Winnowing Wheat From Chaff

For the Political Economy Seminar at the University of Massachusetts at Amherst on March 8, 2005

Social Democracy: Giving Credit Where Credit Is Due

I mean it as a great compliment when I say that capitalism functions poorly indeed without social democrats.  The “golden age of capitalism” was due more to the influence social democrats exerted over capitalism than any other single cause. Only when social democratic policies have been ascendant has capitalism proved able to avoid major crises and distribute the benefits of rising productivity widely enough to sustain rapid rates of economic growth and create a middle class. Political democracy in the twentieth century also received more nurturing from social democratic parties than from any other single source. However, despite their important accomplishments, crucial compromises social democrats made with capitalism bear a major responsibility for the failure of the economics of equitable cooperation to make greater headway against the economics of competition and greed in the twentieth century.

Of all the political tendencies critical of capitalism, social democrats have participated in reform campaigns and electoral democracy most effectively. Sometimes social democratic parties won elections and formed governments that carried out major economic reforms. Other times reforms that began as planks in platforms of social democratic parties out of power were implemented by rival parties decades later. Some of the major reforms social democrats deserve a great deal of credit for include old age insurance, universal health care coverage, welfare for those unable to work or find work, financial regulation, stabilization of the business cycle through fiscal and monetary policies, incomes policies to combat cost-push inflation while reducing income inequalities, and long-run, comprehensive planning policies to promote growth and development. Wherever and whenever social democrats were politically stronger, reforms were more numerous and went deeper. Social democrats were strongest in Sweden from the mid-1950s to the mid-1970s where social democratic reforms achieved their apogee. Social democracy in Germany was strongest under Helmut Schmidt and Willy Brandt in the 1970s. The high point for social democratic reforms in the United States occurred prior to World War II during the New Deal of President Franklin Delano Roosevelt. The high point in France and Great Britain occurred immediately after World War II when a united front government in France and Labor Party government in Great Britain each ruled briefly. Lyndon Johnson’s “war on poverty” in the mid-1960s and Francois Mitterrand’s first year in power in 1981 proved to be short-lived resurgencies of social democratic agendas in their respective countries.

Failures of Social Democracy: The Benefits of Hind Sight

I do not pretend to offer a comprehensive critique of social democracy. In this essay I do not even address what I consider to be the greatest failing of twentieth century social democracy — it’s failure to oppose Western imperialism and support Third World Movements for national liberation. I only consider the economic ideology and programs of social democracy, and review only the work of two authors whom I consider particularly insightful. Michael Harrington and Magnus Ryner are peerless students of social democratic history whose support for their cause did not prevent either of them from writing critically. As the leading social democrat in the United States from the 1960s until his untimely death in 1989, Michael Harrington combined insider knowledge with a critical detachment derived from viewing powerful European social democratic parties from the perspective of a small party in the United States that could not have been farther from the halls of power itself. In The Next Left: The History of the Future (Henry Holt & Co., 1986) and in Socialism: Past and Future (Little, Brown & Co., 1989) Harrington provides a sympathetic, but critical evaluation of social democracy. In “Neoliberal Globalization and The Crisis of Swedish Social Democracy” published in Economic and Industrial Democracy (SAGE, 1999), and in Capitalist Restructuring, Globalization and the Third Way: Lessons from the Swedish Model (Routledge, 2002) Magnus Ryner provides an insightful, up-to-date analysis of the “Swedish model.” Harrington and Ryner both try to explain why social democratic reforms were not more successful in their heyday, lost momentum in the 1970s, and were rolled back over the last two decades. I will emphasize where I think we must go beyond their criticisms.

What IS the Alternative to Capitalism? As the twentieth century progressed, social democrats’ answer to this crucial question became increasingly more vague, ambiguous, and self-contradictory. In the early part of the century they dealt in rhetorical flourishes counterpoising democratic direction of the economy to rule by profit seeking capitalists, but in Harrington’s words, social democrats “were woefully imprecise about what it meant, much less as to how to put it into practice.” (SP&F: 20-21) Harrington concludes that for the first half of the twentieth century social democrats “attempted, with notable lack of success, to figure out what they meant by socialism, and remained inexcusably confused about its content. Was there a socialist substitute for capitalist markets, either a plan or a new kind of market? Even if one could solve the political difficulties and achieve a sudden and decisive socialist take over, that would simply postpone all the other problems to the next morning — as happened, catastrophically, with the Bolsheviks after the Revolution.” (SP&F: 20,21, 24) I could not agree more with Harrington on this point. I am convinced that until progressives clarify how the economics of equitable cooperation can work, convincingly and concretely, we are unlikely to avoid the fate that befell twentieth century social democrats.

Harrington went on to point out that after World War II social democrats gave up on their search for an answer to the question that eluded them, and instead embraced a concrete answer to a different question: “John Maynard Keynes miraculously provided the answer that Marx had neglected: socialization was the socialist administration of an expanding capitalist economy whose surplus was then partly directed to the work of justice and freedom.” (SP&F: 21) While Keynesian policies humanized capitalism significantly, unfortunately that was all they did, or ever can do. Harrington tells us that when the “Keynesian era came to an end sometime in the seventies, the socialists were once more thrown into confusion.” (SP&F: 21) By then, however, social democrats had long forgotten the original question whose answer had always alluded them: Exactly how does the economics of equitable cooperation work?

Unfortunately, even social democrats like Harrington who recognized the above problem, contributed nothing to its solution. In an entire chapter on “Market and Plan” Harrington fails to remove any of the vagueness from social democratic rhetoric about how equitable cooperation could actually function. He tells us “only under socialism and democratic planning will it be possible for markets to serve the common good as Adam Smith thought they did under capitalism.” (SP&F: 219) But he provides no compelling reasons for why this would be the case. He sits squarely on the fence, contributing nothing to the debate over the existence of an alternative to markets and command planning. “Alec Nove argues either there is a centralized and authoritarian plan for the allocation of resources or there must be markets. Nove, I think, overstates this counter position. Ernest Mandel projects a vision of democratic planning, but I am not sure it is feasible.” (SP&F: 242) Harrington concludes his chapter in a paroxysm of ambiguity and double talk surrounding reiteration of the obvious:

Markets are obviously not acceptable to socialists if they are seen as automatic and infallible mechanisms for making decisions behind the backs of those who are affected by them. But within the context of a plan, markets could,  for the first time, be an instrument for truly maximizing the freedom of choice of individuals and communities. I would not, however, use the phrase ‘market socialism’ to designate this process. What is critical is the use of markets to implement democratically planned goals in the most effective way. That, it must be said, involves a danger: that the means will turn into ends. There is no guarantee that this will not happen short of a people genuinely committed to solidaristic values and mobilized against the threat inherent even in the planned employment of the market mechanism. The aim, then, is a socialism that makes markets a tool of its nonmarket purposes. (SP&F: 247)

What Harrington completely fails to address in his confusion is whether or not when people interact through markets this subverts their commitment to Harrington’s vaunted “nonmarket purposes.” If participation in markets systematically undermines the “solidaristic values” of even those most “mobilized against the threat inherent in the market mechanism,” then why would Harrington believe that “means” will not “turn into ends?” What is particularly galling about this abject failure of intellectual leadership regarding plan versus market is that it effectively endorses the unofficial policy of social democracy in favor of market socialism while avoiding responsibility for renouncing the idea of a system of democratic planning. Harrington tells us that “putting market mechanisms at the service of social priorities rather than in command of the economy is an area in which democratic socialists have contributions to make,” (SP&F: 233) and reminds us that social democrats in the Swedish Labor Federation (LO) were taming the labor market through a labor market board and incomes policy as early as 1950. This is all well and good. But the question remains: Is the phrase “democratic planning” to mean something more than political intervention in particular markets in particular ways. After reading an entire chapter on the subject, readers of Harrington’s book remain as clueless about his answer to this fundamental question as they were before beginning.

Coping With a Fractured Working Class: Harrington’s second explanation for the failure of social democracy is that the homogeneous, majoritarian working class prophesied by Marx never materialized. Instead the working class “divided on the basis of skill, gender, religion, and the like, and in the post-World War II period, when the shift toward the professionals and the service sector became blatantly evident, the socialists were forced to confront the fact that their historic ideal had been shorn of its supposed agency.” (SP&F: 21-22) While social democrats may have been slow to give up on the myth of a homogeneous working class, they were quicker to adapt than most communists and libertarian socialists who continued to labor far longer under the illusion of a growing working class majority who would eventually identify primarily in class terms. So I am less inclined than Harrington to chastise social democrats for coming to grips slowly with the fact that a majoritarian movement for the economics of equitable cooperation would have to be built not only from segments of the working class who saw themselves as different and with interests at odds with one another, but from non-class “agents of history” as well. However, I am more critical than Harrington of how social democrats chose to adapt to something that came as a surprise to all leftists. As explained below, I believe social democratic union leaders and politicians too often found it convenient to prioritize more privileged sectors of an increasingly diverse working class at the expense of less privileged ones, and embraced theories that rationalized their behavior by obfuscating the meaning of economic justice.

The Pitfalls of Gradualism: I think Harrington’s third reason for social democratic failures is critical. He points out that even when social democrats realized they were “stuck with gradualism and all its attendant problems,” and responded in the only sensible way — “have socialists permeate the society from top to bottom” — unfortunately they “overlooked one of capitalism’s most surprising characteristics: its ability to co-opt reforms, and even radical changes, of the opponents of the system.” (SP&F: 24) Harrington clearly understands the problem well. He points out: “Capitalists themselves were, in the main, not shrewd enough to maneuver in this way. The American corporate rich fought Roosevelt’s functional equivalent of social democracy with a passionate scorn for the ‘traitor to his class’ who was President. Yet these same reactionaries benefited from the changes that the New Deal introduced far more than did the workers and the poor who actively struggled for them. The structures of capitalist society successfully assimilated the socialist reforms even if the capitalists did not want that to happen.” (SP&F: 25) But while Harrington goes to great lengths to search for what new leftists called “non-reformist reforms,” he has little to say about the only real way to confront the problem that capitalism will co-opt reforms and co-opt reformers as well: create institutions of equitable cooperation for people to live in even while they are engaged in the lengthy process of fighting for reforms and convincing the victims of capitalism to jettison the economics of competition and greed entirely. It is not enough to complain, as Harrington tells us Karl Kautsky did in a letter after World War I, “that it had become impossible to get anyone in the movement to do anything as a volunteer,” or to agree with Robert Michels who demonstrated in his famous study of German social democracy how “outcast revolutionaries had turned into staffers.” (SP&F: 21) There is only so long activists will volunteer while others secure positions in the movement that allow them to wield more power and secure economic livelihoods for themselves that are more commodious than most of those whom they lead. Social democracy insufficiently inoculated its members against the virus of capitalist values, and failed to ensure that leaders lived up to the values they preached. More importantly social democratic practice provided too little institutional support for members who wanted to live in ways that “keep the dream alive,” even while most around them competed individualistically in the capitalist market place. Below I offer suggestions about how this problem can be better addressed, but I do not think the answer lies in searching for reforms that are somehow less “reformist” than most reforms social democrats pursued in the twentieth century. Reforms are reformist. They do make capitalism less harmful while leaving capitalism in tact. It does no good to think we can resolve this dilemma by finding some kind of “non-reformist reform.” Instead, the answer lies in how we fight for the only kind of reforms there are, and in providing people who reject capitalist values practical ways to personally live according to human values — and insisting that those who would lead the movement for equitable cooperation do so as well.

Harrington’s last two reasons why social democracy did not fare better are important historically, but there was no way social democrats could have avoided them in the twentieth century, just as there will be no way for us to avoid them in the century ahead. Therefore, lessons must take the form of how to mitigate predictable damage from circumstances we cannot prevent.

The Pitfalls of “Lemon” Socialism: Harrington complains: “In ordinary times, when the system was working on its own terms, the socialists never had the political power to make decisive changes and were thus fated to make marginal adjustments of a basically unfair structure. In the extraordinary times when the socialists did come to power, after wars or in the midst of economic crises, they had a broader mandate, but never a support for revolution, and they inherited almost insoluble problems from their capitalist predecessors.” (SP&F: 25) A popular joke in Peru in the mid 1980s captured this dilemma perfectly. For more than sixty years the Peruvian military assassinated and arrested leaders of the Peruvian social democratic party, APRA, and prevented APRA from taking power after it won elections on numerous occasions. According to the joke, the cruelest punishment the Peruvian military ever meted out to APRA was to finally allow the party to take power after winning elections in 1985. The oligarchy had so badly mismanaged the economy that neither they nor the military wanted to take responsibility for the economic crisis that was unavoidable. The jokesters proved to be remarkably prescient. In twelve months the approval ratings for Alan Garcia dropped from 60 to 15 percent, and it took more than a decade for APRA to recover its position as a significant political force after his disastrous term in office ended.

This problem is also referred to as “lemon socialism”: When social democrats were able to nationalize companies, or industries, it was usually because they were in terrible shape. Consequently they often performed badly as public enterprises simply because they were going to perform badly in any case. After World War II this was a problem for the Labor government in Great Britain and for the popular front government in France. Harrington comments that Francois Mitterrand’s Socialist Party failed to realize in 1981 “how run down the industrial plant had been allowed to become,” and quotes from a 1984 retrospective on the Mitterrand victory in The Economist that concluded: “The Socialists thought they would nationalize a phalanx of rich industrial concerns that could be used to boost output, jobs, and national wealth. Instead, with one or two exceptions, the state had acquired, at high cost, a collection of debt-ridden, wheezing remnants of the go-go years of Gaullist giantism.” (NL: 123) On a smaller scale this problem plagued steel companies in Pittsburgh Pennsylvania and Youngstown Ohio in the 1980s that were taken over in employee buy outs with support from local governments anxious to preserve their tax base. Of course it is always more advantageous to take over winners than losers for public and employee management. But we will no doubt find ourselves faced with less attractive options in the future, just as social democrats were in the past. What lessons are to be learned?

There may be circumstances so unfavorable that they are literally programmed for failure, in which case we must be patient enough to refrain from taking over only to preside over a disaster. However, rather than turn away from opportunities because they are risky, I think wisdom will more often take the form of negotiating for a larger mandate. After all, with a large enough mandate we believe there is no social problem we cannot tackle successfully! Problems arise when one takes over a lemon with insufficient financial resources, or takes over a government with an insufficient voting majority in the legislature, or with debilitating constraints imposed by the military or by hostile financial interests. My own reading of twentieth century social democratic history leads me to the conclusion that tougher negotiations over how much leeway our opponents permit us when we take over a situation our opponents do not want to take responsibility for themselves, and a greater willingness to turn down the job if we are not given the tools necessary to do it, will often serve us well. But these are always tough calls, and there will no doubt be disagreements among those fighting to replace the economics of competition and greed with equitable cooperation over this kind of tough call in the century ahead, just as there were in the past.

Global Capital Markets: The 900 Pound Gorilla: Finally, Harrington tells us social democrats were “utterly unprepared for the internationalization of politics and economics that has been one of the decisive trends of the twentieth century.” (SP&F: 25) In particular Harrington blames the failure of the socialist government of Francois Mitterrand in France in the early 1980s primarily on hostile global capital markets. “The failure of the bold plans of the Mitterrand government in 1981-82 were caused, above all, by an open economy that had to bow to the discipline of capitalist world markets rather than follow a program that had been democratically voted by the French people.” (SP&F: 27) The extent to which social democratic reforms in a single country can be vetoed by global financial markets in the neoliberal era is of great importance to consider carefully.

A mushrooming pool of  liquid global wealth — created by record profits due to stagnant wages, downsizing, mega mergers, and rapid technical innovation in computers and telecommunications — is now more free to move in and out of national economies at will than at any time in history. A trend away from prudent restraints on international capital flows built into the Bretton Woods system, toward full blown “capital liberalization” began with the unregulated Eurodollar market in the 1960s and culminated in a successful neoliberal crusade to remove any and all restrictions on capital mobility in the context of a global credit system with minimal monitoring and regulation, no lender of last resort, and serious regional rivalries that obstruct timely interventions. Neoliberal global managers have literally created the financial equivalent of the proverbial 900 pound gorilla: Where does the 900 pound gorilla — global liquid wealth — sit? Wherever it wants! And when a derivative tickles, and savvy investors — who realize they are functioning in a highly leveraged, largely unregulated credit system — rush to pull out before others do, currencies, stock markets, banking systems, and formerly productive economies can all collapse in their wake. What this does, of course, is give international investors a powerful veto over any government policies they deem unfriendly to their interests. If neoliberal global capitalism could trump Mitterrand’s program in an advanced economy like France that was not facing international bankruptcy in the early 1980s, and forced the most powerful of all social democrats in Sweden to abandon their reforms in the late 1980s and early 1990s, what hope is there for social democratic programs that attempt to spur equitable growth in bankrupt third world economies facing even more powerful global financial markets and an even more implacable IMF in the early twenty-first century? Both Harrington and Ryner provide useful insights based on twentieth century social democratic experiences that I will add to, more than disagree with.

In chapter 6 of The Next Left Harrington provides a detailed analysis of the failure of the Mitterrand Socialist government in France in the early 1980s that is extremely instructive. He begins: “President Mitterrand and the French Socialists received an absolute majority in 1981 and proceeded faithfully to carry out a program that had been carefully worked out over a decade. Within a year they were forced to sound retreat, and by the spring of 1983 they had effectively reversed almost every priority of their original plan. Had a movement that had boldly promised a ‘rupture with capitalism’ on the road to power become more capitalist than the capitalists once in power?” (NL: 116-117) Harrington admits that “rupture with capitalism” rhetoric was partly hype, but points out that “practically every campaign promise was redeemed during the first year,” in which the Mitterrand government “honored the clenched fist of working class history and the poetic rose of May 1968.” (NL: 119) The program was, indeed, every bit as “audacious” as one could have hoped for. It consisted not only of left Keynesian policies to stimulate equitable growth, but aggressive nationalizations and a “new model of consumption,” i.e. “a qualitative rather than merely a quantitative change.” (NL: 119)  It is worth taking a close look at what happened precisely because unlike many other twentieth century social democratic governments, on taking office the Mitterrand government did not immediately back off from bold campaign promises.

The French Socialists immediately increased the buying power for the least-paid workers through dramatic increases in the minimum wage and a “solidaristic wage policy” giving the greatest wage increases “to those at the bottom of the occupational structure.” (NL: 127) To increase the demand for labor the government increased hiring in the public sector and increased government spending on social programs. To decrease the supply of labor and shift use of society’s social surplus from more consumption to more leisure the government sponsored programs for early retirement at age sixty, increased annual paid vacation from four to five weeks, and tried to reduce the work week from 40 to 35 hours. All this is hard to fault. Unfortunately the last program fell victim to political machinations within the left over whether or not it would be reduced hours for the same pay, i.e. a real wage increase, or reduced hours for less pay, i.e. “work sharing.” The Communist led federation of unions and the more traditional business unions opposed any reduction in pay. The Catholic Democratic Confederation of Labor supported work sharing as did the government’s Minister of Labor arguing that real wages had already been increased in other ways and that work sharing benefited the least advantaged — the unemployed — and encouraged leisure over consumerism. The end result was 39 hours for 39 hours of pay, i.e. an insignificant work sharing that left nobody satisfied and everyone bitter.

Proclaiming themselves different from social democrats elsewhere in Europe who had long since abandoned nationalization, the French socialists went through with an impressive list of  nationalizations they had promised during the election campaign. Again the courage displayed by the nationalizations is hard to fault. However, besides the fact that many of the companies they took over were much weaker than they realized, two other problems limited benefits from the nationalizations. Harrington tells us: “At the cabinet meeting at which the decision was made to go ahead with the nationalizations, there was a fateful debate that pitted Michel Rocard, Jacques Delors, and Robert Badinter against most of the rest of the ministers and, the decisive factor, against the president. There is no need, Rocard and Delors argued, for Paris to pay for one-hundred percent of an enterprise that is targeted for government ownership. Fifty percent is quite enough — and much less expensive. But Mitterrand went ahead with one-hundred percent buy outs.” (NL: 136-137) Harrington points out that the consequences were not dissimilar to corporate takeovers with borrowed money in the United States — “the acquired company had to be starved for cash in order to finance its own acquisition.” (NL: 137) The second problem, how the newly nationalized companies were managed, was caused, in part, by the first. Harrington quotes from a letter sent to the new administrators which said: “You will seek, first of all, economic efficiency through a constant bettering of productivity. The normal criteria of the management of industrial enterprises will apply to your group. The different activities should realize results that will assure the development of the enterprise and guarantee that the profitability of the invested capital will be normal.” (NL: 136-137.) In other words, the new managers were given marching orders no different than those stockholders would send to a CEO they had just hired! Harrington goes on to tell us: “Alain Gomez, a founder of the Marxist left wing of the Socialist party, CERES, and a new official in the public sector, was even blunter: ‘My job is to get surplus value.” (NL: 136)

The problem is, of course, that if capitalists are paid the full present discounted value for their assets, and if nationalized enterprises are managed no differently than private enterprises, the only thing that will change is who employees and taxpayers will resent. Instead of resenting greedy capitalists they will resent the “socialist” government, the “socialist” ministers, and their new “socialist” bosses. Like Harrington, I can understand this is easier to see from the outside free from budgetary and managerial pressures, but it is true nonetheless. Moreover, the government’s efforts to promote decentralization and worker participation were no more successful in state enterprises than in the private sector. Harrington tells us: “Although the Auroux laws were unquestionably progressive, they fell far, far short of the ideal of self-managed socialism. In essence, the workers were given the right to speak up on issues affecting their industry — which was a gain — but they got no power to make decisions. One of the consequences of genuine worker control is that productivity goes up. But given the extremely limited nature of the workers’ new rights — and the mood of moroseness that settled over the society not too long after the euphoria of May 1981 — that pragmatic bonus from living up to an ideal was not forthcoming.” (NL: 137) Unfortunately the administrators of newly nationalized enterprises who received the letter quoted above were no more inclined than their counterparts in the private sector to accede power to make decisions to their employees from whom they were busy extracting “surplus value.”

Finally, the government launched strong expansionary fiscal and monetary policies to provide plenty of demand for goods and services so the private sector would produce up to the economy’s full potential and employ the entire labor force. Again, there is nothing to find fault with here. Everyone deserves an opportunity to perform socially useful work and be fairly compensated for doing so. However, there is only so much any progressive government can do about this as long as most employment opportunities are still with private employers. Mitterrand deserves praise for doing the most effective thing any government in an economy that is still capitalist can do in this regard: ignore the inevitable warnings and threats from business and financial circles and their mainstream economist lackeys preaching fiscal “responsibility” and monetary restraint, and unleash strong expansionary fiscal and monetary policy.

Unfortunately this is where the Mitterrand government had its worst luck and discovered just how powerful global financial markets can be. They were unlucky when OECD projections in June 1981 of a strong global recovery proved completely wrong. They were unlucky that French trade had shifted toward the third world over the previous decade where the global slump was most severe. They were unlucky that “the Socialist stimulus created new jobs in West Germany, Japan, and the United States, as much as, or more than, in France.” (NL: 133) More to the point, they were unlucky there were conservative governments in Washington, London, and Bonn since while Reagan, Thatcher, and Kohl all helped each other juggle expansions at crucial political junctures, they could not have been more pleased when capital flight and growing trade and budget deficits brought the French Socialist program to a grinding halt. But mostly, Harrington tells us they were unlucky “because France could not afford to run a relatively large internal (government) deficit and an external (balance of trade) deficit at the same time.” (NL: 117) The only government fortunate enough to be able to do that, Harrington pointed out, is the United States government, as the Reagan administration proved with their military Keynesianism accompanied by tax cuts for the rich during exactly the same years when international financial markets prevented France from running such smaller budget and trade deficits as a percentage of its GDP.  However, with the benefit of hindsight it is apparent the Mitterrand government did not handle an admittedly difficult situation as well as it might have.

Harrington points out that trying to avoid devaluing the franc was a mistake. Whether it was because the advice to devalue came from Mitterrand’s “arch inter party rival, Michel Rocard,” or due to false pride  — “one does not devalue the money of a country that has just given you a vote of confidence” — matters little. Of course hind sight is twenty-twenty, particularly regarding currency devaluations. Nonetheless, devaluation would have reduced the balance of payments deficit, thereby buying the government more time for its program. But the most important lesson is one Harrington shied away from, just as the African National Congress government in South Africa and the Lula Worker Party government in Brazil have shied away from it more recently. There are only three options: (1) Don’t stimulate the domestic economy in the first place because you are not willing to stand the inevitable heat in your kitchen. (2) Stimulate, but back off as soon as new international investment boycotts your economy, domestic wealth takes flight, financial markets drive interest rates on government debt through the ceiling, and the value of your currency drops like a hot potato. Or (3) stimulate, but be prepared to face the heat international capital markets will bring with strong measures restricting imports and capital flight, by substituting government investment for declines in international and private investment, and by telling creditors you will default unless they agree to roll overs and concessions. Option three is the economic equivalent in the neoliberal era of not only playing hardball with international creditors, but going to financial war if need be. As daunting as option three is, it is important to remember that the Mitterrand government in France proved that option two does not work. As Harrington admitted, “within less than two years the Socialists were engaged in administering a regime of ‘rigor,’ otherwise known as capitalist austerity.” (SP&F: 20) Moreover, option two almost always leads to even worse austerity measures than option one because regaining credibility with global financial markets is usually more difficult than not losing it in the first place. Option two also creates more political damage because voters understandably hold the reformers responsible for the pain caused by the austerity program reformers preside over. On the other hand, the ANC government in South Africa has proved that option one inevitably undermines support from the social sectors that bring progressive governments to power in the first place. If you make no serious attempt to fulfill campaign promises, you inevitably alienate those who voted you into office. Unfortunately it appears the Worker Party in Brazil intends to repeat this mistake. If they continue to renege on campaign promises I fear “comrade” Lula’s political base may prove even less forgiving than the ANC base in South Africa who did have the ANC to thank for delivering them from apartheid, if not from economic subjugation and poverty.

So what lessons can we learn from Harrington’s retrospective? Unlike some left critics, I do not believe that social democracy’s success in taming capitalism was responsible for the failure to replace capitalism in the twentieth century. Had social democratic parties been less successful at reducing capitalist irrationality and injustice, I believe twentieth century capitalism would simply have been more crisis ridden and inhumane than it was. Had Herbert Hoover presided over the Great Depression instead of Franklin Delano Roosevelt, I believe the depression would only have been deeper and caused more unnecessary suffering. Without New Deal reforms to build on, I believe socialists’ chances of replacing capitalism in the US in the years before World War II would have been even slimmer than they were. Without social security, unemployment insurance, and a minimum wage, and without the example of more robust social democratic reforms in Sweden during the 1960s and 1970s, I believe even fewer people today would believe that equitable cooperation is possible. Broadly speaking, I believe the road to equitable cooperation lies through more and more successful equitable cooperation, not through less. “Crises” that sometimes trigger the overthrow of structures of privilege are crises of legitimacy, crises of public confidence in ruling elites, or ideological crises that free people from the myths that make them unwitting accomplices in their own oppression. Cracks in the ideological hegemony that under girds the status quo are the catalysts of social change precisely because they  allow people to see that a better world is possible. More suffering in and of itself does not lead people to revolt. Becoming convinced that suffering can be prevented is what motivates people to take risks and stand up for change. Since winning reforms rather than standing by and pointing accusatory fingers at deteriorating conditions is what convinces people that suffering is unnecessary, in my opinion the problem with social democratic reforms was not that they were too successful, but that they were not successful enough.

Nor do I believe that more competition and greed teaches people how to cooperate more equitably. Quite the opposite, the more people practice competition and greed the more difficult it is for them to develop the trust and social skills necessary for equitable cooperation. And the more competition and greed is tolerated the stronger becomes the capitalist enabling myth that people are capable of no better. Unfortunately social democrats eventually accepted the necessity of a system based on competition and greed. Michael Harrington formulates the “great social democratic compromise” accurately enough: Social democrats “settled for a situation in which they would regulate and tax capitalism but not challenge it in any fundamental way.” (SP&F: 105) But I don’t think Harrington fully appreciated the full consequences of the compromise. It is one thing to say: We are committed to democracy above all else. Therefore we promise that as long as a majority of the population does not want to replace capitalism we have no intentions of trying to do so. It is quite another thing to say: Despite our best efforts we have failed to convince a majority of the population that capitalism is fundamentally incompatible with economic justice and democracy. Therefore we will cease to challenge the legitimacy of the capitalist system and confine our efforts to reforming it. The first position is one I believe must guide the movement for equitable cooperation in the century ahead. Unfortunately the second proposition was the compromise accepted by the leadership of social democratic parties, and eventually by all who remained members.

The first proposition does not promise to refrain from voting capitalism out when the majority is ready to do so. Nor does it promise to refrain from taking effective action against capitalists and their supporters should they try to thwart the will of a majority if and when the majority decide they wish to dispense with capitalism in favor of  a new system of equitable cooperation. It does not promise to refrain from explaining how private enterprise and markets subvert economic justice and democracy no matter how many believe otherwise. It does not promise to refrain from campaigning in favor of replacing capitalism with something different even when polls indicate that a majority still favors capitalism. It is a simple, unwavering promise to always respect and abide by the will of the majority. The second proposition, on the other hand, bars social democrats from continuing to argue that private enterprise and markets are incompatible with economic justice and democracy. It bars social democrats from campaigning for the replacement of capitalism with a system more compatible with economic justice and democracy. The second proposition implies that if capitalism precludes certain outcomes, then social democrats must cease to lobby on behalf of such outcomes. Therefore the second proposition implies either: (1) social democrats were historically wrong, and economic justice and democracy are fully compatible with capitalism, or (2) while social democrats can continue to fight for some aspects of economic justice and democracy they can no longer support full economic justice and democracy. In effect the second proposition buys political legitimacy within capitalism for social democratic parties in exchange for accepting the legitimacy of a system based on competition and greed. So in my view the problem was not that social democrats fought, often successfully, for reforms to mitigate the effects of competition and greed. The problem was that they ceased to keep fighting for further reforms when their initial reforms fell short of achieving economic justice and democracy because they agreed to accept a system of competition and greed even though the system obstructed the economic justice and democracy they had pledged to fight for.

But eventually the damage went deeper. To his credit Harrington admits that by mid century social democrats he describes as “bewildered and half-exhausted” no longer had any “precise sense of what socialism means” and no longer “challenged capitalism in any fundamental way.” By accepting the economics of competition and greed the “social democratic compromise” led social democrats to lose sight of what economic democracy and economic justice are as well.

By the end of the twentieth century social democrats no longer agreed among themselves about what economic democracy meant. Moreover, they no longer debated these disagreements vigorously, preferring not to engage in divisive debates they convinced themselves were irrelevant to the immediate tasks that confronted them. Consequently, many social democrats no longer understood why leaving economic decisions in the hands of private employers who survived the rigors of market competition was not an acceptable way to capture expertise. Many no longer understood why “consumer and producer sovereignty” provided by markets was not, by and large, sufficient means of securing economic democracy. Many social democrats no longer understood why joint labor-management advisory committees in capitalist firms were usually fig leafs rather than meaningful vehicles for self-management. By century’s end, the debate among social democrats over plan versus market was merely a debate about situations where markets were relatively more efficient and circumstances when efficiency required more “planning” in the form of policy interventions of one kind or another in the market system. Why markets violate economic democracy, and how planning by  bureaucrats and corporations can obstruct economic self-management for workers and consumers were no longer issues addressed by social democratic parties by the 1980s.

Similarly, by century’s end social democrats no longer knew what economic justice was. Were workers exploited only when they were paid less than their marginal revenue products? If who deserves what is to be decided according to the value of contributions, why do owners of machines and land that increase the amount it is possible to produce not deserve compensation commensurate with those contributions? Unable to answer these questions, social democrats increasingly avoided them. Social democratic union leaders fell into the trap of justifying wage demands on the basis of labor productivity. By doing so they lost track of the fundamental Marxist truth that profits are nothing more than tribute extracted by those who own the means of production, but do no work themselves, from those who do all the work. Moreover, having accepted the morality of reward according to the value of contribution, it was a short step to concentrating on winning wage increases for employees with more human capital and abandoning workers with less human capital. According to a contribution based theory of economic justice, who is more exploited is determined by whose wage is farthest below their marginal revenue product. No matter how much lower the wages of some workers are than the wages of other workers, if the difference between the marginal revenue product and wage of high wage workers is greater than the difference between the marginal revenue product and wage of low wage workers, it would be the workers with higher wages, not those with lower wages, who are more exploited. So social democratic leaders could justify abandoning the worst off sectors of the working class and prioritizing the interests of  high wage sectors on (false) grounds that workers with higher wages were often “more exploited.” Had they remained clear about what economic justice really means — reward according to effort or sacrifice — it would also have remained clear that workers with lower wages are not only worse off, they are also more exploited. But losing their moral compass provided a convenient excuse for social democratic union leaders and politicians since those with less human capital are often harder to organize, harder to win wage increases for, harder to collect dues from, harder to solicit campaign contributions from, and harder to motivate to get out and vote. In short, accepting reward according to contribution provided a ready-made excuse for a shift in priorities toward a constituency that could increase social democratic political power within capitalism more easily.

In sum, accepting capitalism in a strategic compromise turned into accepting the ideology that justifies capitalism as well. While the effect of strategic concessions on electoral results was always hotly debated, the effects of theoretical and moral concessions were less debated in social democratic circles. In my opinion, however, it was the theoretical and moral concessions that were primarily responsible for slowing social democratic reform momentum, and finally rendering social democracy powerless to fight back against right wing campaigns that rolled back reforms with remarkable speed and ease at century’s end.

The Decline of the Swedish Model: Magnus Ryner introduces his insightful discussion of the crisis of Swedish social democracy as follows:

The overall theme of my argument is that it is important to neither reduce the crisis of social democracy to a set of external constraints totally outside the control of social democratic actors, nor to argue that nothing fundamental in the structural environment has changed, and that the crisis is simply an effect of a betrayal of ideas by social democratic elites. The former approach ignores actual tactical and strategic failures of actors, fails to appreciate alternative options and strategies that might have been pursued and that might provide lessons also for the future. The latter approach ignores the profound structural change that has taken place, and that has redefined the terms of social democratic politics (MR: 40).

Not only is this a realistic and useful way to look at the issue, Ryner provides insightful particulars to flesh out the picture. He remarks that “the transformation of international monetary institutions and global financial markets, the emergence of the Eurodollar and other offshore markets, the flexible exchange rate system, mounting government debt, and the growing asymmetries between creditor and debtor nations has made high finance the pivotal agent in the allocation of economic resources.” (MR: 42) And he fingers the crucial difference between “the ‘double screen’ of Bretton Woods that ensured the capacity of states to manage aggregate demand and to mitigate market-generated social disruptions” and the neoliberal transformation that “deliberately reshapes state-market boundaries so as to maximize the exposure of states to international capital markets and discipline social actors to conform to market constraints and criteria.” (MR: 43-44) As far as I’m concerned Ryner could have dispensed with questionable theories like “Taylorist production norms reaching their sociotechnological frontiers,” “the end of Fordism,” and “flexible specialization replacing economies of scale” others have written much about in explaining why Sweden’s social democrats faced more difficult circumstances at the end of the twentieth century than they had in mid-century. Multinational corporations’ success in getting the rules of the international economy rewritten in their favor, and in favor of financial capital in particular, is sufficient to explain why it became more difficult for Swedish unions and the Swedish government to wrestle part of the social surplus away from Swedish and multinational corporations for those who actually produced it. But not only do all social democrats bear some of the blame for permitting the rules of the international economy to be rewritten in ways that were detrimental to the interests of their traditional constituencies, Swedish social democrats played into the hands of Swedish capitalists allowing them to regain their dominant position in the Swedish economy.

Failure to Wage Class War: Ryner tells us “one should not underestimate the sense of weakness in business circles” in 1970 when Swedish capital faced “the profit squeeze, increased employers’ contributions to finance social consumption, juridification of the labour process, and an outright challenge to private ownership of the means of production.” (MR: 58) But instead of pushing for a new social compromise that won employees greater participation as the Meidner plan called for, and instead of increasing the role of the state in accumulation and investment, Swedish social democrats concentrated on preserving the status quo and their distributive gains in face of a worsening international economic situation. In other words, when they had the chance, Swedish social democrats balked at taking that next reformist step no social democrats ever dared take in the twentieth century, which would also have permanently weakened the power of Swedish capitalists.

What went little noticed at the time was that by frightening Swedish capitalists but leaving them breathing room, the social democrats allowed the Skandinaviska Enskilda Ganken/Wallenberg group, who had only reluctantly accepted the social democratic compromise in the first place, to take over the Swedish employers association (SAF) from the Handelsbank group which had supported the “Swedish model.” The shift in power became clear to all when “Asea’s Curt Nicolin was appointed executive director of the SAF in 1978, an event described as a ‘culture shock’ by senior officials of the organization.” (MR: 59) Under new “hyperliberal leadership” Ryner tells us the SAF “assumed a position of total non-accommodation in the public commission responsible to iron out a compromise on wage earner funds, attempts to overcome difference with the Swedish Labor Confederation (LO) on wage levels and collective savings were abandoned, and by January of 1992 the SAF had unilaterally exited from all corporatist forms of bargaining.” (MR: 59) In short, frightened Swedish capitalists embraced new internal leadership willing to battle not only against social democratic programs but social democratic ideology as well. Taking advantage of neoliberal international conditions that strengthened their cause, and a retreat offered by moderate proponents of “the third way” within the Swedish social democratic party, the SAF went on to roll back the “Swedish model” in the late 1990s.

The Third Way: A Trojan Horse: Ryner argues convincingly that despite external shocks to an overly specialized and vulnerable Swedish export sector, and despite the increasingly hostile neoliberal international environment, Swedish social democrats still had options they failed to pursue that could have changed the outcome. Moderate “third way” social democrats called for a retreat in face of more difficult economic and political conditions, while the more progressive wing of the Swedish social democratic party (SAP) called for an expansion of economic democracy. Ryner provides an invaluable description of how “third way” policies paved the road to economic failure and political defeat that all who are attracted to such policies would do well to heed. This lesson is so important I quote Ryner at length:

The economic policy of the SAP 1982-90, coined “the third way” (between Thatcherism and Keynesianism), presupposed that “supply-side” selective labour market policy measures and a coordinated restraint in collective bargaining would be sufficient measures to contain unemployment and inflation. The policy ultimately faltered because long-term GDP and productivity growth were not realized, and the implicit incomes policy failed. A basic fallacy of the policy was the premise that increased private profits and investments would regenerate GDP and productivity growth. Apart from the success of pharmaceuticals, there was little growth in new dynamic sectors and enterprises. Instead the strategy benefited existing firms, which had a “golden decade” despite the lack-luster performance of Sweden’s economy. (60)

The government deregulated capital and money markets in 1985, and this was followed by a formal deregulation of foreign exchange markets in 1989. Moreover, the strategy in managing the public debt changed. Together with a vow not to devalue again, the government declared it would no longer borrow abroad directly to finance the debt or cover balance of payments deficits, but would rather only borrow on the domestic market. This meant that in order to maintain balance of payments, the Swedish interest rate would have to increase to a level where private agents would hold bonds or other debts in Swedish krona, despite the devaluation risk. In other words, the Ministry of Finance and the Central Bank deliberately sought to use global financial markets for disciplinary purposes on unions (LO and TCO) and social service agencies in wage and budget bargaining. The LO and TCO did not consent to their marginalization, and continued to demand support for solidaristic wage policy and did not heed the “moral suasion” of incomes policy since there no longer was a coherent common moral framework. It led to what became known as the “War of the Roses” between the Ministry of Finance on the one hand and the unions and social service cadres on the other. ( MR: 62)

It should be noted that these policy changes were not subjected to debate and approval in any party congresses or in the electoral arena. Only the Central Bank and the Ministry of Finance were effectively involved. Concurrently, just as these policies were implemented, the “third way” was still presented to party ranks and in the electoral arena as a reformist socialist response to the crisis in opposition to neoliberalism. (MR: 63)

These “third way” economic failures Ryner describes so well also led to electoral defeat. “It was in the context of the ‘extraordinary measures’ of a wage freeze and a temporary ban on strikes that the electoral support of the SAP plummeted to a historical low, ultimately leading to a humiliating electoral defeat in 1991.”(MR: 63) But more importantly Ryner explains how “third way” politics led to a rightward shift in the entire Swedish political spectrum.

The SAF began to assume the role of an aspiring hegemonic party, attempting to shape intellectual and popular discourse and the terrain of contestability in civil society in a market friendly direction. Although this strategy has fallen short of realizing a Thatcherite national-popular hegemony in Sweden, it has nevertheless been quite a success. It ensured the defeat of wage earner funds in the electoral arena. More broadly, it has made neoliberal ideas popular in the middle-class strata, which is reflected in the successes of the Moderaterna (the neoconservative party) and the rightward shift of the liberal Folkpariet on economic issues. The subsequent shift in the substance of academic discourse in economics also took place in the context of strategic business funding of economic research. (MR: 59)

Is “Economic Democracy” Still Possible? Rear guard measures clearly failed to save the Swedish Model, and it should now be apparent to all that “third way” politics functioned as a Trojan horse for the economics of competition and greed inside the walls of the Swedish Social Democratic Party. But was there a viable alternative that could have produced better results? Ryner admits conditions were unfavorable, and  there is no way to know for sure. But he goes to great lengths to point out ways in which moving the reform agenda forward — increasing what Swedish social democrats call “economic democracy” rather than unleashing market forces — might have had more success.

Ryner argues that continued expansion of social welfare programs that were the hallmark of the Swedish Model in its heyday eventually required increases in productivity. But he points out that the left within the SAP consistently offered proposals aimed at these objectives. In other words, contrary to complaints from neoliberals abroad, Swedish conservatives, and third wayers inside the SAP that the Swedish left was only about redistribution, the LO, social service agency cadre, and their progressive intellectual allies inside the SAP had a coherent program to stimulate productivity, investment, and growth. In other words, they were neither short-sighted nor exclusively about redistribution.

The LO launched an offensive for “industrial democracy” in the early 1970s which led to the Codetermination Act, the Work Environment Act, and Legislation of Employment Protection. But all attempts to build on these beginnings came to naught. In 1976 the LO endorsed the “Meidner Plan” to expand worker participation and gradually give them partial ownership of the firms where they worked. On numerous subsequent occasions the LO proposed ways to increase “collective savings and investment” through excess profit taxes and wage earner funds (The fourth AP fund, the Waldenstrom Report, and the LO wage earner fund proposal of 1981.) Unfortunately “the LO never managed to convince the rest of the social democratic movement that it was worth the electoral risks to mobilize around the issue.” (MR: 57) In their excellent chapter on what they call the Swedish “Middle Way,” Charles Sackrey and Geoffrey Schneider describe what reformers hoped would be the effect of wage earner funds: “The funds were intended to be used to buy up shares of companies, so workers could gradually gain a voice in all business decisions. Once labor leaders became owners, they would sit on corporate boards and directly influence corporate decision making. Laborers could then keep firms from moving overseas, or downsizing workers unnecessarily. The funds would also inject Swedish firms with new capital for investment.”  But of course, this is not the kind of program for investment and growth that Swedish capitalists were interested in. More to the point, advocates of “the third way” in SAP did not buy it. As we saw, they preferred instead to put their faith in private savings and investment, and in market discipline and financial liberalization to promote investment and growth. It is widely acknowledged that increasing participation increases worker productivity. Unfortunately there is no telling to what extent this might have happened in Sweden because it was never tried.

The second plank in an alternative response to the crisis of Swedish social democracy would have been to strengthen government control over credit, rather than loosen it. Gregg Olsen provides a mind-numbing description of the disaster unleashed by “third way” social democrats who succumbed to the croonings of neoliberal financial reformers instead of heeding the warnings of Keynes and the old guard leadership of  SAP.

The Swedish credit market was rapidly deregulated throughout the 1980s. By the end of the decade, Sweden’s long standing system of controls over foreign investment and exchange and the financial sector were effectively eliminated. Finance houses proliferated during this period, and money flooded into office buildings and real estate. However, the speculative boom ended in short order. The Swedish credit system foundered by the end of 1991, forcing the government to divert tax revenues to bail out several of its major banks at a cost of 3% of GDP.

Along with retaining strong controls over domestic credit, Swedish social democrats would also have had to adopt strong measures to prevent capital flight and prevent international finance from exercising defacto veto power over Swedish social democratic policies. But unlike underdeveloped economies where it is more important to achieve a net inflow of investment, as a highly developed economy Sweden faced the less daunting task of merely preventing a net capital outflow. With sufficient controls on Swedish capital flight, Swedish social democrats could have withstood a virtual boycott by international investors. It is not unreasonable to believe that once having done so, international investors would have eventually reentered profitable Swedish markets on terms acceptable to social democratic governments.

There is no telling if Swedish social democrats could have mobilized enough popular support to sustain an alternative program along these lines. Ryner provides compelling evidence that there was strong support for such policies among workers and beneficiaries of Sweden’s social programs. Quoting surveys, Ryner tells us “there is a profound divide between the increasingly neoliberal paradigm of Swedish elites and the continued welfarist ‘common sense’ of the Swedish people.” (MR: 39) So according to Ryner support for a program to deepen “economic democracy” was lacking in the SAP leadership and its economic advisors rather than in the SAP base. Nor is there any way to know if the SAP had mobilized support behind such a program whether international conditions would have permitted Sweden to move from a left Keynesian welfare state toward deeper and more productive “economic democracy.” What is now known is that “the third way” was a huge step back toward the economics of competition and greed, and the vast majority of the Swedish people are worse off for it.

Libertarian Socialism: Not Always a “Basket

Leave a comment