Social democracy beats democratic socialism

CAMBRIDGE — It used to be an unwritten rule of US politics that a socialist could never qualify for high national office. But now a self-proclaimed “democratic socialist”, US Senator Bernie Sanders, is the leading candidate for the Democratic presidential nomination. Should America embrace the change?

Democrats have made the primaries about much more than US President Donald Trump. Sanders’ momentum reflects a yearning for radical solutions to serious structural economic problems. In the decades after World War II, the US economy became steadily more productive, and wages for all workers — regardless of education — grew by over 2 per cent per year, on average. But that is no longer the case today.

Over the last four decades, productivity growth has been lackluster, economic growth has slowed, and an increasing share of the gains have gone to capital owners and the highly educated. Meanwhile, median wages have stagnated, and the real (inflation-adjusted) wages of workers with a high-school education or less have actually fallen. Just a few companies (and their owners) dominate much of the economy. The top 0.1 per cent of the income distribution captures more than 11 per cent of national income, up from around just 2.5 per cent in the 1970s.

But does democratic socialism offer a cure for these ills? As an ideology that regards the market economy as inherently unfair, un-equalising and incorrigible, its solution is to cut that system’s most important lifeline: Private ownership of the means of production. Instead of a system in which firms and all of their equipment and machinery rest in the hands of a small group of owners, democratic socialists would prefer “economic democracy”, whereby companies would be controlled either by their workers or by an administrative structure operated by the state.

Democratic socialists contrast their envisioned system with the Soviet-style brand. Theirs, they argue, can be achieved wholly by democratic means. But the most recent attempts to socialise production (in Latin America) have relied on anti-democratic arrangements. And that points to another problem with the current debate in the US: Democratic socialism has been conflated with social democracy. And, unfortunately, Sanders has contributed to this confusion. 

Social democracy refers to the policy framework that emerged and took hold in Europe, especially the Nordic countries, over the course of the 20th century. It, too, is focused on reining in the excesses of the market economy, reducing inequality and improving living standards for the least fortunate. But while US democratic socialists like Sanders often cite Nordic social democracy as their model, there are in fact deep and consequential differences between the two systems. Simply put, European social democracy is a system for regulating the market economy, not for supplanting it.

To understand how social-democratic politics have evolved, consider the Swedish Social Democratic Workers Party (SAP), which distanced itself early on from Marxist ideology and the Communist Party. One of the SAP’s early and formative leaders, Hjalmar Branting, offered a platform appealing not only to industrial workers but also to the middle class.

Most important, the SAP competed for power by democratic means, working within the system to improve conditions for the majority of Swedes. In the first election following the onset of the Great Depression, SAP leader Per Albin Hansson presented the party as a “people’s home”, and offered an inclusive agenda. The voters rewarded the SAP with a remarkably high 41.7 per cent of the vote, enabling it to form a governing coalition with the Agrarian Party. Following another overwhelming election victory, the SAP organised a meeting in 1938 of representatives of business, trade unions, farmers and the government. That gathering, in the resort town of Saltsjöbaden, launched an era of cooperative labour relations that would define the Swedish economy for decades.

A key pillar of the Swedish social-democratic compact was centralised wage setting. Under the Rehn-Meidner model (so named for two contemporary Swedish economists), trade unions and business associations negotiated industry-wide wages, and the state maintained active labour-market and social-welfare policies, while also investing in worker training and public education. The result was significant wage compression: All workers doing the same job were paid the same wage, regardless of their skill level or their firm’s profitability.

Far from socialising the means of production, this system supported the market economy, because it allowed productive firms to flourish, invest and expand at the expense of their less competitive rivals. With wages set at the industry level, a firm that increased its productivity could keep the resulting rewards (profits). Not surprisingly, Swedish productivity under this system grew steadily, and Swedish firms became highly competitive in export markets. Meanwhile, similar institutions developed in other Nordic countries – in some telling cases introduced not by socialists or social democrats but by centre-right governments.

Social democracy, broadly construed, became the foundation of post-war prosperity everywhere in the industrialised world. That includes the United States, where the New Deal and subsequent reforms strengthened or introduced important components of the social-democratic compact, including collective bargaining, social welfare policies and public education.

When intellectual and political currents deviated from the market-based social-democratic compact, things generally didn’t work out too well. Starting in the late 1960s, Swedish and Danish trade unions, under the influence of more radical left-wing forces, embraced democratic socialism and started demanding economic democracy and direct control of profits. In Sweden, this led to intense negotiations with businesses and the introduction of “wage earner funds”, whereby portions of corporate profits (usually in the form of new stock issues) would be put into company-level funds for the workers. This change destroyed the cooperative agreement between businesses and unions, and distorted the incentives that had previously driven investment and productivity growth. By the early 1990s, the system’s flaws had become apparent, and it was duly abandoned.

When free-market intellectual currents led to rightward deviations from the social-democratic compact, the results were just as bad. Inequality widened amid equally tepid productivity performance, while social safety nets were left in tatters.

What is needed, then, is not market fundamentalism or democratic socialism, but social democracy. The US needs effective regulation to rein in concentrated market power. Workers need a greater voice, and public services and the safety net need to be strengthened. Last but not least, the US needs a new technology policy to ensure that the trajectory of economic development is in everyone’s interest.

None of this can be achieved by socialising firms, especially in an age of globalisation and technology-led companies. The market must be regulated, not sidelined.

Daron Acemoglu, Professor of Economics at MIT, is co-author (with James A. Robinson) of “Why Nations Fail: The Origins of Power”, Prosperity and Poverty and “The Narrow Corridor: States, Societies, and the Fate of Liberty”.  ©Project Syndicate, 2020.
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