On the Conditions of Successful Social Democratic Alternatives

October 13, 2017

Globalisation has ravaged the economies and societies in the industrialised world. Uneven growth and deindustrialisation are causing political turmoil. The left, trapped in a limited territorial state, is likely to fail even if it wins national elections, unless it succeeds in globalising democratic politics. Patomäki calls also for breaking “the gap between routine production and established privileges, on the one hand, and emerging areas and forms of the economy, on the other. This should the true goal of structural reforms; not free markets but emancipated and self-determining humans.” In the end he, like so many others, comes to the conclusion that wealth has to be justly taxed, but things seem to be going in the other direction. [This text was first published at the Brave New Europe site on 12 October 2017.]

Capital and wealth in their various forms roam ever more freely in the liberal world economy, whereas state-powers are confined to limited territories and labour remains rooted in states. This asymmetry has resulted in a shift in power-relations. The outcome accords with Michał Kalecki’s classic analysis. Business leaders and capitalists have succeeded in creating circumstances under which policies depend on their confidence; the scope of free markets has been maximized; and hierarchical power-relations in the workplace have been intensified.

Simultaneously, the rise of China and other BRICS and Asian countries, and the relocation of industry across borders, has hastened deindustrialization in many parts of Europe and North America. Data suggests that automation has been more important than relocation when measured in terms of loss of jobs in manufacturing. This does not mean that relocations and globalization are unimportant, for globalization affects power-relations. To retain industrial activities in Europe as much as possible, the EU and its member states have resorted to steeper hierarchies in the work place, have tried to reduce costs via “labour market flexibility”, and have resorted to deflationary free market economic policies. Together these measures have created a tendency toward a downward spiral in socio-economic developments.

Many countries that used to belong to the periphery of the world economy are growing fast. In China and partly in India economic expansion has generated a virtuous circle between output and productivity; productivity growth is correlated with the expanding output driven by high demand for exports. Uneven developments are transforming what is core and what is periphery in the world economy, while the world economy as whole grows more slowly than before. In China and elsewhere in Asia, the virtuous circle of expansion may dominate, but not forever. Future crises will affect also Asia. The process of uneven growth will take new shapes over time.

With the euro crisis of the 2010s, a third world style debt crisis landed in Europe. As in many developing countries in the 1980s and 1990s, structural adjustment policies have augmented the direct effects of the debt crisis. The characteristic effects of neoliberal globalization and deindustrialization, involving unemployment and the precarisation of work with rising inequalities, have fuelled political turmoil. Existential insecurity and the lack of hope feed aggressive identity politics.

What is to be done?

The dynamic processes of the world economy shape conditions everywhere. Actors participate in bringing about and steering global political economy processes in various, but often short-sighted and contradictory ways.

The left, trapped in a limited territorial state, is likely to fail even if it wins national elections. On the one hand, left-alternatives are usually unpopular among business-leaders. Institutional mechanisms have been put in place to ensure that policies depend on business-confidence. Capital and wealth can exit from a state in many different ways and they can also shape public perceptions. On the other hand, the pursuit of competitiveness and attempts to export unemployment and other problems to other countries quickly become contradictory when everyone tries to do the same. For instance, to the extent that corporate tax cuts have a positive effect on the level of real investments in one country, it will likely do so at the expense of other countries.

There is no reason, however, to refrain from pursuing alternatives within the EU and its member states, provided that feedback effects through the whole of the world economy are properly understood. Moreover, the problem of asymmetric power-relations must be addressed. Industrial production for world markets is crucial, but the left must avoid trying to increase demand for EU goods and services at the expense of other countries. To the extent possible, the game must be made positive-sum for all parties, preferably by institutional means. This does not preclude acknowledging for example that China’s underconsumption is a global problem.

Selective reindustrialization and public investments

The EU and its member states should first of all engage in selective reindustrialization. This means more investments. The level of output and employment depend on the amount of investment; and the amounts of factors of production are not given but depend on the level of investments. Since the beginning of the global financial crisis and the consequent recession, EU investment levels remain some 15% below their short-range peak in 2008. Eurozone investment was about 26% of GDP in 1991 and 19% in 2016. Also for example financialization has reduced investments. While it is inevitable that industrial employment will continue to decline, it is possible to reindustrialise partway through large-scale public investments, geared toward missions that matter and are sustainable also ecologically.

The social-democratic project involves creating full fiscal capacities for the EU. The EU budget must be increased also in order to create redistributive systems such as regional policies, a European minimum wage, and unemployment benefit schemes. Essential transformations of the EU require changing the EU Treaty. A cosmopolitan and democratic solution would be to convene an Assembly of directly elected citizens’ representatives. However, because immediately implementable reform proposals must be consistent with the EU Treaty, at least in the next 3-5 years, increases in public investments must come largely from member states.

An ambitious but feasible target would be to increase investment by 5% of the EU GDP, of which 3-4% would be coming from member states, 1-2% from the EU. To make this possible, public investments must be exempted from the deficit spending rules. Until the EU Treaty is changed, EU-level investment programmes can rely on creative arrangements involving central bank funding, such as those proposed “modestly” by Yanis Varoufakis, Stuart Holland and James Galbraith. Moreover, through the enhanced cooperation procedure, groups of member states can implement European taxes benefitting special funds established for a particular purpose.

Investments can generate new qualities and abilities. As Mariana Mazzucato stresses in her widely acclaimed book, The Entrepreneurial State, and other publications, strategic public investments and policies should aim at creating and shaping productive powers and markets. The creation of production-powers and markets can also be achieved through “mission-oriented investments that led to putting a man on the moon and are currently galvanizing green innovation”.

Global context matters, determining the conditions of success for alternatives

One indication of the effects of globalization is that states’ power to tax corporations and wealth has eroded. Corporate tax has fallen dramatically (tens of percent) in most countries. In addition, large multinational companies and wealthy individuals engage in aggressive “tax planning”, which further reduces tax revenues. Collective action and institution-building are indispensable to counter these trends and tendencies.

Corporate taxation is now under discussion in the EU, with concrete proposals on the table. The Common Consolidated Corporate Tax Base (CCCTB) would to a large degree abolish harmful corporate tax planning within Europe by creating a single set of rules for how corporations operating within the European Union calculate their EU taxes. A more ambitious version of that proposal would involve an agreement on a common minimum corporate tax rate – say 30% – which is substantially higher than the average corporate tax rate in the EU. The states participating in the CCCTB could treat a part of the revenues as a common tax even in the absence of treaty-change.

The problem is of course not only European but global, so the CCCTB is best conceived as a part of more general attempt to tackle global corporate power and value chains. A left-cosmopolitan European Union would also take part in building new worldwide institutions. Consider the case of trade. Many states are committed to improving their current account balance by enhancing their “competitiveness”, often simply by means of lowering export prices. Yet current account deficits and surpluses cancel each other out and, moreover, attempts to increase cost competitiveness through internal devaluation tend to prove contradictory due to decreasing effective demand. What is needed to overcome this contradiction is a collective mechanism through which world trade surpluses and deficits are automatically balanced through tax-and-transfer; and a global central bank that can issue global reserve money.

As local and global struggles are closely interwoven, it is necessary to increase and intensify political collaboration across the world. This process involves support for workers’ rights and trade unionization on a planetary scale, both out of solidarity and to increase global aggregate demand. Better working conditions and salaries, for example to the Chinese workers, would mean less reasons for capital relocation and more demand for European goods and services in China. Deepened global political cooperation could over time lead to the formation of new kinds of actors.

Or consider the universal right to high-quality education, which could be facilitated by various global means, including global tax revenues. The practical realization of this kind of universal right to education can be seen (i) as an attempt to build human capital as the basis of sustainable growth, (ii) as an attempt to speed up the process of demographic transition, (iii) as a mechanism for global redistribution, and (iv) as an example of what enlightenment and global solidarity can mean in the 21st century.

Trust, existential security and hope

The aim of the social-democratic and socialist left should be to reverse the current EU strategy of growth. Power-relations can be democratized; personal employment paths can be made more secure; and industrial and other policies can actively shape political economy development in the desired direction. The göal is to create an upward spiral of virtuous developments. This spiral must be grounded in existential security and trust, encouraging hope for better futures.

The aim of proactive economic policies is to stimulate investments, create capacity and increase output and thus reduce unemployment, which is major source of insecurity. A sufficiently high-level basic income for all European citizens would further diminish dependence on unstable markets. Also participation in processes of collective will-formation can generate trust and existential security.

Hope is, in part, based on the promise of fulfilling people’s higher needs, including: belonging to a community, gaining recognition from others, and realising autonomously set purposes. After a certain amount, more consumption does not increase well-being. When Keynes envisioned life after capitalism in his 1930 essay “Economic Possibilities for our Grandchildren”, he argued that “it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.” Keynes argued that capitalist profit-motive will fade away as historically unnecessary. This will not happen automatically, however.

In a just society, work is organized so that everyone has the opportunity to enjoy communality, recognition and at least some self-realization in their work and participate in the public definition of activities and goals. The essential question is: how should we organise relations of production? The long-standing but unresolved debate between the advocates of hierarchy and democracy has revolved around efficiency. There are always many possible and plausible ways of organising things, also from the point of view of efficiency.

We can learn from of world history. In the absence of practical skills and widespread virtues of participation, democratic experiments may fail. Moreover, they tend to evoke movements of counter-reformation. Thus for instance the democratic experiments realised in many universities around the world have, by the 2010s, been replaced by New Public Management managerial hierarchies, relying on hierarchical capitalist corporations as their inspiration and model.

The German social democrat Eduard Bernstein defined “socialism as a movement towards – or the state of – an order of society based on the principle of association.” This idea was also at the heart of Marx’s vision. Ultimately, social democracy aims at building society around voluntary partnership and democratic cooperation rather than competition. The question is: how to achieve a maximally open space for cooperative and democratic experimentation?

One possibility is the negotiated involvement model of relations of production, which involves workers directly intervening in the introduction of a process. This would provide functional flexibility of working practices instead of neo-liberal flexibility of wages and working conditions. Efficiency and innovations could be sought also in terms of breaking the gap between routine production and new emerging sectors of the economy and by means of deeper institutional experimentation.

Consequences of “Baumol’s disease”

The potential for economic growth is gradually diminishing also because of what is known as “Baumol’s disease”. Economist William J. Baumol realised in the 1960s that the share of services in the economy is growing. This is the other side of the coin of deindustrialisation. In many service sectors, labour productivity does not rise at all; while in others only a little. Music training today takes just as long as it did a hundred years ago and almost as many barbers are needed today as before to keep 100 people’s hair neat.

Baumol’s solution in his well-known 1960’s study was to increase the relative funding of sectors where labour productivity does not increase. As many of the services are best produced publicly, this means the expansion of the relative share of the public part of the economy. According to many indicators, gravitation toward social services, health, education and research means an increase in welfare.

Agriculture and manufacturing will employ an ever smaller proportion of people. For example in Germany the share of employment in manufacturing has already declined from 40% in 1970 to 20% in 2016. Yet industry is critically important because of the benefits of economies of scale and increasing labour productivity. It is essential to retain industrial know-how as widely and deeply as possible. Growth comes from the diversity and complexity of production, enabling the development of new industries.

H.G. Wells envisaged a century ago, in his Outline of History first published in 1920, a future world in which “perhaps 10% of the adult population will, at some point or another in their lives, be workers in the world’s educational organization”. Today we could set a new target: at least 10% of the adult population will work at universities or research institutes for a major part of their working lives. Part of this group will train future engineers and architects and develop new technologies.


Against the hierarchies of corporate power and entrenchment of privileges, the left must find ways to democratise relations of production, work organizations and systems of global governance. The new social democratic programme combines employment, transforming society’s power structures and economic efficiency. The left programme includes ways to break the gap between routine production and established privileges, on the one hand, and emerging areas and forms of the economy, on the other. This should the true goal of structural reforms; not free markets but emancipated and self-determining humans.

The point is to increase domestic European demand and improve the quality and attractiveness of European commercial goods and services in world markets in a non-contradictory way, bearing in mind the generalisability of actions and global aggregate efficient demand. Moreover, democratisation of globalization is a condition for progress anywhere. As also phenomena such as nuclear weapons and climate change show, the destiny awaiting us is now common to all. Global solidarity can and will find new manifestations, from trade union solidarity to global political parties.

It is the collective history of humankind that has enabled our current average level of material and immaterial consumption. We are all standing on the shoulders of the past generations and depend on the multitude of our contemporaries. This suggests a major degree of socialization of the output from large-scale production. A major step in that direction would be a considerably high global tax on wealth and capital.

Heikki Patomäki