatívneho inštitútu v rámci Conservative Economic Quarterly Lecture Series francúzsky ekonóm Pascal Salin s prednáškou „Prečo potrebujeme kapitalizmus a konkurenciu“. 

To Fight Unemployment – Increase Labour Freedom!

by Johnny MUNKHAMMAR

For a long time, unemployment has been a serious problem for many European countries. It leads to serious social problems. But now, there are quite a few countries that are very successful in creating new jobs and higher incomes. For any country, it is essential to draw the right conclusions. In short: Copy the best, forget the rest.

Unemployment is down a bit in the EU, and in the euro area, at the moment. At 7,5 per cent, it is the lowest in a long time. The business cycle is simply very good, the global economy is booming – which is bound to have some positive effect even in the Western Europe. But first of all, sooner or later, the business cycle will not be as good. Then what? Back to even higher levels of unemployment than before?

And secondly, the official figure for unemployment doesn’t show the whole picture of social exclusion. There are at least as many people of working age as the formally unemployed that don’t work, but they are called something else, like “early retired”. The total number of people who are excluded is very high, and they are out of a job for a long time. Not least is this the situation for young and immigrants. Thus, the value of a drop in official unemployment of a percentage point should not be exaggerated.

Furthermore, long-term trends show that these problems have been present in Western European countries for a long time. Indeed, the relative decline of several European countries is hardly disputed. The main debate is about the causes of the problems and possible solutions. There will always be politicians, like Ms Royal, who would like to blame someone or something else for problems. But reality speaks another language.

A comparison of labour markets between the more free-market US, and the EU, is quite revealing. The share of the working-age population employed in EU countries is only 64 per cent; in the US, it is 72 per cent. In 2004, only 13 percent of unemployed workers in the US were unable to find a new job within 12 months; in the EU, the figure was 44 percent. In the US, youth unemployment is 10 per cent, in the EU, it is 17 per cent.

But the best comparisons can be made within Europe itself. Denmark has an employment rate of 76 percent, but Poland is far lower at 53 percent. Youth unemployment is above 20 percent in Greece, Italy, Sweden, France, Belgium, and Finland and below 8 percent in Ireland, the Netherlands, and Denmark. In the EU:s 15 member states, between 1995 and 2004, the development of employment was also very different between the countries. In Ireland, the Netherlands, and Spain, the increase in employment was the highest; in Germany and Austria, it was almost zero.

What were the differences between the countries? First of all, the labour market was substantially freer in the countries that succeeded in creating new jobs. Second, payroll and income taxes were more than 10 percentage points lower in the five best economies (in terms of job creation) compared to the five worst. Third, the levels of contribution from the state for unemployment and sick leave were lower in the best economies. Thus, freer labour markets, lower taxes, and lower contributions – in the successful countries.

This should not be a surprise. In recent years, the OECD has published a number of studies that confirm these correlations in its member countries. Government interventions in the labour market produce serious negative effects in terms of unemployment, especially among young people and immigrants. There are numerous academic studies that confirm this, as well as empirical data.

In the newly published “2007 Index of Economic Freedom” (Heritage/Wall Street Journal), there is a new category called Labor Freedom. It measures the degree of a number of regulations in the labour market in four main categories – hiring and firing regulations, for example – on a scale from 1 to 100, and the 41 European countries score between 45,4 and 99,9. The differences are thus substantial. Countries with a high score, and a relatively free labour market, tend to be more successful in terms of employment.

What about the Nordic countries, then? Don’t they have vast government intervention in the labour market and still are successful? No, quite the contrary. First of all, the Nordics are very different. Denmark has one of the highest levels of Labour Freedom in Europe, and they are successful. But Sweden, which has one of the lowest levels, has not been successful. All international analysts advise Sweden to de-regulate the labour market, which the new government has started to do. Thus, learn from Denmark, not from Sweden – in that respect. Sweden is successful in other ways.

Taxes, public monopolies, subsidies and social security will of course also affect the results in the labour market. It is not only direct labour market regulations. The more government intervention, on a general level, the more problems with few jobs. If Labour Freedom is combined with high levels of economic freedom in other categories, there will be better results.

There will always be numerous details to discuss about how to shape an economic policy for strong success in the labour market. But the general picture is clear: The freer a country’s economy is, the wealthier it is – and unemployment is lower.

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Johnny Munkhammar

Program Director, Timbro - Policy Research Institute in Sweden

Author of “European Dawn” (Timbro/Stockholm Network)

Article was published in economic magazine TREND no. 11

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Personal Liberty, Voluntary Exchange and Self-Ownership

by Rok SPRUK

In State, Anarchy and Utopia, Robert Nozick, one of the greatest philosophers of all time, developed the concept of self-ownership according to which individual are free to choose, live their own lives and in which nobody has an ultimate right to violate or regulate our living rights which we own. One of the reasons why some want to violate the rights of others lies largely in the fact that those individuals enjoy in controlling the rights of others. Conservatively emerged attitudes towards the limits of personal liberty in the name of morality and higher instances have never relied on empirical justification of their arguments. Instead, conservatism relies on a falsified framework in which denying liberty to individuals is legally and morally accepted. As a truly classical liberal I regard personal liberty based on self-ownership as untouchable and undeniable because, generally speaking, the question is which institution is accredited for limiting already limited personal liberty of individuals to live their own life, which essentially emerges from the principle of self-ownership.

The case for personal liberty begins with the question who or which higher organ is justified to violate the individual self-ownership. Taking individuals as sovereign in making decisions on their own together with the right to compensate in case of violation of those rights is there really an upward instance who limits our lives in accordance with their state of moral judgments and personal preferences. As a matter of fact, ideological viewpoint is unavoidable but the problem which emerges from the ideological set of values and preferences, is questionable when the one's view on valuable judgments and moral preferences is trying to use coercion in order to equalize individuals and force them to avoid enjoying their life by imposing certain features that correlate with the grounds of specific ideology.

Beginning with Karl Marx and continuing with Rousseau and Hegel, the viewpoint of liberty turned into the need for the so called positive liberty where a certain instance of authority aims to judge the justification of liberty of certain kind in specific fields. The proponents of positive liberty have always designed a theoretical framework in which the private property, its respect and the institution of self-ownership were largely erased from the basis of individual decision-making. There has never been greater violation of individual liberty than Hegelian and Marxist philosophers and ideologists have proposed in their efforts to brainwash the individual initiative and violate the self-ownership principle. Hegelian-Marxist philosophy has streamlined towards the fictive illusion where liberty is supposed to be unlimited but in the reality, the state and coercive institutions have taken a full control on the individual decision making. Marxist agenda has favored the elimination of private property, saying that it leads to wars and social conflict. In fact, there is no life and no liberty without private property. Sometimes, Marxists aimed fanatically to collectivize the means of production but today they aim to socialize the results of production. In this case, there is no economic liberty which means that then there is no liberty at all without private property as well. It is very hard to believe in Marxism when you review its legacy. Marxism dialectically opposed private property and thus explicitly supported the means of coercion to be exercised. In fact, with the confiscation of income and property Marxism has been the greatest violator of human rights and principles of free society and individual liberty. Coming to conclusion, positive liberty is a myth that has nothing to do with the appearance of spontaneous order that set grounds to the flourishing of exchange agreement and individualism.

The major source of objection to individual liberty means the lack of belief in freedom itself. Several issues and hot topics are put on table today. Sexual issues are among the hottest. First of all, sexuality is an explicit matter of private life and is thus one of the basic ingredients of self-ownership. If governments and policymakers deny the sexual freedom then they largely imitate Marxist philosophy and its principles. Denying sexual freedom means a source of collectivism when only one social norm is commonly allowed and where individual freedom to own your life and make your own decisions is ripped off. Another example of socialist imitation is denying individuals from being free to choose euthanasia as a way to end their life. Ending your life is a matter of choice, not a matter of collective decision undertaken by government. Further, drug war is the most obvious crusade of socialism. It is a vicious source of socialist enterprise. It is not the society that is poisoned by, say marihuana, individuals are. If they enjoy and not affect others to do so, then there is no reason to set sanctions against the use of marihuana for certain purposes. In order for certain drugs to be abolished, negative externalities have to be empirically proven. Drug market is not a market failure because markets themselves always do things perfectly. If both parties benefit from the purchase of marihuana and if transaction costs cause no problems, then there is no need at all for the government to exercise coercion and prohibit the use of marihuana. Drug wars have no empirical correlation with classical liberal tradition, not least with the principles of free society.

Collective bargaining is also a serious violation of the individual liberty since it is exercised through coercion and individually violent approach that forces individual agents in the collective bargain against their will because, in other case, they would loose certain gains and thus be less well-off. The violation of personal liberty is even more obvious when trade unions exercise politically granted power as a means of coercion. Personal liberty largely coexists with economic liberty. Without both, it’s impossible to have a free society based on individual initiative, free exchange entrepreneurship, limited government, minimal state and above all – personal liberty based on the principle self-ownership.

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Rok Spruk is a supply-side economist and a classical liberal. He lives in Slovenia where he studies economics and business. His fields of research and work are economic growth, international economics, macroeconomics, tax reforms, international competitiveness economic policy, financial markets, business models, strategic management, innovation and marketing. Rok works for the freedom of choice, economic freedom and individual liberty based on self-ownership. His ideas, views, analysis and observations are posted on his blog Capitalism & Freedom.
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Happy Birthday, Murray!

Nedávno sme tu mali výročie jedného z najvýznamnejších predstaviteľov rakúskej ekonómie. Len pár dní po Carlovi Mengerovi môžeme oslavovať aj narodenie „najväčšieho nepriateľa štátu“. Túto prezývku si za svoje konanie vyslúžil Murray N. Rothbard. Druhý marcový deň v roku 1926 prišiel na svet „Mr. Libertarian“.

Pri tejto príležitosti by bolo vcelku vhodné pripomenúť si jeho myšlienky o podstate vlády a štátu. Preklad jeho eseje „Anatómia štátu“ je dostupný na stránke INESS-u.

Takto Murrayho vnímajú jeho bývalí kolegovia a ľudia, ktorí mali tú česť s ním prísť do kontaktu:

Gary North ("Čo robí Rothbarda veľkým"):

„Vyjadroval sa jasne a priamo k mnohým problémom súvisiacim s politikou, ekonomikou, filozofiou. Posunul Misesovu systematickú ekonómiu do prehľadnej a čitateľnej formy, ktorá sa vryje čitateľovi do mysle. Jeho bývalí kolegovia ho opisujú ako optimistického, dobrosrdečného a vybuchujúceho smiechom. To sú vlastnosti, ktorými mnohí z nás nedisponujú.

Spravil to, čo mnoho ekonómov pred ním (vrátane Misesa) nie. Nastolil otázku etiky a jej vzťahu k ekonómii. Veril v prirodzené právo. A veril tomu, že štát porušuje princípy prirodzenosti. Na rozdiel od Misesa a ostatných „value-free“ ekonómov bol presvedčený o tom, že k obhajobe slobody je okrem ekonómie bez hodnotových súdov treba aj morálne hľadisko.“



Walter Block ("Žiť principiálny život"):


„Rothbardovo poňatie slobodnej trhovej ekonomiky bolo tak „radikálne“, že si dovolil kritizovať takých ľudí ako Milton Friedman, Ronald Coase, Fridrich A. Hayek, či George Stigler pre ich prílišné kompromisy so socializmom.“




Hans-Hermann Hoppe ("M.N.Rothbard: Ekonómia, veda a sloboda"):


„Podobne ako jeho predchodcovia (Menger, Bohm-Bawerk, Mises) je racionalista a kritik všetkých odtieňov sociálneho relativizmu: historicizmu, empiricizmu, pozitivizmu, skepticizmu. Rothbard tak isto zastáva pozíciu, že ekonomické zákony nielen existujú, ale že sú exaktné a apriórne. Nepovažuje za potrebné ani možné testovať ekonomické tvrdenia študovaním dát.

V knihe Etika slobody prostredníctvom konceptu súkromného vlastníctva zlúčil hodnotovo neutrálnu rakúsku ekonómiu a libertariánsku politickú filozofiu (etiku) do jednotnej sociálnej teórie, ktorá je základom tzv. „austro-libertariánsko-filozofického“ hnutia.

Rothbard opovrhoval myšlienkou obmedzenej a ochraňujúcej vlády, ktorá je protichodná a nezlúčiteľná s presadzovaním slobodnej spoločnosti. Limitovaná vláda má totiž vrodenú tendenciu prerásť v neobmedzenú totalitnú vládu. Preto ak k tomu pripočítame monopol na tvorbu a vymáhanie zákonov a právomoc vyberať dane, obmedzovanie moci vlády a ochrana života a majetku jednotlivca je len iluzórna.“



Llewellyn H. Rockwell, Jr.("M.N.Rothbard: Odkaz slobody"):


„Ústrednou témou jeho politickej ekonómie bol konflikt štátu a dobrovoľných združení a zápas o vlastníctvo a ovládnutie majetku. Ukázal, že majetok sa musí nachádzať v súkromných rukách a vlastníci musia mať slobodu v jeho spravovaní. Jedinou logickou alternatívou je úplný štát. Neexistuje miesto pre „tretiu cestu“ ako sociálna demokracia, zmiešaná ekonomika alebo „dobrá vláda“. A pokusy o ne majú vždy ničivé následky.

Ako povedal Rothbard, nie je utópiou snažiť sa o spoločnosť bez násilného zdaňovania. Je utópiou nazdávať sa, že právomoc vyberať daň nebude zneužitá v momente jej udelenia.

Ekonómovia len málokedy hovoria o slobode a súkromnom vlastníctve, a ešte menej o tom, čo znamená spravodlivé vlastníctvo. Rothbard tvrdil, že majetok získaný prostredníctvom konfiškácie, či už jednotlivými kriminálnikmi alebo štátom, je nespravodlivo vlastnený.
Pre vzťahovanie tradičných štandardov morálky na vládu bol Rothbard prezývaný aj „najväčším nepriateľom štátu“. Tvrdil, že ak je zlé pre človeka žiadať násilne od iného peniaze alebo život, je to tak isto nesprávne pre bandu lúpežníkov nazývajúcu sa vláda.“




Je to extrémistický a radikálny postoj?

On Swedish Model

by Rok SPRUK

Predominantly left-leaning newspapers such as British Guardian say that Sweden is the most successful society the world has ever known. This discussion has primarily already taken place back in the second half of the 20th century when policymakers, economic advisers and largely Keynesian experts embodied Sweden as a model for economic success which supposedly combined generous welfare safety mechanism with an unlimited free enterprise industrial and entrepreneurial sector. Political and economic debates about Sweden have confronted two specific points of view. The first point of view dominates that Keynesian economic policy and practice have successfully put up an “optimal” combination of wealth and income redistribution in addition to free entrepreneurial sector. The second point of view is quite the opposite from what the proponents of the so called Swedish model claim. Swedish success story is accorded to a long period of free-market and a very limited government. For years, the rate of public spending had not exceeded 10 percent of the annually adjusted GDP. In Slovenia, Swedish model is vastly popular among the politicians who see Sweden as an example how to admire the rest and simply forget the best. The aim of this article is to crystallize the Swedish model and unmask the most commonly confused myths about Sweden.

Swedish economic miracle was largely a result of long periods of peace and aided prosperity. The transformation of Swedish economy began in 1846 when a group of classically liberal reformers instituted a religious liberty, deregulation, structural liberalization and free trade. The institutions of free market benefited Swedish society as industrial revolution galvanized Swedish economy. Between 1860 and 1970, Sweden had, after Japan, the highest economic growth rate in the world. The second industrial revolution created a firm entrepreneurial foundation as many Swedish multinational engineering companies (DynoNobel, LM Ericsson, ASEA/ABB, SKF, Alfa Laval) built a bulk of inventions and innovations that streamed toward a high value-added of goods and services and thus further pushed Swedish economy toward a rapid growth rate. Sweden’s development included the participation of foreign investment in improving the infrastructure, mainly in railroads and technological improvement. As Sweden did not participate in neither of two World Wars, the export sector had been breaking records and meanwhile became, beside stable institutions, protected private property rights and flexible contract enforcement, the foremost component of the economic growth in Sweden. When the international trade was partly liberalized, the removal of trade barriers turned shortages into surplus and the prices went down rapidly. As firms had to cut their prices to keep on maintaining and increasing their market share, their income was cut and a number of firms went into liquidation. On the other side, unemployment and production fall increased dramatically. It took some years before the economy started to grow again.

When the Great Depression slightly struck the Swedish economy, the unemployment increased by 25 percent due to the belief that trade protectionism and currency regulation would be the surest protection against the global economic slump. Compared to other countries, Sweden survived the depression much better than its global counterparts. When in 1931, the Swedish krona devaluated against dollar, the export activity grew by 30 percent. Due to the rapid recovery since the crisis of the 1920s, the economic growth increased significantly. The first leap towards the interventionism was made in 1932 when the new government of social democrats wanted to take a greater role in the economy and society in terms of controlling and fighting unemployment which became the first priority. Keynesian economic policy under the government of social democrats aim to closely control the economy and take interventionist features to control the business cycle. The Second World War did not touch Sweden and thus, the production facilities remained undamaged. Export sector was growing meanwhile the war was on. After the war, Swedish economy had a much better starting position than its counterparts in Continental and Western Europe. Sweden took a major advantage of both World Wars as being aided with neutrality and peace and easier became one of the wealthiest countries in the world.

Swedish model is interpreted as a historical compromise between a social democratic government and widespread privately-owned industrial and entrepreneurial sector. The proponents of copying the Swedish model abroad do not understand that Swedish model did not include the nationalization of industries and means of production at that time as many policymakers in the rest of the Western Europe largely exercised. Private industrial ownership was largely smaller in France and the United Kingdom as in Sweden. The Swedish model emerged in 1932 when Gunnar and Alva Myrdal designed a generously expansionary welfare model saying that Sweden is an ideal country for such an experiment. They claimed that small and homogenous population and protestant working ethics would additionally support the creation of a generous welfare state and expansionary government spending and regulation. The compromise in the pool of the Swedish model has involved strong bargaining position of trade unions. Together with the government, the unions play an explosive role in labor market policies. The government devised numerous systems of taxation and wealth and income redistribution. The “middle way” between state socialism and market capitalism had been coined and thus became a surprisingly successful original Swedish trademark. Until the 1970s, the economy was booming as well as specific economic indicators and characteristics were seemed great. Swedish economy strongly exceeded the average world economic growth rate between 1950 and 1970. The reason why Swedish economy still grew despite the increase in government spending is that industrial business sector successful restructured to compete with global competitors on international markets. Gross value added output increased strongly between 1950 and 1970. Textile industries faced tough global competition as costs associated with welfare and employers’ contribution to health and social insurance reduced the return on each invested unit of capital. On the other side, engineering sector achieved the greatest gross value added output levels on an international scale. The supply of technical staff in the market was large enough to avoid structural unemployment. Its rate went extraordinarily low to 2 percent between 1950s and 1960s. But in 1960, Swedish labor market saw major changes. The employment in the service sector was growing while was a drop in the employment base for industrial and textile workers. The socialistic economic policy of Palme government leaned further toward orthodox Keynesianism and excessive spending. During the late 60s and early 70s, the number of people employed in the public sector grew rapidly. At the same time, the number of job leavers depended on social welfare and labor training programs considerably as well. The outcome of government’s disastrous welfare and spending policy had been the highest tax burden in the OECD group of countries. For example, the marginal tax rate on individual income was above 80 percent in the middle of the 80s.

Structural crisis went evenly deeper in the early 70s as international economic crisis negatively affected Swedish economy. As Sweden is largely export-oriented economy, the oil crisis of 1973-74 left negative effects on the economy more than in any other country. The stability of the export sector was shook when the decline in international business activity was completely unexpected and optimistically above the immediate expectations. The structural problems involved greater pressures from trade unions which led to dysfunctional wage formation and problems connected with higher inflation and rapid expansion of money supply at a rate far above the GDP growth rate. Macroeconomic stability of public finances was not flattering. Budget deficits and a growing size of public debt caused the macroeconomic financial risk as the economic policy was focused on the expenditure side of the budget. At that time, the business environment was very inhospitable as high taxes discouraged capital and job formation and supported capital flight. Tough international industrial competition in shipbuilding and steel industry was faced and employment level in those sectors went down dramatically. High taxes and substantial government intervention discouraged strategic restructuring and market reorientation and consequently the capital flight was made a bubble waiting to explode. In the absence of restructuring and in the presence of enormous contribution to social welfare programs, the entrepreneurs streamlined towards moving the production plants abroad. The government solution to the problem was, as Milton Friedman would say, even worst than the problem itself. The government relied on massive subsidies to those industries. This kept employment up only temporarily. The need for spending on granted subsidies turned into a growing size of budget deficit. The Central bank, Riksbank, broadened the monetary base which immediately resulted in a higher inflation rate. High cost increases and a decreasing level of international competitiveness of the Swedish economy fostered several devaluations of the krona. The devaluations supported the short-term competitiveness and export based industries but worsened the long-term problems associated with higher inflation so that Riksbank adopted the policy framework of inflation targeting in search of a nominal anchor.

The overall picture of Swedish economy was scrapped in the scratch, worse than anytime before, after the World War 2. In order to let the economy grow, Swedish policymakers initiated several deregulations; transportation sector, telecommunication market and financial market were among the most exposed. In the financial market, loan restrictions were liberalized and some barriers were dismissed. The reaction of the market was quite logical. The lending expanded rapidly quickly, focusing mostly on real estate market. Rigid, stoned and hard-hand regulations contributed the major share to the risk of credit expansion. Due to the devaluation, the export sector was given a monetary surplus and the liquidity problem had been solved by investing into real estate sector which contributed to a rapid growth of overall asset prices.

As the banking system overheated, credit risk led to the instability of the financial system due to credit losses and the loss of liquidity. The combination of structural crisis was coupled with government financial crisis and currency crisis. The latter led to the abandonment of fixed exchange rate regime which partly exported inflation risk and pressures to the major trading partners. The transformation to free-floating exchange rate regime depreciated Swedish krona. This made a positive effect on export activity but it was still not enough to cover the whole loss turbulently created in times of the near collapse of financial and service sector. The official unemployment jumped to 8,2 percent and the GDP between 1990 and 1992 fell by 5 percent. It is quite hard to predict the real jobless rate as numerous unemployed participate at the labor training programs and statistical office does not count them as unemployment though they are not seeking a job on the labor market or working.

The deepest economic crisis since 1930s was marred by a blurred picture of deteriorating public finance. In 1994, the budget deficit was above 15 percent. The public debt climbed at around 80 percent as central bank disciplined its policy to hit the inflation through inflation targeting and tightening the money supply. All in all, due to the combination of two decades of low growth and economic crisis, Sweden slid in the OECD’s Prosperity League from 4th place in 1970 in 16th place in 1998.

Several economic reforms and measured features were introduced in order to move the economy out of depression. Central bank gained independence in targeting inflation while the government had to cut the expenditure rate. Health-care sector was fundamentally changed. Private health-care insurance schemes were allowed. Reforming the pension system has been oriented toward individual retirement accounts as it has been partially privatized. Vouchers and competitive mechanisms were introduced in the education system. Budget outlays were reduced and the general budget policy turned into the policy of golden surplus, minimizing the pressure on public finance and short-term policy expectations.

Sweden is a country that went from rags to riches. Aided by peace and neutrality, it continually relied on a minimal GDP consumption. The foundations of early entrepreneurship and free trade introduced in early 1860s were also the ground for a rapid development through industrial revolution and high economic growth rates as well. This had largely been the result of running on the road to free economy which had been based on entrepreneurial innovations and numerous inventions that additionally helped create an enriched profile of gross value-added output and this is one of the several components that helped Swedish economy succeeded in international trade. In 1950s and early 1960s, the government intervention sparked and after 1970s, it became an explosive experiment of excessive welfare spending. In the case of Sweden, Keynesianism bankrupted again when Swedish economy slid into depression, facing a GDP fall, inflation pressures and high unemployment. The middle way embodied in the Swedish model is not appealing as left-leaning charlatans, socialists of all parties and economically illiterate self-proclaimed experts would wish.

In Slovenia, where “the gradualist way” of economic policy inhibited the transition to market economy, the worst features of the Swedish model streamlined the course of public policy. Thus, we still have the highest taxes in Central and Eastern Europe, not to mention substantial government ownership of banks and several corporations. Trade unions possess politically given monopolized position in the labor market which is one of the least free in Europe. In the beginning of transition to market economy, only the “rest” of the Swedish model was copied to Slovenian public policy, including excessive welfare spending and extremely rigid and inflexible labor markets. Copying Nordic problems immediately revenged when the economy and society have been fading on the scale of international competitiveness.

The relevant question to ask is how Nordic countries, say Sweden, became rich and how they progressed structurally, achieved high rates of economic growth and what kind of set of solutions was exercised when the economy was coming in the recovery. At last but not least, when talking about the Swedish model my advice is simple:

Admire the best and don’t think of the rest.

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Rok SPRUK is a supply-side economist and a classical liberal. He lives in Slovenia where he studies economics and business. His fields of professional interest and research are economic growth, international economics, macroeconomics, tax reform, international competitiveness, free trade and globalization. In the field of business he is focused on strategic management, financial markets, business models, marketing and innovation. Rok works for economic freedom, individual liberty, free enterprise and a free society. His ideas, writings and observations are posted on his blog Capitalism & Freedom. You can contact Rok by sending an email to rok.spruk@gmail.com
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