Who came first: Politicians or academic economists?i Johan Lönnroth (University of Göteborg) Introduction
The ideas of practical men, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Economists and political philosophers, who see themselves quite exempt from any ideological influence, are usually the slaves of somebody from the economic or political elite. No. This was not Keynes. It was me turning him upside down. Of course I pressed my point, as did Keynes. But I claim that it is somewhat more natural to consider that men (and they were almost always men) who had to take action in acute situations are forced to try new ideas more than people working with “normal science” (Kuhn) in a “free” intellectual surrounding.
Were the new “Keynesian” or “Stockholm School” ideas important in forming the economic policies after the 1932 election in Sweden? Were those policies of any importance for the upturn the following years compared to the devaluation of the crown after September 1931? Which impact had the ideas of an active labour market policy within the Swedish workers movement on the successful years for the Swedish economy in the 1950s and the first half of the 1960s? Was it good or bad that Swedish politicians waited longer than their colleagues in other countries to go over to a monetarist anti inflation policy? Did the center/right government find the right level of expansionism in the crisis of 2008 and 2009? I do not know. This text is not dealing with such difficult questions, only with who was first to implement new macroeconomic policy ideas that later were to be accepted in international mainstream economics.
I have chosen three paradigmatic shifts in Sweden, all of them connected to economic – unemployment and/or inflation – crises.: The so called New Economics in the 1930s, the forming of the Swedish labour market policies in the 1950s and 1960s and the gradual shift from Keynesianism to monetarism during the latest three decades of the 20th century. I also make some comments on the partial return to Keynesian ideas in the recent financial crisis, but what happened then is too early to evaluate.
Academic people, and especially so the writers of textbooks in economics, have tended to focus on the role of economists in those paradigmatic shifts. In most historical texts on the shift in Sweden from neoclassissism to Keynesianism and the Swedish Model, the main figures have been Knut Wicksell, Gustav Cassel and Eli Heckscher in the older generation, the so called Stockholm School, with Bertil Ohlin, Gunnar Myrdal and others and also Gösta Rehn and Rudolf Meidner in the younger generation.ii And the later shift from Keynesianism to monetarism is also mostly described as a battle between an older and a younger generation of academic economists, and this regardless of whether the writer is positive or negative to the shift.iii Political scientists are for natural reasons more interested than economists in the politicians. But also among them, the politicians have mostly been given the role of receivers and implementers of economic ideas coming from academic expert economists more than as initiators.iv I cannot claim to have the total overview of this wide field of study in economics, political science and economic history. But I believe that my main idea in this text – that politicians and economists working in political institutions more than academic economists were frontrunners in economic political thinking - is rather unusual.
Who introduced the new economics of the 1930s?
Gradually around the end of the 1920s and the early 1930s the ideas later connected to Keynes’ name and the “Stockholm School” were fully recognized and established in Sweden. Karl Gustav Landgren in1960 summarized his dissertation on the introduction of those new ideas in Sweden:
The strange result has been reached, that an amateur economist, Ernst Wigforss, had a greater sensibility to the new doctrine than the professional economists. (Det egendomliga resultat har vunnits, att en nationalekonomisk amatör, Ernst Wigforss, visade sig ha finare känslighet för den nya läran än de professionella nationalekonomerna.)v Landgren showed that Ernst Wigforss, social democratic minister of finance 1932 - 1949, had studied the British debate on active monetary and fiscal policies against unemployment already in the 1920s while leading Swedish economists in the older generation such as Gösta Bagge, Gustav Cassel and Eli Heckscher still believed that lower wages would be the only really efficient remedy against unemployment. Landgren also claimed that in the beginning Erik Lindahl and Gunnar Myrdal never understood the new ideas. According to Landgren, Ohlin was the only younger generation “Stockholm School” economist who had absorbed the new ideas at an early stage, but not before Wigforss already had presented the ideas in programmes and pamphlets before the election in 1932.
Landgren’s dissertation was followed by an intense debate. In Ekonomisk Tidskrift 1960 a number of reactions were published. Tor Fernholm, the faculty opponent to the dissertation, criticized Landgren for having treated a number of pioneering (“banbrytande”) Swedish scientists in an ill-informed and unfair manner. Fernholm also claimed that Landgren’s interpretation of Keynes was based on an oversimplified macro model. But he also praised the dissertation for having started an important debate.vi
Erik Lundberg, who was a member of the ’Stockholm School’ and one of the targets of Landgren’s critique, did also criticize some parts of Landgren’s dissertation, but he nevertheless confessed:
Certainly there was an unbecoming pride among the Swedish economists of the time when we – I count my insignificant self to the company – welcomed Keynes and his epigones to a table with higher insights, on which theoretical findings were served, to a big part made by Wicksell nearly 40 years ago. This attitude was common in Stockholm in the 30s – ’for us the Keynesian perspective means nothing new, and when it really is new, it is wrong’... (Nog fanns det oklädsam högfärd bland den tidens svenska nationalekonomer, när vi – jag räknar min egen obetydlighet till sällskapet – hälsade Keynes och hans epigoner välkomna till ett bord med högre insikt på vilket det serverades teoretiska rön, som Wicksell till stor del gjort för nära 40 år sedan. Denna attityd, som var vanlig i Stockholm på 30-talet – ’för oss innebär det Keynesianska synsättet inget nytt och där det verkligen är nytt är det galet’…)vii Ernst Wigforss, Landgren’s hero, was also asked to contribute to the debate in Ekonomisk Tidskrift. He wanted to show his readers that before the crisis of the 1930s not only social democrats, but also practical men from the business community, had advocated an active policy against unemployment. He referred to an article in New Statesman about a petition in 1923 to the British conservative government from English entrepreneurs in ‘The Industrial Group’, who urges the Government to embark without delay on a big programme for the development of home resources. According to Wigforss, this group were “probably hardly at all influenced by academic economists and even less by socialist writers” (sannolikt föga tillgängliga för påverkan från akademiska nationalekonomer och ännu mindre från socialistiska skribenter).viii Wigforss also asked himself and his readers what difference it would have made if the achievements of the English liberals in the 1920s had not been noticed within Swedish social democracy: “Can we believe that the party had followed the same road and at the same time? For me the answer could only be yes. Knowledge of the correct line was not lacking. Compulsion to act would have come with the severe crisis. (Kan man tro att partiet skulle ha slagit in på samma väg och vid samma tid? För min del kan svaret inte bli annat än ja. Kunskap om den rätta linjen saknades inte. Tvånget att handla skulle ha kommit med den svåra krisen.)”ix Already in his memoirs (1953) Wigforss had answered his own question in the same way. There he also wrote about the professional economists in the 1920s and the beginning of the 1930s:
the conviction to have a coherent theoretical motivation and an impressive scientific support for the politics then called bourgeois was evident. (övertygelsen att bakom sig ha en sammanhängande teoretisk motivering och ett imponerande vetenskapligt stöd för den politik som kallades borgerlig var omisskännlig).x A common belief seems to prevail among mainstream economists that Marxism constituted an obstacle in the social democratic search for a practical economic policy. Take Ton Notermans as an example:
Unable to indentify a viable policy alternative, many social democrats relapsed into a sort of Marxist fatalism, which postponed all practical policies for the improvement of the lot of the working class to that mythical time when the socialist revolution might arrive.xi Therefore it can be worth mentioning that Wigforss had not only studied the British liberals, he was also one of the best schooled introducers of Marxist thinking in Sweden. In my opinion, the role of at least some sorts of Marxist thinking might instead foster practical policies. Keynesianism was perhaps harder to understand within the classless neoclassical paradigm, compared to a Marxist understanding of how different classes should react to the new policies of the 1930s. Wigforss was an important promoter of the class compromise in Saltsjöbaden 1938 (see below) and his Marxist background might have contributed to his understanding of the dangers and possibilities also then.
Landgren’s dissertation and the ensuing debate came at a time when the Keynesian paradigm was firmly established both in Swedish politics and academic economics. Since then a number of authors have modulated and corrected details in the overall picture given by Landgren. Benny Carlsson (1993) for example gives a more positive picture of Cassel and Heckscher and calls attention to that their critique heralded what later was to come with Milton Friedman and Monetarism. But Landgren’s overall conclusion still holds. The paradigmatic shift in academic economics appeared like Minerva’s owl after the shift in practical politics.xii Who created the Swedish Model?
Today I believe that there is a rather general agreement, at least among professional macro economists, that the 1931 devaluation of the Swedish crown and the general development of the international business cycle were much more important than the new social democratic macroeconomic policies after the election 1932. The important shift came more on the ideological level. Social Democracy abandoned the revolutionary ‘big perspective’ and adopted the ‘small perspective’: To reform capitalism in the interest of all inhabitants of ‘The People’s Home’, a concept used by the prime minister Per Albin Hansson to stand for a society without class contradictions.xiii
‘The Saltsjöbaden Agreement”, which took place in 1938, constituted the most important manifestation of this ideological shift: There SAF (Svenska Arbetsgivareföreningen), the Swedish capitalist employers organization, and LO (Landsorganisationen), the Swedish trade union confederation, agreed upon a series of rules for the relations between business and labor. In practice it meant that SAF accepted strong trade unions and a strong collective bargaining system and LO in return accepted capitalist power in the companies, new technique and structural change. Wigforss was also now an important player and the agreement was followed by the more progressive capitalists accepting a strong public sector and generous social insurance systems.
Gunnar Myrdal and many others world wide, including Keynes and his British and US followers, feared that a depression would follow directly after the war as it did after the First World War. In a pamphlet published in 1944 Myrdal wrote that even if the inflation problem will be more or less permanent in a society with full employment:
we social democrats claim that it is possible to uphold full employment without a resulting inflation. (hävdar vi socialdemokrater att det är möjligt att uppehålla full sysselsättning utan att detta behöver leda till inflation.)xiv But Myrdal had no concrete ideas on how this full employment and low inflation policy should be formed. An unexpected high demand for Swedish export after the war soon gave the economic political debate a new direction with a focus on the problem how to prevent inflation without creating unemployment. The two LO economists Gösta Rehn and Rudolf Meidner tried to give a solution: First, fiscal policy was to be restrictive in order to hinder inflated profits and wage drift. Second LO should follow the solidarity wage principle, equal pay for equal work across sectors, by means of a centralized wage policy. This policy raised the reservation wage of low productivity sectors, which in turn forced inefficient firms either to increase productivity or to go bankrupt. The third element of the model, an active labour-market policy, was designed to promote labor mobility through education, relocation, and investment programs. Meidner said:
Labour market policy should be the means by which to remove hindrances in a market economy in accordance with an only dreamt of classical economic theory.xv The LO leader Arne Geijer said to Meidner when he delivered a text dealing with the solidaristic wage principle:
This is very good, but you must strengthen this policy when people lose their jobs. You must invent something more here. (Det är jättebra det här men ni måste förstärka den här politiken när man blir av med jobben. Ni får hitta på något mer här.)
Meidner later said that in this moment, the actual labor market policy was born.xvi The new ideas were expressed in a report to the 1951 LO congress. According to Meidner, this was a practical political program for action with some theoretical perspectives, rather than an economic model. (“Rapporten till LO-kongressen 1951 var ett ekonomiskt-politiskt handlingsprogram av praktiskt slag med vissa teoretiska perspektiv snarare än en ekonomisk modell”).xvii Rehn’s & Meidner’s & LO’s propositions were criticized by leading academic economists. Some of them - Erik Lundberg especially - argued that the leveling out of wages could lead to an inefficient resource allocation. Bent Hansen, one of the founders of the new formalized theory of fiscal policy, raised the objection that the solidarity wage policy would lead to high unemployment in low productivity sectors (for example textile and shoe industry meeting hard competition from Southern Europe) and in low productivity regions (for example parts of the North of Sweden).xviii The combination of Keynesian macroeconomics and labor market policies following the Rehn & Meidner model was to be called the Swedish Model. It was generally accepted both politically and in academia in the 1960s. Also in this case individuals working near or in the workers movement were leading the way, while most of the leading academic economists were hesitant. Today it is my impression that most economists, rightly or wrongly, accept that the Swedish Model – at least for a period – on the whole was a success story. Ton Notermans writes in a summary:
The main argument of this study is that rather than being determined by the political strength of social democratic parties, the success or failure of the social democratic program depends crucially on the institutional and political ability to combine growth with a fair degree of price stability. Economic growth was required to achieve the goals of full employment and a well developed welfare state. However, it could only be brought about by an expansionary macroeconomic regime. Macroeconomic policies, however, can concentrate on growth only if labor market institutions can assume a major part of the responsibility for keeping inflation down.xix From Keynes to Chikago
In the end of the 1960s and in the beginning of the 1970s, the Swedish economy met a number of stabilization policy problems connected to the turbulence in the global economy. The minister of finance Gunnar Sträng (a former farm worker)
was convinced that rising inflation and balance of trade deficits should be met with a tight fiscal and monetary policy. In 1970 he put a brake on bank credits and raised payroll taxes.xx Unemployment rose from 2 to 3 percent. The center/right political opposition named the credit policy of 1970 “idiotstoppet” and the period 1970-72 ”the lost years”. Sträng was attacked from not only the opposition but also from the leading economists. When he presented the Government budget in Nationalekonomiska Föreningen (the Swedish economists association) 15.1 1973, Erik Dahmén criticized him for his exaggerated anxiety for budget deficits and for that
the pure financial bookkeeping of the state, unfortunately again now coming almost in focus, in a ghostlike manner reminds us of the perspectives of the 1920s. (det rent statsfinansiella bokhålleriet, som tyvärr numera åter kommit nästan i centrum och spöklikt erinrar om 20-talets synsätt.)xxi
In the same discussion Assar Lindbeck said:
The expected supply of idle factors of production decides if there is room for an expansionary fiscal policy or not, and a budget surplus or a budget deficit says not a bit about that… To look at the size of a budget deficit instead of the general economic situation is as if a drunken person looks at a thermometer, finds it showing 24 and exclaims: ‘Hell, is it already midnight!’ (Det är den förväntade tillgången på lediga produktionsfaktorer som avgör, om det finns utrymme för en expansiv finanspolitik eller inte, och om tillgången på lediga produktionsfaktorer säger budgetöverskott eller budgetunderskott inte ett dugg... Att se på budgetunderskottets storlek i stället för på det samhällsekonomiska läget är som när en berusad person går fram till en termometer och finner att den visar på 24 och utropar: 'Å fan, är det redan midnatt').xxii This critique gave arguments to politicians in and outside the government who were opposed to Sträng’s restrictive policies and it gave support to the policies adopted to meet the oil crisis and the international slump in the middle of the 1970s. Before losing the 1976 election, the social democrats economic strategy had been based on fiscal policies designed to keep domestic demand high, in order to prevent the oil price increases from reducing domestic economic activity. These so-called ‘bridging policy’ (överbryggningspolitik) was continued by the center-right governments after the election 1976.xxiii Much later Sträng’s policy of 1970-72 was to be reassessed. Hans Tson Söderström wrote about it in 2004:
In an international comparison the policy must be seen as successful. Our relative inflation rate was pressed down with as much as 4 percent, our relative production costs was improved with around 6 percent and our relative balance of current account was strengthened with 2 à 3 percent of GDP. (I ett internationellt jämförande perspektiv måste emellertid politiken betraktas som framgångsrik. Vår relativa inflationstakt pressades ned med hela 4 procent, vårt relativa kostnadsläge förbättrades med omkring 6 procent och vår relativa bytesbalans förstärktes med 2 à 3 procentenheter av BNP.)xxiv When a discussion draft for Wage-Earners’ Funds was presented in 1975, Rudolf Meidner said that the labor movement now had to make a choice:
Either we move against capital or capital will move against us. (Antingen rör vi oss mot kapitalet eller kommer kapitalet att roar sig mot oss.)xxv My interpretation of this is that now that Keynesianism and the Swedish Model were under attack from growing financial markets, the labor movement had to see to it that capital remained in Sweden or we had to adapt to new policies so that Sweden would be able to attract mobile capital. The Funds could also be seen as an offer: If the workers get a part of capitalist ownership, the trade unions will take responsibility for competitive wages and the social democratic state will form capital-friendly economic policies.
In the beginning of the 1980s the Swedish economy was in a deep crisis. The manufacturing industry had been stagnant for almost a decade. The state’s budget deficit was about 12 to 13 percent of GDP. In the Social Democratic economic program “The Future for Sweden: Measures to Guide Sweden out of Crisis” from 1981 the same sort of idea as Meidner’s in 1975 – the Funds as a condition for responsible behavior - was expressed like this: “one important prerequisite for a recovery policy is that Wage-Earners Funds are initiated.”xxvi Among the leading academic economists as well as among politicians, the monetarist paradigm (in a broad definition) gradually crowded out Keynesianism in the first half of the1980s. The main difference between the politicians and the economists was that the politicians often concealed their changed opinions behind an anti-monetarist rhetoric. The wage-earners’ funds were in 1983 watered down to rather harmless state owned pension funds and their impact on the real economy was small. But they probably played a certain role as a leftist alibi to legitimate that LO accepted that the collective bargaining system was decentralized beginning of 1983. Also the social democratic government’s and especially the finance minister Kjell-Olof Feldt’s introduction of norms for the inflation rate (1983) and the deregulation of the credit (1985) and foreign exchange markets (1986-89) might have been more easy to defend against a left opposition because of the ideological wage-earners’ funds battle.
The combined effects of the deregulation of the credit market, extremely high marginal taxes, generous rules for interest on debts tax deductions and the government’s failure to tighten its fiscal policy was an overheated economy followed by a deep financial crisis. During this period the academic economists on the whole were forerunners in the demand for a shift towards monetarist perspectives while most of the politicians were more hesitant. Feldt in vain tried to persuade his party to adopt a more restrictive fiscal policy in the end of the 1980s. One of his arguments was that the monetary policy of the central bank had to concentrate on holding the exchange rate fixed. He had to explain to the director of the central bank Bengt Dennis, that his “political resources” were not enough for more than the lowering of marginal taxes in a big reform of the tax system implemented in 1990. xxvii As a part of a crisis policy package, the social democratic party in October 1990 made public that it had changed its mind and that it now wanted Sweden to join the EU. The same government in a budget document in spring 1991 announced that a low inflation now was the main operative target for Swedish economic policy. That occurred later than in almost all other capitalist countries. And in 1993, the central bank adopted a two percent inflation rate target.
During the 1990s, both under a right/center government 1991-94 and social democratic governments 1994 – 2006, a number of institutional reforms in a monetarist spirit (still in a broad sense) were decided upon with broad majorities in the parliament: deregulations of postal service, telecom, electricity and railroads. Privatization and a competitive spirit spread to the educational, health/elderly and child care systems. A new state budget system was introduced now with expenditure caps. So was a new pension system with an element of private funds, while a central bank reform was following the demand from the EU (Sweden became a member in 1995).xxviii In one of the leading textbooks used in Swedish universities, the authors summarize the situation in 2005: ”Now, in the beginning of the 2000s, the most realistic prognosis seems to be that we are facing a world with relatively free mobility of capital, technology, goods and services over national borders, where stabilization policies are directed to the maintenance of low inflation. (Nu, i början av 2000-talet, förefaller den kanske mest realistiska prognosen vara att vi står inför en värld med relativt fria rörelser över gränserna av kapital, teknologi, varor och tjänster, där stabiliseringspolitiken är inriktad på … låg inflation.)xxix And back to Keynes
During and after the global financial crisis in 2007 – 2009, opinions once again seem to have changed among leading economic politicians and economists in Sweden as well as internationally. It is too early to evaluate these recent events, but my impression is that politicians so far also this time reacted a little earlier than the economists.
The Swedish Government stated in a bill enacted on 10.4 2008:
The restrictive direction of the finance policy that we applied to prevent an overheated economy and which increased the structural surplus in public finance, the Government now intends to adjust in a less restrictive direction within the limits of a responsible policy. (Den åtstramande inriktning som finanspolitiken har haft för att förhindra överhettning, och som ökat de strukturella överskotten i de offentliga finanserna, avser regeringen att justera mot en något mindre åtstramande riktning inom ramen för en fortsatt ansvarsfull politik.)xxx One month later, the The Swedish Fiscal Policy Council (Finanspolitiska Rådet) agreed:
On the whole our assessment coincides with the Government’s… The Government should in the present situation primarily consider reforms with positive structural effects and which should not be too costly in a short perspective. (Vår bedömning sammanfaller i huvudsak med regeringens... Regeringen bör i nuläget främst överväga reformer som kan väntas ha gynnsamma struktureffekter och inte är alltför kostsamma i det kortsiktiga perspektivet.) xxxi The Executive Board of the Swedish Central bank (Riksbanken), who had gradually raised its key interest rate, the repo rent (reporäntan), from 1.5 percent in the beginning of 2006 to 4.25 percent in spring 2008, in a unanimous decision 2.7 2008 raised it again 2.7 2008 to 4.5 percent. In a press release the decision was explained:
With a higher repo rent, the rate of inflation will decrease, and it will in a two years time perspective be close to its 2 percent target. The GDP gap will grow, but it is expected to be normal at the end of the period. (Med en högre reporänta avtar inflationen och är på ett par års sikt nära målet 2 procent. Resursutnyttjandet faller men väntas vara normalt i slutet av prognosperioden.)xxxii
As late as 3.9 2008 a divided board of the Central Bank raised the repo rent once more to 4.75 percent. According to the minutes from the Executive Board meeting, the chairman of the board, Stefan Ingves, justified the decision:
To summarise, Mr Ingves said that it is appropriate to raise the repo rate by 0.25 percentage points. An increase will make it clear that the Riksbank takes its inflation target very seriously. Mr Ingves pointed out that he wants to see a reduction in inflation and inflation expectations before easing monetary policy. A higher repo rate could also provide some support to the krona, which is important with regard to dampening external inflationary impulses.xxxiii Nine days after this, 12.9 2008, the Government decided upon the budget bill for 2009. There it was said:
The weaker development to be seen now entails… that the risk for a fast rising inflation rate the coming years decreases. Therefore … there is room for a somewhat more expansive finance policy … in the order of the magnitude 1 percent of GDP... (Den svagare konjunkturutveckling som nu förutses medför … att risken för snabbt stigande inhemsk inflation de kommande åren minskar. Detta gör … att det finns utrymme för en något mer expansiv finanspolitik …på cirka 1 procent av BNP 2009...)xxxiv In the end of 2008 and during 2009 several economists including them in the Fiscal Policy Council criticized the Government and its finance minister Anders Borg and claimed that the fiscal policy was not enough expansionist. In a lecture in December 2009, the chairman of the Council Lars Calmfors said:
Before the current crisis, there was a consensus that monetary policy should be the prime stabilization policy tool and discretionary fiscal policy should be avoided. If fiscal policy were to be used, policy makers should rely on the automatic stabilizers.... Policy makers should… be given credit for rapidly abandoning conventional wisdom in the current crisis. In the autumn of 2008 it was very quickly realized that the situation was so extraordinary that normal principles were no longer applicable.xxxv And in a debate in Nationalekonomiska Föreningen (The Swedish Economists association) 12.1 2010 Calmfors also said:
I can only see that the inflation goal regime of today has come to the end of the road. (jag kan inte se annat än att nuvarande inflationsmålsregim har kommit till vägs ände.)xxxvi When this is written in March 2011 Sweden had an extremely high growth rate for a number of months. And the critique against the fiscal policy no longer is heard.
Were the politicians wiser?
Lars Jonung in 1999 summarized his study of Swedish stabilization policy 1975-1995 as a learning process for politicians and economists:
Were the policy-makers able to ’learn to learn’, i.e. did they take into consideration the changed conditions … in their policy reactions? Did they grasp the advantages of continually revising their view of the goals and instruments of stabilization policy and of developing the capacity to look forward? The answer must be a negative one.xxxvii Jonung’s evaluation of the economists’ learning process was more positive:
The time of learning for economists was prior to the comparable point in time for the political system. There were two reasons why economists were generally the first to formulate new alternatives. First, they were not bound by political obligations and political programs. They could present their viewpoints more freely than politicians. Secondly, university economists participated in the traditional academic learning process constantly testing and questioning established theories and interpretations.xxxviii On the whole, I think that here Jonung was rather unfair to the politicians. As seen above, sometimes they adopted (and implemented) new ideas earlier than the academic economists. Sometimes they hesitated to accept the dominating ideas in academia and sometimes they had good reasons for this.
Lindvall writes about the same period as Jonung:
the fact that the shift to low inflation policies occurred approximately ten years after Keynesianism was abandoned strongly suggests that expert ideas have had little or no impact on the objectives of economic policy in Sweden.xxxix You could also put it this way: Swedish politicians for a long time refused to accept monetarism and they abandoned full employment as the most important goal for economic policies later than politicians in most other countries.
Lindvall also writes more generally about the influence of expert ideas on economic policies:
More generally, the article claims that expert ideas influence the methods governments use but not the goals they pursue.xl Certainly this is the politically correct division of labor in mainstream economics. But I am not sure if this is always the case, at least not in Sweden. Many professional academic economists here have expressed strong opinions on goals for economic policies - economic growth and economic efficiency are most common - while politicians and politically active economists often invented methods to reach goals themselves, for example public works or wage earners funds.
My experience from my life in both camps is that both politicians and economists have ideas about what should be done and how it should be done. Politicians often decide what they want to do first, then they look for an economist expressing opinions compatible with this and then they use those opinions in their rhetoric in order to persuade other politicians and the public opinion.xli To take a recent example: In the social democratic alternative budget from October 2009, Lars Calmfors was quoted when he said that the government should have a more expansive fiscal policy, but not when he said that the job tax deduction and the lower unemployment benefits had certain positive effect on employment.xlii It is too early to make historical assessments of recent decades. But my own preliminary opinion is that in Sweden during the last 80 years, initiatives to change policies more frequently came from politicians than from academic professional economists. I have tried to illustrate the mutual influence between Swedish politicians and economists in this diagram:
How representative is Sweden?
Of course my Swedish examples cannot “prove” that the economists followed the politicians rather than the other way around, as Keynes once claimed. Also my reader can rightfully ask: How representative is Sweden?
Few speak or understand Swedish. We always belonged to the intellectual periphery of the western world. We imported ideas from other countries and adapted them to suit our Swedish “middle way model”. We were like “butterflies fluttering between the different international schools of thought”, taking from each what we felt useable.xliii When “nationalekonomi” (our term for economics) was founded with separate academic institutions in the beginning of the 20th century, the German influences dominated. Between the wars, Britain with Keynes and a “scientific field that is organized around the authority of elite institutions and personalities” took over as number one. And since 1945, USA with Paul Samuelson’s Economics and “an economics profession that is profoundly rooted in the academic world” has been the leading exporter of economic ideas to Sweden.xliv Since our academic, administrative and political elites were small, most of them had personal contacts with each other. Another distinctive feature of our economics profession is that many leading Swedish economists either were politicians or civil servants themselves. Gösta Bagge was leader of the Conservative party (1935 – 1944) and Minister of Education, Bertil Ohlin was leader of the Liberal party (1944 – 1967). Gunnar Myrdal was Social Democratic Minister of Trade (1945-47). All three of them were also economics professors. Dag Hammarskjöld was also a professional economist, working for the government before he became the UN general secretary. Almost every leading economist in Sweden was also a member of different government or parliamentary expert committees. They also wrote in the biggest newspapers about actual political and economic matters.
Vito Tanzi writes that the theory of fiscal policy owes much to northern European economists such as Jan Tinbergen, Bent Hansen, Leif Johansen. He relates this to the fact that those small countries had a fairly homogeneous populations and low Gini coefficients. In the Swedish case, he might have added the Saltsjöbaden agreement and the spirit of mutual trust and class compromise. The assumptions of the theory of fiscal policy – the government as a single “nerve center” to take one example - were unrealistic also here in Scandinavia, but they certainly were closer to reality compared to countries like Italy. Tanzi also refers to the ”positive theory of fiscal policy”, in which Sweden with our proportional elections is predicted to “tilt the composition of public spending toward programs benefiting large groups in the population”.xlv All the above mentioned factors combined with the fact that Sweden had peace for more than 200 years, explains why political differences in Sweden were relatively small. Swedish politicians took smaller political risks when they changed their policies and were more ready to act in acute situations without being fettered by strong ideological or theoretical principles compared to their colleagues abroad.xlvi But even so, I dare say that Sweden is not the only country where the role of politicians in the history of economic thought have been undervalued by economists.
A primitive theory of politicians and economists behavior
From where do politicians get their ideas to change policies if they do not get them from the economists? One possible answer is that politicians are forced to create new ideas when their material surrounding change. When their ideologies meet brutal realities and other ideologies in international political bodies, in governments or in parliamentary committees, they have to try to consider all aspects of reality regardless if they like it or not. Often they have to act intuitively without knowing most of the relevant facts and without understanding what is really happening.
By contrast, the professional economist tends to create a simplified model of the politicians – a Jesus figure in welfare economics or a pure egoist in public choice – and so they miss the complexity in the political process of “muddling through”. Some economists even express a general contempt for politicians and political parties. Keynes is a telling example. In a letter to the prime minister he contrasted his own faith in the “scientific spirit” as opposed to the “sterility of the party attitude”.xlvii This attitude together with an unnatural division of labor between economists and political scientists, contributes to the unrealistic modeling of the political economic process. As Jessica Lindvert express it: Economists are seldom interested in how politics works in reality.xlviii Most economists see their profession as a “higher” sort of activity than politics. Or as Massimo Augello and Marco Guidi puts it:
The real distinction was widely felt to lie between the science of political economy (positive or normative) and the art of economy, delegated to politicians and subordinated, depending on the point of view, either to ‘higher maxims’ or ‘sinister interests’.xlix I try to be a historical materialist and so I believe that change of policies most often can be seen as responses to changes in material economic conditions. For example the shift from Keynesianism to Monetarism was mainly a result of globalized financial markets after the collapse of the Bretton-Woods system, not a result of the production of ideology in the Chicago School. So in my opinion Mark Blyth – and even more so some of my friends among Swedish left wing politicians or journalists – give a vastly exaggerated role to the right wing and capitalist sponsored think-tanks for the paradigmatic shift in the 1980s and 1990s. Also now neokeynesian economists are accorded too big a role compared to the politicians in the handling of the 2008/09 financial crisis.
But of course the relations between changes in the economic base and in political and economic decisions and ideas are dialectical if the reader permits me to use terms from the Marxist (or Hegelian) tradition. Also the mutual influences between politicians and economists in the forming of economic policies and ideas are dialectical. But it is my impression that economic politicians and economists working within political institutions not only in Sweden are somewhat more influential than their purely academic colleagues.
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i This text is prepared for the project “Economic Theories and Policies. A Historical Perspective (1945-2002)”, intiated by professors Piero Bini and Fabio Masini in Rome. In this version I have extended the time perspective to 1930-2010. Johannes Lindvall, Martin Ross - Peterson and Bo Sandelin gave me valuable advice before and/or after this text was presented on a national meeting organized by the Arne Ryde foundation, in Lund 1.10 2010. At this occasion also my opponent Magnus Henreksen’s valuable critique made me revise the text on some points. After that Deirdre Nansen McCloskey gave me some very important advice. She and Ross - Peterson has also helped me with my English.
iii Jonung (positive) and Blyth (negative) are two examples
iv Lindvall is my example here
v Landgren 1960 p 289. When I am uncertain of my English translation I also quote the Swedish original texts.
vi Fernholm pp 181
vii Lundberg 1960 p 195
viii Wigforss 1960 p 192
ix Ib p 193
x Wigforss 1954 p 20
xi Notermans p 4
xii The Minerva’s owl metaphor is used by Fernholm and by myself in Lönnroth 1985
xiii The two perspectives are from Tingsten (who takes them from Marx and Hegel) part I p 84-85. The ‘People’s home’ was a concept used by the Swedish prime minster (1932-1946) Per Albin Hansson.
xiv Quoted after Ekdahl p 24
xv Quoted after Blyth’s translation p 6-7
xvi Lindvert p 39
xvii Meidner p 219
xviii For the critique, see Lundberg 1984 p 110 & 119 and Lindbeck p 46 ff. Tanzi mentions Hansen together with Leif Johansen and Jan Tinbergen as one of the North European economists who contributed to this theory
xix Notermans p 3
xx Åberg p 152 and 165
xxi Ekonomisk debatt no 1 1973 p 65
xxii Ib p 67
xxiii Lindvall 2009 p 718
xxiv Söderström p 109
xxv Meidner confimed that he said so in a private conversation I had with him in the middle of the 1990s. Alas I could not find/remember the dates he said it or confirmed it.
xxvi Quoted after Bergström p 160-161
xxvii See Feldt, Carlsson and Åberg
xxviii This political paradigm shift will not be developed further here. It is described in more detail by Blyth, Boréus, Carlsson, Feldt, Jonung, Lindvall 2006, 2009, Lundberg 1984, Lönnroth 1988, 1993, 2004, Persson, Persson-Tanimura and Åberg.
xxix Fregert, Jonung p 523
xxx http://www.regeringen.se/content/1/c6/10/28/08/9bac7fd3.pdf p 16
xxxi Svensk Finanspolitik 2008. A report published 9.5 2008. http://www.finanspolitiskaradet.se/download/18.cd1771b11927f1f0c6800085452/Svensk+finanspolitik+2008.pdf p 145 and 147. The Council consists of leading Scandinavian economists including two former leading politicians.
xxxii http://www.riksbank.se/templates/Page.aspx?id=28416. The board has six members.
xxxiii http://www.riksbank.com/templates/Page.aspx?id=29000. Three members of the board wanted that the repo rate should be held unchanged
xxxiv http://www.regeringen.se/content/1/c6/11/16/79/bc7025e7.pdf p 4
xxxv Calmfors 2009
xxxvi From a discussion at the Nationalekonomiska Föreningen (The Swedish Economists Association) 12.1 2010, published in ekonomisk debatt no 3 2010 p 72
xxxvii Jonung p 297
xxxviii Ib p 301
xxxix Lindvall 2009 p 723-724
xl Ib p 703
xli After having listened to and talked with Deirdre Nansen McCloskey about her ideas about the role of rhetoric I am convinced that this is an underrated factor in policy making.
xlii Motion 2009/10:Fi260 av Mona Sahlin m.fl. (s)
xliii The quotation is from Kærgård & Sandelin & Sæther. See also Lönnroth 2011, where the international influences on Swedish economic thought are described
xliv The quotations are from Fourcade p 9-10 and p 8 respectively
xlv Persson & Tabellini p 25
xlvi I was as vice chairman of the Left Party 1993 – 2003 and negotiator with the social democratic government of eight budgets (1994 and 1998 – 2002) and as associate professor in economics also both politician and professional economist - a very small potato in comparison with the names mentioned above, however. This can be worth mentioning since the reader might rightfully suspect me of being biased in favor of politicians.