“I can’t help but believe that in the future we will see in the United States and throughout the Western world an increasing trend toward the next logical step, employee ownership. It is a path that befits a free people.”
— President Ronald Reagan (1987)
The old reinvention of social democracy (1945–2007)
Social democracy is a nebulous term, encompassing the political ideals of everyone from Vladimir Lenin to Tony Blair, but it has shifted and changed with time and place. Today it is used to the describe the somewhat big tent of the Western centre-left, advocating reformation of capitalism to align it with the ethical ideals of social justice; a long time ago that social justice was simply the adoption of socialism — collective ownership of the means of production, distribution, and exchange— over time however, most social democrats shifted towards a commitment to a reformed capitalism, one with legislated worker protections and a strong welfare state to redistribute the proceeds of economic growth.
How did that shift occur? At the start of the 20th century, the major social democratic political parties of the West were committed to a very different kind of economic plan to today’s political economy: one that sought to nationalise large, strategic sectors of the economy as well as regulate and reduce the influence of market mechanisms (with an eventual aim to socialise the entire economy). The split between social democrats and revolutionary socialists was more in strategy and tactics rather than goals. Given the often slow and pluralistic nature of liberal democracies, the centrally planned, state socialist dreams of social democrats in power did not take place as quickly or suddenly as it did in the communist East with rapid dictatorial fashion. Whether it was in Weimar Germany, the French Third Republic or Ramsay MacDonald’s Britain, the socialist programme was watered down and unrealised by the constraints of the political system.
But beyond these speed bumps, practical and ideological challenges to maintain consistent electoral success shifted what the centre-left were going to aim for and ultimately, the end result became a general swallowing of centre to centre-right economics and centre-left social policy. Starting with the SPD Godesberg Program in 1959, and ending with a final coffin-nail through the revision of Labour’s Clause IV in 1995, social democracy became more about welfare capitalism (with an increasingly friendlier attitude towards the capitalism) than any reformist route to socialism. As my friend Sam Bowman once recognised on behalf of neoliberals, social democrats lent a lot of credence to the maxim “markets are astonishingly good at creating wealth, but not always good at distributing wealth.”. This strategy, what’s been termed the Third Way (between old school social democracy and laissez-faire neoliberal capitalism) became the most modern and typical expression of social democracy in the 21st century Western world.
But despite this shift, and despite the electoral success of many social democratic Third Way leaders like Tony Blair, the Third Way has had a marked decline and reaction against it since the advent of the Great Recession. A process, referred to as Pasokification, saw enormous declines or outright collapse of Third Way social democratic parties. In a nutshell: the pressures of austerity in the face of debt crises from the recession removed any real distinction between the centre-left and centre-right — if social democrats abandon their trump card of high welfare spending, voters pondered, what was the point of them anymore?
The new reinvention of social democracy (2007- today)
The Third Way project, with notable exceptions such as the presidency of Emmanuel Macron and the short-lived premiership of Matteo Renzi, is on it’s last legs. In a post-Great Recession world, the social democrats of today have had to reinvent themselves to remain relevant, just as they did after the the various economic and political crises of the 20th and early 21st centuries. Many of these social democrats have taken two main routes to reinvention that have seen any significant level of electoral success:
- The Nationalist Route
Exemplified most distinctly by the continued success of the Socialdemokratiet in Denmark, this route would mean abandoning much of the most unpopular aspects of market liberalisation — immigration and globalisation. A rise of nationalist sentiment in Europe tended to be a crutch for the right, but given the pro-business sentiments commonplace on that political wing, it could be very electorally advantageous for the left to drop commitments to free movement, mass immigration and globalisation from the standard economic orthodoxy. A “reframe of nationalism” has been argued by some to be the ultimate route to keep the social democratic project of a reformed economy and social justice alive. The protectionist call against globalisation could be an effective signal to those (particularly working class voters) who may be tempted to vote for the right despite greater sympathies with an overall social democratic policy agenda of welfarism and high public spending.
- The ‘Broad Left Coalition’ Route
More typical of the social democrats in Southern Europe, a changing of rhetoric and alliance with left-wing splinters is one possible route to success. Pedro Sánchez, then opposition leader of the social democratic PSOE in Spain, successfully staked his claim to the premiership by declaring intent towards a “post-capitalist” society of a 30 hour work week and a basic income, allied with socialist and populist parties he formed a broad coalition of the left — with his party forming the more moderate and gradualist wing of an overall movement to stop the excesses of the neoliberal right. Similarly in Portugal, António Costa (leader of the social-democratic Partido Socialista) also successfully won power with an explicitly anti-austerity message and broke precedent by forming a broad confidence and supply agreement with left-wing populists and communists. Similarly in Italy, the social democratic Partito Democratico forged an unlikely coalition with the populist Movimento 5 Stelle to seize power. In all these cases, social democrats can achieve power by curbing the excesses of austerity (although notably not rejecting it outright), adopting more left-wing rhetoric, and by allying with the socialist and populist left in broad coalitions without sacrificing too much in terms of policy concessions.
It is worth pointing out that advocating for economic nationalism, whether in trade or migration, represents (what a consensus of economists can agree) would be severe economic hits, moreover, the move towards expansive programmes such as a basic income also comes with sketchier evidence of success than its proponents would like you to believe.
Furthermore, both of these routes, despite big rhetorical shifts, do not really represent much of a departure from the Third Way. On the nationalist route, the departure of mass immigration and a naked embrace of free trade does little to curb the ultimate programme of high welfare spending combined with a free(ish) market, if anything it accentuates that feature by gatekeeping the spending as a central aim that cannot be diluted by the introduction of (arguably) largely welfare-dependant immigrants, refugees and asylees. Similarly, the ‘broad left coalition’ strategy, despite any claims to “post-capitalism” is simply an even greater emphasis towards Third Way welfarism in taking it to new heights through such basic income proposals. Therefore, neither strategy seems to directly address what caused the decline of the Third Way in the first place after the great recession: an inability to consistently maintain welfarism and high public spending.
Identifying the long-term problems with the Third Way and its post-recession reinventions
The welfare state, particularly in its more liberal guise of cash benefits, is a particularly expensive endeavour. With an ageing population and slowing economic growth, the financing of large public spending initiatives will always come to a crisis whenever a recession anywhere near the scale of 2007/8 comes knocking. Despite what some heterodox economists may say, even with the abandonment of austerity a Keynesian response to economic downturns will leave less and less to spend on welfare or public services and more to repaying large borrowed sums. In other words, social democracy (as we know it) may simply be unsustainable as time goes on.
One other challenge that faces social democrats is the shifting nature of the political right. As seen by the embrace of large public spending by Britain’s Conservatives (and even the US Republicans with Covid-19 stimulus), larger welfare spending may not be the trump card of the left anymore, even times of economic growth. Denmark’s social democrats for example, may have only succeeded despite their anti-immigration rhetoric, and that it mainstreamed as well as benefitted the high spending, populist Danish People’s Party.
In order for social democracy to survive, it can no longer simply rely on large public spending promises to achieve continuous electoral or policy success.
Learning from the past to understand why we’re here
The policy positions of high public spending and cash transfers as the heart of social democracy comes from economic history. The failure of the Soviet Union’s central planning to produce significant growth prevented social democrats from folding leftwards into socialism, and the cases of state-interventionist, highly nationalised social democracies like post-war Britain and 1980s France also shifted the narrative. Britain’s architect of market reform Margaret Thatcher, rather facetiously, referred to this state of affairs as TINA (There is No Alternative) and to a limited degree, social democrats largely agreed with her when it came to the general role of markets in building wealth.
But unlike their opponents on the right, social democrats were not going to accept a completely hollowed out state or unconstrained laissez-faire capitalism that came to be described from the 1970s onward as neoliberalism. They were instead going to accept the principles of neoliberalism in its original definition from the 1938 Colloque Walter Lippmann:
“the priority of the price mechanism, free enterprise, the system of competition, and a strong and impartial state”
Social democrats fundamentally do not reject these principles, even in its more recently left-leaning variants on the Iberian peninsula. But ultimately, with a penchant for state-driven redistribution of income as the primary distinguisher from the neoliberals of the right, the current form of social democracy is likely to remain a late 20th and early 21st century phenomenon. As the century progresses (with all the economic challenges that comes with it) social democrats must discover a means to reconcile the lessons of the past. One way to imagine what the social democracy of the future will look like, building on the Third Way, is through a series of fundamental pillars of thought:
1. The aim to achieve greater social justice and economic egalitarianism within society (always central to social democracy)
2. The maintenance of markets, rather than the state, as primary drivers of economic growth (added in the late 20th century as the Third Way)
What should be added now is a third pillar:
3. The reduction of a reliance on the welfare state in order to achieve these aims
As it stands, it is impossible to achieve the third pillar under the current framework of Third Way inspired social democracy. Social democracy without a welfare state would be indistinguishable from right-neoliberalism, so how can this circle be squared? The way to look at this is not to return to the beaten track of the Third way in its combination of markets and state redistribution but to look at the path less travelled, one that does not jettison markets, to create what I would call the Fourth Way.
Learning from the past to see the future
The 1970s and 1980s was a particularly tumultuous time for social democracy and a schism was created between those who wished for a leftwards shift to more state-driven socialism and those that (tentatively) wanted to embrace markets. A no more clear example of this schism is that within the British left. The Labour Party, under leadership of Michael Foot, had embraced a programme of further nationalisation and collectivisation that would make the British economy adjacent to the centrally planned communist states of the Eastern Bloc. The breakaway Social Democratic Party (SDP) (in alliance with the Liberals) were willing to embrace many of the market reforms of Thatcher’s Conservatives but unwilling to merely ape it. Both represented competing visions of social democracy but ultimately, despite electoral failure, the SDP-Liberal Alliance’s broad vision involving a combination of free markets and social justice won through the rise of the Third Way within Blair’s New Labour.
The Alliance, however, did not go for some kind of proto-New Labour, instead they advocated for a policy programme with one distinct feature. Lifted from their 1983 manifesto:
An Industrial Democracy Act to provide for the introduction of employee participation at all levels, incentives for employee share-ownership, employee rights to information, and an Industrial Democracy Agency (IDA) to advise on and monitor the introduction of these measures
The Alliance was not alone in this thinking, around the same time Swedish social democrats (S/SAP) adopted a similar proposal of what was termed the Meidner Plan, which combined the S/SAP’s increasing neoliberal market reforms with the transferring of excess profits into investment funds controlled by workers in the efficient firms. The plan focused on a twenty percent annual taxation of private enterprise to be used to create investment funds that were to be owned collectively by employees. The plan would result in wage-earners gaining a controlling share in their enterprises within twenty-five to fifty years. However, with Social Democratic defeat in the 1991 election, this slow, gradual plan was scrapped.
Beyond Europe, an unlikely candidate for this type of social democracy was none other than the conservative US President Ronald Reagan. Who, in the aftermath of his accelerated market reforms to the US economy, outlined “Project Economic Justice” in 1987, where (despite little actual policy change) outlined his vision for social justice within a free market economy:
I can’t help but believe that in the future we will see in the United States and throughout the western world an increasing trend toward the next logical step, employee ownership. It is a path that befits a free people.
What Fourth Way Social Democracy can look like
Ultimately, these proposals in Britain, Sweden, and (bizarrely) the United States were the only little explorations of what could be possible in the future. Like the more socialist social democrats of the early 20th century, these plans were derailed by a combination of electoral failure and faith in a long term plan that could not be guaranteed when out of government.
Revisiting the pillars of social democratic thinking, these kinds of policy proposals are fundamental in understanding how to be social democratic and maintain markets without going for state redistribution: by addressing social justice at the company level.
Fourth Way social democracy, as I would put it, would embrace free markets and private firms as the drivers of growth and prosperity but recognise the inequities of such firms. The standard Third Way response for the state to pick up the tab with wage subsidies, public services and legislated workers’ rights is no longer popular nor will remain feasible for too long. The alternative is to change corporate governance, to give workers more of a say in their workplaces and a larger chunk of the earnings. The Fourth Way would advocate the transformation of the economy into a free market of partnerships and cooperatives, enabling social justice without the pitfalls of the state.
Under the Third Way, corporate governance in private business is left more-or-less unchecked, but advocates of the Fourth Way would push towards democratising the workplace by giving workers a say in how their company is run and by creating a kind of profit sharing regime will fundamentally shift social justice to the grassroots level within a liberalised market economy. Already voluntarily existing in through firms such as the John Lewis Partnership and Mondragon corporation, social responsibility would shift from the state to voluntary organisations and ultimately to the individuals working at them. Such ventures already tend to be more successful than other types of private enterprise, and therefore reforming all firms to follow a similar structure would not only be socially just, but a pro-growth reform too. The Fourth Way, much like the Third Way, takes much of the lessons on board about the efficacy of liberalised markets, but instead takes on a more ordoliberal approach: changing the rules of the game without intervening directly in the game itself.
This is not, however, to say that the state has no role to play in individual economic wellbeing. Unemployment, particularly in the case of automation and the effects of global competition/outsourcing, would mean that the state would have to continue to provide an active role in retraining and funding the wellbeing of the unemployed. But given the expense of pure Third Way welfarism, it is worth exploring another route that has been left behind by the Third Way: public works.
Classic Social democracy had the benefit of achieving full employment despite all of its pitfalls. Under neoliberalism, it took until the late 2010s to achieve the same levels of employment as the 1970s. As it stands, having an increasing level of people on welfare as the West develops further towards knowledge economies and automation, will mean a larger pool of unskilled workers without employment. Studies have often observed the link between mental wellbeing and employment, particularly in men, and to avoid a permanent class of unemployed people it is worth having direct state intervention (perhaps at above market wage rates) to create job guarantees in industries that have particularly high unskilled employment such as agriculture, construction, infrastructure and social care. That said, cash-based benefits cannot really be totally discounted in the short to medium term.
Hence, the difference between the Third Way and the Fourth Way is not in the perception of markets but where the state’s limited interventions to ensure social justice are made.
The Fourth way, unlike left-wing alternatives to social democracy, does not require abandoning the neoliberal commitments to a market determined price mechanism, private business or competition. It builds on the successes of the Third Way but addresses its potentially fatal flaw by introducing changes at the corporate level, not through top down market tweaks and a reliance on cash-based systems of economic justice.
Social Democracy has adapted with the economic realities of our times, constantly maintaining a desire to see a more equitable and socially just political economy. Taking on lessons from mainstream economics, social democrats developed the Third Way model of the late 20th century. That model, due to an over-reliance on a large and expensive state apparatus, may no longer be fit for purpose. Social democrats, in looking at recent history towards what created the Third Way, can build a new, radical but workable means to deliver social and economic justice through employee share ownership and workplace democracy within a free and open market. These policy prescriptions avoid the economic sacrifices a more nationalistic or broad left-wing front would entail and instead be a sustainable and understandable method for social and economic justice going into the future.