‘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In just twenty years the certainty that even the Right would have to maintain full employment and the welfare state had been replaced by acceptance in the Labour Party that Keynesian policies could not work.footnote^＊ Labour’s travails, operating within one of the least dynamic of the advanced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

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.

Keynes himself foresaw a less favourable position in the General Theory since he believed that the real wages of those already in work would have to decline in order to make profitable extra employment at declining productivity. This cut in the real wage would simply be passively accepted by workers provided it was achieved by a one-off increase in the price level rather than being imposed by uncoordinated wage cuts. However he was soon persuaded that the evidence did not support such anti-cyclical behaviour of real wages, and subsequent empirical work found no consistent cyclical pattern.footnote¹⁰ Moreover, with increased productivity in an upswing as labour is used more intensively, a constant (or even moderately rising) level of real wages would still allow profits to rise faster than output. As Kalecki noted, there seemed to be a unity of economic interest, covering the unemployed, the employed and the employers, in expansionary policies to create jobs.footnote¹¹