Transformation Pressure and Growth - a Missing Link in Macroeconomics

Economists and politicians in Sweden stated in the early 1990s that devaluations of the country's currency had lessened the external pressure on manufacturing and led to a delay in structural change and rationalizations. The theory of transformation pressure generalizes the idea that productivity growth in firms is promoted by intense competition, cost pushes and low product demand. The main challenge faced by such a theory is to explain why it seems that an immediate threat is needed to get a productive response from firms. Three separate explanations are presented here emphasizing either the value of waiting to get more information about potential threats, the irrational tendency to ignore threats until they show up or the stimulation of individual creativity when firms are put under real pressure. But productivity growth is not always promoted by tight external circumstances. Growth may be maximized if pressure in each period is moderate or if periods with strong pressure are followed by periods of financial and technical consolidation, scale advantages and lesser needs to spend resources on rationalization in order to survive.Transformation pressure; Competition; X-inefficiency; Innovations; Productivity; Growth; Irrationality; Uncertainty; R&D investments

A Social Innovation or a Product of Its Time? The Rehn-Meidner Model’s Relation to Contemporary Economics and the Stockholm School

A wage and economic policy programme for full employment, price stability, growth and equity was developed by two Swedish trade-union economists in the early post-war period. A restrictive macroeconomic policy, a wages policy of solidarity and an active labour market policy are the cornerstones of the Rehn-Meidner model. The model was influenced by Hans Singer’s analysis of the fallacies of incomes policy under full employment conditions. However it is difficult to find equivalences in contemporary economics to the model’s composition of means and goals, functional relationships or to its emphasis on the role of actual profits in wage formation.Rehn-Meidner model; Swedish model; Stockholm school of economics; labour market policy; wages policy of solidarity

Travelling Along the Third Way. A Swedish Model of Stabilisation, Equity and Growth

The Swedish economic policy to combine full employment and equity with price stability and economic growth was developed by two trade union economists shortly after World War II. Through the use of extensive employment policy measures, a tight fiscal policy and a wage policy of solidarity, the Rehn-Meidner model represents a unique third way between Keynesianism and monetarism. This essay analyses the application and performance of the Rehn-Meidner model in Sweden. Although never consistently applied, it is possible to distinguish a golden age for the model from the late 1950s to the early 1970s. In the 1970s and the 1980s, governments abandoned the restrictive macroeconomic means of the model and were thus unable to combine low rates of unemployment with low inflation and high economic growth. Since the early 1990s, Sweden has not met the requirement of full employment in the Rehn-Meidner model. Recent declarations by the EU to prioritise full employment once again but without giving up the objectives of price stability and growth legitimise a renewed interest in the model.Swedish model; Rehn-Meidner model; third way; labour market policy; solidarity wage policy; productivity growth; fiscal policy; unemployment; inflation

Development Blocks, Faulty Investment and Structural Tensions – The Åkerman- Dahmén Theory of the Business Cycle

Johan Åkerman and Erik Dahmén’s structural theory of economic fluctuations is a constructive alternative to traditional macroeconomic approaches and also to modern business-cycle models based on micro economic concepts. There are similarities between Åkerman and Dahmén’s theory and Schumpeter’s theory in Business Cycles. Both theories underline the importance of progressive industries for the recovery or prosperity phase. However, by the notions of faulty investment, structural tensions and development blocks, Åkerman and Dahmén provided an original explanation of the turning points in the business cycle. An empirical study of the severely overheated Swedish economy in the 1980s and the following depression did not confirm the Åkerman-Dahmén theory. One weakness of the theory is that it downplays the independent role of financial-market conditions. Åkerman and Dahmén’s theory is more valid for innovation-driven cycles such as the ICT boom in the late 1990s and the subsequent crisis.Development Blocks; Faulty Investment; Structural Change; Juglar Cycles; Progressive Industries

Combining Keynes and Schumpeter. Ingvar Svennilson's Contribution to the Swedish Growth School and Modern Economics

In a study of European growth in the interwar period, the Swedish economist Ingvar Svennilson integrated a Keynesian theory of cumulative growth with a Schumpeterian analysis of economic transformation. Svennilson emphasised that innovations and the use of new technologies had been stimulated by high demand and production growth. Svennilson’s strong commitment to "Vendoorn's Law" which actually was "Svennilson's Law", made it difficult to incorporate him in a Schumpeterian tradition. A synthesis between Keynes and Schumpeter with Svennilson as a mediator was also prevented by the decisive role of entrepreneurship and the critique of Keynesian models in works by Schumpeter and the Swedish growth school. However, a synthesis has been facilitated by neo-Schumpeterian theories of demand-led innovations and cumulative economic processes. Svennilson’s study has been superseded by later contributions to economics except for a theory of a negative, "Keynesian", relationship between unemployment and growth and an exceptional "un-Verdoornian" theory that high aggregate demand may lead to crowding-out of new firms from capital markets. Besides, Svennilson's integration of short run and long run macro analysis and of theoretical and empirical work is still a fruitful research strategy in economics.Innovations; Cumulative Growth; Productivity Growth; Verdoorn’s Law; Swedish Growth School

The Theory of Transformation Pressure - a New Perspective on Growth and Economic Policy

The theory of transformation pressure offers a uniquely Swedish perspective on the "productivity slowdown" of the 1970s and 1980s. One example of this theory can be found in an influential argument from the early 1990s which states that devaluations of the Swedish currency lessened the external pressure on manufacturing and led to a delay in structural change and rationalisations. The theory generalises the idea that productivity growth in firms is stimulated by intense competition, cost pressures and low or qualified demand. The main challenge faced by such a theory is to explain why it seems that an immediate threat is needed to get a productive response from firms. The theory presented here assumes either genuine uncertainty, irrational behaviour or that firms become more creative when they are put under real pressure. Productivity growth is not always promoted by tight external circumstances. Growth may be maximised if pressure in each period is moderate or if periods with strong pressure are followed by periods of financial and technical consolidation.Transformation Pressure; Competition; X-inefficiencies; Innovations; Productivity; Growth; Rationality; Uncertainty; R&D Investments

A Swedish Economic Policy - The Theory, Application and Validity of the Rehn-Meidner Model

The macroeconomic principles behind the Swedish model were developed by two trade union economists, Gösta Rehn and Rudolf Meidner, shortly after World War II. The Rehn-Meidner model respresents a unique third way between keynesianism and monetarism in its approach to combine full employment programs, a tight fiscal policy and wage policy of solidarity. This essay demonstrates the logic and comprehensive character of the Rehn-Mediner model, as well as the originality of its underlying economic theory. It aslo analyses the application of the model in Sweden during the post-war period. In the 1980s, the means of the model were largely abandoned. In the 1990s, the governments generally adopted the means of the model, but they were unable to combine low inflation with full employment. A renewed interest in the Rehn-Meidner model may emerge from recent declarations by the EU to prioritise full employment without giving up the objective of price stability.Fiscal policy; Fair Wages; Productivity; Inflation; Labour demnad; Labour mobility; Swedish model

Is the psychology of high profits favorable to industrial renewal? Experimental evidence for the theory of transformation pressure and Schumpeterian economics

The theory of transformation pressure sheds light on the importance of negative driving forces for economic growth and the countercyclical movement in innovations and productivity growth. The theory suggests that firms have a status-quo bias in periods of increasing profits leading to lower productivity growth. Firm agents are governed by changes in current profits through historical relativism, the peak-end rule and overconfidence. They will first abandon a status-quo bias after an actual decline in profits though both under- and overreaction is possible. On the other hand Schumpeterian economics stress that firm renewal is speeded up during recoveries, e.g. by psychological reasons. The two contradicting hypotheses were tested by a role play where a group of university students in economics completed a questionnaire acting as managers for an established company. The students had the opportunity to choose between different growth strategies and define the underlying psychological mechanism. The questionnaire also provided room for rational considerations. The role play confirmed the theory of transformation pressure more than Schumpeterian economics but primarily that the students expected that they would have reacted rationally as managers.Transformation pressure; Schumpeterian economics; peak-end rule; historical relativism; productivity growth; overconfidence; bounded rationality; the business cycle; heuristic decision rules; role play

Under the influence of traumatic events, new ideas, economic experts and the ICT revolution - the economic policy and macroeconomic performance of Sweden in the 1990s and 2000s

The new economic-policy regime in Sweden in the 1990s included deregulation, central-bank independence, inflation targets and fiscal rules but also active labour market policy and voluntary incomes policy. This article describes the content, determinants and performance of the new economic policy in Sweden in a comparative, mainly Nordic, perspective. The new economic policy regime is explained by the deep recession and budget crisis in the early 1990s, new economic ideas, EU integration and the power of economic experts. In the 1998-2007 period, Sweden displayed relatively low inflation and high productivity growth, but unemployment was high, especially by national standards. The restrictive monetary policy was responsible for the low inflation and the dynamic ICT sector was decisive for the productivity miracle. Furthermore, productivity increases in the ICT sector largely explains why the Central Bank undershot its inflation target in the late 1990s and early 2000s. The new economic-policy regime in Sweden performed well during the global financial crisis. However, as in other OECD countries the moderate increase in unemployment was largely attributed to labour hoarding. And the rapid recovery of the Baltic countries made it possible for Sweden to avoid a bank crisis.Swedish model; Swedish economic policy; Swedish Central Bank; economic experts; Sweden’s macroeconomic performance; financial crisis; new economic-policy regime

The Rehn-Meidner Model in Sweden: Its Rise, Challenges and Survival

A Swedish economic policy was developed by two trade union economists shortly after the Second World War. The Rehn-Meidner model recommends the use of selective employment policy measures, a tight macroeconomic policy and a wage policy of solidarity to combine full employment and equity with price stability and economic growth. Although never consistently applied in Sweden, it is possible to distinguish a golden age for the Rehn-Meidner model from the late 1950s to the early 1970s. In the 1970s and 1980s, Swedish governments abandoned the restrictive macroeconomic means of the Rehn-Meidner programme and decentralised wage bargaining obstructed the wage policy of solidarity. In the 1990s and 2000s a new economic-policy regime could not meet the strong requirement of full employment in the Rehn-Meidner model but it satisfied the model’s priority of selective employment policy within the framework of a restrictive macroeconomic policy.Swedish model; Rehn-Meidner model; third way; labour market policy; wage policy; productivity growth; fiscal policy; unemployment; inflation