Government Business and Society (POL1000)

The Swedish Model of Capitalism vs. American Model

Introduction

            Over the past years, capitalism and its different models have become a very popular discussion matter, especially when dealing with matters of the economy and policy making (Hatfield 2005, p. 154). This has become even more rampant after the demise of the alternative, which had been created to deal with capitalism by the East European (Coates 2002, p. 274). Before any model can be selected, it is important that the most competitive one is determined first. It is from this that a choice can then be made. This paper will discuss the two models of capitalism, stating each of their similarities as well as the differences. It will also delve deeper to evaluate the importance that they have, with the aim of determining which model is better than the other.

Discussion

The Swedish Model

The Swedish model of capitalism is also referred to as the Nordic Model. It is regarded widely as a benchmark. Comparative studies carried out show that countries using this model are usually more successful in combining both economic growth and efficiency with a labor market that is peaceful, providing social cohesion as well as fair income distribution (Evans 2002, p. 62). There are many observers who are amazed at the manner in which the model has prospered, in spite of its weak economy, high taxes, wage coordination, sturdy labor unions, as well as very generous systems of social protection.

This has lead them to try and come up with arguments, stating that the reason why the model was successful was due to some temporary advantages that the countries had, which would eventually fade away after some time. Although it is evident that some form of economic efficiency may be lost due to the characteristic that the Swedish model has, but there are other factors that equally make up for the downfalls that might be experienced (Lane 1991, p. 136). The most important feature within this model lies in the mutual supportive interaction, encompassing sharing of risks as well as globalization.

Although this model was not very productive in its early years, it has over the years been able to keep up with other countries such as the US for a period of close to thirty years. This is something many other countries have been unable to do. The success of this model can better be explained using a number of factors. They can be categorized in the following ways: exogenous factors, these are factors such as climate, religion, natural resources and geographical location (Hatfield 2005, p. 154). Then there are the institutional factors, which include a lack of corruption, political freedom, and rights over property, good education and health standards as well as having a judicial system that can be relied upon. The other factors are those that are concerned with the result of the different economic policies.

Strengths

The Swedish model has a number of strengths. They include the following: It assists in the opening up of globalization. This is because, a country might experience some kind of lack within itself can expand abroad to combat the effects (Mascarenhas 2002, p. 103). This promotes globalization. It is also very advantageous as its openness to globalization allows them to become quite aware of the negative aspects of globalization therefore making them very pro-active (Coffey & Thornley 2009, p. 74). It provides a sense of social protection for the people living within that economy. It is also very much economically flexible and has a very high capacity for structural change to take place.

It enhances egalitarianism. This means that people are not divided on the basis of class, as these distinctions do not exist. This is very evident, in that the salary gap that is found between the lowest earners and the highest earners, is quite minuet. This is because the senior executives under this model usually receive a much lower compensation than other executives, who work abroad. The model also promotes democratic capitalism. This refers to the degree of participation and equality in decision making activities, pertaining to politics and corporations. This is very important as it provides room for the sub-ordinate staff to discuss issues with their senior executives. They are even able to sit as board members, due to the heavy presence of the trade unions (Tragardh 2007, p. 72).

The trade unions have also allowed women to receive different promotions as there is a fixed quota on the number of women that they ought to have in management. Also any interested person can receive quality education. This model has been proved to be successful in aiding a country, such that it is able to bounce back after a period of harsh economic turmoil (Mascarenhas 2002, p. 103). The year 1990, saw the success of this model as crisis within the Swedish region was dealt with.

Major Challenges

Just like any other model, the Swedish model is not fully perfect. It is also subject to a certain number of challenges (Lane 1991, p. 136). This challenges are very crucial and require some form of reform if the model is to continue being successful. The root cause of its challenges is based primarily on the set up that country using this model has. Many of the provisions within the country are usually financed by the taxes. Although this is important in that all the basic welfare service are independent of a person’s employment status and income level. However this in the long-term could cause an impasse in the finance of the public.

The reason as to why the impasse would take place is because, some time the demand for the services provided could be higher than the amount of income being collected. This is better known as ‘Wagner’s Law’ (Tragardh 2007, p. 72). Also the productivity of welfare services increases at a very low rate, if it is at all productive. This would then mean that, unit costs should increase much faster in welfare service production, than just within the economy. This is a phenomenon referred to as ‘Baumol’s Law’ (Coffey & Thornley 2009, p. 74). These two factors show that the amount that will be spent on the service offered on welfare will increase faster than the Gross Domestic Product (GDP) as more time passes.

Globalization is quite beneficial to the growth of the economy. This is because it provides a country with the opportunity to multiply its production factors through international trade of services and goods as well as mobility. Although globalization is beneficial, it is also another challenge that faces the model. When labor mobility is increased for prolonged periods of time, it then becomes a threat both to the model as well as to the state’s welfare. This is because all the welfare entitlement will be shared by all the individuals. Higher labor mobility makes it very difficult for a person to benefit. This is because they are forced to contribute to receive the services.

Another serious challenge facing the Swedish Model is caused by the changes taking place in the demographics. It has been forecasted that the age composition within the population will change dramatically in the coming years. This change is supported by two main factors, the baby boom effect, as a large number of people begin to reach the age of retiring. This will be a temporary effect. However there will be an effect that is more permanent, which will be caused by the increase in the life expectancy. This will also impact greatly on the financial sustainability of the country. It is therefore very important that some solutions are created in order to deal with the challenges that this model will face.

The American Model

The American model of capitalism was first introduced as a way of dismantling the welfare state after the war. This was done through privatization, regression of taxes, de-regulation as well as regression of social policies, with the aim of endorsing economic efficiency. It was highly characterized, by distrusting the government and having much faith of the markets. This kind of capitalism uses an approach that is considered very hostile, especially towards the labor unions. This model of capitalism was quite popular with the Lady Thatcher, after the Soviet collapsed (Huber 2002, p. 86). However, the ever expanding income disparities and the economic crisis have led to it downfall over the years.

This model of capitalism has been successful in eliminating what was excess after the war. However because of the attack it made on the government as well as placing a lot of its focus on the markets, it was unable to maintain its growth.

Criticisms

For over a decade, there has been intense debate on the issue of globalization as well as that of the convergence of the corporate governance. The main question being debated about is whether the economy should be converged to follow the American model of capitalism or if the present institutions should be sustained. The poor economic growth coupled with the high rate of unemployment is proof enough that they model is sure to fail (Mascarenhas 2002, p. 103). Although many of the supporters of the model have tried to bring out some unassailable economic principles to support their stance, not many people agree with them.

Initially, the American model was begun as a way of critiquing totalitarianism. However this has now evolved and become a revolt against the intervention of the state. The founders believed that the intervention of the state was basically a threat to human liberty and the society as a whole. They argued that even if the state received support and was demanded by the free democratic process, the situation would still remain as it was. They also argued that due to problems of incentives and information any other kind of plans carried out, would only make the more inferior especially in coordinating matters dealing with economic production.

Although in the beginning the American model seemed like a great idea, it was however responsible for its own downfall. This is because having full employment only went on to strengthen the workers that then lead to the welfare practices and demands, which in turn alienated the rich from the poor and the middle class. This caused a stagflation, which amplified the disenchantment of the public (Huber 2002, p. 86). It was at this point that the politician Reagan and Thatcher saw this as an opportunity and used it to break down the state welfare, combining free enterprise with individual liberty. However due to its lack of growth the model became a failure.

Conclusion

            Although each of the models do have their own unique features as well as striking differences, a study carried out on the capitalist diversity shows that neither model can be termed as being more superior than the other (Huber 2002, p. 86). However if certain aspects such as the economic or social structures from the models are borrowed and coupled, then better results can be achieved. If a combination of the two cannot be done, then it would be wise to opt for the Swedish Model of Capitalism. It has greater advantages than the American model (Coates 2002, p. 274).

Bibliography:

Coates, D. 2002, Models of Capitalism: Debating Strengths and Weaknesses, Cheltenham, Edward Elgar.

Coffey, D. & Thornley, C. 2009, Globalization and Varieties of Capitalism: New Labor, Economic Policy and the Abject State, Hound mills, Basingstoke, Hampshire, Palgrave Macmillan.

Evans, J. 2002, the New Deal: The Triumph of the Anglo-American Model of Capitalism No Longer Seems Assured. Euromoney, London, 62.

Hatfield, J. 2005, Swedish Model, Publish America Inc.

Huber, E. 2002, Models Of Capitalism: Lessons For Latin America, University Park, Pennsylvania State University Press.

Lane, J. E. 1991, Understanding the Swedish Model, London, England, F, Cass.

Mascarenhas, R. C. 2002, A Comparative Political Economy Of Industrial Capitalism, Hound mills, Basingstoke, Hampshire, Palgrave Macmillan.

Tragardh, L. 2007, State And Civil Society In Northern Europe: The Swedish Model Reconsidered, European Civil Society, New York, Berghahn Books.