Capitalism and The Swedish Welfare State

by | Oct 13, 2021 | Europe

As Ayn Rand observed, a compromise between two opposite principles – such as between freedom and government controls in a welfare state – is never sustainable,

Prompted by my recent visit to Finland, I listened to a lecture about the country’s challenges in the new world economy. It was delivered by the controversial banker and economist Björn Wahlroos at Aalto University Business School, my alma mater. (The lecture is available on YouTube, with English subtitles promised soon. Wahlroos’ talk starts at minute 37. Most comments about Sweden start about minute 65).

Dr. Wahlroos is a controversial figure in Finland, a country committed to the egalitarian welfare state, because he has been a provocative proponent of free markets and a critic of the welfare state. In this lecture, however, he argued that it is possible to have both the welfare state and market freedom if a country approaches them “sensibly.”

Wahlroos criticized the Finnish government for the zero GDP growth rate in the last 13 years and attributed it to the government’s “insensible” approach to growing the welfare state while failing to facilitate economic growth through market mechanisms. He cited Sweden as a model, where the modest annual GDP growth of 2% in the same period has financed welfare spending and avoided accumulating government debt.

In a 10-year period from the mid-1990s to the mid-2000s, Sweden’s social democratic government recognized the unsustainability of the ever-ballooning welfare state and set to restructure it (without giving it up). According to Dr. Wahlroos, Sweden did this primarily by lowering taxes and by reforming labor laws. It abolished the wealth tax for its wealthiest citizens in 1995 and the inheritance and gift taxes for everybody about ten years later. It also increased the tax deduction for employment income and changed labor laws, which encouraged those on welfare to go to work. Finally, in 2020 the government introduced a flat state income tax of 20%.

For such improvements of people’s economic freedom, Wahlroos deservedly praised Sweden. However, his endorsement of the Swedish welfare state model which permits modest economic growth by slightly expanding economic freedom, is indefensible. He argued that Sweden (where he now lives) represents a middle ground (a compromise) between the Asian tigers (such as Singapore, South Korea, Taiwan) and Venezuela. Therefore, it is “a sensible home for industry and also a tolerable home for capitalists.”

Dr. Wahlroos’ argument is indefensible because a compromise between two opposite principles – such as between freedom and government controls in a welfare state – is never sustainable, as Ayn Rand has observed.

Why? Because a system based on opposite principles is unstable and always moving toward either direction. There is no “sensible” middle to which the proponents of the principles can agree in the long term.

A welfare state based on a mixed economy, is founded on the idea that society – all its members collectively – must take care of everyone’s needs. In a welfare state, those who have more needs must be taken care of by those who are more productive and therefore can afford to help.

This principle of “to each according to his needs and from each according to his ability” is in a fundamental conflict with the opposite principle that individuals should be free to pursue their own interests. The latter includes trading with others and not being forced (through taxation and regulation) to give away the wealth they have produced so that the government can satisfy others’ needs.

The welfare state with lower taxes that incentivize production of goods and services and thereby wealth creation may be tolerable to some capitalists, as Wahlroos argued. In a world that consists mainly of welfare states of varying degrees and dictatorships of various stripes, this may be understandable.

However, why should capitalists – those who accumulate wealth by producing and invest it in further production and wealth creation – want to compromise and merely have “tolerable” conditions for production?

They do so because they have embraced the welfare state as an ideal. They have accepted that it is their duty to fulfill the needs of others by enabling the welfare state. But if the capitalists and the producers really wanted to increase everyone’s prosperity and wellbeing, they should reject this wrong ideal. Instead, they should embrace true capitalism: the principles of individual freedom and free trade. It is only such a system that can maximize and sustain economic growth and wealth creation, and therefore, human wellbeing.

The evidence, both historic and current, shows clearly that freedom leads to the greatest prosperity and wellbeing for all, and that government controls hinder them. If human flourishing is the goal, the compromise between the principles of individual freedom and the government control that is the welfare state should not be tolerated or embraced.

Jaana Woiceshyn teaches business ethics and competitive strategy at the Haskayne School of Business, University of Calgary, Canada. How to Be Profitable and Moral” is her first solo-authored book. Visit her website at profitableandmoral.com.

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