11
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.)