The Economics Of Social Democracy – Social Europe Journal

The Economics Of Social Democracy – Social Europe Journal.

By John Weeks

In a recent article in the Social Europe Journal Shayn McCallum develops in some detail his interpretation of the “political economy” of social democracy. Central to his approach is the work of Karl Polanyi, and specially the famous Chapter 6 of The Great Transformation, “The Self-regulating Market and the Fictitious Commodities: Labor, Land, and Money”. This chapter, obviously influenced by Karl Marx who is not cited, provides the basis for developing the “economics” of social democracy.

I specifically seek to distinguish the economic policy framework of social democracy from that of “liberalism” as that term is used in the United States (for a longer discussion see Chapter 10 of my new book, The Economics of the 1%). US-style Liberalism under different names has characterized the policies of the left of center parties in most of Western Europe.

The economics of Liberalism at its core assesses capitalism as suffering from imperfections and distortions, but an essentially stable, effective and even efficient organizer of production and distribution. A society’s economic framework involves designing and implementing policies to correct or eliminate the imperfections and distortions. At the macroeconomic level policy seeks to correct the tendency for capitalist economies to operate at less than full employment. A clear example of this policy is the US Full Employment Act of 1946, which mandated Congress to “promote maximum employment”, as well as creating the presidential Council of Economic Advisors. Complementary to fostering employment in the Liberal framework is the use of the tax structure to prevent extreme differences across the income distribution.

At the sectoral level the Liberal economic policy seeks to enforce or establish market competition. This policy derives from an analysis that views competition as an effective regulator of business behavior. Its antithesis, monopoly (or more generally monopolistic competition), results in misallocation of resources and abuses derivative from market power. Of particular importance is close regulation of the financial sector, which characterized both the United States and Western European countries during the thirty years following World War II. I would argue that the enthusiasm for financial deregulation beginning in the 1970s disqualifies as Liberal all US presidents as well as Tony Blair and Gordon Brown in the United Kingdom.

To summarize, the Liberal economic framework rest on the presumption that capitalism tends to stability, and the task of policy is to correct its inefficiencies and excesses. In contrast, the economics of social democracy derives from an assessment that capitalism is inherently unstable and competition the basic cause of that instability. Writing in the foremost economic publication of the time, The Economic Journal, in 1946 the British economist K. W. Rothschild summarized the social democratic view of competition succinctly,

…[W]hen we enter the field of rivalry between [corporate] giants, the traditional separation of the political from the economic can no longer be maintained. Once we have recognised that the desire for a strong position ranks equally with the desire for immediate maximum profits we must follow this new dual approach to its logical end.

Fascism… has been largely brought into power by this very struggle in an attempt of the most powerful oligopolists to strengthen, through political action, their position in the labour market and vis-à-vis their smaller competitors, and finally to strike out in order to change the world market situation in their favour.

How is the Economics of Social Democracy different?

To state the social democratic argument simply, competition among great corporations generates the instability and anti-social tendencies in capitalist society, leading to dictatorship not freedom. If competition is the essential flaw in capitalist economies rather than its stabilizing force, this implies a fundamentally different approach to regulation. To use the dichotomy made popular by the Occupy Movement, the malign effects on competition imply that in markets the 99% confront the overwhelming power of the 1%. To use more traditional language, in markets capital is strong and labor is weak.

The overwhelming strength of capital in markets sets the social democratic agenda for the economy – restrict the role of markets in society. This has taken two forms: 1) replacing private enterprise with public sector institutions, and 2) ending the commodity status of labor and also of important elements of basic human needs.

With regard to the first, the vast majority counters the combined strength of capital by collective action implemented through public sector institutions. Controlling the power of capital has two parts. Collective action by the majority restrains the power of capital by severely restricting the role of wealth in the political process, including regulation and/or public ownership of the media (e.g., public sector radio, television and in the current era the internet). These restrictions can take the form of strict regulation of private enterprise, direct public ownership, or converting private profit-making enterprise into non-profit institutions (such as the British Broadcasting Corporation).

Following the deregulation of banking in the United States and Europe, economic activity has increasingly come under the control of finance capital. Essential to the social democratic project will be to neutralize the power of finance. As for the media, collective action can achieve this neutralization through direct public ownership or converting financial institutions into non-profit enterprises.

Introducing a guaranteed minimum income for all citizens would severely limit the commodity status of labor. This would in effect eliminate unemployment as a method of disciplining labor. Working people would have a real choice among employers and types of work, rather that forced to take whatever might be offered. Health care, education and basic transport are not items of consumption. Rather, they are activities to maintain the productivity of the labor force and facilitate a decent life lived with dignity. A social democratic society ensures universal provision of these without regard to ability to pay.

This core agenda, replacing destabilizing private sector enterprise with public institutions and insolating labor from the misery of unemployment, is consistent with an economy in which production is overwhelmingly in the hands of capital. However, the power of capital to dominate markets and the political process would end.

To summarize in a sentence, Liberalism seeks to tame capitalism, while social democracy aims to restrict capitalism. While some policies apply to both, such as countercyclical fiscal and monetary policy, the economic frameworks of Liberalism and social democracy are quite different. Forty years ago the economics of social democracy to varying degrees characterized countries in Europe, most obviously the Nordic states, West Germany and the United Kingdom. The defeat of social democracy required the dismantling of the regulations that constrained the power of capital.

From the point of view of the vast majority, the countries of Europe and much of the rest of the world have gone down a cul de sac of deregulation and liberation of capital. We shall escape this cul de sac of dominance by financial capital by turning around and going back the way we came in. We shall achieve a more permanent exit with a social democratic economic agenda rather than Liberal re-regulation.

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