Sweden's Experiment with Economic Democracy

Post-Keynesianism, socialisation of investment and Swedish wage-earner funds

Philip Whyman*

This paper analyses the performance of one of the most controversial of recent economic policy ‘experiments’, namely Swedish Wage-earner Funds (WEFs). It examines the ability of the WEFs to meet macroeconomic, financial and democratic objectives. The analysis indicates a favourable financial performance, but little significant democratisation. Macroeconomic influence was constrained by the limited size of the scheme and, though associated with positive changes in economic variables, the experiment was ultimately overwhelmed by the collapse of an asset price ‘bubble’. Nevertheless, the performance of the WEFs has legitimised the concept of collective investment funds as an economic policy instrument.

Key words: Post-Keynesian economics, Socialisation of investment, Wage-earner Funds, Swedish economy, Economic democracy JEL classifications: E6, G0, J5, P5

1. Introduction

The degree of instability at the heart of the capitalist market economy has prompted radical

economists to consider the full or partial socialisation of the investment function as

a means of eliminating causes of instability and promoting progressive social and economic

reform. For Marx, this was as part of the transition towards the public ownership of the

forces of production. For the Fabians, it would be pursued through the nationalisation of

the ‘commanding heights’ of the economy. For Keynes, socialisation of investment would

facilitate full employment in the long run. Proposals have varied considerably, in terms of

their preferred form of ownership, degree of centralisation of control, impact upon the

economy and speed of transition. Nevertheless, policy proposals of this type form

a significant part of the radical-progressive economics stream.

This paper aims to advance the literature on this topic through consideration of one

‘experiment’ in the socialisation of investment—namely, the establishment of a system of

Wage-earner Funds (WEFs), or Löntagarfonderna in the original Swedish. Highly original

in terms of its design and objectives, this became one of the most controversial economic

Manuscript received 3 November 2003; final version received 4 May 2004. Address for correspondence: Department of Information and Finance, Lancashire Business School,

University of Central Lancashire, Preston PR1 2HE, UK; email: [email protected]

* University of Central Lancashire. The author wishes to thank the Swedish Institute for its support of this research, through award of a years’ research fellowship, affiliated to the Statsvetenskapliga Institutionen, Stockholm University. The author additionally wishes to thank two referees for their helpful suggestions and contribution toward the improvement of this paper.

Cambridge Journal of Economics 2006, 30, 49–68 doi:10.1093/cje/bei048 Advance Access publication 4 July, 2005

� The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

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policy initiatives pioneered in any Western industrialised economy in recent years.

Opponents argued that the reform threatened the fabric of a liberal market economy,

and with it pluralistic democratic society itself (Lindbeck, 1979, pp. 49–51). Supporters

claimed that WEFs might contribute towards the democratisation of economic life, while

providing the foundations necessary to sustain the Rehn–Meidner ‘Swedish Model’. WEFs

therefore represent a unique attempt to pursue the socialisation of investment through

a decentralised, employee-controlled form of collective ownership, established as part of

a social contract to facilitate progressive economic policy while gradually extending

democratisation within the economic sphere.

Despite its significance, however, there has been a paucity of detailed analytical studies

examining the performance of the WEF scheme. Virtually no independent studies have

been undertaken in this regard, and even the few honourable exceptions (e.g., Pontusson,

1992) fail to provide a comprehensive analysis of the entire period of WEF activities. This

paper, therefore, seeks to contribute towards filling this gap in the literature.

2. Keynes and the socialisation of investment

Keynes (1936, pp. 375–8) advocated comprehensive socialisation of investment to

‘augment’, or if necessary to replace, most private investment to maintain full employment

in the long run. He did so for a number of reasons. First, he viewed the inequality associated

with capitalism, together with the higher propensity to save of those with higher incomes, as

impediments to economic growth (Keynes, 1936, p. 373). Second, Keynes regarded the

degree of uncertainty experienced by economic actors, reinforced by speculative ‘animal

spirits’, as factors leading to instability in capital accumulation and a resultant insufficiency

in productive investment to sustain full employment in the long run in the absence of state

intervention (Beveridge, 1944, pp. 171–2; Keynes, 1980, p. 322; Skidelsky, 1979, p. 57).

The socialisation of investment would increasingly remove the determinants of investment

(and hence full employment) from the fluctuating expectations of capitalists, and hence

create greater stability in the foundations for economic development.

Keynes additionally believed that the high rate of investment and capital accumulation

required to secure long-run full employment 1

reduces the return on capital, either because

its yield falls or increased demand causes its production price to rise, to the extent that the

rate of interest and the marginal efficiency of capital (MEC) may decline towards zero

within one or two generations (Keynes, 1936, p. 136; Smith, 1962, p. 151). Full

employment is dependent upon the existence of a sufficient level of productive capacity,

which is, in turn, determined through investment (Rowthorn, 1995; Arestis and Biefang-

Frisancho Mariscal, 1997). However, with the return on investment covering only the cost

of capital production and normal profits to offset risk, supervision and administration,

relative capital scarcity is replaced by capital abundance, thereby minimising opportunity

cost and social conflict (Smith, 1962, p. 99). 2

This would cause ‘euthanasia of the rentier’

1 A high rate of investment is not necessary to achieve full employment in the short run, since this could be

met with a low proportion of GDP dedicated to investment yet still producing a balance between aggregate full employment supply potential and aggregate demand. However, this proposition fails to give sufficient weight to considerations that a low rate of investment might hinder the pace of technological change and organisational innovation, with consequences for the maintenance of international competitiveness.

2 This conclusion is in line with Harrod–Domar growth theory, which suggested that, under continual

conditions of full employment, capital replacement would tend to increase as a proportion of capital accumulation, requiring a rising investment trend over time to maintain the expansion of capacity necessary to sustain full employment.

50 P. Whyman

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and ‘euthanasia of the cumulative oppressive power of the capitalists to exploit the scarcity-

value of capital’ (Keynes, 1936, p. 376). Given a low or zero MEC, socialisation of

investment provides the ‘only means’ to secure sufficient investment, to maintain full

employment and economic growth (Arestis, 1989, p. 62; Keynes, 1936, pp. 376–8). 1

In

other words, according to Joan Robinson (1973, p. 130), ‘Keynes was arguing that, if

a private enterprise system cannot deal with potential abundance, we must turn it into

a system that can’.

Building upon Keynes’ work, there are two additional reasons why radical-progressive

economists have accepted the necessity of socialisation of investment. The first focuses

upon private control over the investment function within capitalist economies as the

principal restriction preventing sustained redistribution of wealth and power.

Conventional redistribution strategies are restricted by private control of the investment

function because investment is a necessary but insufficient condition for maintaining full

employment in the long run. Expected future profitability predominantly determines

present investment, while realised profits finance new investment (Kalecki, 1971; Arestis,

1989, p. 614). Thus, the greater the level of capitalist profit and the expected development

of future profitable sales, the higher savings, investment and accumulation of capital will

be, ceteris paribus (Keynes, 1936, pp. 135–41; Caporaso and Levine, 1992, p. 117).

Whilst current profits remain high, and expectations of future returns provide incentives

for capital accumulation, sufficient investment should be forthcoming to ensure capital

accumulation consistent with full employment. However, this suggests a ‘fairly rigid lower

limit to the profit share’ beneath which profits cease to fulfil both functions, thereby

severely limiting the income redistribution achievable by government or trade unions

(Kaldor, 1966; Burkitt, 1983, p. 125; Burkitt and Whyman, 1995, pp. 25–6). Thus,

redistribution through fiscal policy and/or wage bargaining cannot permanently shift the

distribution of income between wages and profits over the long term beyond a ‘functional’

level, nor achieve a more equal distribution of wealth (Robinson, 1966; SOU, 1979, p. 74).

That requires fracturing ‘the link between profits and personal income so enabling

investment to increase without reducing equality’ (Burkitt, 1983, p. 125). Consequently,

socialisation of investment would facilitate progressive redistribution.

Finally, the socialisation of investment could mitigate the ‘dynamic inefficiency of

capitalism’, where the combination of imperfect information and mistrust between trade

unions and employers creates a sub-optimal bargaining solution, and frustrates the

superior alternative of trading wage moderation for increased investment and the creation

of employment (Lancaster, 1973). Organised labour is in a ‘prisoners’ dilemma’ to the

extent that, while unions can squeeze profits to the extent that investment declines, they

cannot guarantee that wage moderation leads to increased investment (Elster in Zukin and

DiMaggio, 1990, p. 110; Martin, 1992, pp. 25–6). This highlights the asymmetry of union

power (Gourevitch et al, 1984, p. 248). Two optimising solutions are available for labour.

First, collaboration with capital to secure a sufficient level of investment necessary to

sustain full employment, in return for a restricted wage share, as per Meade’s ‘capital–

labour partnership’ (Meade, 1989). Second, labour could take control over investment.

1 Westergaard and Restler (1975) found that profit levels did fall until the mid–1970s, appearing to

confirm Keynes’ prediction although it may alternatively reflect under-reporting profits during a high-tax period. However, abandonment of full employment enabled lower rates of investment to generate high MECs, through investment in non-productive, non-domestic asset portfolios (Bergström, 1980; Hyman, 1975, p. 360).

Swedish wage-earner funds 51

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The alternative is inflationary pressure resulting from a wage struggle between labour and

capital. Joan Robinson (1973, pp. 129–31) stated:

It was an obvious rider to The General Theory that if we are to enjoy continuous near-full employment without changing the institutions and habits of industrial bargaining, we shall suffer from inflation. It is neither the fault of the trade unions, who are fulfilling their proper function of demanding their fair share in rising profits, nor of businessmen trying to preserve profits by raising prices when costs go up. It is the fault of an economic system inappropriate to the state of development of the economy.

Accordingly, post-Keynesians have proposed the incorporation of the socialisation of

investment within a ‘social contract’ forged between the state, industry and trade unions to

provide a potentially superior framework that ensures efficient capital formation and full

employment (Arestis, 1989, p. 622; 1992, p. 267–71; Whyman and Burkitt, 1993).

3. Swedish Wage-earner funds

The WEF initiative was first proposed in Sweden, in 1975, by economists from the

Swedish Trade Union Confederation (Landsorganisationen i Sverige, LO), under the

guiding influence of Rudolf Meidner, co-architect of the ‘Rehn–Meidner Swedish Model’.

Tensions within this model, together with grassroots demands for increased workplace

influence and an egalitarian distribution of income and wealth, encouraged the LO to

promote an active investment policy intended to increase productive investment without

regressive distributional consequences (Esping-Andersen, 1985, p. 232). The combination

of a deficiency in warranted investment, as ‘allocative outcomes of private investment

decisions began to diverge from labour’s interests’, together with excess profits stimulated

by the global inflationary boom of the early 1970s, undermined the wage moderation

inherent within the wage solidarity policy (Martin, 1981; Gourevitch et al, 1984, pp. 265–

9; Erixon, 1985; Pontusson, 1992, p. 98). The traditional solution of increasing profits to

stimulate investment would worsen inequality and was therefore unacceptable to a solida-

ristic labour movement. Thus, socialisation of investment appeared necessary to achieve

economic democracy, particularly since organised labour’s power resources had grown

sufficiently to challenge core capitalist prerogatives (Ahrne, 1978, p. 319; Edwards et al,

1986, p. 276; Hamilton, 1989, p. 195; Korpi, 1983, p. 212).

3.1 Objectives

The Meidner report identified three aims for WEFs, namely, to complement trade union

solidarity wage policy, to increase employee influence over the economic sphere and to

counteract the degree of wealth concentration resulting from the private ownership and

control of the forces of production (Meidner, 1978, p. 15). The democratisation of

production sought to reduce the domination of Swedish production by 17 key ownership

groups (Hermansson, 1965; Lindström and Nordin, 1977). This concentration of capital

was claimed to be ‘probably unparalleled in any capitalist society’ (Israel, 1978, p. 347).

WEFs were introduced after a time lag of almost a decade, owing to a combination of

political opposition to the proposals, including influential figures in the Swedish Social

Democratic Party (SAP) leadership, together with SAP exclusion from government for six

years. As a result, the original proposals were significantly modified, shifting the emphasis

from economic democratisation towards a narrower economic strategy, involving the

facilitation of higher profits without stimulating wage–cost inflationary pressure, while

simultaneously reducing the cost, and increasing the availability, of risk capital to finance

52 P. Whyman

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additional investment. Specifically, the founding legislation defined the following operating

objectives (Ministry of Finance, 1984, pp. 7–16):

1. reduction of distributional conflicts to enable higher profits without wage–cost inflation,

2. increased supply of risk capital to stimulate higher investment, growth and employment,

3. increased employee influence over production,

4. redistribution of power and ownership to reduce undue concentration.

Despite the modifications to the Meidner proposals, however, WEFs still represent

a ‘Kaleckian’ ‘institutional accommodation to full employment’ by ensuring that employ-

ees share in accumulation, thereby securing high profitability and investment through

enhanced corporate liquidity and provision of additional risk capital (Esping-Andersen,

1990, p. 184; Gourevitch et al., 1984, p. 75).

3.2 Design

The essential characteristics of the version of WEFs introduced in Sweden in 1984 differed

considerably from the original Meidner proposals. Rather than a coordinated system of

company-based funds, the eventual scheme involved a multiple fund system, distinguished

through nominal regional identities, 1

financed through a combination of a 0.2% payroll tax

(investment wages) and 20% tax on excess profits (profit-sharing). Each fund received an

equal share of the capital, capped at SEK400 million (1983 prices), with additional

taxation income diverted to the state pension fund (ATP).

One attempt made to assuage critics of the WEF programme, and to counter accusations

that the original, open-ended scheme proposed by Meidner could socialise a considerable

proportion of the most profitable sections of Swedish industry within as little as a decade,

involved imposing a time limit of seven years on WEF funding. Accordingly, the total fund

system was estimated to receive a maximum of SEK14 billion, representing some 5–6% of

share price valuation, given the prevailing market valuation. Thereafter, fund assets would

decline unless yields exceeded the 3% real rate of return payable to the ATP for the loan of

capital (Finansdepartmentet, 1983).

The WEFs were instructed to restrict their investments to Swedish companies and

concentrate upon the manufacturing sector, while minimising risk through portfolio

diversification. Each fund was required to pay the ATP system a 3% real rate of return for

use of the capital—a rate selected as representing Sweden’s long-term growth trend and

intended as an exacting target for fund managers to promote allocative efficiency.

Employee ‘ownership’ envisioned majority trade union representation on WEF boards,

albeit appointed by government and not through democratic election, and with 20% of the

voting rights accruing through fund share ownership delegated to trade unions in the

relevant companies to facilitate employee influence upon business strategy (Finansdepart-

mentet, 1983; Riksdagens protokoll, 1983).

4. Evaluation of WEF performance

Having briefly outlined the design of the WEFs, together with those objectives established

to steer their operations, this paper evaluates the performance of the experimental fund

system.

1 The five funds were Sydfonden, Fond Väst, Trefond Invest, Mellansvenska löntagarfonder and

Nordfonden, representing the South, West, East, Central and Northern Swedish regions.

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4.1 Macroeconomic impact

The WEFs were introduced in Sweden as part of a ‘Third Way’ economic strategy

(TWES), which sought to utilise a 16% devaluation to surpass the poor growth and

productivity record of the previous decade and hence re-balance the economy through the

‘renewal of the private sector as the engine of economic recovery’; with particular emphasis

upon export-oriented production (Walters, 1985, p. 368). A restrictive fiscal policy,

intended to switch resources from consumption to investment at a time of full employ-

ment, would also facilitate the reduction of a budget deficit standing at a level of 9.5% of

GDP (Bosworth and Lawrence, 1986, pp. 26–35).

The strategy was based upon the post-Keynesian assumption that investment is not

constrained by the supply of savings but rather generates the savings needed for its own

finance, in the form of undistributed profits (Caporaso and Levine, 1992, pp. 117–18).

Therefore, higher current profitability causes rising future profit expectations, thus

stimulating higher investment, partly financed by higher retained profits (Arestis, 1989, p.

614). This, however, violated one of the basic tenants of the Rehn–Meidner ‘Swedish

Model’, developed by the LO. Yet, the TWES presumed voluntary wage restraint, despite

the distributional tensions exacerbated by high corporate profitability, tight labour markets

and the anticipated acceleration in economic activity. WEFs were, therefore, portrayed as

a means to restrain feelings of distributional injustice by securing part of any increase in

capital accumulation for employees without the need for a potentially inflationary wage

struggle. They might facilitate economic expansion by boosting corporate profits and hence

stimulating business expectations, with resulting benefits for the expansion of investment

and output (George, 1993, p. 127). WEFs might additionally increase the availability and

reduce the cost of investment capital, while simultaneously facilitating its reallocation to the

high productivity, export-oriented sector, thereby enhancing allocative efficiency.

The TWES was initially rather successful, as profits rose by an average of 60% in the first

year of the policy programme, 1982/3. The profit share of value added in manufacturing

expanded from 15% in 1978 to 33% by 1984; a level comparable with rates in the 1950s

and 1960s (Ryner, 1993, p. 8). The improvement in the business climate had the

anticipated positive impact upon investment expenditure, as fixed business investment rose

from 10.5% of GDP in 1982 to 15% by 1990. The expansion in real capital formation

compares favourably with the end of the ‘golden age’ of Swedish development (see Table

1), while this transformation was particularly notable after a decade of stagnation and loss

of productive capacity.

Economic growth rates improved significantly during the period of the TWES, rising from

an average 1.4% achieved during the previous decade, to 2.5% between 1984 and 1990,

Table 1. Gross and real capital formation in Sweden, 1964–91

Years

Gross capital formation (% change)

Real capital formation (% change)

1964–1973 8.34 2.85 1974–1983 10.34 �0.01 1984–1990 12.1 5.5 1984–1991 10.1 3.4

Source: OECD (1993, 1994).

54 P. Whyman

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although the onset of recession during the final year of the programme reduced overall

growth rates to an average of 2%. This was an improvement on recent Swedish history, but

remained disappointing relative to Sweden’s estimated long-term trend growth of 3% per

annum. More favourably, Sweden maintained full employment in the face of the significant

problem of high and rising unemployment rates across most OECD and EU nations (Table

2). This was a significant achievement, particularly when associated with increased labour

market participation—at 85%, the highest among industrialised nations. Total employment

rose during the period, from 3.89 million to a peak of 4.23 million in 1990, before recession

caused a decline to 4.17 million in 1991. Thus, the introduction of the WEFs was associated

with increased employment.

One feature of the TWES that can be closely associated with the introduction of WEFs

concerns the favourable development of wages and labour costs (Table 3). Despite

devaluation reducing employee purchasing power, tightening labour markets and boosting

corporate profitability—following six years in which real wages had declined by 10%—

WEF introduction (together with increased welfare provision) persuaded the LO to

accommodate devaluation by accepting further reductions in purchasing power for most

employees (Pontusson, 1992, p. 116). Thus, developments in manufacturing labour costs

and earnings were more favourable for international competitiveness than in previous

periods. Relative unit costs declined, facilitating an expansion of output and growth in

manufacturing employment (Calmfors, 1993, p. 48). Industrial costs declined to 45%

below equivalent values following the cost–price inflation of 1973–74 (Whyman, 2003).

Indeed it took the loss of around one-fifth of Swedish industrial employment, during the

1991–94 recession, to secure smaller real wage increases.

Table 2. Inflation, unemployment, misery indexes and sacrifice ratios, 1974–1991

Countries

Years Sweden Total OECD OECD Europe EU

1974–83 Inflation 10.4 10.0 12.1 11.9 Unemployment 2.3 5.9 6.1 6.3

1984–91 Inflation 6.5 4.7 6.3 5.0 Unemployment 2.2 7.1 9.5 9.9 Sacrifice Ratio �0.03 0.23 0.59 0.52

Source: OECD (1993).

Table 3. Swedish manufacturing earnings and labour costs

Years

manufacturing hourly labour costs manufacturing hourly earnings

Nominal Real Nominal Real

1969–1981 12.9 4.1 10.6 1.8 1982–1991 8.4 1.4 7.9 0.9 1992–1994 4.8 1.1 4.0 0.3

Source: OECD (1993).

Swedish wage-earner funds 55

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Trade union restraint may have additionally contributed to a 3.9% reduction in inflation

during the TWES, although a second contributory factor relates to the simultaneous

decline in international inflation during this period (Table 2). Admittedly, Sweden’s

inflation rate remained an average of 1% higher than average OECD and EU rates.

However, an appraisal of multiple macroeconomic objectives demonstrates that the TWES

was associated with expansion of employment and maintenance of full employment,

against the international trend, in a faster growing economy, without having a detrimental

impact upon inflation. This comparison may be illustrated using an index to measure the

‘misery’ caused by unemployment and inflation (Figure 1) (Dawson, 1992, pp. 60–74).

Alternatively, calculation of a ‘sacrifice ratio’, in terms of lower inflation achieved at the

cost of higher unemployment, indicates that, while OECD and EU nations paid a high

price for their deflationary policies during the 1980s, Sweden actually achieved a net gain

(Table 2).

Firm conclusions are difficult to reach in terms of the precise impact of one particular

policy instrument when introduced as part of an integrated economic programme.

Nevertheless, it would appear from a cursory examination of the macroeconomic data

that the ‘WEF period’ coincided with a general improvement in those variables the funds

were intended to influence. Though the scale of WEF economic impact was undoubtedly

limited by their size, the direction of their influence appeared to be largely positive. Thus,

even when introduced in a ‘muted’ form, the funds appeared to at least temporarily

legitimise the principle of ‘solidarity profit policy’ (Harrington, 1987). Nevertheless, the

TWES suffered from two inherent weaknesses that ultimately proved fatal.

First, the real devaluation proved to be significantly weaker than the nominal variation in

exchange rate, resulting in only a modest relative expansion of the traded sector. This

favoured Sweden’s primary sector (particularly forestry products), thereby locking

resources into mature industries at the expense of firms based upon new technology and

innovative techniques (Erixon, 1989, pp. 187–93). Furthermore, despite devaluation

facilitating an expansion in private sector industrial employment for the first time in

a generation, the expansion of public sector employment arguably had greater significance

in maintaining full employment in Sweden (Lindbeck et al., 1993, p. 236).

5

10

15

20

25

30

74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

EU

OECD-

Europe

OECD

Sweden

(Source: OECD, 1993).

Fig. 1. Augmented ‘misery’ index -Sweden, OECD, OECD-Europe and the EU, 1974–1991.

56 P. Whyman

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The second problem concerned the absence of an effective means of ensuring that

increased profitability was consistently channelled into increased investment in domestic

productive resources. Financial sector deregulation had the unintended consequence that

companies invested a significant proportion of their increased profits in property, financial

securities and/or foreign assets, rather than domestic productive capital. Long-term capital

flows out of the Swedish economy rose from the OECD average of 1% of GDP in 1981, to

6.2% of GDP in 1990, immediately upon the abolition of exchange controls, before

stabilising at 4% in 1991.

This was considerably more than any other OECD country and meant that, during the

1980s, the outward flow of productive investment capital had risen more than 40-fold

(Iversen, 1996, p. 417). Consequently, by 1990 approximately 55% of Sweden’s in-

vestment stock was located in EU countries (OECD 1992). Thus ‘the increases in

profitability created by the devaluation and by the wage restraint of Swedish workers has

largely been used to finance operations outside Sweden’ or to take-over competitors to

achieve market dominance (Ryner, 1993, p. 10).

The result was sluggish productivity growth, rising only by an average annual rate of 1%

between 1982 and 1990 (Ryner, 1993, p. 9). Furthermore, the bursting of the asset price

bubble caused a 20% contraction in bank lending during 1993/94, worsening the

economic downturn (Whyman, 2003). Ryner (1999, pp. 64) therefore concludes that

‘one cannot but conclude that capital deregulation and the strategy to increase Sweden’s

interest rate sensitivity seriously backfired’.

As excess profits increasingly stimulated consumption and not investment in domestic

productive assets, voluntary wage restraint collapsed (Flanagan, 1986, p. 172). Wage

pressure intensified precisely as the economy overheated, in 1990, while political paralysis

prevented corrective measures being introduced. This ultimately resulted in the replace-

ment of the social democratic government, in 1991, and replacement of the TWES by

a non-accommodatory, neoliberal economic approach. However, political difficulties

cannot disguise the fact that the TWES had become unsustainable and that deregulation of

the economy had withdrawn many policy instruments previously deployed to stabilise the

economy in the advent of internal or external shocks. In the absence of a means of

transferring increasing corporate profitability, or at least that proportion stemming from

wage moderation, directly into productive investment, the TWES failed as a long-term

strategy. Thus, the WEFs did exactly what could be expected of them according to the scale of

activities that their limited resources allowed.

4.2 Democratic Influence

Although latterly presented as a macroeconomic policy instrument, WEFs were never

intended to be solely concerned with economic objectives, but were simultaneously

expected to increase employee influence within the workplace, thereby promoting

economic democratisation. The founding legislation stated that the fund system would

provide employees with a ‘greater measure of influence in enterprise’ through control over,

and responsibility for, the proportion of capital owned by the funds (Ministry of Finance,

1984, p. 7). The funds would secure a ‘greater measure of participation and workers’

influence in economic life’, counteracting the ‘private concentration of power and wealth’

which arguably distorts Swedish democracy (Ministry of Finance, 1984, p. 16).

WEFs were intended to empower employees to monitor their organisations to

ensure sound corporate governance exercised by others, rather than providing the

means for their exercise of the managerial function (Whyman, 2004). To facilitate

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this process, local trade unions would utilise half the votes accruing to WEFs

through their share ownership, while fund nominees would exercise the remaining

voting powers at annual general meetings and propose members to the company

board. Employee ownership may additionally resolve tensions between divergent

stakeholder interests within the production process, and thereby contribute towards

the reorientation of production in a socially beneficial direction.

Analysis of WEF performance must examine the extent to which WEFs, individually

and collectively, achieved significant democratisation, either in absolute terms or relative to

the proportion of a company’s capital the fund was able to purchase. It includes not only

the absolute voting influence they gained in individual companies and over the economy as

a whole, but also their relative influence when compared with other principal investors. The

analysis of the democratisation secured by the funds could therefore include the following:

(i) ascertaining relative prioritisation of democratic objectives by individual funds,

(ii) analysis of the use made of the voting power secured by the funds,

(iii) examination of the extent to which WEFs and other social funds sought to maximise

democratic influence through selective, concentrated investments.

There are a number of complementary strategies that would optimise the degree of

democratisation available to the WEF system. These include:

� investing entire capital allowance in vote-bearing equity � concentration upon smaller, non-quoted companies � focusing portfolios on companies providing relatively more voting power per capital

invested

� coordinating investments among collective funds to maximise collective influence.

When aggregated, WEFs were Sweden’s eighth largest shareholder group, representing

2.6% of total stock market value at the end of 1991 (Sundqvist, 1992). This degree of

ownership could have risen to 4%, if WEFs had invested their full capital entitlement and

had not held a significant proportion as liquid assets in the expectation of declining share

prices. Even this enhanced level was far too small to exert a major macroeconomic or

democratic influence over Swedish industry, as originally intended. However, WEFs could

still exercise authority within individual companies if they concentrated and coordinated

their investments.

At the end of 1991, each fund held one-quarter of total voting rights in at least two non-

quoted companies, while in aggregate the fund system held this degree of influence in 13

companies. Owing to their relatively low level of capitalisation, it is among non-quoted

companies that WEFs could have exerted a powerful hegemony had their legal rules of

operation not dissuaded them from assuming corporate management functions. Neverthe-

less, individual funds displayed a divergent propensity to perform an active micro-

development role by selecting and nurturing promising new (non-quoted) firms, with

Trefond Invest utilising only 0.8% of its capital for their purpose, compared with 5% by

Fond Väst and 8.2% by Mellansvenska fund (Whyman, 2004).

The existence of stocks with differential voting power during this period implies that

WEFs could optimise democratisation through selection of companies in which they

received disproportionately greater voting rights. However, comparing the amount of

capital individual WEFs invested in individual companies with the proportion of voting

power that accrued to the funds as a result, produces insignificant results. If individual

58 P. Whyman

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WEFs had targeted their investment activity towards those companies providing a larger

proportion of voting power per krona invested, high correlation results should be obtained.

Yet, values ranging from �0.31 to 0.11 demonstrate the apparent absence of this anticipated relationship (Table 4). Examination of the degree of relative democratisation secured by the

WEFs produced similarly low correlation values, ranging from �0.17 to 0.29. This suggests that WEFs failed to concentrate placements in those companies providing proportionately

greater voting power, and rather prioritised non-democratic objectives when identifying

companies in which to invest.

Examination of the degree of voting rights is insufficient to distinguish the extent of

influence secured through WEF ownership because this depends upon the degree to which

the largest shareholder group(s) dominated the companies in question. This is critical

because the largest shareholder group exercised a majority of the voting rights in 11 of the

24 enterprises in which aggregate WEF voting rights exceeded 5%. In a larger sample of 44

companies where WEFs held significant blocks of shares, the largest shareholder group

held an average of 31.2% of total capital and 44.6% of the voting rights. Consequently,

WEF ownership was effectively prevented from securing real influence except, perhaps,

through participation in alliances of smaller shareholder groups during exceptional

circumstances, such as company take-overs or the threat of bankruptcy.

The ability of the largest ownership group(s) to dominate Swedish companies was

reinforced by a disproportionate holding of higher-voting ‘A’ stocks, delivering an average

of 66% more votes per share than in the absence of differential voting stock. WEFs, by

contrast, received only 68% of the voting power that would accrue in a neutral share

system, while the public pension AP-Funds received approximately 75%. This result

indicates that either the public pension funds were more concerned about democratisation

than WEFs, or the latter suffered greater discrimination when seeking to purchase high-

voting ‘A’-shares. In the absence of additional data, however, it is impossible to discover

precise causation.

The fact that WEFs did not target companies that provided an absolute, or relative,

advantage in terms of a greater proportion of voting power leaves one final strategy to

enhance democratic influence, namely through investment coordination between collec-

tive funds. Total collective equity holdings, including WEFs, AP-Funds and state holding

companies, Fortia and Kammarkollegiet, were valued at SEK55.5 billion at the end of 1991;

a sum equivalent to approximately 10.1% of total stock market value (Sundqvist, 1992).

Restrictions imposed upon collective ownership limited individual WEFs to holdings

generating a maximum of 8% (later 6%) of the voting rights in a quoted company, with the

Table 4. Correlation relating to the value of WEF investments with the proportion of voting power and proportionate democratisation

WEF Amount with % voting power

Amount with (%votes/%capital owned)

Sydfonden �0.3062 �0.1658 Fond Väst �0.1553 þ0.2925 Trefond Invest �0.0946 þ0.0608 Mellansvenska löntagarfonder þ0.1096 �0.0588 Nordfonden �0.2682 �0.0418

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Fourth AP-Fund allowed 10%, thereby preventing majority ownership through collabo-

ration (Isaksson and Skog, 1988, p. 540). Nevertheless, a combination of collective

investments in a single company provided the best option for pursuing democratisation

through collective funds.

There were 44 companies in which at least two WEFs held shares, 24 where a minimum

of three WEFs were represented, 12 where four or more WEFs owned equity and 6

companies in which all five WEFs had ownership (Regeringens Skrivelse, 1992).

However, WEFs did not appear to coordinate investment to optimise voting authority.

Indeed, both the average voting power and relative democratic impact were lower than

that achieved by individual funds on those occasions where three or more funds

simultaneously invested in a given company (Whyman, 2004). Thus, while it is possible

that pairs of funds may have coordinated investment strategies in a limited number of

cases, WEFs in aggregate did not appear to engage in systematic collaboration to

concentrate their investments in those companies where most influence could be gained.

A more plausible explanation is that, where investments overlapped, individual WEFs

were simply attracted to similar types of companies. For example, the largest single

investment made by three of the WEFs was in the pharmaceutical company, Astra,

purchasing a combined 9% of its share capital yet only 2.3% of its total voting power.

Indications of collaboration are, however, less likely than the desire to invest in

a successful Swedish company in a dynamic sector.

Frequency analysis of WEF placement in companies quoted on the stock market was

heavily skewed towards investments resulting in relatively little stock voting power. In

1991, at financial maturity, the aggregate WEF system held in excess of 15% of voting

power in only two quoted companies; Skrinet (22.3%) and Frontline (29.1%). Temporary

exceptions were granted to permit WEF voting power to exceed a 6% ceiling in these cases,

because sizeable investments were built up before the companies floated on the stock

market, subject to the stipulation that combined collective funds were prevented from

securing a majority of voting rights (Regeringens Skrivelse, 1992, p. 266). Collective funds,

in aggregate, secured more than 10% of voting rights in 14 companies out of the 230

quoted on the stock market; a mere 6% of the total, but exceeding 15% of voting power in

only three of these companies. Aggregate funds held more than one-quarter of all voting

rights in a total of 24 non-quoted companies. However, even in those companies where

WEFs and other collective funds developed significant voting positions, the largest owners

very often held a majority of the votes or at least a voting bloc sufficient to ensure control

through the use of proxy votes.

The tentative conclusion reached is that WEFs placed a lower priority upon securing

democratic influence for employees than upon pursuing macroeconomic and financial

goals. Only in certain cases, for example Fond Väst’s interest in non-quoted companies, did

individual WEFs appear to focus specifically upon enhancing democratic authority

through share ownership, while combined investments in given companies was associated

with weaker degrees of democratisation than would be anticipated if this were the

motivation behind any active coordination of activity. In this respect, they typically acted

almost as passively as private institutional shareowners. It is arguable that, had WEFs

expanded to reach a critical size, and not suffered from consistent discrimination in terms

of receiving lower voting rights relative to their proportion of capital owned, they might

have adapted their placement strategies to give democratisation a higher priority. However,

there is little or no evidence that it received significant attention during the period under

examination in this paper.

60 P. Whyman

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4.3 Financial results

The ultimate macroeconomic and democratic impact made by WEFs depended upon the

ability to protect their capital and secure a growth rate in social capital similar to that of the

economy as a whole. Otherwise, inefficient use of scarce resources would undermine social

ownership. Accordingly, four of the five funds published their own placement strategies

which sought to maximise yields and employee influence through share voting power, with

investment in non-quoted companies representing a long-term concern to nurture

enterprises (Regeringens Skrivelse, 1992).

The founding legislation reflected this concern, demanding that the funds should: ‘yield

a good return, on a long-term basis, and with a distribution of risks. Investments will

mainly be made primarily in manufacturing and related enterprises’ (Ministry of Finance,

1984, p. 6).

It further imposed a specific requirement upon WEFs to pay an annual 3% real return to

the ATP state pension fund system for use of their capital. Thus, once the funds had ceased

to receive additional capital injections after their first six years of operations, the future

viability of the funds depended upon their ability to meet, or exceed, this demanding target.

In terms of the more limited objective, WEFs successfully protected their capital, having

accumulated a SEK1.7 billion surplus in real terms (Whyman, 2004). Moreover, having

developed a portfolio disproportionately concentrated in export-oriented manufacturing,

together with the paper and pulp industries, WEFs were better placed to withstand the

sudden collapse of banking and property company share prices following the collapse of

a property ‘bubble’, stimulated by the deregulation of the financial sector. According to

Lindbeck et al. (1993, p. 22), ‘in retrospect, credit institutions were not able to deal

properly with their new freedom to engage in risky activities’ and secured loans on the basis

of rising property prices. Falling property prices, causing rising loan defaults, caused the

state to expend between SEK100 and 140 billion in loan guarantees, injections of equity

and the floating of bad debts onto a state banking agency, thereby effectively nationalising

almost the entire Swedish banking sector, and costing every Swede SEK16,500 (Lind-

beck,1993, pp. 4–6). Compared with the failure of the more established private Swedish

financial sector, the collective funds prudently safeguarded the social capital with which

they had been entrusted.

The real 3% target, however, proved more problematic. The state body charged with

monitoring the public pension funds, the National Audit Bureau of Sweden (Riksrevi-

sionsverket, RRV), estimated that WEFs underperformed by SEK2.3 billion against this

more rigorous target, representing approximately 11% of total WEF assets at the end of

1991. The fact that the Swedish economy grew by less than the 3% target could not excuse

this performance because the RRV calculated that, had the WEF foundation capital been

invested in the bond market over the same period, the returns would have been 20%

greater, while comparison with stock exchange indexes demonstrates a 1.5% under-

performance (Regeringens Skrivelse,1992). This conclusion must, however, be qualified

for two reasons.

The first refers to a conservatism employed by the WEFs in terms of their end of

year estimation of market value, introduced to avoid accusations of result manipulation.

Thus, WEFs used the lowest share price for their holdings on the final trading day of the

year to calculate their annual results rather than the more usual practice of taking the

closing price at the end of trading. Anecdotal evidence provided by one fund manager,

Låftman (Mellansvenska), suggests that this practice underestimated fund performance, as

price fluctuations on the final trading day meant that his fund exceeded the 3% real return

Swedish wage-earner funds 61

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criteria at both the start and end of trading but, because prices dipped in the middle of

the day, the historical verdict on the fund is that it failed to achieve its financial goal

(Whyman, 2004).

A more fundamental qualification of the RRV’s conclusions, however, reflects two

apparent weaknesses in the methodology employed in its calculations. First, the RRV failed

to account fully for the fact that WEFs transferred 3% of their capital to the ATP each and

every year, rather than at the end of the period of examination, and therefore comparisons

made by simply adding this amount of money back in the final set of accounts is

insufficient. Had the WEFs retained this capital throughout their operations, they could

have made compound returns on this sum, and therefore their final results would have been

more favourable. Accounting for this factor reduces the apparent underperformance of the

WEFs to SEK1.2 billion.

This error is compounded because the same methodology is utilised in RRV compar-

isons with the bond market and stock exchange indexes. If these are treated on the same

basis, namely that hypothetical bond and stock investment companies had transferred 3%

of their assets annually to an external body, WEFs would have generated SEK1.3 billion

more than alternative investments in the bond market, representing 6.4% of WEF market

value (Whyman 2004).

In addition, the RRV assumes that WEFs received their total allowance of foundation

capital on the first day of each financial year. Unfortunately, there are no data to

substantiate this assumption. If it is alternatively assumed that the funds received their

foundation capital at the mid-point of the year, then the aggregate deficit is reduced to

SEK0.3 billion, representing 1.7% of total fund assets; an amount comfortably within the

boundaries of daily stock market fluctuations (Whyman, 2004).

The comparison with imaginary indexes is additionally problematic because significant

investors in small stock markets may be able to select only 20 or 30 company stocks with

high turnovers, and thus investments may get locked into small and medium-sized

companies by the irregularity of opportunities to sell their shares (Affärsvärlden, 1992, p.

10). If a large block of shares with a given book value were to be actually put up for sale, it

mighty require a substantial fall in the market price to entice a buyer for the stock.

Imaginary indexes do not encounter this problem, and therefore possess a distinct

advantage that threatens to undermine the usefulness of the comparison.

An alternative method is to compare WEF returns with private investment funds of a

similar size. Using data on the tax-subsidised unit trust investment funds (Allemansfonder) 1

that operated throughout the period 1985–90, sourced from the business magazine

Affärsvärlden, WEFs produced a superior average rate of return approximately equivalent

to the 1.5% average administrative charge that Allemansfonder levied on their members

every year (Veckans Affärer, 1991, p. 67) (see Table 5). Limiting the analysis to the smaller

numbers of Allemansfonder that operated for the entire period, between 1984 and 1991,

reduces the WEF advantage over the private unit trusts to 0.7% per annum. WEFs

additionally produced an annual yield 2.1% higher than those private investment

companies detailed by Affärsvärlden, between 1985 and 1990 (Table 6).

Analysis of the individual WEFs highlights differences in investment selection, yet in

aggregate, WEFs were most associated with measures of corporate success, specifically

turnover, profitability and marketisation, but not by short-term financial inducements

1 In 1986, total Allemansfonder assets were valued at SEK8.96 billion compared with SEK7.8 billion for the

WEF system. The combined capital held in Allemansfonder expanded to twice the size of the WEF system, although the average size of individual private and collective funds remained approximately equivalent.

62 P. Whyman

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Table 5. Comparison of yields achieved by WEFs and Allemansfonder, 1984–91

Investment funds Average yield 1984–89 (%)

1990 yield (%)

1991 yield (%)

Average yield 1984–91 (%)

WEFs Sydfonden 20.0 �21.1 14.1 14.1 Fond Väst 24.2 �28.3 10.3 15.9 Trefond Invest 21.7 �25.7 1.3 13.2 Mellansvenska 26.3 �30.6 6.1 16.7 Nordfonden 24.0 �25.3 3.7 15.3 Av. WEFs [1] 23.1 �25.8 7.1 15.0 Allemansfonder Sparbanken 1–4 24 �30 20 16.8 S-E Banken 1–3 36 �15 15 27.0 Gota Trade 19 �25 13 12.8 Gota Trust 19 �25 12 12.6 SHB Chans/Risk 21 �21 11 14.5 F.B. 1–2 19 �21.5 8.5 12.6 Banco 22 �28 9 14.1 SHB Index 18 �30 6 10.5 St. Eriksfonden 34 �33 1 21.5 Av. Allemansfonder [2] 23.6 25.4 10.6 15.8 Difference [1–2] �0.5 �0.4 �3.5 �0.8

Source: Affärsvärlden, 14/8/91 No. 33–34, p. 26; various WEF yearly accounts.

Table 6. Average change in portfolio value by WEFs and private investment companies as a proportion of share portfolio, 1985–90

Rank Fund Av. change

1 Lator 21 2 Hasselfors 21 3 Mellansvenska löntagarfonder 20.6 4 Nordfonden 18.9 5 Fond Väst 18.4 – WEF average 17.4 6 Investor 17 7 Ratos 16 8 Bahco 16 9 Trefond Invest 15.3 – Private Investment

Company Average 15.3

– Veckans Affärer Stock Market General index

15

10 Providentia 15 11 Industrivräden 14 12 Sydfonden 13.7 13 Öresund 13 14 Custos 11 15 Cardo 9

Source: Affärsvärlden (1991, p. 28)

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such as the level of dividend payments. Thus, WEF investment facilitated efficient

companies and did not subsidise inefficient firms as critics had predicted. However, the

possible existence of a trade-off between maximising rates of return and democratic

influence within a given company, might demonstrate an inherent limitation to WEFs

simultaneously pursuing multiple objectives (Table 7). Aoki (1984) recognised this

possible tension and termed it the ‘dilemma of industrial democracy’.

Financial analysis, therefore, indicates a relatively successful WEF experiment, as

collective funds performed slightly better, on average, than private sector investment

agencies, protected their assets against the full cost from a property ‘bubble’ and only

narrowly failed to meet a stringent 3% real rate of return target. This is a credible

performance for relatively new investment organisations.

5. Conclusion

The socialisation of investment has formed part of post-Keynesian, progressive economic

thought, as a potential solution to the instability generated by the private control of the

investment function, and the limitations this places upon the combination of sustainable full

employment and an egalitarian redistribution of wealth and power. Apart from nationalisa-

tion and state equity holdings, there have been few large-scale experiments realised in

democratic industrialised economies. Consequently, the evaluation of the Swedish WEFs,

contained in this paper, represents an extension of the literature in this regard.

Examination of the performance of the WEF system demonstrates that it achieved

many, but not all, of the multiple objectives established for the funds to pursue. In

macroeconomic terms, their introduction and expansion was associated with increased

collective savings, capital formation, economic growth, moderated labour costs, higher

industrial employment and an improved inflation–unemployment trade-off. However,

their influence proved insufficient to counter destabilisation caused by financial deregu-

lation, together with the resultant asset price bubble and outward flows of capital that

ultimately undermined voluntary wage moderation. Moreover, the funds came close to

fulfilling their varied financial targets, having safeguarded their assets more successfully

than the majority of the Swedish private financial sector, achieved superior results to

alternative investment in government bonds and private unit trust Allemansfonder, and only

marginally failed to meet their stringent target real rate of return of 3% per annum.

WEFs were, however, less successful in terms of economic democratisation, owing to

their preference for selecting investments on the basis of economic success, growth and

Table 7. WEFs ranked by yield performance and democratic influence

Ranking

Financial Democratic

Average yields, 1984–91 % votes %v/%K

1 Mellansvenska Trefond Invest Trefond Invest 2 Sydfonden Nordfonden Fond Väst 3 Fond Väst Fond Väst* Mellansvenska 4 Nordfonden Mellansvenska* Nordfonden 5 Trefond Invest Sydfonden Sydfonden

Source: Figs 40–3 and 48, Whyman, 2004. *Signifies equal ranking.

64 P. Whyman

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employment, rather than pursuing collaboration or individual placement strategies aimed

at maximising employee influence through share ownership. Whether restrictions upon

investment patterns, limited funding and the dominant position of the largest group of

private shareholders in most Swedish companies frustrated this element of fund activity, or

whether fund managers preferred more orthodox financial and/or macroeconomic goals,

remains an open question.

The fact remains that, during a relatively short and turbulent period of operations,

WEFs performed about as effectively as could be expected. They produced neither the

optimistic nor the disastrous outcomes that advocates and opponents had predicted.

Nevertheless, this should not distract from the lessons that can be derived from this

experiment. First, if employee-controlled investment funds are to be utilised as a macro-

economic instrument, they need to be far larger in size and scope, if they are to have an

effective influence upon the economy. But, even an expanded form of WEFs should be

viewed as secondary and complementary to active supply-side and aggregate demand

management policies.

Second, for WEFs to secure significant democratic influence in the larger companies

within a small economy, the question of the form of allocation to the funds needs further

consideration. Transfers in the form of cash, as in the Swedish experiment, had the

inegalitarian consequences of enhancing a stock exchange boom. Moreover, to the extent

that disproportionate voting powers are allowed for different categories of share, democrat-

isation through employee shareholding will be frustrated unless WEFs have access to the

higher voting shares. The alternative is for transfers to WEFs to be made in the form of new

stock rather than cash. This would provide a direct link between the profitability of an

individual enterprise and the degree of influence accruing to its employees. However, it

might hinder the efficient allocation of resources, especially if mature industries made excess

profits, while emerging industries remained starved of funds for expansion.

Thirdly, even with cash transfer and stock market allocation, there can still be problems

of capital being ‘locked in’ to small and medium-sized companies, whose stocks are only

irregularly traded. Yet these firms are often unable to finance expansion through retained

profits, and hence there is a need for venture capitalists to nurture areas of future promise.

WEFs could play this role, but would need to develop long-term relationships with

stakeholders—an approach that would require a different skill set to the placement of WEF

resources through the stock market.

Fourth, the goals established for the WEFs might be reconsidered, and possibly

simplified, because their experience appeared to demonstrate the difficulty of pursuing

multiple goals simultaneously. Indeed, the possibility of a trade-off existing between

financial and democratic performance, only sketchily indicated here, would reinforce this

point were future analysis to find that it does indeed exist.

Finally, the performance of the Swedish WEFs raises the interesting question, which

sadly lies beyond the scope of this paper, concerning the extent to which the original

formulation devised by the Meidner Plan would have produced superior results. It is

probably indisputable that it would have developed into a more substantial scheme and it

would therefore have had a far greater macroeconomic impact, although it might have

inhibited efficient capital allocation through its firm-based system of funds. It is likely that

democratic participation would have been enhanced within those companies making

substantial excess profits, although this would have been spread unevenly across the

Swedish economy, and with substantial groups of employees (e.g., in the public sector)

receiving little benefit.

Swedish wage-earner funds 65

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It is possible that changes in the international economic environment—particularly

relating to the internationalisation of financial capital, EU membership, the rise

in foreign ownership of Swedish industry following financial sector deregulation, wage

bargaining decentralisation, the trend towards post-Fordist production and the increased

importance of service sector employment—could have rendered the Meidner proposals

irrelevant a decade later. This conclusion, however, appears to be a little premature,

since many of the original problems prompting initial interest in WEFs have still not

been resolved. WEFs were designed to reduce the distributional conflict, and its

consequent inflationary pressure, inherent in the successful maintenance of full

employment, with strong, independent trade unions, and the private control over the

investment function, while simultaneously facilitating the necessary levels of capital

accumulation and providing an increased voice for employees within the work situation.

WEFs proved to be a relatively successful instrument in terms of meeting most of their

(albeit limited) objectives. It is now open to post-Keynesians to evaluate the evidence

and consider whether a superior alternative can be fashioned, to supplement a sustain-

able, egalitarian full-employment programme.

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