The 'Third Way' Revisited. A Revaluation of the Swedish Model in the Light of Modern Economics.

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 model’s economic and wage policy represents a unique third way between keynesianism and monetarism in its approach to combine full employment and growth with price stability and equity. This essay describes the content and economic foundation of the Rehn-Meidner model and evaluates its validity in the light of later theoretical and empirical work. With some exceptions, the model is either in harmony with or a serious challenge to current thinking about employment, inflation and growth. The model’s main contribution to economics is its dynamic description of wage formation, giving room for both competitive forces, X-inefficient firms and wage setting phenomena such as relative wage preferences, labour market policy and a wage policy of fairness. The model also makes a valuable contribution to modern growth economics by incorporating the idea that structural change and company productivity can be promoted by profit squeezes induced by wage and economic policy.