Tuesday, April 30, 2013

The Upper Class and Wealth Inequality in Sweden

Sweden is viewed as an egalitarian utopia by outsiders, but reality is complex. In some ways Sweden has less social equality than the United States. While the American upper class is largely meritocratic, the upper class in Sweden are still mostly defined by birth.

Historically, Sweden, Norway and Finland alone in Europe never developed Feudalism (Denmark was closer to continental Europe). The Nordic nobility was a small share of the population and not as powerful as the nobility in continental Europe, though still influential. The upper class in Sweden today consists of the nobility and of wealthy bourgeoisie families that socially merged with them. Wealthy bourgeois families live in the same neighborhoods and have adopted similar behavior and identity as the nobility. Despite long Social Democratic dominance they remain a coherent social group, with a distinct and recognizable accent, way of dressing, values etc. 

Belonging to the upper-class is not defined merely by wealth, depending more on blood. Just as in historical times, a Noveau riche member of the middle class will not automatically be accepted as a member of the upper-classes, unless they actively adapt their behavior and are accepted by the upper-classes socially.

The upper classes in Sweden retain a disproportional hold on wealth and power. The formal nobility in Sweden constitutes around 0.2% of the population. A couple of years ago I looked through the list of the wealthies Swedes. Fully 10% of the richest Swedes are members of the nobility. By contrast not a single one of the richest Swedes was a non-European immigrant. Of Sweden’s prime-ministers Sweden during the modern era 20% belonged to the nobility.

Sweden is known for income equality. Increasingly, studies also point to Sweden as a country characterized by high intergenerational mobility of income. Income-distribution and wealth distribution are however not the same thing. What some may not know is that wealth-inequality is relatively high in Sweden. The top one percent own around 35% of wealth in the United States. In Sweden, because of extensive tax evasion, the number is harder to calculate. When including estimates of wealth held outside of Sweden Roine and Waldenström estimate that the top one percent richest Swedes own 25-40% of total wealth, not far from American inequality levels, and increasing more rappidly.

At the same time, the intergenerational mobility of top wealth is chokingly low. A recent study found that a astonishing 80-90% of inequality of top wealth is transmitted to the next generation in Sweden!

According to one study the share of the richest Swedes who inherited their wealth is around, 2/3 with 1/3 being entrepreneurs, while in the United States it was the opposite, with 1/3 of the wealthiest inherited their wealth while around 2/3 are entrepreneurs.

Thus while the Swedish middle class is large and has a compressed earning distribution, at the very top you have a small number of aristocratic families controlling much of the wealth. Mobility into this group is rare, probably rares than it is in the United States. One reason are stronger informal class-barriers, merely earning wealth is not enough to be accepted a member of the aristocratic upper-class. Another more interesting reason may be the unintended effect of welfare-state economic policies.

During the era of Social Democratic dominance, they wondered how to deal with wealth inequality. The dilemma facing the Social Democrats was this: The upper-class business families did a very good job managing Swedish export industry, the key to Sweden’s wealth. This is especially true for the Wallenberg family, the leading industrial family in Sweden, controlling amongst others ABB, Ericsson, Electrolux, Atlas Copco, SKF, AstraZeneca and Saab and doing an excellent job.

The Social Democrats decided to accept the unequal distribution of assets, but simply make these assets worth less using punitive high tax rates. Because of high inflation capital taxes were often 80-100%.

The upper-class families still owned most of private industry, but because of taxes those assets were simply not worth much. Paradoxically the high taxes and capital regulations which prevented foreign investments seem to have helped freeze the asset distribution into place, with the share of wealth owned by the rich being fairly constant between 1970 to the 1990s.

Though Sweden was historically a country with a high rate of entrepreneurship, the economic policy of this era made it extremely difficult to build new wealth. Of the largest firms in Sweden’s only a couple were founded after 1970. Needless to say this reduces reducing mobility into the upper-classes. Meanwhile the combination of generous pension and high income tax rates reduces the incentives of the middle class to accumulate capital.

Eventually,  free market ideas became popular in Sweden. This led to reduced tax rates, better business climate and abolished capital constraints. The result was that the hitherto depressed assets exploded in value. Between 1980-2000 Stockholm stock exchange increased by a factor of 56! Real estate values in affluent areas of Sweden also increased. Who owned those assets? Largely the upper-class.

For reasons that I do not fully understand (perhaps fear of the rich moving their wealth), Sweden has continued to lower tax rates for the already rich, while keeping taxes on new wealth through work or entrepreneurship high. In 2005 the left abolished the inheritance tax entirely. This means that today the top tax rate for someone who inherits wealth is 0%, and the tax rate for someone who creates new wealth by building a new company 67%.

The Swedish experience shows that the free market is not necessarily the enemy of social mobility. The Social Democrats reduced upward mobility and through work and entrepreneurship, helping to freeze the class society in its place instead of getting fresh blook in. It is not easy to solve wealthy inequality. Perhaps one idea is to re-introduce a reasonable inheritance tax, only for the rich, and use the revenue to lower taxes on entrepreneurs.  


  1. Hi Tino

    I´m not quite certain how the things happening in sweden in the 70íes and 80íes but during this years we had an inflation of ~15% yearly.....and we had and interest rate in accordance....and we also had a full rate deduction from tax and the top tax rate was 85%.....i.e. borrowing 100.000SEK to by a house was of cause expensive BUT the inflation lowered the loan with a factor of 4(@10 years) hence the house which added value according to inflation at the same time increased with the same factor hence in 10 years the house was paid mostly by tax benefits......so what happened was thar most of peoples money at banks was loosing value all the time, and a lot of people had money in that manner, it was the greatest transfer of money between people ever happened in sweden.....firstly the government restricted the loans although banks had the cash...then government realised that this was not sustainable....mostly when all the money at bank accounts was deminished...so the the rate and the inflation etc. was put on a much lower rate....pls use if useful!

  2. Hence the observation that the progressive income tax appears to have been created by the extremely wealthy as a barrier to entry into the ranks of the extremely wealthy by upstarts.

  3. "Despite long Social Democratic dominance they [i.e., the wealthy bourgeois and the nobility] remain a coherent social group, with a distinct and recognizable accent, way of dressing, values etc."

    I wouldn't know, but are you sure this is the case? A lifelong Swede, I've never thought of Sweden as a class society. Certainly, in the media, it's popular to portray it as such, but it just doesn't "feel" right.

  4. Bert:

    One of the characteristics of the Swedish upper class is that they are tiny as a share of the population, and concentrated in Stockholm. This has been true historically. So sure, in day-to-day life you will probably not run into them, unless you live in Östermalm.

    They are however hard to ignore in finance or corporate sector or politics, since they control much of the firms.

    In my experience people who say Sweden is not a class society are upper-middle class (I also didn’t come to this conclusion based on private life experience, but on a more abstract level looking at studies and data). The working class is aware of the remaining elements of class society, and so are the upper classes.

  5. P.S

    More data on wealth distribution in various countries in this paper.


  6. Excellent. I fear the same dynamics are growing in play in the US. My biggest pet peeve is when people conflate high earners with wealth. You do a good job of pointing out that elites in Sweden that are already wealthy have a marginal tax rate 0% if they inherit their wealth but pay 67% if they have to earn their way. It kills off a lot of incentives and motivation

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  8. I am by birth a member of the Swedish upper class, albeit I've chosen to spend my life mostly in partibus infidelium, and I think this article is pretty much spot-on. As a child I'd sit at the breakfast table with my grandmother reading the DN or SD and, for every other name mentioned, she would point out how the person was a a cousin, a friend of the family, a friend of a cousion, or the cousin of a friend.

  9. That paper is ludicrous to indicate 33% of the wealthiest Americans inherited their wealth, it's somewhere just below 10%.

    One trick they play is take a young entrepreneur who inherited $1m, but then used it to build a $500m business. Academics that want everyone to scream 'unfair lucky sperm club!' will classify him as having inherited his wealth, rather than as having made it through hard work and intelligence.

    Buffett and Gates both came from rich and successful families but classifying them as rich from 'inheritance' we'd all agree is absurd.

  10. Buffet and Bill Gates are *not* defined as inherited, both are defined as "self-made". Forbes list is pretty common-sensical and will define you as "self-made" if you grew a couple of million to a billion or more. Even Rupert Murdock is defined as "self-made", thought he inherited his first paper.

    You are missinformed if you think only 10% of American billionaires inherited their wealth.

    Many billionaires are kin to the previous generation of entrepreneurs. The top 10 list of the richest American contains 4 Walton's (heir to the Wal-Mart fortune).

    33% inherited is low compared to most other countries.

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