In just twenty years the certainty that even the Right would have to maintain full employment and the welfare state had been replaced by acceptance in the Labour Party that Keynesian policies could not work.footnote＊ Labour’s travails, operating within one of the least dynamic of the advanced capitalist economies, anticipated the general collapse of confidence within social democracy. As Scharpffootnote3 emphasizes, Keynesianism had rescued social democracy from the paralysis of the inter-war period and provided it with a viable economic programme: ‘As long as capitalist crises could happen at any moment, whatever gains unions and social-democratic parties might have achieved in the redistribution of incomes or the expansion of public services must have seemed extremely insecure. Indeed the unions had been helpless during the Great Depression of the early 1930s, as the welfare state collapsed under the burden of mass unemployment. Social democrats could thus make their reluctant peace with capitalism only if they could also hope to avoid its recurrent crises or at least dampen them sufficiently to assure the continuous
The fundamental claim of social-democratic economics was that economic inequality and insecurity in capitalist economies could be radically reduced by government intervention without impairing economic performance. With unemployment a major source of economic inequality and insecurity, as well as representing a glaring example of economic inefficiency in terms of the potential output foregone, the guarantee of full employment represented ‘the first marriage of equity and efficiency’.footnote4 The collapse of Keynesianism weakened the defence of social democracy against those who asserted the necessity for divorce on grounds of fundamental incompatibility. As Schmitter and Streek noted: ‘Governments in the early 1980s felt hard pressed or saw a golden opportunity, depending on their political complexion, to withdraw the political full employment promise of the post-war period and yield control over the restoration of prosperity and employment in the internationalized national economies to “the market” including the deregulated labour market’.footnote5 Most damning of all, perhaps, ‘the major social-democratic parties are rapidly abandoning social democracy and embracing market liberalism’.footnote6 Social democracy’s historical trajectory is summarized by Perry Anderson thus: ‘Once, in the founding years of the Second International, it was dedicated to the overthrow of capitalism. Then it pursued partial reforms as gradual steps towards socialism. Finally it settled for welfare and full employment within capitalism. If it now accepts a scaling down of one and giving up of the other, what kind of movement will it change into?’footnote7
This paper attempts to set the disastrous collapse of social-democratic aspirations in the context of the decline of the ‘golden age’ of post-war rapid growth. Section I explores the two problems of achieving full employment—the ‘Keynesian’ issue of how to secure sufficient demand and the ‘Kaleckian’ problem of how to deal with the conflicts which arise
Wages, Inflation and the Free Lunch
It has been argued by Przeworski that the decisive feature of Keynesian full-employment policies from the social democratic point of view was that they ‘suddenly granted a universalistic status to the interests of workers’.footnote9 An increase in government expenditure financed by borrowing yielded benefits to all those using the expanded infrastructure or public services, as well as those finding work in or for the public sector and in industries on the receiving end of the multiplier effects on consumption. If all the spending could be covered by borrowing, the generality of taxpayers could even gain from the fall in unemployment benefit and rising tax take (alternatively the deficit would rise less than the growth in spending). Additional employment yielded extra real resources which implied that at least some sections of society would be better off. Since there was no economic constraint dictating that any group must be worse off, nobody need pay for full employment with reduced living standards. It was a rare example of a true Pareto improvement.