Sweden in 1850 as an “Impoverished Sophisticate”: Comment

Abstract

Lars G. Sandberg has twice in this JOURNAL described Sweden in the middle of the nineteenth century as an impoverished sophisticate, whose institutions and stock of human capital were well in advance of its income per capita as compared with other countries in Continental Europe.' The- term impoverished sophisticate may be questioned for the adjective, which suggests a dynamic process of falling income, whereas prior to 1850 Swedish income was not growing rapidly as it was in later decades, but had been sustained by the introduction of the potato. This note is directed, however, to the question of the sophistication of Swedish financial institutions, prior to the rapid development of banking in all countries of Europe in the 1850s and 1860s. I have no question on education or literacy. Sandberg is sometimes hesitant to be precise as to whether he is characterizing Sweden as sophisticated in 1850 or 1870.2 There can be no dispute about the latter date. Rapid export-led growth in the 1850s and 1860s contributed vigorous stimulation to the founding of credit institutions, beginning with the Stockholms Enskilda Bank in 1856 and continuing with the joint stock banks of the early 1860s. The issue for 1850 is of moment because of the Coase theorem, which maintains that institutions spring into place as needed.3 There can of course be institutional borrowing in advance of demand, notably in political science where constitution-writing patterned after other countries and bicameral legislatures have sprung up early in newly independent countries, and even in finance where Kemmerers, H. Parker Willises, and Triffins have produced central banks in many countries in advance of the country's capacity for its effective use. The demonstration effect in consumption, first noted perhaps by Ragnar Nurkse, is familiar. But financial innovation in advance of need on a wide front would constitute, along with the lag postulated by the school of institutionalists, a counter example to the Coase theorem. Designation of Sweden in 1850 as sophisticated raises a question primarily because so many writers on the subject take the view that the Swedish banking and credit system prior to 1850 was antiquated. Heckscher, for example, finds it illuminating that when banks appeared they were likely to seek the assistance of the trading houses, rather than vice versa. He goes on to say that Swedish trading houses were far inferior to the leading houses in the principal countries of Europe.4 Joint-stock companies were not accepted