stable framework for the subsequent process of industrialisation. it is just this stability in the fundamental conditions for economic activities that was no doubt important for the process that resulted in the industrial revolution, which in itself was full of commercial risks and uncertainties. improvement in opportunities for change but … a similar gloss can be applied to the realignment of economic policy from the second half of the 1980s to the middle of the 1990s. there have been a number of reforms aimed at creating stability and opportunities. the credit and currency markets have been deregulated, components of the social security system have been reformed, a tax reform has been implemented, targets have been established for government finances, price stability is enshrined in law and the riksbank has been given an independent status. all this represents good possibilities of the swedish economy facing a stable future as we step over the threshold to a new millennium. the question is, however, whether the new information technology will be implemented in the far - reaching ways that are necessary in order to reap the really large benefits. let us look at another period in sweden ’ s economic history when things did not go quite as well. after world war ii, when activity in the industrialised countries recovered and competition grew, partly because trade barriers were lowered, it became necessary to realign production in sweden. the need for change resembled what we are beginning to discern on the horizon today. for much of this post - war period, however, wage costs rose at a rapid rate. profitability in swedish business was accordingly under pressure from two fronts : growing competition from the rest of the world and rising wage costs. firms countered the pressure on profits by rationalising in an attempt to cut production costs rather than by investing in new products. the diminishing profits simply did not provide the stimulus that was needed for a prompt renewal of the capital stock in response to the pressure for change. a process of change involves shedding, but development is equally important. most things still looked good to begin with. the 1960s was a fantastic decade for growth. but the strategy proved to be defensive and stagnation set in during the 1970s. rationalisation has its limits as a means for growth. without renewal, growth normally slows sooner or later. measures are called for in periods of growth but it is easy to be deceived and lean back to enjoy the fruits. the long - term growth trend did indeed begin to turn downwards more markedly than in other countries. economic policy responded

an average share portfolio is equivalent to around thirty times the annual earnings. the ratio in the united states is even higher, around 35 ( fig. 2 ). price - earnings ratio for sweden and usa affarsvarlden general index and s & p 500 s & p 500 average for 1871 - 1999 note : exceptionally high p / e ratios for sweden in 1992 and 1993 are not shown here sources : global financial data and statistics sweden although long series for the stockholm exchange ’ s p / e ratio are hard to find, it is hardly controversial to say that the present level is well above the historical average. the deviation of share prices from the fundamental conditions that have applied historically is even clearer after a look at the path of real trends in us shares s & p 500, average annual percentage change total real return real share price real earnings / share 1940 - 1981 1982 - 1999 note. averages calculated as geometric mean. somewhat different results may be obtained with an arithmetic mean, an estimated time trend or another base year, but the results still support the conclusion that the earnings trend in recent years is not markedly higher than for the entire post - world war two era. source : global financial data earnings. in the united states the real earnings trend since 1940 has been virtually constant between 2 % and 3 %, while - as i just mentioned - the real return on shares shows a trend break after 1982 ( fig. 3 ). 2 are present share prices fundamentally justifiable? i shall now use a simple model to examine whether the present level of share prices can be justified in fundamental terms. 3 simplifying somewhat, this model equates the value of a share with the present value of the future income the share is expected to generate. a valuation in p / e terms accordingly rests on the assumptions that are made about these future incomes - the future growth of the company ’ s earnings - and the factor by which these incomes are discounted - the stock market ’ s expected return. we can insert alternative values for these assumptions to find the combinations that might justify different p / e ratios ( fig. 4 ). it will be seen that a p / e ratio of 14 can be warranted if the expected real return is 6 % and the real growth of earnings averages 2. 5 %. these figures are all approximately in line with the historical trends. p / e ratios with different combinations of earnings growth & expected return earning earnin s growth % gs expected return % 4. 5 4. 0