The Economics and Politics of Social Democracy: A Reconsideration

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Yves here. This history of the decline of social democracy comes from a vantage that might strike readers as novel: that of economic policy and how that played out in politics.

By Servaas Storm, Senior Lecturer of Economics, Delft University of Technology. Originally published at the Institute for New Economic Thinking website

Social democracy, the political force that shaped post-1945 Western Europe more than any other political movement, is in terminal decline—or so it appears. In recent years, in European country after country, voter support for social-democratic parties has collapsed. In France, Greece and the Netherlands social democrats hold less than 10 percent of the seats in parliament. In Germany and Italy, social-democratic parties are at a historic low. Britain’s Labour Party’s last electoral win dates back to 2005— half a generation ago. The result has been a remarkable, steady decline in the political relevance and influence of Europe’s social-democratic parties. The long-run decline of electoral support for social democracy reflects a failure of social-democratic parties in Europe to strike a convincing and effective balance between ‘short-term practical relevance’ and ‘progressive, egalitarian reformism’ (Bhaduri 1993). This paper argues that this failure originates in a flawed macroeconomic thinking.

Short-term practical relevance requires social democracy to accept, at least partly, the very socio-economic and political conditions of ‘really-existing capitalism’ which it purports to change in the longer run. Once social democrats chose to work within the rules of capitalism, they had to abandon their radical goal of systemic transformation and commit themselves to maintain private property in the means of production. After all, the capitalist class has the power to block any egalitarian transformation of the property-rights and economic system by sharply reducing firm investment, which, in turn, reduces demand and employment in the short run and has negative impacts on long-run growth as well. Hence, working within the capitalist system creates an inescapable dilemma for social democracy: its policies must at the same time strengthen the productive power of capital and counteract the (political) power of capitalists. Through the state, social democrats had to assure capitalism’s efficiency and the growth of its productive capabilities, while at the same time mitigating adverse distributional effects.

Phase I (1950-1975): Co-Operative Capitalism, Partly Enabled by ‘Wage-Led’ Demand

The Keynesian revolution in macroeconomics led to a drastic reorientation of European social democratic thinking: away from the revolutionary ‘nationalization of the means of production’ to the ‘nationalization of consumption’, as Swedish economist Bertil Ohlin (1938) put it. Reformism was abandoned—and capitalism accepted—on the condition that it be regulated and disciplined by the state, without any need to socialize the means of production. Social democrats developed a full-fledged ideology of the ‘welfare state’, as the means to nationalize consumption and bring about mass-consumption-driven economic expansion. Thus, during the 1950s and 1960s, Keynesian demand management helped sustain a full employment regime, which featured high real wage growth, shortening of the working week, and the build-up of welfare states. What was critical is that the high wage growth, the shortening of the working week and welfare-state expansion did not hurt the profitability of firms. To the contrary, the ‘golden age of co-operative capitalism’ managed to avoid a profit squeeze, because of four factors which more than offset the negative impact of higher wages on the profit rate.

First, aggregate demand was ‘wage-led’ (Bhaduri and Marglin 1990), which meant that higher wages led to higher demand and hence to higher capacity utilization; higher capacity utilization raised the profit rate of firms. Second, the pressure of high wages on the profit rate was reduced, because higher demand and higher utilization led to higher labour productivity through the Kaldor-Verdoorn relation. The third factor was that high wages were supported by fiscal policy intended to keep the economy (and utilization) close to full employment. The fourth and final factor was the high growth of world trade, enabled by the Bretton Woods system of stable exchange rates, and the restrictions imposed on cross-border capital mobility in most economies. Full-employment-oriented fiscal policy was the key ingredient, because it made possible (and stabilized) high productivity growth and hence high wage growth, helped by the overall wage-led nature of demand. Taken together, the four factors safeguarded adequate profit rates for firms, and thus offered a solution to the dilemma facing European social democracy.

The co-operative compromise unravelled in response to the ‘stagflation’ of the 1970s. The reason for the breakdown was more political than economic: decades of (near) full employment had unleashed, as Michaɬ Kalecki (1943) warned, forces which directly threatened the authority structure of capitalism—forces which became manifest in growing wage pressure, heightened worker militancy, calls for more redistribution, and growing demands for a radical democratization of society, the economy and the workplace. The breakdown of the Bretton Woods system in 1971 added further fuel to stagflation, leading to heightened uncertainty for exporters, competitive exchange rate devaluations (triggered by the devaluation of the U.S. dollar), a slowing down of world trade growth, two oil-price shocks, and import-cost inflation (Halevi 2019). Demand growth declined, which in turn depressed productivity growth—and this drove up the wage share even more. The ‘indiscipline’ of workers, the collapse of the Bretton Woods order, and the consequent ‘profit squeeze’ led governments to implement structural policy reform aimed at improving the ‘climate’ for private investment and finance.

Phase II (1975-End of 1980s): Co-Operative Capitalism With ‘Profit-Led’ Demand

The collapse of wage-led growth and the crisis of stagflation brought back, with a vengeance, the dilemma of social democracy—in a profit-led system, profits must be protected from demand of the masses, because if profits are not ‘sufficient’, then eventually wages and/or employment must decline. Reviving private investment became the focal point of a new wave of conservatism, which, championed by British Prime Minister Margaret Thatcher and U.S. President Ronald Reagan, centred on wage moderation, monetarist inflation control (instead of full-employment-oriented fiscal policy), the deregulation of labour and financial markets, privatization, (corporate) tax reductions, globalization and (accompanying) military build ups, and the scaling down of ‘nanny’ welfare states (Halevi 2019).

The stagflation seemed to prove that in an open profit-led economy, full employment demand management and radical redistributive policies are not in the material interest of wage-earners, because they result in high wages and poor international cost competitiveness, and therefore low profitability, sluggish investment and stagnation. Some social democrats internalized this lesson quickly. West-German Bundeskanzler Helmut Schmidt (1976), a leading European social democrat, articulated it in Le Monde as follows: “The profits of enterprises today are the investments of tomorrow, and the investments of tomorrow are the employment of the day after.” Other social democrats needed more time—Francois Mitterand, the social-democratic President of France, who was elected on the promise of Keynesian demand stimulus, capitulated only in 1981-83 after bond and currency markets started to protest against his – half-hearted – fiscal stimulus.

Schmidt’s argument won the day and became the cornerstone of the post-1970s social democratic consent of capitalism. Perhaps the clearest expression of this reorientation of social democracy within the EU is the Dutch ‘Polder Model’ consensus on strict real wage restraint. Dutch real wage growth was kept below productivity growth, which raised the profit share and lowered Dutch relative unit labour cost. Dutch unemployment declined steeply in the 1980s and 1990s, exactly when unemployment in other E.U. countries remained high or even increased. This way, the Dutch social democrats set the example to emulate, and from the late 1980s onwards, their European comrades followed suit, choosing to co-operate to reproduce capitalism and rather drastically tone down whatever was left of their initial reformist intentions. However, social democratic consent was still based on the common understanding that aggregate demand mattered for profits and investment. Keynesianism was not dead yet. Social democrats could continue to argue in favour of fiscal stabilization, (decent) minimum wages, collective wage bargaining, and welfare-state support for the unemployed, the disadvantaged and the elderly, because these ‘Keynesian’ interventions could be argued to contribute to stabilizing aggregate demand and protecting the profit rate. ‘We are all Keynesians now’, captured the mood in this period.

Phase III (early 1990s – Now): Final Surrender to TINA

Social democracy’s compromise with ‘profit-led’ capitalism broke down in the early 1990s, under the impacts of two powerful forces. The first one was the collapse of communism in the Soviet Union and much of Eastern Europe. The collapse of communism deprived European social democracy from its ideological ‘doppelgänger’ and left it with nothing distinctive to offer, except its “exhausted language” (Judt 2010). The second force to undermine the compromise of the 1980s, no less important than the first, was the demise of Keynesianism. The victory of Thatcher-Reagan conservatism might not have happened, as Tony Judt (2010) argued, without a supporting intellectual revolution—one which succeeded in overthrowing the Keynesian consensus and turning ‘government’ into the problem, rather than the solution. This is the essence of the neoliberal turn in Europe’s political formation: rather than entrusting the state, or the ‘Staatsvolk’ in Wolfgang Streeck’s (2016) terminology, with the task to stabilize the unstable capitalist economy, the new conservatism relegated to deregulated (financial) markets, or Streeck’s ‘Marktvolk’, the task to maintain the stability of the social and political order.

In macroeconomics, the ‘intellectual revolution’ gave birth to the New Consensus Macroeconomics (NCM) in the 1980s. NCM rejected Keynesianism by arguing that the stagflation of the mid-1970s ‘proved’ that the Phillips-curve trade-off between inflation and unemployment could only exist in the short run, for as long as actors in the economy were wrong about (actual and expected) inflation. In the longer run, once actors had learned from experience and correctly started to anticipate the rate of inflation, the NCM claims that the Phillips Curve is vertical at a given rate of unemployment—the ‘natural’ rate of unemployment, also known as the non-accelerating inflation rate of unemployment (NAIRU).

Accordingly, monetary policy could only affect the unemployment-inflation trade-off in the short run, but economic activity could not deviate from its ‘natural’ level, as determined by the NAIRU, in the long run. Likewise, fiscal policy cannot have permanent, long-run, impacts without causing unmanageable accelerating inflation, which would force the central bank to increase the interest rate. Higher interest rates would, in turn, crowd out private-sector investment—and unemployment would converge back to the NAIRU. There is, in this approach, only one way to structurally raise growth and permanently reduce unemployment in a non-inflationary manner, namely imposing structural reforms on the labour market, which lower the NAIRU. This way, the NCM created the governing myth that governments and central banks should refrain from intervening actively, using fiscal and/or monetary policy instruments, to smooth short-run fluctuations or to steer the economy, but rather concentrate on creating the structural conditions for deregulated (labour) markets to grind out the ‘natural’ long-run equilibrium.

The NCM has one profound policy message, which constitutes a radical denial of the promise of Keynesian demand management in a wage-led economy: macro-economic policy faces an inescapable trade-off between ‘growth’ (or ‘efficiency’) and ‘equality’. What it means in common parlance is that any policy intervention to reduce inequality, for instance by means of labour market regulation and welfare-state redistribution, carries a welfare cost, because it raises the NAIRU and hence must lower growth. Vice versa, any attempt to permanently raise economic growth means lowering the NAIRU by deregulating the labour market and downsizing the welfare state—which must raise inequality. Andrew Glyn (2006) appropriately called it the ‘Nasty Trade-Off’ between higher wages and more jobs—or, more generally, between economic growth and egalitarianism.

The death of Keynesianism left it clueless and without any effective policy levers to counteract the power of capitalists. The ideological emptiness created by the collapse of communism and the demise of Keynesianism in favour of NCM was filled by ‘Third Way’ pragmatic compromising, strategic rebranding and technological tinkering. The defining feature of New Labour of the ‘Third Way’ variety is its complete internalization of the idea that the ‘Nasty Trade-Off” really exists. As a result, New Labour discarded fiscal policy activism in favour of rule-based fiscal austerity, supported the independence of central banks (in effect, handing over the levers of monetary policy to unelected and democratically unaccountable technocrats), completely submitted to ‘reactionary’ financial interests (of the ‘Marktvolk’) by endorsing central-bank inflation targeting and deregulation of financial markets, and, in doing so, lost all sense of shared purpose. Peter Mandelson’s statement that “we are all Thatcherites” captures the new mood perfectly.

In the U.K., Tony Blair’s ‘Third Way’ economic policies intended to create a business- and finance-friendly economic environment (Osler 2002)—by means of the (semi-) privatization of public services, social dumping to attract foreign investors, tax cuts for the rich and social-benefit cuts for the (undeserving) poor, opting out of the European social charter, unconditional support for financial globalization, harsh law & order policies and deregulation of labour and financial markets, while turning a blind eye on rising income and wealth inequality.

But it is not just Britain’s New Labour. In the 1990s, it was widely felt that European social democracy needed a modern makeover, in order to become more market-friendly. As a result, social democracy became a conservative force, both politically and economically, in France, Germany, the Netherlands and Italy—and most governments adopted the strategy of blaming the EU and Brussels for unpopular policy reforms, which they themselves were (covertly) favouring. Labour law reforms such as the Hartz reforms by the Schröder government in Germany but also elsewhere, created a larger ‘disposable’ labour force, a flexible reserve army of the under-employed, and through this, raised (income, wealth and job) inequality in Europe.

The Economic Consequences of New Labour

New Labour’s compromise did succeed in reducing unemployment in Europe, but it rather spectacularly failed to improve overall macroeconomic performance. Real GDP growth continued its secular stagnation—notwithstanding the structural reforms introduced on New Labour’s brief. The reason for the growth slowdown is ironic: as is shown by study after study, aggregate demand in these six economies is robustly ‘wage-led’. This means that the New Labour strategy of wage restraint and structural reform, coupled with strict rule-based fiscal austerity (Storm 2019), which was meant to reduce the NAIRU, raise the profit rate and push up utilization, backfired. The reason: it did reduce demand and utilization and hurt both the profit rate and investment. To paraphrase Mark Twain, the report of the death of Keynesianism seems to have been an exaggeration.

But the macroeconomic damage done is larger. The labour market deregulation and supply-side measures which pushed more people into the labour market were, as noted above, successful: unemployment came down and labour force participation went up, which was exactly the intention. However, it is impossible to read this as (social and/or emancipatory) progress—because what it reflects on the ground is the growth of low-productivity, low-pay, generally temporary ‘alternative working arrangements’, mostly in private services industries—arrangements which in post-Schröder Germany are often ‘mini-jobs’, in Italy are all fixed-term contracts and in the Netherlands most often mean temporary self-employment. And at the macro level, the slowdown of economic growth and the increase in employment growth imply, when taken together, a decline in labour productivity growth.

This slowdown of productivity growth puts welfare states under growing fiscal pressure. The stagnation of wage-led aggregate demand and the growing job and income insecurity, characteristic of the New Labour compromise, helped to undermine its political legitimacy. The rapid growth of deregulated financial markets provided policymakers with an opportunity to defer this threat by enabling a strong growth of private borrowing, by households and firms, to keep ‘the show going’ by sustaining demand. Crouch (2009) calls it ‘privatised Keynesianism,’ and its defining feature is the dramatic increase in the system’s reliance on household and corporate debt to defer distributional conflicts and continue to meet the electorate’s welfare expectations.

The failed New Labour compromise has caused political damage as well. First, big parts of social democracy’s core constituency have defected to either the more extreme Left movement or to (extreme) right-wing populist parties. There is a growing polarization in the polity—with growth on the far left and even more on the far right. In Italy, France and the U.K., this polarization has already seriously destabilized the established political system—to (as yet) unknown effect. Germany, the Netherlands and Sweden each have seen not just growing right-wing populism, but also a considerable shift of the political centre and ‘accepted political discourse’ to the right. Governing is becoming increasingly difficult under these polarized conditions. The other form of damage comes in more subtle ways: growing (income and wealth) inequalities have made class and status divisions more powerful, have considerably reduced (upward) social mobility, and strengthened residential segregation and segregation in education (Wilkinson and Pickett 2019). In contrast, in more equal societies, citizens trust each other, there is a greater willingness to help each other, and general attitudes to the social welfare state and taxation are more positive. Adam Smith (1776/1976, p. 88) put it like this: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” As inequality rises, all this goes in reverse. Seen this way, the recent collapse in support for social democracy is a largely self-inflicted wound—and unprecedented act of self-destruction.

What Is To Be Done?

What sort of political-economy framework can the Left propose to explain its objectives and justify its goals? For a start, social democrats should discard the now discredited NCM thinking, and draw the right lesson from Keynes, namely that capitalism is inherently unstable and needs to be ‘wisely managed’ in order to become more efficient. Markets turned out to be ‘bad masters’, and now have to be turned into ‘good servants’. We need social and political organization to impose stability on unruly markets, including through imposing cross-border capital controls (when and where necessary). Social democrats also have to understand that it makes no sense to let financial markets determine the fiscal capacity of the state—this is a fundamentally political decision which involves matching society’s levels of taxation to its social (spending) ambitions and deciding on how to finance a public deficit (in case it arises). This is not a plea for Big States, nor for maximum monetary financing, but rather for meaningful deliberative democracy in which citizens have a say in politics when and where it matters most. It is a firm plea against the de-politicization of fiscal and monetary policy as well as against the corrupting influence of political money on democracy—which should have been obvious to social-democrats anyway.

Second, social democrats must reject the ideology of the ‘Nasty Trade-Off’ for what it is: a conservative fantasy. In the European economies, higher wages and progressive income redistribution do indeed improve macro-economic performance and benefit both workers and firms, especially when supported by aggregate demand management. Social democrats ought to stand for both fair real wage increases and a credible commitment in macroeconomic policymaking to full employment (rather than low inflation)—demands which do not conflict with productivity growth and profitability (if properly managed). Likewise, welfare states and protective labour market institutions must not be considered a cost and a drain, but rather constitute efficient frameworks which by helping nations to share the costs and benefits of globalization and technological progress, make firms more flexible and raise their international competitiveness. The above is by no means a covert defensive call for a return to an idealized past (e.g. the ‘golden age’), but instead it is an evidence-based diagnosis of where we are and how we got there and a recognition that there are alternatives to Thatcherism. Capitalism needs to be managed, and if citizens do not do it (through the political process) than ‘superstar’ firms, big banks, big-tech companies and billionaires will do it for us.

However, any reimagined social democracy worth the name must begin by imposing discipline on banks and financial markets—and by domestication, turn them from the powerful over-lords (who they currently are) into useful servants to the societal interest. This, in turn, requires a counter-revolution in economic thinking, one which overthrows the NCM in favour of more realistic (less utopian) and more humane approaches. NCM must be seen for what it is: stale nineteenth-century pre-Keynesian thinking, a parody of an accountant’s nightmare, in John Maynard Keynes’ (1933) words.

The global recession caused by the COVID-19 lockdown is making such a counter-revolution in economic thinking only more urgent. The current panicky ‘emergency Keynesianism’ which is upending decades of ruthless austerity in Britain, France, Germany and elsewhere does not come close to what is needed. Yes, governments will be paying “for the war against COVID-19” by taking on much more debt, but once the crisis is over, higher public indebtedness will turn out to be socially unjust and economically inefficient. After all, the Pavlovian response of politicians and a majority of economists, brainwashed by modern (NCM) macroeconomic theory, is a return to fiscal austerity with a vengeance, on the argument that debts must be repaid, bringing another lost decade of ruthless spending cuts (in public investment) and structural shortages and lowered wages in exactly those services, such as health care, social support and education, which are now deemed ‘essential’ during the health emergency.

A simple and effective, Keynesian and social democratic, alternative to fund the unprecedented public rescue packages would be much higher taxes on wealth, incomes and (rentier) finance. This way, the strongest shoulders will carry the largest burden without corroding and undermining economic growth and public health in the future. The longer-term impact of the COVID-19 recession will be chronically painful, if we do not apply the right lessons learned from earlier crises. While the virus may go away, helped by massive social distancing and the lockdown of the global economy, we must remain alert to the consequences of a longer stay or the arrival of a new mutant. To able to deal with these consequences, our crisis response now should not lock us in into a permanent state of austerity, greater inequality and heightened vulnerability to future health calamities. New-old social democratic solutions are needed more than ever before.

Three comments on this essay can be found here. The first is by Joseph Halevi and Peter Kriesler; the second is by Duncan Foley, and the third is by Thomas Ferguson.

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  1. Thuto

    “You cannot serve two masters” as Jesus said. The political centre is collapsing because the inherent tension of trying to serve an increasingly desperate social constituency and increasingly implacable (and politically powerful) capitalists has had deleterious effects on the standing of social democracy with the populace.

    “Practical” compromises entered into with capital have a way of becoming long term policy straitjackets nigh impossible for countries to extricate themselves from. Such political Faustian bargains have tended to increase the hold and power of capital over the state while muting the voice of the rest of society, and this leads to the socially driven rhetoric of social democrats becoming increasingly hollow, to say nothing of outright dishonest in some cases (depending on where in the election cycle politically expedient promises are made). Social democracy has therefore, and unsurprisingly, lost credibility with its core constituency because the pull of capital on it has proven to be stronger than the pull of the working poor and the downtrodden.

    Covid could be a seminal event resulting in social democracy (re)entering the stage as a viable and more humane alternative to the ravages wrought by cold, market driven, austerity laden systems of governance we’ve seen take hold in many parts of the world.

    1. PlutoniumKun

      Yes – ultimately I think Social Democracy worked for a while because capital saw that it was the best of a range of bad options after the disasters of the mid 20th Century. But it collapsed both for those reasons anticipated by Kalecki, but also because globalisation gave capital the opportunity to arbitrage cheaper labour and alternative markets against their ‘home’ countries and so win their war with organised labour. The rapid unwinding of globalisation which I think Covid is accelerating will I think force capitalists to reconsider their future. I think that on a national level at least, there is an opportunity again to force various interests back to the table and create a more consensus based economy – at least until the next opportunity arises for corporations to run riot.

      One issue I think which does provide an opportunity for a new politics is that Covid has laid bare the differing agendas of various forms of capitalism. Small to medium business people are seeing how large corporations and rentiers are using governments as personal banks to boost their profits at the expense of everyone else. Perhaps that is one sector (traditionally a bedrock of conservative politics in most countries) who might suddenly realise they have more in common with wage earners than they do with Wall Street or Shell or Apple.

      1. Thuto

        Precisely, as capital sloshed around the world in search of yield it pitted countries against each other to win “investment”. “Open for business” became the rallying cry for those countries willing and able to enslave their most desperate citizens in service of global capital. The zeal and fervour thus displayed by a country to give foreign corporations unfettered access to its reserve army of cheap labour became a “competitive advantage” in this competition for investor dollars, as you point, and this had the effect of weakening the bargaining power of social democrats.

        I like the point you make about the shattering of the myth/illusion that capitalism is an all encompassing, shared experience where the interests of enterprises are treated equally. Small and medium enterprises are seeing that, much like healthcare and education have become, capitalism itself is a two-tiered system where the big fish are treated differently to the sardines.

      2. .Tom

        To your last point, PlutoniumKun, the situation at present is less like the old labor vs capital tension and more like (idk) concentrated capital vs everyone else. Given that one side in this has power over politics, policy and media and the other side is constantly at war with itself over other topics (guns, public toilets, Russia…) I’m not sure how it will get its argument together.

  2. David

    This goes back to the fundamental disputes before the First World War, such as that between Proudhon and Jaurès, about whether a peaceful and democratic transition to socialism was actually possible. Jaurès was one of those who did (he was assassinated, which is a data point of its own). Social Democracy, which dates ultimately from that era, is the belief that a socialist society (or at least a society with elements of socialism) can be introduced through the ballot-box, and that the forces of finance, being decent people, will stand aside and let it happen. By the 1980s it had become clear that the was hopelessly naive, and the Social Democrats had a choice between putting up a struggle (through general strikes, or emergency laws if they were in government ) or giving up. They ran away, and the rest, until recently, was history.
    There are now no socialist parties with the mass membership and more importantly the will to profit from the current situation. In some countries, the forces of the radical (not traditional) Right may be able to do so, since they have the organisation and the ruthlessness to act. The social democrats have become simply apologists for the status quo.
    It may be that what the virus will do is essentially the destructive work that might otherwise be accomplished by war and revolution. (What’s happening to banks at the moment is not pretty). But it’s practically a definition of the political Left that it fails to see opportunities, and that if it sees them it fails to exploit them.

    1. m sam

      But it’s practically a definition of the political Left that it fails to see opportunities, and that if it sees them it fails to exploit them.

      Yes. The grim fact is there is no left capable of exploiting such opportunities. What is the best that can be mustered? A giant protest where everyone wears funny hats? It really seems like there is a long and difficult road ahead before the left can transform itself into something that can rise to such an occasion.

      1. Amfortas the hippie

        it’s not just that.
        the Right can wear sheets, burn crosses and wave guns around in a threatening manner…even train in the woods with camo and live ammo(I’m from East Texas)….all the while talking openly on FB about violent intent and overthrow.
        Few of them get in any trouble for these often threatening, if not actually violent acts.
        Conversely, let the left get riled up(ie: making signs, talking about non-violence, etc), and the FBI sends in moles and agents sabatteurs, and has troops at the ready, just in case.
        people go to prison for holding a sign or taking pictures or sitting in a tree.
        Because “all the violence is brought by the left”—which is something i’ve heard a million times from righties for most of my life.
        One kind of “Popular Revolt” is considered manageable, if not useful.
        The other, although much less threatening physically, is considered to be of the utmost danger to the Machine.

      2. Anarcissie

        It seems to me that the problem here is that the Left (with exceptions) has tried to take over and use the state, but the principles of the Left — to me, peace, freedom, and equality — are the antithesis of the state’s principles, which are those of the Right: power, authority, rank, private wealth, the military virtues, and so on. In a state, these two sets of principles struggle with one another. The Left usually loses in spite of the attractiveness of its principles, because the principles of the Right are more appropriate for combat. Attempts to synthesize the two do not seem to work, hence the degeneration of social democracy into neoliberalism or fascism.

        1. Bsoder

          One is not going to get equity and equality in a society without first getting justice. Getting justice is not always peaceful. Depending on where you start in time and who define as left’, the left for most of its history hadn’t been peaceful at all. Was the American Revolution right, or a left movement? It depends whether you were American or British. It seems pretty lefty to me. And mind you before, during, and definitely after that war if you didn’t agree you were literally thrown out of the country. The Civil war in Lincoln’s mind started as one thing, forcing slavery back into the original slave states to entirely something else, ‘freeing the slaves’, fairly radical for which he died. I don’t think any if these labels help unless you a poli-sci prof. As a sometime philosophy prof I take issue with the poli-sci guys. There are some who won’t take up arms, but there are plenty that will, all depends what the ‘issue’ is. Clearly, things will not remain as they are.

  3. Dave Whelan

    The only problem with the left going back to socialistic principles is that when Corbyn (and Bernie) offered exactly that, the electorate roundly rejected it. At the moment it looks like the only way any radical changes will be acceptable to a majority of voters is if the offer comes from the Right rather from the Left.

    1. Daniel Raphael

      Corbyn was not defeated by voters so much as he was by a by-now well-documented internal campaign by influential parts of his own party, in active collusion with external political enemies, to slander and disorganize his own campaign. Sanders was defeated by comprehensive vote-rigging and electoral scams by the Democratic National Committee (DNC). In neither case, was it a matter of “rejection of socialist principles” or anything like it. These were straightforward campaigns of political sabotage and “dirty tricks” a la Nixon, and they were quite successful.

      That sets the record straight.

      1. Dave Whelan

        The electorate is a collective of individual minds that completely control their own behaviour in the ballot box, whatever the influences that you or I might like to think was the reason, the rejection remains whether we like it or not.

        1. Alex Cox

          Daniel R outlined some of the ways the Labour party, media and intelligence agencies worked to undermine Corbyn and promote the Tories. 800,000 Labour voters stayed away from the polls as a result.

          In the US in 2016 Sanders was not the candidate. He was not defeated at any ballot box.

  4. Sound of the Suburbs

    Liberals always dismiss the early warning signs.

    When a neo-Nazi party, Golden Dawn, rose in Greece, I was concerned, but liberals dismissed this as a one off that wouldn’t happen again.

    Thomas Frank has been looking at this for years and has been amazed how populist forces keep pulling to the Right. Populism has a long history in the US, which Thomas Frank has studied, and in the past it always pulled to the Left, but this hasn’t been true for decades in the US.

    He went to a Trump rally where he saw Trump being introduced as “the blue collar billionaire”.

    This truth table.
    Economically Right Socially Conservative
    Right 1 1
    Liberal 1 0
    The masses 0 1

    The Right can attract the masses on socially conservative issues and this is what they have been doing.

    The Liberals are out on a limb and are going to struggle attracting support from the masses.
    In the past they used economically progressive issues, that would appeal to the masses, to make progress on socially liberal issues that they wanted.

    What was just being used by the Right in the US, has now gained traction throughout the West.
    The Telegraph 15/01/2020
    “Now they feel they have lost their local institutions, clubs and civil societies, believe the wrong priorities are being pursued by unaccountable elites and that their (relatively) conservative values, their love and loyalty to family and country, are being mocked. .”

    The liberals have set themselves up as an easy target for the Right.

    (the truth table hasn’t come out very well due to white space deletion – shift the numbers along to the two headings.)

  5. Sound of the Suburbs

    Things have gone so badly wrong it’s hard to know where to start to put things right again.
    The clues have been there all along; the things that have gone wrong point us to where the problems lie. You just need to question almost everything to get to the answers.
    Being an engineer, the conventional wisdom on economics is not ingrained and I can just apply engineering problem skills to work out what has gone wrong.
    I have looked for good explanations for events from other people along the way and just adopted them into my own thinking, e.g. Michael Hudson, MMT, Richard Werner, Richard Koo and Steve Keen.
    They all have very important insights into what has been going wrong.

    Let’s go back to those classical economists who observed the world of small state unregulated capitalism as it existed in the beginning (Michael Hudson).

    William White (BIS, OECD) talks about how economics really changed over one hundred years ago as classical economics was replaced by neoclassical economics.
    He thinks we have been on the wrong path for one hundred years.
    Small state, unregulated capitalism was where it all started and it’s rather different to today’s expectations.
    Rent seeking was a problem that the Classical Economists were only too familiar with, but this knowledge disappeared as economics moved on into Neoclassical Economics and this exacerbates inequality.

    Everything had been going well for 5,000 years and then the classical economists turned up.
    Those at the top had been living in luxury and leisure, while other people did all the work. The last thing they needed was “The Enlightenment” as people would work out what was really going on.
    The European aristocracy were just the same, they lived in luxury and leisure while other people did all the work. The Classical Economists realised they were being maintained by the hard work of everyone else.

    The Classical economist, Adam Smith:
    “The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

    Economics was always far too dangerous to be allowed to reveal the truth about the economy.
    How can we protect those powerful vested interests at the top of society?
    The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.
    They took the focus off the cost of living that had been so important to the Classical Economists to hide the effects of rentier activity in the economy.
    The landowners, landlords and usurers were now just productive members of society again.

    It took one of today’s Nobel Prize winners to see what has been hidden for so long.
    “Income inequality is not killing capitalism in the United States, but rent-seekers like the banking and the health-care sectors just might” Angus Deaton, Nobel prize winner
    It got really bad because no one was aware of the problem anymore, until he spotted it.

    Today’s capitalism looks like rentier capitalism because it is.
    Economics really changed over 100 years ago, leaving today’s economists unaware of the problems of rentier activity in the economy.

    1. Bsoder

      Economics when it started using math, became no more the astrology. If we’re going to be druids then let’s adopt the whole program. Saying economists know about reality is like saying The Godfather was about importing olive oil.

  6. eg

    While this was written primarily about Europe, it is clearly applicable to the perfidy of the DNC where US electoral politics is concerned. It also brilliantly outlines the process by which the centre-left more generally has steadily rendered itself irrelevant over the course of a generation, as many of Mark Blyth’s lectures also describe.

  7. Synoia

    IMHO the stagflation of the 70s was cause by the tripling of the price of oil in late 1974, coupled with the fall in US spending when the US retreated having lost the Vietnam war. A point skipped over at the beginning of this article.

    The article appears to points to the full employment system as the fault, when it had worked up until these two impacts to the system.

    Neo liberalism appears to me to be the Government deliberately abandoning its duty to its people and avoiding the tasks of rule that accompany power – specifically managing the welfare of its people, and attending only to the wealth of its moneyed class.

    A reversion to the practice of rule before WW 1: To whit – Aristocracy and Powerless peasants.

    1. Left in Wisconsin

      Yes, the inflation of the 70s is a weak point in most economic analysis. It is usually portrayed as one long consistent increase from the mid-60s to 1980, driven at least in part by high union wage settlements, when Volker finally put the kibosh on. But anyone who experienced that time knows the 70s inflation spike was largely driven by oil. And, the whole argument about wage-push inflation (in the U.S.) is completely bogus: COLA clauses in union contracts only adjust wage rates AFTER the inflation has already happened and the same argument holds for other negotiated wage increases such as in Europe where wage negotiations are held every year – unions are always chasing inflation.

      Also, in retrospect, the term “stagflation” is a complete lie because economic growth (in the U.S.) in the late 70s was actually quite good despite the second oil shock until Volker drove the economy into the ground in 1980.

      But, there was a creeping inflation in the U.S. in the second half of the 60s (the kind that we would kill for now, up to like 5%) combined with low UE that prompted a huge backlash from right-wing economists and business and an inadequate hand-wringing from the mainstream “Keynesians.” (The right had been screaming about the threat of inflation since the first union contracts with COLAs appeared in the early 1950s but until the late 60s they had no actual inflation to accuse the unions of causing.) Then, when the oil shocks hit, the right-wing doubled down and the mainstream completely folded. None of this second wave had anything to do with low UE, which never got below 5% in the 70s.

      To give Storm the benefit of the doubt on this – he is talking about Europe, not the U.S. Maybe things were different there (though I doubt it).

  8. Lil’D

    Excellent article and comments… much to ponder

    Am still in despair as the Covid responses reveal quite a bit about what states are willing to protect

  9. Amfortas the hippie

    Seeing history through the Lens of “Policy” is all well and good (and interesting) but it sort of reifies “events” and “policy” as natural forces,that we are subject to, as if we were lacking agency.

    Some meanders:

    “Reformism was abandoned—and capitalism accepted—on the condition that it be regulated and disciplined by the state, without any need to socialize the means of production. “
    so, Boss Class was afraid of the Working Class…nobody ever talks about this aspect, lest the FBI?etc take an interest.

    “The fourth and final factor was the high growth of world trade, enabled by the Bretton Woods system of stable exchange rates, and the restrictions imposed on cross-border capital mobility in most economies. “

    “Full-employment-oriented fiscal policy was the key ingredient, “
    Capital Controls (and robust antitrust( sung to an old ac/dc song)) rendered one weapon of the Boss Class inoperable for a time…they couldn’t run off to some labor arbitragetopia…it was cheaper to keep the workers happy than to “offshore” physical plant.

    “…more political than economic “–”…forces which directly threatened the authority structure of capitalism—forces which became manifest in growing wage pressure, heightened worker militancy, calls for more redistribution, and growing demands for a radical democratization of society, the economy and the workplace. “—(=)–”….The ‘indiscipline’ of workers ….”
    They were spooked by the whole social revolution of the 60’s…Civil Rights”, “Peace”, an educated middle class youth cohort who had enough material wiggle room that they could read, think and pursue the Humanities in college….
    all that coupled…but importantly, not aligned with… the labor agitation…(see: defeat of McGovern)
    Bosses were scared.
    Like Sound of the Suburbs says,it was that damned Enlightenment, again…upsetting their applecart.
    “In the 1990s, it was widely felt that European social democracy needed a modern makeover, in order to become more market-friendly. As a result, social democracy became a conservative force, both politically and economically, in France, Germany, the Netherlands and Italy—and most governments adopted the strategy of blaming the EU and Brussels for unpopular policy reforms, which they themselves were (covertly) favouring. “….
    again, human agency?…”it was widely felt…”
    I’ve been interested in How that happened for most of my life…
    answer? “They” applied the Humanities against Humans.
    Jesus as Moneylender…”Free Market” as catechism… citizen as “Consumer”, then “Enterprise”.
    How “they” have had boots on necks but still had support on the hustings.
    How “they” were able to progressively break the Social Contract to vocal acclaim(until hopefully right about now)

    “…welfare states and protective labour market institutions must not be considered a cost and a drain, but rather constitute efficient frameworks which by helping nations to share the costs and benefits of globalization and technological progress, make firms more flexible and raise their international competitiveness. The above is by no means a covert defensive call for a return to an idealized past (e.g. the ‘golden age’), but instead it is an evidence-based diagnosis of where we are and how we got there and a recognition that there are alternatives to Thatcherism. Capitalism needs to be managed, and if citizens do not do it (through the political process) than ‘superstar’ firms, big banks, big-tech companies and billionaires will do it for us.”

    state/regulations/etc as infrastructure.
    Goat barn => having goats (and storage in the rafters).
    Chicken house enables chickens and therefore free eggs.
    Water to a dry part of the property means I can grow stuff there.
    Infrastructure matters, including the regulatory infrastructure.
    I’m old enough to remember Republicans yammering incessantly about “The Rules”, and the “Enforcement of Contracts”, back when they had more of a moral stance to stand on.
    But once they had purchased the Demparty, all that went out the window.

    Lots to chew on as I rooted around in the dirt this morning.

    1. juliania

      Beautiful,Amfortas – root around some more!!

      Capitalism needs to be managed, and if citizens do not do it (through the political process) than ‘superstar’ firms, big banks, big-tech companies and billionaires will do it for us.”

      I’m with you! But do remember Socrates against the Sophists, barefoot walking around Athens and refusing to be paid for his wisdoms – he’d be rooting around too!!!

      Got a spare pitchfork??

  10. HotFlash

    It occurs to me that trying to understand capitalism and corporations these days using any past analyses is hopeless without understanding the evolution of corporations. As in the very old days there were settlements, and they got raided or something, so some smart guy convinced his neighbours to build a wall to keep out the lions and roaming barbarians. It worked pretty well. The walled cities which prospered had lots of food and enough spare labour kicking around to do socially useful things — like the walls, and roads, and guaranteeing food security by building centralized granaries and mills, setting guards for the fieldworkers and to keep the peace locally. This is analogous to capital formation and industrialization.

    There was enough production and enough spare labour to annex neighbouring villages and cities, if they could, which, over time, they did and you ended up with city-states. So, kinda like monopolies. They in turn annexed as much of the local countryside as they could, or got swallowed up by stronger/smarter city-states, and eventually you had a state, aka country, or a diversified corporation. Neighbouring countries were then ‘unified’ (ie, conquered, corporations call it mergers-and-acquisitions) to form nations and when all the neighbours were either conquered or had been fought to a draw, the richest, strongest nations went looking for countries in other lands (developing countries/emerging markets) to annex. The Age of Empire, or in our time, the rise of global mega-corporations. These new colonies served as sources of resources, labour, and as markets. Sound familiar?

    Trying to make sense of Smith or Marx or even Keynes is hopeless without understanding that the capitalism we are dealing with today is not merely a difference in degree, not just a larger pin-making factory. In addition to the economists, we should heed also the words of the prophet, ”We’re an empire now, and when we act, we create our own reality.”

    1. Amfortas the hippie

      add in that those Megacorps(e) don’t really exist, save in a state/non-state of Holy Abstraction, and that even then, they’ve become Supranational…operating with a new kind of sovereignty way above the level of the Westphalian Nationalism we us’n’s still toil under….Superorganisms astride the world, with as yet no predators/parasites sufficient to keep them within bounds.
      if all this were closer to evolution, or ecological succession, then the Regulatory Superorganism might grow into that space, at the supranational level…like the proliferation of Barn Swallows and Scissortails and various Lizards reproduce sufficient to absorb the excess grasshoppers—which was caused, IMO, by something hurting the birds, etc in the first place—which is in itself analogous to the purposeful withering of the Regulatory State.(boy out of the country, and all…)
      But so far, the latter, Regulatory Superorganism has been successfully curtailed by the former.
      If ever there was a time to get after it, it’s now….the entire mythos and logical system of the Hypercapitalists lies in ruins…the Great Day came and went,here we all are on the barren hilltop, looking at each other, all not-raptured, pockets picked… and the promises and prescriptions of the Priests of Moloch are laid bare as lies and cheating and the grandest of Larcenies.
      That, right there, is the silver lining to all this chaos, suffering and death.
      Quick, before they recover their wits!

  11. Jeremy Grimm

    The analysis in the post is very strange. Do European politics and economics account for that strangeness? The reasoning is alien to what I believe drove the decline of social democracy in the US. There is no mention of money in politics, the dismantling of legal constraints on monopoly, and monopsony, no mention of the proliferation of policy think tanks or Big Money purchase of Education, Science, and the Media. Did none of these things happen in Europe?

    One sentence in the concluding section jumped out at me: “The current panicky ‘emergency Keynesianism’ which is upending decades of ruthless austerity in Britain, France, Germany and elsewhere does not come close to what is needed.” Is there ’emergency Keynesianism’ spending in Europe? Would the author of this post call the US Corona spending ‘Keynesian’?

    Practicality forces social democracy to accept ‘really-existing capitalism’ but once deciding to work within the rules of capitalism they had to abandon systemic transformation. “Hence, working within the capitalist system creates an inescapable dilemma for social democracy: its policies must at the same time strengthen the productive power of capital and counteract the (political) power of capitalists. Through the state, social democrats had to assure capitalism’s efficiency and the growth of its productive capabilities, while at the same time mitigating adverse distributional effects.”

    Contrast this beginning to the post with its conclusions proposing a way forward for social democracy: 1) “discard the now discredited NCM[New Consensus Macroeconomics] thinking”, 2) reject the ideology of the ‘Nasty Trade-Off’, 3) begin by imposing discipline on banks and financial markets, 4) “much higher taxes on wealth, incomes and (rentier) finance”. But what about the “inescapable dilemma”? I suspect the NCM consensus[Neoliberalism?] is quite alive and well in Europe as it is in the US.

    1. juliania

      “There’s no mention…” That’s okay, Jeremy — you just mentioned it! Thanks, it might have slipped our minds! Hoo boy yes, and more! Did I just say ‘hoo boy’? That’s Amfortas for you. I think he’s in there, pretty completely. Just scroll up!

    2. Yves Smith Post author

      Campaign money does not play much of a role in UK/EU politics. They don’t allow paid TV ads. Each candidate above a certain level gets a certain amount of free time. The big $ amounts in US politics are due almost totally to TV ads.

      1. Dirk77

        Interesting. Wonder then how corruption manifests in European politics. If I’m Labour in Parliament who do I owe for my job?

        1. PlutoniumKun

          UK (and most European) political parties are much cheaper to run than in the US, but they are still to some extent beholden to ‘sponsors’. In the UK, the Conservatives get considerable sum from wealthy individuals and companies to run the party. The Labour Party gets most of its cash from Unions and individual members. Some MP’s are in effect ‘sponsored’ by a Union. There is plenty of open corruption in UK politics, but it tends to be at a local level. When I worked as a consultant in the UK it was an open secret as to which local authorities were clean and which ones you had to deliver some cash to get things done. The latter were invariably the ‘safe’ Labour or Conservative areas. Those areas where the politics was more competitive tended to be a lot cleaner.

          In general, an MP is more likely to be ‘owned’ by an interest group who promotes and supports that particular politician or group. The Brexiter tendency within the Conservatives were promoted for a long time by a sub-group of libertarian funders.

          Things are a little different in much of Europe where proportional representation means that you don’t have so many overt ‘factions’ within parties as individual small parties can thrive in a way they can’t in one person one vote systems. This creates a different dynamic. Sometimes of course it means a rich person can pretty much fund their own political party, although its not usually that overt. But it does mean more political parties that are linked to particular interest groups – for example, rural businesses, or heavy industry or construction or fishing.

          Its also worth pointing out that the US is an outlier with the nature of its political parties, that they are so lightly regulated. In most countries there are pretty strict laws on what political parties can and can’t do, and this usually applies to financing and contributions. Hence, while in the US individuals and companies can happily provide unlimited cash to a party or candidate, this just isn’t possible elsewhere. Political advertising is far more restricted in nearly all European countries than in the US. Contributions have to be far more, shall we say, subtle. It doesn’t make it less ‘corrupt’, but it’s definitely less overtly transactional than in the US.

          1. Dirk77

            Thanks PK. That was helpful. It hadn’t struck me how the US was so different from Europe re political contributions. I guess that means it has to go farther to improve. Since every political idea seems to have one country that champions it most and thus serves as a lesson to the others, I wonder if it is the USA’s turn now for the bad idea of essentially unregulated political contributions.

  12. Dirk77

    After this article and the comments above, I’m wondering if such a history of social democracy could have been avoided had there been better ideas. Yanis Varoufakis might argue that what doomed the Social Democrats was accepting the split of society into labor and capital. His answer appears to merge them, not as workers seizing the means of production, but essentially owning it. I came upon last night a baking supply company in Vermont. Interestingly, it started out (1790!) as a typical founder owned business yet recently transitioned to employee owned. It would be interesting to learn how and why that happened. King Arthur.

  13. Jeremy Grimm

    The tail of this post “Three comments on this essay can be found here” does not refer to what we think of as comments at NakedCapitalism. The ‘here’ link:
    references a 19-page collection of brief essays by three other INET members. A quick scan of this paper suggests the decay of social democracy is a topic others at INET have contemplated and analyzed.

  14. Susan Mulloy

    Yves, thank you for sharing this paper and the essays commenting on it. It will take me awhile to digest the ideas and analyses here. I think the content is relevant to most capitalist societies.

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