Review of Björn Wahlroos

This review was originally published in Swedish on the website Frihetssmedjan in June 2015. Björn Wahlroos is a well-known figure in the Scandinavian finance sector, as a chairman of Nordea, the 9th largest European bank by market cap and Sampo, the holding company of IF (the largest Insurance company in Sweden). He has a Ph.D in Economics and used to teach at Brown University, Northwestern University and Hanken School of Economics in Helsinki, Finland. To my knowledge the book has not been translated from Swedish, and so those curious about Wahlroos may have to learn a new language beforehand.


Summary: Wahlroos has produced an impressive critique of the economic myths most prevalent in contemporary politics. The book is powerful yet comprehensive, and turns self-evident “truths” in the political world upside-down. It is hard to see how left-wing economics can reasonably remain standing after this vicious attack.
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When Björn Wahlroos recently released his book, De 10 Sämsta Ekonomiska Teorierna – Från Keynes till Piketty [Eng: The 10 Worst Economic Theories – From Keynes to Piketty] he received much attention in various Scandinavian media, especially when he called the economist Piketty’s celebrated book about inequality “700 pages of unqualified garbage”, and before that argued that 80% of people are idiots. The book itself has received much positive response and is a fresh element in an otherwise quite rigid politic landscape with respect to economic matters.

Despite the fact that Wahlroos explicitly tried to write without too much economic jargon requiring an economics degree simply to decipher the meaning of the text, a few of his chapters falls pray to precisely this impulse. The best and most controversial chapters, however, are largely free of the diagrams, the confused equations or weird words and symbols that otherwise dominate mathematical economics.

Among the ten myths that Wahlroos so brilliantly attacks we find the climate movement’s hatred towards capitalism (the chapter titles express the myths: “Capitalism exploits natural resources”), left-wing economists’ indignation towards cutbacks in public spending (“Austerity kills economic growth” & “Higher taxes reduces deficits”) as well as the efficient market hypothesis.

The best of Wahlroos stinging and systemic critique of left-wing economics is more appropriately targeted toward the inequality crowd of recent years: Piketty, Stiglitz, Krugman and Wilkinson & Pickett. Nobody who listened to Wahlroos’ Sommarprat 2014 (popular Swedish radio program) will be surprised that he sincerely despises Piketty for the academic and conceptual failures of his work.

For obvious reasons, Wahlroos spends much time in explaining the mistakes in Keynes’ writing that during the 1930s revolutionised economics and public policy. Wahlroos vividly shows how the most basic Keynesian trick, the multiplier (where governmental deficit-spending creates more economic output than its own initial borrowing), is an incorrect con trick that sounds superficially plausible. Instead, Wahlroos describes it as:

The core of the Keynesian magic, like feeding five-thousand hungry believers with five tiny loaves of bread and two fish. (pp. 25-26)

As even followers of Keynes have admitted over the years, the entire argument hinges on the unbelievable assumption that wages and prices do not react according to changes in aggregate demand. Furthermore, Wahlroos shows that empirically the multiplier surpasses 1 “only in the very short run, and can in the longer run fall substantially below 1” (p. 40). That is, an extra government spending of £100 billion translates into around £100 billion in economic output – not £150, £200 or £250 billion that standard Keynesian economics would have you believe. This is fairly self-evident, Wahlroos claims, since even if there is unemployment or spare capacity in the economy, additional demand does not mean that those particular resources will come into use. It could very well be the case that additional spending attracts resources away from other activities and worthwhile endeavours (especially outside the economic sphere such as leisure, exercise or creative activities), and unemployed resources (humans or machines) may face difficulties in moving towards the geographical space in which they are needed or demanded; high government benefits and the value of leisure can also mean that other things than fulfilling Keynes’ magic may be prioritised by potential employees:

As any employer knows, unemployment hardly ever means a reserve [army?] of knowledgeable and competent workers, who could instantly be put into work in relevant business projects. Unemployment can be regional and reflect the fact that employees don’t want to leave their homes and communities and friends in order to follow the capital to the most attractive locations, wherever they may be. Unemployment can also reflect a mismatch between the competency and education of the available work force and the demands required by the projects in question. (pp. 37-38)

The modern market economy is simply not a rigid machine, incapable of rational re-adjustments to demand chocks, like the one Keynes had in mind. (p. 45-46)

When it comes to inequality of income, Wahlroos is even more brutal. Systematically he reveals the data problems in Wilkinson & Picketts best-seller The Spirit Level (which means that their infamous correlations no longer hold), he criticises Stiglitz for a lack of understanding the significance of investment in regards to future economic growth, since rich people’s capital allows societies to benefit from fantastic inventions and technological progress. As he succinctly puts it:

We desperately need the savings and investments of the wealthy and the successful. (p. 122)

For obvious reasons, Piketty receives much more attention. Wahlroos briefly mentions Chris Giles devastating critique against Piketty’s empirical work, before he points out that Piketty forgot to mention that the biggest change in relative incomes is global; it is hard to accept Piketty’s conclusions about a growing inequality crisis when we, in 35 years, went from a world in which the average American was 20 times richer than the average Chinese, to a world in which the average American is only 5 times richer than the average Chinese:

Piketty seems indifferent between absolute wealth and income levels. The only thing that interests him is how much more well-off the wealthiest are […] But people live and thrive on absolute incomes, not relative incomes […] and even John Rawls’ difference principle says that differences in income are acceptable insofar as they improve the lives of those worst off. (p. 138)

Wahlroos’ expertise, however, lies in the financial sector, where Piketty’s claims are especially mistaken. Piketty’s famous thesis is that if the rate at which capital earns interest, (r), is higher than the growth of the economy, (g), capitalists will receive an ever-larger share of the economy. This, Wahlroos objects, doesn’t hold once we take risk and uncertainty into consideration:

Piketty would have us believe that r was simply deposited in the capitalists’ account at the end of the year, when in reality the average return on an asset varies with the amount of risk associated with that investment. With no exposure to risk, the capitalists could earn perhaps 1%. The rest of an expected return of 5% is compensation for accepting that the return can be anything between +30% and -20%.

But the average capitalist still earns 4% more than the workers, Piketty says, and he’s right. But the point is that not all capitalists do. Some – those who are either lucky or knowledgeable – will make much more, while others go bankrupt. To make more than 1% they who are still in the game have to enter the race next year, taking the same risks, and again some will win while others will lose.

After comparing risk-free return on several different markets, in Europe, the U.S. and Asia, Wahlroos finds that “the risk-free return was not higher than the economic growth, but substantially lower” (p. 140).

Towards the end, Wahlroos brings up Piketty’s troubling neglect of human capital, i.e. the skillset and knowledge that we have in our minds. As many others have pointed out, McCloskey, Mankiw and Magness included, Wahlroos argues that the change in income distribution over the last few decades reflect a higher return to human capital as well as a globalised world; when the creations of Steve Jobs, J.K. Rowling and Spielberg can be seen and experienced by billions rather than millions of people, any other development than a widening income distribution would be strange.

This was just an extract of all the grandeur contained in Wahlroos’ book. It’s an absolute must-read for anyone who wants to understand what’s wrong with today’s political discussion about economics, and who wants to disprove the left’s attempt at economic theory. A perfect summertime read that will guarantee much joy and revelation.