Forget Piketty ...

How Sweden combined wealth and equality through capitalism

by Andreas Bergh

SWEDEN continues to be one of the countries others look to for an answer to this fundamental question of our times: how can a country successfully combine increasing prosperity with a relatively egalitarian distribution?

The French economist Thomas Piketty provided part of an answer in his book Capital in the Twenty-First Century, in which he argues for a global, progressive tax on capital. The book has had a tremendous impact on the public debate in Sweden, especially among leftist intellectuals. Yet Piketty’s Swedish popularity is surprising, as his solutions are fundamentally different from those evoked by Sweden’s experience. They are also different from the pragmatic view of capitalism typically held by Swedish social democrats.

Before we look at why, it’s important to understand where Piketty has gone wrong. His research has made three major contributions: first, lots of empirical data documenting trends in income and wealth concentration; a theoretical reasoning in which he shows that, under certain assumptions, capitalism increases inequality; finally, a concluding policy discussion, where Piketty advocates a global tax on capital.

There are objections to Piketty’s reasoning. The empirical part, for instance, contains graphs that show how wealth and income inequality declined sharply between 1910 and 1970. So remarkably, during the period of industrialisation, when capitalism blossomed in most western states, inequality fell sharply. While most curves tend to rise somewhat in the most recent decades, we are still well below the highly unequal circumstances prevailing 150 years ago. In other words, a book that argues that capitalism by default generates inequality in fact shows that inequality fell sharply during the capitalist era, when prosperity increased rapidly.

Piketty acknowledges falling inequality in the twentieth century, but claims it to be an exception. He predicts increasing inequality in the future (several graphs end in 2100). To show that capitalism is prone to generate inequality, Piketty uses a simple theoretical model. This is not unusual for an economist. But most intellectuals that are not economists are smart enough to avoid being impressed by theoretical models that produce controversial conclusions using stylised maths and debatable, implicit assumptions, some of which seem strange when compared to reality. Yet Piketty’s conclusion that capitalism is by default prone to increase inequality comes from exactly that kind of model.

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