Monday, October 31, 2016

Will social democracy return? A review of Offer and Söderberg

Avner Offer and Gabriel Söderberg (“The Nobel factor: the prize in economics, social democracy and the market turn”) look at the strange death of social democracy at the hands of market liberalism. That death was accelerated by the role of the Nobel prize in economics that conferred to economics an allure of science and that was used to much greater profit by neoliberal economists to push for their version of economic policies.

Offer and Söderberg define social democracy as a continuation of Enlightenment: from equality before God to equality before law, to equality between men and women and races, to equality of entitlements between citizens. Since each citizen goes through periods of dependency (as a child, as a mother, as unemployed, or as an old person) when he/she cannot earn an income, he has to depend on transfers from the working age population. This life-cycle pattern is shared by all, and thus society, in a form of social insurance, sets a system that provides redistribution from the earners to the dependents.

How does market liberalism solve the life-cycle problem? By positing that everyone is a free agent with his endowments of capital and labor. When he cannot work, he uses the proceeds from his capital (assuming of course that he originally either inherited or saved enough wealth to have a capital). It is not a “society” in a true sense of the word, but a group of “agents” who manage own income over the life-cycle. Since returns are to one’s ownership of labor and capital and there is no redistribution, it is a “just world” society where one gets back what he has put in, and where income inequality is never an issue—precisely because income is exactly proportional to one’s contributions.

These are indeed two different views of the world. As Offer and Söderberg write, social democratic view was extremely successful empirically but was not theoretically worked out much by economists. The neoliberal view has exactly the reverse characteristics: empirically it was not much of a success (look at private pension schemes in Chile), but economists have extensively worked on it theoretically.

Neoliberal view became dominant in the early 1980s as social-democratic model was blamed for the slowdown in growth. The Nobel prize accelerated this shift because it tended to favor neoliberal version of economics. The origins of the Nobel prize are revealing in the same way that a look at the beginning of every great fortune  is revealing. There are there details that are better left unexplored. The prize has all but been bought by the Swedish Central Bank (Riksbank) that had the magnificent idea that a Nobel prize in economics can help it assert its independence from the government by elevating economics to the position of a “science”. The Swedish government let the Riksbank lobby with the Nobel Committee for the introduction of the only prize not envisaged by Alfred Nobel, essentially as a vanity project. The Riksbank prevailed upon the committee by, inter alia, removing some constraints on the financial instruments in which the Nobel Committee could invest and by funding the prize itself. It was a great example of entrepreneurship: buy a prize for yourself. (One wonders if, for example, Apple may not follow Riksbank and buy a prize to award for the most promising technological development.)

There was, according to Offer and Söderberg, another reason why social democracy was abandoned even by the parties that were brought into existence through social democracy like British Labour, French socialists (SFIO) and German SDP. The leadership of the parties passed from social activists and workers into the hands of credential leaders who emphasized meritocracy and in whose eyes redistribution rewarded the “underserving poor”. This is the background to Bill Clinton’s “end of the welfare as we know it”, and Tony Blair’s New Labour. The shift was also helped by the self-interest of the new leaders who in  the process (as the Clintons and the Blairs show) immensely enriched themselves. It could be even said that the parties were to some extent hijacked by their self-interested leadership.

Offer and Söderberg do leave the door open to a possible return of social democracy and see the harbingers of such a change in the increasing role played by the left wings of the social-democratic parties as in the case of Bernie Sander, Corbyn, Syriza and Podemos.

I find the Offer-Söderberg narrative largely persuasive but I do have somewhat of a disagreement in that I think that the “objective” conditions that  played against social democracy are not sufficiently emphasized. This is not only of an antiquarian interest. If the objective conditions have indeed changed, as I believe, then the future appeal of social democracy will also be more limited. In other words, we are unlikely to return to a status quo ante even if the failure of neoliberalism is clear to most (except perhaps to a few economists whose self-interest lies in denying the obvious).

There are four such changes that I see which work against the ideal-typical model of social democracy. (And some of them were mentioned at the recent presentation of the book at the New School in New York.)

The first is multiculturalism. Social democracy was created for ethnically and culturally homogeneous societies. West European societies today are much more diverse than they were sixty years ago. This is the issue on which Assar Lindbeck  (incidentally, the most influential person in the creation and early awards of the prize) has picked early on. If cultural norms differ and if there is a “lack of affinity” between the groups (to use Peter Lindert’s term) then willingness by some to fund transfers for the others wanes.

The second challenge is the end of Fordism. With much more heterogeneous labor, in terms of their skills and tasks; smaller size and geographically dispersed units; the self-employed rather than workers, the natural constituency of social democracy (homogeneous labor assembled in one place) disappears.

The third challenge is demographic. Social democracy was very successful through the use of pay-as-you-go (PAYG) system in the countries where population was increasing and the working age population was large. Many people worked and they could transfer income to the retirees in the expectation that the same deal will apply to them when they become old. But when the population is in the decline and there are too many retirees compared to the working age population, maintaining the integrity of the PAYG system is harder. It is not impossible as the pension age can be raised and pensions reduced, but it is certainly not politically easy to do.

The fourth challenge is globalization. Social democracy operated within rather closed economies  where migration (and thus the challenge of multiculturalism) was minimal and where capital was generally locked in nationally. None of that is true anymore.  Capital is much more mobile, and if heavily taxed to provide funds for social transfers, will flee. Developed welfare states that make sure that nobody is left behind may provide incentives particularly to the low-skilled migrants. Thus “better” social democracy may perversely attract lower quality migrant labor than the much more austere and “mean” systems.

These, and perhaps a few other, elements seem to me to imply that a return to the Golden Age of social democracy is unlikely to happen. On the other hand, there is a realization of inadequacy of the neoliberal model that bequeathed a huge crisis (which did not turn into another Great Depression precisely because the key rules of neoliberalism were abandoned in order to save the system). As many times in history, we are now at the point where neither of the two established doctrines seems to provide reasonable answers to today’s issues. That leaves the field open to new thinking and experimentation.

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