Classical liberals can point to numerous examples of robust economic growth coinciding with low taxes and light-touch regulation: Britain in the 18th and 19th centuries; the US before the 1930s; and more recently Hong Kong since the 1960s. Of course, it must be conceeded that these examples were far from night-watchman states and the role of government remained significant in certain areas. But the general hypothesis that economic liberalisation aids the production of wealth receives further empirical support from the large number of countries that have experienced rapid growth after adopting free-market oriented reforms – from China in the late 1970s to some of the ex-communist nations of central and eastern Europe in the 1990s.
The history and geography of wealth creation is far more problematic for supporters of big government. Yet they often claim empirical support from the economic success of Scandinavia and Sweden in particular. The latter is said to combine a very large state with high levels of prosperity. But unfortunately for social democrats, the economic history of Sweden appears to be far more consistent with the classical liberal analysis than their interpretation.
For illustrative purposes, the graph below compares GDP per capita (adjusted for purchasing power) in Sweden and the UK between 1900 and 2008 (Maddison). (Incidentally, the increased gradient of the lines is the result of compounding rather than faster growth).
GDP per capita in Sweden and Britain, 1900-2008 (1990 International Geary-Khamis dollars)
Sweden enjoyed significant relative economic success in the first half of the 20th century. In this period, Sweden had a very small state by modern standards. In 1937, for example, state spending in Sweden constituted just 16.5% of GDP (see Crafts, 2002), lower than China today, while in the UK it was far higher at 30%. Even in 1960 – just after Sweden had overtaken the UK in GDP per head - state spending in Sweden was still only 31% of GDP - lower than in Britain.
In relative terms, economic growth has been sluggish in Sweden since the early 1970s, since the size of government there had become really huge. For example, per capita GDP in Sweden was 16% higher than the UK in 1980 (and public spending accounted for a mammoth 60% of GDP), but only 3% higher in 2008. Indeed, Sweden suffered a severe fiscal crisis in the early 1990s, so high was the level of state spending, and radical reforms had to be introduced in an attempt to curb the growth of government.
While one should be cautious about drawing too many conclusions from growth statistics, Sweden’s economic record certainly fails to falsify classical liberal theories on the relationship between government intervention and economic prosperity. People often confuse levels with changes in levels. Sweden has a high level of national income - similar to Britain's - in an economy in which the government currently spends not much more than in Britain. In many respects it has a more liberal regulatory environment. However, the growth in Swedish national income was most rapid when the proportion of state spending was relatively low. High state spending almost brought the country to its knees.