Social democracy and the European Social Model

This text is the concluding chapter of the essay published in the Papers: of Insight with the title: "The rise and fall of socialism", For the "References", please, look at the essay. 

 The label of social democracy applies to a fully capitalist economy with an active economic policy of the government, a significant though not necessarily  dominant public sector, with price and investment policies of state enterprises used to promote government targets, monetary and fiscal policy used to raise investment and employment, the use of direct controls if necessary, the responsibility of the welfare state for health, education, pensions and the availability of housing at accessible prices, with measures of income redistribution in order to alleviate poverty and inequality. These measures are based on a political and moral imperative – although similar policies and achievements must be credited politically and morally also to conservative or liberal governments, from Bismarck to Macmillan, in order to ensure social peace in an antagonistic capitalist system.  

Social democracy has also suffered, albeit to a lesser extent than socialism, of the pretence that economic laws could be suspended or ignored. This is true both for the extreme Left – for instance with Potere Operaio in Italy recommending to workers the strategy of “refusal to work”, as if all could enjoy the condition of rentiers, or with the Paris May 1968 slogan “Soyez réalistes, demandez l'impossible” – and for social democracy. For instance, at the Labour Party Conference in Blackpool in 1949, Aneurin Bevan declared that  "The language of priorities is the religion of socialism", confirming the confused thinking and the abandonement of a correct economic valuation of strategic alternatives on the part of social democratic leaders.  

For a long time, until New Labour came to power in the United Kingdom (1997) rarely did social democrats ask themselves whether there might be feasibility limits to the welfare state, or considered the possibility and implication of opportunistic behaviour (so-called moral hazard). Or whether a capitalist economy might prosper and grow without profit margins sufficient both to finance and to encourage investment. Whether an economy open to international trade and investment should not worry about its own international competitiveness. Whether or not there might be limits – though flexible, but precisely because of their flexibility also dangerously uncertain – to public expenditure, whether financed through inflation or the rise of public debt. Whether public enterprises have a role in growth promotion not only in strategic sectors like energy or steel or the development of new technologies, but also in sectors like food or textiles.

Trade Unions, that are a driving force of social democracy, are in manifest conflicts of interests with the rest of the population, in that they represent only a part (continuously falling) of dependent workers, mostly males. When strikes interrupt the production of goods that continue to be available to the public out of existing inventories, strikers inflict a loss on their employers, thus raising their probability of victory in a conflict; but when strikes concern essential services (transport, trade, health, education) most of the damage is inflicted on service users (travellers, shoppers, the sick, students), and therefore strikes are counterproductive, alienate the public and necessarily must be limited and regulated.

It is true that sometimes trade unions have recognised that there are limits to the compatibility of wage claims with the fight against inflation and the promotion of employment and growth: for instance many Italian unions have recognised that the wage is not an “independent variable” of the capitalist economy but it is subject to consistency with other objectives. More often however Unions set themselves impossible objectives, like the preservation of jobs in enterprises facing bankruptcy or in crisis situations, although they ought to realise the economic implications of their negotiating positions.

In spite of all of these limitations, the social democratic model has been realised on a large scale and has had some considerable success in various countries of western Europe, in a form that was designated as the European Social Model (ESM). The Treaty of Rome (1957) did not contemplate social developments; successively the coordination of the systems of social security of member countries was neglected or blocked by United Kingdom opposition, including the blocking of the espace social europeen sought by Jacques Delors. Only in 1989 was a Charter that guaranteed minimum social rights established, under the guise of a political non binding declaration (Vaughan-Whitehead 2003).

A document of the Nice European Council (2000) states that “The Social European Model, characterised in particular by systems that offer a high degree of social protection, by the importance of social dialogue and by services of general interest that cover activities essential to social cohesion, today is based, beyond the diversity of social systems of single Member States, on a common core of values” (para 11, p. 4; see Giannetti-Nuti 2007). This characterisation was underlined in the Barcelona summit of 2002 and in many other occasions, for instance in the European Parliament (2006).

A lucid characterisation of the ESM-European model of social dialogue and the American model is provided by Freeman (2005). In some respects the two economies are like “two peas in the same pod”: advanced capitalist systems, abiding by the rule of law, protecting private property, guaranteeing freedom of association, with various degrees of social security and welfare systems, combining “institutional regulations and markets to determine economic outcomes. The difference is in the weights they place on institutions versus markets, not the qualitative differences that divided capitalism from communist state planning” (Freeman 2005, p. 3).

For Freeman (2005) the US economy, in its idealised form, conforms to the neoclassical theory of markets “where the Invisible Hand of exit and entry determines outcomes” (p. 3). Trade Union membership has declined to a low level and wages and employment have become largely market-driven. Firms’ employment policy and wages policy do not have to be negotiated with employees, who can take it or leave it. Product markets are little regulated and firms can enter and exit easily. Employment is the primary form of social protection, including access to health care. University activity and funding are geared to the demands of business communities.

The EU system, instead, “relies more on the non-market institutions of ‘voice’ to determine outcomes, particularly in the labour market” (ibidem, p. 3; the reference to ‘voice’ is taken from Hirshman 1970). The EU requires dialogue between social partners at the company level, through the Works Councils (EC 94/45/EC), at sectoral and inter-professional level through sectoral and Social Dialogue Committees, at the aggregate level through the Standing Employment Committee, and Advisory Committees (e.g. on social security); there are also Occupational Health and Safety committees. Wages are determined by collective bargaining through agreements between federations of employees and employers applying also to firms that are not party to the agreement. Firms entry and closure, and employee lay-offs, face greater administrative obstacles in most EU countries. Welfare state financing requires higher taxes. Higher education is funded and run by the government, with lesser concern for and support by business circles. Judt (2005) maintains that the European Social Model is “what ties together the Europeans”: “We are so engaged in remembering all that states do badly, that we have forgotten what they do well... The Anglo-American model with its privatisation cult is not only ethically dysfunctional, but will soon be recognised as economically dysfunctional”.

A major problem in system comparison is to what extent performance differences can be attributed to institutional differences (Freeman 2005). However Freeman points out that the US outperformed the EU in the 1990s up to the mid-2000s, but some of the smaller EU social dialogue countries, like Ireland, Austria, the Netherlands and Denmark, had an exemplary performance in the same period, while the EU outperformed the US from the 1950s through to the 1990s. Eichengreen (2006) also stresses that relative EU and US performance depends strictly on the periods selected. “Since the turn of the century, the euro zone has created more jobs than the United States” (The Economist, 27 January 2007; the position was reversed in subsequent years, primarily because of different policies adopted to deal with the Great Recession and because of the Euro crisis).  Income inequality is lower in the EU than in the US, also, and with better universal health care at lower cost in the EU than in the US.

The European Social Model has been subjected nevertheless to particularly strong criticism. Goodin (2003), for instance, claims that all Coordinated Market Economies “are naturally doomed to extinction”, because non-market co-ordination takes a long time to build and can be disrupted very fast; the system is vulnerable and unstable. “Liberal Market Economies ultimately [will] prevail”. Shackleton (2006) considers the model “not so much as a descriptive category, more as an aspiration” (p. 46), a criticism justified by the fact that the model’s features have never been part of the acquis communautaire, i.e. the statutory obligations of Member States. However at the same time Shackleton deems the ESM as responsible for EU slower growth, slower job creation and higher unemployment (looking only at 2003-2005), attributed primarily to labour and product market rigidities, higher levels of government spending and taxation and social partners involvement; the model ”is in crisis” and has no future.

In reality the European Social Model came to fade and practically vanish as a general tendency because of other reasons: its optional, non statutory nature already mentioned, the dilution of the model through Union enlargement to the hyper-liberal countries of post-socialist transition from 2004 onwards; the reduction of workers contractual power as a result of globalisation, that raised global labour competition through migrations, de-localisation of production and above all through foreign trade; the progressive diffusion of hyperliberalism and austerity in the EU; and the Great Recession that began in 2007 and is still in operation.

From time to time, intermittently, European institutions reaffirm vague principles that correspond to the original design of a European Social Model. For instance, on 17 Novembre 2017 the European Parliament, the European Council and the European Commission proclaimed a European Pillar of Social Rights in Gothenburg.  The basic idea of this initiative was that Eurozone stability required an effective capacity of stabilisation in any of the states that belong to it: to begin with, generous unemployment subsidies, the end of labour market segmentation (between fixed term precarious employment and indefinite labour employment), the activisation of the unemployed; the re-insurance of national insurance systems against unemployment. At the same time the presence of an externality was recognised: a country that insured itself against unemployment would benefit also neighbouring countries.

Officially the extremely ambitious 2017 Pillar should “realise new and more effective rights for citizens”; European Commission President Juncker requested its approval “to avoid social fragmentation and social dumping”. However there is no coherent design for a European Social Union, no project for European obligatory legislation; thus all these beautiful principles remain the individual and voluntary responsibility of Member States.

Perverted social democracy: globalist, austerian, unequal

Towards the end of the 1990s the fall of the Berlin Wall and the victory, seemingly definitive at the time, of hyper-liberalism, provoked a late and exaggerated conversion of social democracy to hyper-liberalism.

This happened first in the transition countries on the part of right and left governments alike (as we have seen earlier), then in western Europe under the leadership of Tony Blair’s New Labour and his Third Way, replicated by the German Neue Mitte of Gerhard Schroeder.  By the end of 1998 13 out of the then 15 EU members (except for Ireland and Spain) had social democratic or left-wing coalition governments; social democrats also held a dominant position in the European Parliament, which they promptly lost in 1999. A similar strategy can be found in the policies followed by President Bill Clinton in the United States (Meeropol 2000).

Blair and Schroeder (1999) reaffirm their commitment to uphold traditional socialist values: “Fairness and social justice; liberty and equality of opportunity; solidarity and responsibility to others: these values are timeless. Social democracy will never sacrifice them” (p. 2).

However their social democratic project differed drastically from traditional social democracy in three major respects.

1). The acceptance of the primacy and desirability of internal and international markets, fully recognising their global nature in the modern world. “The market is part of the social organisation we desire, not just a necessary means which we reluctantly admit that we need, and need to master” (Karlsson 1999). Thus they were oblivious to the national and global adverse distribution implications of market allocations. In 1998 Peter Mandelson – Business Secretary in the Labour government and European Commissioner for Trade – declared: “We are intensely relaxed about people who become filthy rich – as long as they pay their taxes”, although in 2012 he admitted that he would not have repeated such “spontaneous and unthoughtful” statements, because “globalisation has not generated rising incomes for all” (Guardian 26/1/2012).

The belief that globalisation benefits everybody, a tide that lifts all boats, whose benefits in in any case “trickle down” from the initial gainers to the rest of the population, is widespread (e.g. Yergin and Stanislav 1998). In fact international trade liberalisation undoubtedly involves net benefits, but at the same time it inflicts gross losses on some of the national subjects affected. The possibility of an overcompensation of losers on the part of the gainers is not sufficient to declare an improvement in general welfare, because actual overcompensation is essential for that purpose. And precisely at an international level the practical possibilities of overcompensation are limited by the lack of supernational governance organs with redistribution functions. Moreover such overcompensation, even if it were possible, might involve inegalitarian transfers from poor gainers to relatively richer losers. Finally, the advantages of trade liberalisation do not necessarily extend to the liberalisation of financial capital movements and labour migrations, nor to agreements regulating standards, competition and jurisdictions (Rodrik 2018a).

2) The rejection of public ownership and enterprise, in support of private entrepreneurship and a decisive and continued privatisation of state assets. ”The government does whatever possible to support enterprise but does not believe that it can substitute it ... we want a society that celebrates successful entrepreneurs as it does artists and footballers – and appreciates creativity in all spheres of life” (Blair and Schroeder, 1999). Privatisations have involved the abdication of the entrepreneurial role of the state in research and innovation (Mazzucato 2011, 2013), the neglect of essential public services and the diffusion of public private partnerships (PPPs) that collectivised risk and privatised profit, the destruction of building societies and of the entire mutual societies sector through the privatisation of capital that belonged to its members and was not for the government to dispose of. All these distortions have soon demonstrated the limits and drawbacks of privatisation. Finally, the promoters of the Third Way insisted on:

3) Affordability, in the sense of fiscal discipline and a restrictive monetary policy, rejecting therefore both Keynesian policies of public deficits financed by debt, and inflationary monetary expansion. “A healthy public finance should not be a reason of pride for social democrats”. “... deficit expenditure cannot be utilised to overcome the structural weaknesses of the economy which are an obstacle to faster growth and higher employment. Socialdemocrats, moreover, should not tolerate excessive levels of public debt, which imposes an excessive burden on future generations and could have other undesired distributive effect. All the money spent for the service of a high public debt is not available for other priorities [sic] among which an increase in investment in education, formation or transport infrastructure”. (Blair and Schroeder 1999, p.10). These astounding propositions rule out anti-cyclical interventions regardless of the phase of the business cycle, take for granted intergenerational effects that are inexistent or exaggerated or at the very least questionable, they confuse objectives with “priorities” and presume that the most important objectives should necessarily be sacrified to fiscal and monetary discipline.

Such fiscal restraint initially found strong support in two strands of economic theory that appeared in the 1990s and 2000s, on presumed “expansionary fiscal consolidation” (for instance Giavazzi and Pagano 1990, 1996) and on the alleged existence of a public debt threshold of 90% of yearly GDP, beyond which debt would exercise a negative impact on GDP growth (Reinhart and Rogoff, 2010).

Fiscal consolidation – the reduction of public deficit via expenditure cuts and/or higher taxes – would promote private sector-led growth through a reduction of crowding out private expenditure, the expectation of lower future taxes (due to Ricardian equivalence of borrowing and taxes in funding government expenditure), confidence improvements, lower interest rates, net exports promotions via a weaker currency. Except that by 2012 IMF researchers revised estimates of fiscal multipliers, generally assumed to be around 0.5 in OECD countries for the previous twenty years, to values in the range 0.9-1.7, due to the recession, exchange rate rigidities especially in the Eurozone, and simultaneous fiscal consolidation occurring in a large number of countries (IMF 2012, Blanchard and Leigh 2013).

This meant that the cost of fiscal consolidation has been grossly under-estimated. Moreover Nuti (2013b) shows that, if the fiscal multiplier is greater than the inverse of the Public Debt/GDP ratio, fiscal consolidation necessarily raises instead of lowering the Public Debt/GDP ratio with respect to what it would have been without consolidation. This appears to be the case for all or nearly all of advanced countries, assuming national multipliers equal to the IMF newly revised average. Fiscal consolidation reduces the Public Debt/GDP ratio only in the least indebted countries that do not need such a reduction. Consolidation makes debt less rather than more sustainable, consequently making necessary further fiscal consolidation, activating a vicious circle. Finally, the maintenance and growth of a gap between potential and effective income discourages investment and slows down both potential and actual growth.

The notion of a threshold to public debt was based on a new dataset of 44 countries spanning about 200 years, incorporating “over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances”; Reinhart and Rogoff found that “the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more” (p. 22-23).

However Herndon et al. (2013), who replicated Reinhardt’s and Rogoff’a analysis using the original data, found that they selectively had excluded available data for several Allied nations—Canada, New Zealand, and Australia—that emerged from World War II with high debt but nonetheless exhibited solid growth. And summary statistics were all weighted equally regardless of the duration of high debt and growth performance. Herndon et al. (2013) conclude that “… when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not 0.1 percent as published in Reinhart and Rogoff”. It turns out that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios
are lower” (p. 1).

Unfortunately such an amazing, cumulative and final discrediting of both expansionary fiscal consolidation and the associated 90% threshold to debt sustainability, does not appear to have had much impact on actual policies, above all by EU and especially Eurozone countries. In the Southern member states of the Eurozone, social democratic support for or even acquiescence in the premature creation of a Common Currency, ahead of political, fiscal and banking unification, condemned them to unnecessary unemployment and stagnation and is simply unforgivable.

The supporters of the Third Way claim to uphold the values of social democracy but – apart from the spectacular reversal of social democracy’s pacifist traditions in Iraq –take away from government every single traditional instrument of economic policy needed to implement social democracy: fiscal policy is constrained by balanced budgets, monetary policy is delegated to a Central Bank that is not only independent of the government but is totally disconnected from fiscal policy; privatisations remove the government ability to influence distribution and growth through the price and investment policy of public enterprises; direct controls are replaced by market parameters. In practice the only instruments left to government economic policy are so-called “reforms”, and in particular the alleged
“structural reforms” (IMF 2015).

A reform by definition should be a change for the better, and a structural reform an embedded significant change for the better, which therefore would have to be unanimously accepted and not politically controversial. The problem is that there is not and there cannot be a total agreement on the desirability of any given reform, in view of its re-distributive effects. And in any case any positive effect of implemented reforms, even if present, would only take place in the longer period (five or ten years), with likely strong negative effects in the short period. In other words, even successful reforms are a form of investment, whose return even if positive may not necessarily be sufficiently high for it to be wholly desirable or accepted.

In truth reforms, whether structural or not, are only an offensive and misleading euphemism for what characterises the precarious nature of employment (Standing, 2009), the facility to dismiss dependent workers even without just cause and the continuous and profound dismantling of the welfare state. The IMF has confirmed the ineffectiveness of these measures for the purpose of relaunching the economy, but nevertheless hyper-liberal governments – whether or not social democratic – have adopted such instruments with an enthusiasm worty of better causes.

The 1996-97 Labour Third Way project proposed also the realisation of an economy of stakeholders, understood as bearers of legitimate interests different from those of enterprise owners/shareholders, in their capacity as employees, managers, customers, suppliers, creditors and debtors, local authorities and communities, the environment. The sheer multiplicity of enterprise stakeholders makes the resolution of their inevitable interest conflicts an extremely difficult and practically impossible task. It is no accident that the proposal rapidly petered out and vanished.

A de-centralised solution of stakeholders’ conflicts might arise from the voluntary recognition on the part of enterprises of their social responsibility, sacrificing profit maximisation to the achievement of social peace and consensus. However there is no reason why enterprise managers taking this course should really sacrifice their long term profits; presumably they would sacrifice only a small part of their short-term profits, which they would convert into greater social peace, without resolving the fundamental problem of conflicts among stakeholders and between them and shareholders, which by its own nature cannot be resolved (Nuti 1998).

Another example of an apparently innovative Labour Third Way policy, which turned out to be simpleminded and ineffective, is the concept of “pre-distribution”, introduced by Hacker (2011) and re-launched by Ed Miliband (in an interview with the New Statesman, 6 September 2012) while Leader of the Opposition. According to this approach the state, instead of reducing inequalities by re-distribution through taxes and transfers after inequalities have already occurred, should prevent them before they happened.

The reduction of market inequality could be achieved in many ways: raising the productivity of lower-paid workers by training them, and generally facilitating investment in human capital; improving child care facilities thus improving parental access to work; reducing the gender wage gap; facilitating employment of disabled and older workers. At the same time excessively high salaries can be reduced, together with unjustified wage differentials and obstacles to competition. The role of trade unions in protecting the lower paid and their work conditions could be stenghtened; workers’ participation in company governance can be introduced. The markets for consumption products and capital, and especially energy, can be made more competitive thus promoting employment. Finally, local autorities should be given greater discretionary resources for the construction of low-rental housing. A favourable treatment of early successions might improve access to capital on the part of the young.

It is hard to disagree with the desirability of all these measures: everybody would want a high skill high wage economy, just as everybody loves  motherhood and apple-pie. But these pre-distribution measures are complementary and not substitutive of traditional re-distribution interventions; there is nothing miraculous about them since they equally require scarce resources, an enormous administrative capacity and a strong political determination. Thus the pre-distribution strategy had an ephemeral life and was immediately liquidated in a Labour Party publication as “a meaningless formula in place of real policies” (Hatwal 2012).

At the same time the Third Way supporters did not move fast enough or far enough on the road they had chosen: they still talked of “priorities”, proposed the reduction of the working week to 35 hours without corresponding wage reductions, wanted to reduce pensionable age in an ageing society, proposed a Tobin tax on financial transactions unenforceable without its universal adoption and virtually impossible in the cyberage. At the same time they all went much too far in endorsing hyper-liberalism (see Nuti 1999) and unconditional globalisation, including free movement of capital and labour in a world without borders, unleashing in 2007-08 the worst economic, financial and political crisis in the modern age, whose disastrous effects we are still suffering today.

In the last few years this perversion of the social democratic project has been rejected by the electorates of a large number of countries, from the United States with Donald Trump’s election as President, to many European countries independently of their EU membership (as in Germany, Sweden, France, Spain, Austria) and in Commonwealth countries (the UK, Australia, New Zealand, Canada). In the 15 countries of post-comunist Europe, today seven have “populist” parties in power, two have them as members of a coalition, and in another three they are the major opposition force. Hodgson (2018) writes of Wrong Turnings – How the Left Got Lost; Kennedy and Manwaring (2017) ask ‘Why the Left Loses’. There are multiple causes: the reduction of the electoral base of industrial and manual workers; the emergence of parties more committed to the left (for instance Die Linke) or to the right (like the Front National or the AfD); the increasing lack of confidence in political parties, often leading to electors’ abstentionism; the discontent and disaffection due to economic crisis. Significantly, the phenomenon is particularly marked in countries governed by social democrats in a coalition with the right[1], characterised by high immigration, the reduction and worsening of social services and the welfare state, and more generally the absolute or   relative impoverishment of the middle classes (see Pauly 2018, from which the two following graphs have been taken; the picture has been made worse in the spring of 2018 by the results of both Italian and Hungarian elections, which are not in the graphs).

Often the loss of electoral consensus on the part of social democratic parties is attributed to “populism”, in a pejorative sense. Rodrik (2018b) distinguishes between political populism, that compromises pluralism and the liberal democratic rules, and economic populism which on the contrary finds justification in the policy failures of governments, including progressive ones, and can be a necessary and sometimes the only way to avoid political populism. 

In general we can define populism as the promise of impossible or non-sustainable policies, accompanied by the appeal to selfish sentiments of the electorate. In truth this populism is indistinguishable from democracy, being simply the expression of electoral dissent from government policies even if supported or tolerated by social democrats, and even when it encourages unjustified but legitimate prejudices of the electorate (for instance xenophobia, which as simple fear of the foreign or the different is an inalienable citizen right).  This populism might be stirred up or literally bought with concessions and promises by unprejudiced political leaders without falling into the danger The decline of Europe’s social democrats[2] of the “oclocracy” described by Polybius or of the majority dictatorship feared by Toqueville (see section 6 above); its threat cannot be avoided without limiting democracy or destroying democracy outright.

Piketty (2018) notes that in the 1950s and 1960s the Democratic Party in the United States and Europe’s social democratic parties (though his European data refer mostly to the UK and France) were supported by voters of all genders with low education level and low income. Globalisation (raising a division between internal and external inequality), and education expansion (generating inequality of education as well as of wealth) have created new, multi-dimensional conflicts about inequality and re-distribution. Why have democratic regimes failed to reduce inequality? Because – according to Piketty – “without a strong egalitarian and internationalist platform it is difficult that voters of low education and low income would vote all for the same party. The division between racism and nativism is a powerful force that divides the poor when a strong unifying platform is missing. Politics has never been a simple conflict between the poor and the rich; it is necessary to look with greater attention to political cleavages” (p. 4).   

Starting from 1970s-1980s a political system would have been created that juxtaposes two transversal coalitions one against the other: the intellectual élite of left-wing “Brahmins” against the business élite/mercantile right, both dividing among themselves the support of a working class whose interests are radically different and do not find expression in political parties; a similar thesis is put forward by Rovny (2018). Clearly there is some truth in these propositions, but both authors neglect the difference between the USA and Europe, the differences among European countries, and between the relevant periods, as well as the civic roots of the welfare state evolution attributed to socialism.

The current debacle of social democracy is not due to the refusal of the social democratic model as such but to its perversion in following hyper-liberal. austerian and globalist tendencies, not only in trade but also in capital movements, foreign direct investments, production de-localisation to low-wage emerging economies, and labour migrations. These tendencies favour large multi-national companies, dry up fiscal revenue by encouraging fiscal competition between states, facilitate fiscal avoidance and evasion with the proliferation of fiscal paradises and greatly reduce the policy space of national governments. This is the perverted social democracy that today has lost electoral consensus in the greater part of the whole developed world.

Some conclusions

The rise of socialism was rooted in the drawbacks of capitalism, which mobilised human labour and imagination bringing about unprecedented prosperity but also generated unemployment of labour and productive capacities, fluctuations and crises intermittently but with increasing frequency and on increasingly large scale, thus creating over time an ever-increasing inequality especially in the last post-War period.

The construction of socialism in a backward, labour abundant, vast and despotic country affected the development of centralised planning in the USSR, with its own conflicts and contradictions aggravated by lack of political democracy and the belief that economic laws would not operate at all in the socialist economy (Luxemburg, Bucharin, Hilferding and other Bolshevik thinkers). The Soviet-type system was impressively successful in realising the industrialisation, urbanisation, accelerated growth, rearmament and victory in a World War; in conquering space and raising standards of education, health and greater equality than obtainable in capitalist economies. However it suffered from authoritarianism, repression of basic freedoms and lack of political democracy. It also failed to adapt to the challenges raised by its own achievements, and eventually was brought down by its inefficiency, instability, internal and external imbalances leading to a crushing debt, and loss of popular support.

The transition to open market economies with private ownership and enterprise, in turn, was expensive – with a few exceptions – because of the shock therapy approach adopted, the unavoidable disruption due to economic and monetary disintegration and the hyperliberal institutions and policies that prevailed in the transition.

In the last post-War a social democratic model, pursuing socialist values in a market economy without dominant public ownership and enterprise, was implemented in Scandinavia and in other capitalist countries, exemplified by the European Social Model in the EU, and served the countries that adopted it. Towards the end of the 1990s the social democratic model was perverted by its political leaders adopting a hyperliberal, austerian and globalist capitalism, leading to crisis, unemployment and mounting inequality. In the last few years this deformation of traditional social democracy has met with repeated, resounding electoral defeats, in favour of parties promptly accused of populism when they are expressing popular discontent.

A sequel to this long essay, under preparation, will deal with the future of socialism. The Chinese model of a market economy under state capitalism is considered and rejected due to its authoritarian nature. The Yugoslav model of associationist market socialism is also considered and rejected as inegalitarian and tendentially inefficient. Other forms of grafting socialist institutions on to a capitalist models are also considered and found of positive but limited help in the design of a social democratic alternative.  

Popov (2017) visualises the possibility of the successful creation of a “new socialism”, with the realisation of more egalitarian policies on the part of some market economies, adopting income redistribution, greater regulation and a heavier fiscal burden, and with greater emphasis on public ownership in a mixed economy. The reduction of inequality and its adverse impact on social tensions would make these more egalitarian economies more competitive internationally with respect to their less enlightened competitors. I follow Popov’s approach, while dismissing the desirability of greater equality achieved through unrestricted migrations in a world without borders.

The new socialism, beside controlling and managing migrations, needs to face the challenges of the management of globalisation, reducing its adverse distributive impacts, handle the unemployment and distributive implications of robotization and Artificial Intelligence; deal with climate change and resource conservation. The difference with respect to existing capitalism will be primarily a difference in policies, but these required policies demand fundamental differences in the economic policy instruments available, which make up a very different system from really existing capitalism. Dixi et salvavi animam meam (Marx 1875).

[1] The September 2017 electoral losses of the SPD, following participation in the Grosse Koalition with the CDU and CSU, have continued in opinion polls with a reduction of support from 20.5% to 16% after the announcement of the coalition renewal, in spite of considerable SPD gains in both economic policies and key ministerial posts.

[2] The Italian elections of 4/03/2018 have marked an even heavier social democratic defeat, with the two “populists” – the 5Star Movement and the Lega – actually obtaining a comfortable absolute majority, increased in after election opinion polls.  

Domenico Mario Nuti

Professor Emeritus, Sapienza University of Rome. Member of the Editorial Board of INSIGHT -
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