“Our wills and fates do so contrary run
That our devices still are overthrown;
Our thoughts are ours,
their ends none of our own.”

Claudius, King of Denmark; from The tragedy of Hamlet, Prince of Denmark,
William Shakespeare

Introduction:

The economic history of Sweden is unique and full of fascination. It is a history of human
mind’s attempt to rationalize the world into perfection and to take fully conscious control of
it through the interplay between the state and the advancement of sciences in both physical
and social realms. Yet, it is also a story of how we all must accept the limited reasoning
ability of our own mind at the end. And learn to live in our imperfect world where it is
impossible for the state, a psychological substitution of god, to become the master plan of
human collective destiny. That we must put our faith into individual liberty as a means to
allow the evolution of our orderly but unplanned modern Open Society based upon
“institutions as general rules that can’t determine the outcome” to develop.

The Swedish economic development is of extreme interest for many other nations, both the
developed and developing countries. Its charm of the third way between capitalism and
socialism still draw attention from the students of political economy all over the world. I
myself am one of them, my decision to come to Sweden as an exchange student lied very
much on the hope that it is possible to reconcile the two seemingly opposite intellectual
positions with the model of welfare state. However, the fall of the Swedish model, the
stagnation of the Swedish economy and even the stagnation of Western Europe economies
seem to revolve around the welfare state system with its interplay between politics and
economics. Hence, the understanding of Swedish socio-economic development is important
to derive the lesson we’ve learned from the Swedish attempt to deliberately design their
social institutions and the economy to attain social justice. The implication of this lesson is
crucial to the development of the world in the 21st century as it is not a technical attempt to
play with the economy as we’ve commonly seen but a total transformation of the grand
idealistic values manifested into social institutions that, in turns, deliberately determine the
outcome in the economy.

The theme of this essay is to illustrate that the development of Swedish political economy
can be viewed as the rise and the fall of Hayekian spontaneous order (i.e. the evolutionary
nature of the political economy based on institutional rules that has no grand designer and
no deterministic outcome). The digression into Swedish model that marked the fall
spontaneous order was based on the invalid concept of social justice and over-optimism in
the rational ability of human mind. This digression caused a path-dependent irreversable
distortion in the market system and the society as a whole. Finally, the fundamental
institutional changes are required into the reposition Sweden back into the track of
spontaneous order. It is perhaps useful to note here that the framework developed in this
essays are based mainly upon the idea of F.A. Hayek, J. Schumpeter and Dauglass C. North.
Spontaneous order and directed order.

Cosmos, Taxi and the limitation of human mind.

Before we go into the analysis of Swedish economy, it is useful to review some basic
concept underlying this essay, namely, the spontaneous order. It is obvious that we are living
in a society where order, consistency and regularity exist. We called this observable pattern
of rules that made possible our intelligent life in the society possible as ‘order’. However,
there are two sources of order, namely in Greek, cosmos (grown) and taxi (made). The order
of taxi is that of the organizations, firms and different kinds of agents in the society. In this
kind of order, it must be deliberately planned into to realize the purpose of each
organizations. It is the deliberate organizations of players in the social games. It needed the
centralization of planning, imposing rules and commands by the authority of each
organizations to make the most use of all knowledge available to them. Examples are
commercial firms, hospitals, military and the government itself.

However, the cosmos or the grown order is different. Although it is the result of
human action but it is never a result of human deliberate design, it is rather based upon
evolution. There is no grand conscious plan to create the order but the order evolved and
survived due to the process of random selection through time that integrate what is
beneficial and exclude what is not. As it is not created, therefore, as Hayek put it “it can not
legitimately be said to have particular purpose, although our awareness of its existence may
be extremely important for our successful pursuit of a great variety of different purposes.” It
simply the collective rules that allow us to survive and progress through out the history of
mankind.

As it is the result of countless individual elements that adapt itself to the worldly
circumstances, the totality of the knowledge about the whole systems can’t be know to any
one single mind or authority for the purpose of coordination. This is the remarkable
different between the order of cosmos and that of taxi, while taxi is rather simple
relationship between elements in the systems not so complex and, therefore, can be process,
control, command and coordinate by the authority. The progress of the taxi order is
dependent on the ability of central control and coordination while the progress of the
cosmos order lies upon the fact that all elements are following general rules which allow
them to act freely as individual agents. Hence, the use of knowledge in the spontaneous
order based upon the democratization of knowledge i.e. the use of knowledge each agent
possess in order to plan their action based on the future outcome that follow the general
rules applied to all agents. Hence, in spontaneous order, the systems can make use of
fragmented knowledge spread around the whole systems without the need of centralized
commanding authority. In fact, it is the only possible form of the progress of our complex
civilization that all attempt of centralization have failed.

It is also easily can be seen from this point that it is impossible to impose the
directed order (taxi) over the spontaneous order (cosmos) as our human’s calculation
capability is limited and also the consequence of that act will wiped out any differences in
human preferences. Hayek argued “though spontaneous order and organization will always
coexist, it is still not possible to mix these two principles of order in any manner we like…
to some extent every organization must rely also on rules and not only on specific commands.

The reason here is the same that which makes it necessary for a spontaneous order to reply
solely on rules: namely that by guiding the actions of individuals by rules rather than specific
command it is possible to make use of knowledge which nobody possesses as a whole.
Certainly nobody has yet succeeded in deliberately arranging all the activities that go on in a
complex society. If anyone did ever succeed in fully organizing such a society, it would no
longer make use of many minds but would be altogether dependent on one mind; it would
certainly not be very complex but extremely primitive and so would soon be the mind whose
knowledge and will determined everything”.

Now we could turn into the institutional economics of Dauglass C. North, he argued
that in trying to understand the institutions and the institutional changes, we must first
separate institutions from organizations. According to North, “Institutions are the rules of
the game and organizations are the players the interaction between the two shapes
institutional change.” Hence, the Hayekian Spontaneous order manifested through North’s
institutions while the directed order are actually organizations. He argues further that “It is
not possible to develop a theory of institutional change that
Mixes up the rules of the game and the players.” Of course, the impossibility in developing a
theory implicitly means that it doesn’t make sense to mix the spontaneous order with that of
directed order.

In conclusion, the institutions under Spontaneous order are rules that constraints
human interactions in general but never determine the final outcome as the spontaneous
order has no particular purpose so that it allow individual liberty to work. While the directed
order or organizations are purposeful and aimed at achieving particular outcome, however, it
can only operate efficiently in the complex social systems because it also follow the general
rules of the spontaneous order. Of course, there are interactions between the two orders.
Institutional rules change as it evolves, human alter the rules under spontaneous all the time,
however, it should still always be the general rule apply to all organizations or players in the
social games and never deliberately determined the final outcome but rather rely on each
organizations to make use of their incomplete information while the spontaneous rules
reduced the transaction cost of human interactions and exchanges. The attempt to mix them
together always results in a problem of unsustainable condition.

The rise of spontaneous order; Pre-Folkhemmet Sweden.

Swedish economic history, for the most part until 1930s, can be viewed as the rise of
spontaneous order. To follow Mauricio Rojas argument, there are four important
endowment factors that made Swedish progress uniquely successful into the spontaneous
order that are required to the development of modernity, namely, Ethnic homogeneity, a
strong nation state, repaid industrial growth, and technology based on mass production and
standardized organizations. Sweden’s “agrarian nation based on a poor but free peasantry”
based on the advent of Charter of Liberties of 1319 has made it unique in term of economic
freedom. The Charter was the important component in creating the spontaneous order of
modern Sweden as it, in effects, allow peasants to enjoy the liberty of operating their
economic activities without much interference of the government and, hence, lay down the
institutional basis of the spontaneous order. Although it is politically centralized in term of
government control as there is a direct relationship between the farmers and the monarchy,
but this is not the obstacle of spontaneous order as it keeps the economic arena relatively
free and actually help imposed common rules in the society much more effective than other
feudal systems in other kingdoms in Europe, i.e. it help reduced the transaction cost in the
society by having a centralize government that imposed general order in the society of
homogeneity.

The Swedish land distribution reform and enclosure process during the second half
of 18th century has contributed significantly to the Swedish economic development. It can
be viewed as the institutional change that seeded the root of Swedish entrepreneurship
development while using rules and laws to allow the reallocation of land based on economic
efficiency. The trading environment of the period also create an environment that is friendly
to the development of free market systems as the communication of market information
between major market (such as in iron) between Stockholm, London and other important
cities in Europe was existed since then. Hence, the transaction-based economy is firmly
established in Sweden.

The factors that contribute highly to the rise of spontaneous order in Sweden are the
institutional change around the year 1850. Started with the liberalization through the
abolition of the guild system, the general freedom of trade and the free foreign trade. The
government has created the environment that are very much entrepreneurial friendly
through the regulations of joint-stock companies and commercial banks that made available
the local capital market while the government also invested in the infrastructure such as
communication, education and urban instrastructure. Last but not least, the large but
properly managed capital import made possible to large scale investment in Sweden at the
time. It should be note here that the government intervention here wasn’t a direct
intervention into the market but rather fostering the entrepreneurial environment while
provided services that the private sector can’t function at the time. All of these institutional
changes created the great environment for individual free organizations to progress into free
market system and capitalism under proper rules; of course, these are the crucial ingredient
of the success of Swedish industrialization. With the availability of land, labor, capital,
entrepreneurs can work out their industrial plans based upon consistent rules of game under
various market institutions.

All in all, from the year 1319, Sweden progress its political economy under the
development of general rules and laws limited the power of the royal government while
allow the peasants to enjoy relatively well economic liberty. Also that there are institutional
development that allow the availability of the factors of production while the freedom to
trade and many other market institutions ensure the low social transaction cost while
position individual market organizations to be at the center stage of the whole economy. It is
the system under spontaneous order which, again, result of human actions but no deliberate
design. It is rather based on the social evolution of formal and informal rules-ideas and the
liberty that allow all players to freely make use of their market knowledge.
The fall of spontaneous order; Folhemmet Sweden.

In his Nobel prize lecture, Gunnar Myrdal said “Our knowledge, as well as our ignorance, at any
time and on every issue, tends to be opportunistically conditioned, and thus brought to deviate from full truth.
In every epoch and every problem, this opportunistic tendency operates also in our scientific work, if not
critically scrutinized.” And yet perhaps it is this opportunistically conditioned attitude that
clouded the mind of the early architects of the so-called “Swedish model”.
The formation of Swedish model was based around the pursue of social justice and the over-
optimism of scientific progress. Its attempt to socialize the consumption side, is the words
of Rojas, “using regulatory measures, economic policy and a very expansive taxation policy to gain control,
not over the means of production but over its result” As it tried to determined and control the result
of the economic game, it is clearly a violation of the spontaneous order, i.e. it tried to
substitute spontaneous order with the expansion of the directed order of the government.
Although many scholars claimed that the real Swedish model was only true around 1960s to
1970s.

However, we must consider how the institutional changes over a long period of time
made possible the total realization of the model in that period. We must remember that the
rise of spontaneous of Sweden is a product of social evolution that involved hundreds of
years before it could truly turned into the system of free market and capitalism during the
industrialization period. North argued clearly in his 5th proposition on the institutional
change that the nature of this development if of path-dependence kind, i.e. the past truly
affected the future through complementary and network effects through time. The
transformation of social ideology to general rule of thought into informal rule and finally to
formal rules is complex process and take long time. Therefore, we can’t change the society in
one day due to the lack effect of institutional changes of the past.

Within this view, we could make sense of the development of thought on Swedish model.
The root of the model is developed by the social democrat party with its Marxist root;
however, after the transformation of their ideology, there was still, in a word of Hirdman “a
purely utopian notion of the possibility of rationally planned society to create the greatest
possible happiness and the least possible unhappiness.” Rojas further described “The basis
of the model rested upon the image of good home there is no privileged and disadvantaged,
no favorites and no step-children…The classless society, the native country. The new
community is to be founded on scientific thinking, on a planned co-ordination of the new
creative power of the mankind. According to the socialists, that co-ordination has in fact
already been achieved within the framework of big industry”

It is this attitude on social justice and the power of sciences that made possible the future
development of the model into reality of the 60s and 70s as it deeply rooted into the mind of
policy makers and main stream academics that it is difficult to find any view in disagreement.
This is part of the informal institutional changes that later manifested into formal laws and
rules in the later period, especially in the Rhen-Meidner Model and solidaristic wage policy.
Although at the early periods, the model seemed to work as the economy truly gain
tremendously from the economies of scales, rationalization and relatively fix wage structure.
However, this attempt literally tried to digress from the spontaneous order by imposing
result-controlling rules into the market institutions. It now put the government as the master
designer of the whole political economy through its scientific specialists in all areas. It
brought the spontaneous order down into the complete conquest of directed orders. Free
market systems were seriously criticized and distrusted.

Paradise lost: Post-Folhemmet Sweden.

As Sweden moved into the perfection of the Swedish model theme which tried to socialize
the economy through the consumption, in effect, the government deliberately pushed for
big corporations causing the rather distort concentration of capital and resources around
large investment based upon old structure such as iron, steel and shipyards. The model also
lead to higher marginal tax and much bigger public sector. All of this easily caused the
distortion in the free market order as the price systems are distorted through government
direct play in the economy. As the public sector grow, many more resources were devoted
into this sector that rather has no impressive productivity, in fact the increase in
unemployment of the 1960s was only saved by the rise of public sector. Total tax burden
transfers about 75 % of gross income to the public sector which transfer back to the private
sector, this process is surely of high transaction cost and could easily distort the economy.
The tax regime could distort profit incentive heavily as the there are international investment
alternative available for both local Swedish and international investors and especially
entrepreneurs.

The deliberate push of Rhen-Meidner Model caused a tremendous unseen problem. It
implicitly assumes that the large corporations and the government could calculate and pick
the right technology or innovation that will be important in the future as it doesn’t allow the
SMEs to grow easily. Of course, the large corporation and the government have no way in
doing that and causing Sweden to cling to its old technological structure while ignoring the
transformation into new structure based on new technologies that by could be attain by
allowing the smaller firms to perform their random searches. Hence, Sweden is in deeper
structural problem than it was in 1930s as the whole welfare systems are in questions while
the Swedish model, especially the Rehn-Meidner version of it, ran into problem during the
1970s as the public sector become so large while there is not much room for the SMEs that
could contribute to the creation of the new innovation that could be radically important to
the growth of Swedish economics as a whole. The productivity growth in Sweden also are
also pulled down by the perhaps negative productivity growth in the large public sector that
was almost 70% of GDP during the early 1990s.

The return to spontaneous order and the trouble of path-dependence.

Now, Sweden has learned the importance of keeping institutional basis of the spontaneous
order and the danger of mix it with the directed order. It is attempting to reform its
institutional, macroeconomic and microeconomic structure towards a freer market systems.
It is very difficult to achieve the reposition of Swedish political economy back to the path of
spontaneous order. Its politics and interest groups had formed a very problematic
relationship during the rise of Swedish model. Its ideological basis, which is in one way part
of the informal institution, are still deep into the charm of directed order where the
individual responsibility are substituted by the unholy relationship between the government,
large corporations and the labor unions. The social democrat was reelected back into the
power in the recent election of 2002. The Swedish people has lost their patience in
reestablishing the spontaneous order back in Sweden as the political party advocate the
cutting of tax and government spending encountered an unfortunate fate at the election
while the social democrat that bring back the picture of good old days of Folhemmet or at
least never fully committed to put the country back from their disastrous experiment. It is
much easier for people for demand for the government to satisfy all their demands without
consciously realized that it is their transfer and tax that the government is playing with. The
painful road of self-realization seems to be the only way out of the long stagnation is being
avoided again in Sweden. The country is still under the influence of their institutional path-
dependence and perhaps what Assar Lindbeck wrote in his “Swedish experiment” is true, it
is a point of no return. And this story, therefore, should be taken into all the students of
political economy.

Bibliography:

Assar Lindbeck, 1997 The Swedish Experiment, Journal of Economic Literature.

Douglass C. North, Five proposition about Institutional Change, online PDF document.

F.A. Hayek, 1973, Law, Legistration and Liberty Vol. 1,2,3, University of Chicago Press

Mauricio Rojas, 1998, The rise and the fall of Swedish model, TIMBRO, Profiles Book,London.

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