‘The voters, now convinced that full employment, generous welfare services and social stability can quite well be preserved, will certainly not relinquish them. Any Government which tampered seriously with the basic structure 0f the full-employment Welfare State would meet with a sharp reverse at the polls’ (Antony Crosland,1956).footnote1

‘We used to think that you could spend your way out 0f a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and that insofar as it did ever exist, it only worked on each occasion by injecting a larger dose of inflation into the economy, followed by a higher level of unemployment as the next step’ (James Callaghan speaking at Labour Party Conference, 1976).footnote2

In just twenty years the certainty that even the Right would have to maintain full employment and the welfare state had been replaced by acceptance in the Labour Party that Keynesian policies could not work.footnote Labour’s travails, operating within one of the least dynamic of the advanced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 economic growth that was necessary to maintain full employment and expand public services. The hope was provided by Keynesian economics. It was only in alliance with Keynesianism that social-democratic concepts could achieve the intellectual hegemony that shaped the post-war era.’

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 at full employment. Section II outlines the achievement of full employment and welfare-state redistribution during the golden age and evaluates the problems of maintaining high employment in an era of weaker investment and more internationalized economies. The analysis here is narrowly economic, and ignores many of the broader aspects of the decline of social democracy.footnote8 But it does not accept a fatalistic conclusion that current underlying economic trends, such as internationalization, have definitively driven full employment off the agenda.

Wages, Inflation and the Free Lunch