Chapter 5

A Modest Hypothesis Concerning Swedish Social Democracy

 

Whatever they might have learned from the teachings of Karl Marx in the early years before they became Sweden's perennial ruling party in 1932, the Swedish socialists in office have drawn from Marx very little inspiration.  Perhaps it is a generically Marxist idea that workers need to organize politically and economically in order to struggle for their rights, and perhaps in that generic sense they have been good Marxists.  On the whole, however, since the Social Democrats initiated their long reign as Sweden's governing party, Swedish social democracy has been guided by its own sui generis ideas, formed in the light of Sweden's historical circumstances and in dialogue with mainstream currents of Western academic social science. 

In the 1930s the economists of the Stockholm School--Gunnar Myrdal, Erik Lundberg, Dag Hammarskjöld, and others--worried about the same problems John Maynard Keynes was worrying about in England, stimulated by the worldwide Great Depression.  They and he contributed to formulating what has become known as macroeconomics.[1]  The practical applications of macroeconomics tend toward macro-managing an economy to improve its performance by using policy instruments to affect a few key variables.  Swedish social democracy can be viewed to a large extent as an exercise in macroeconomic policy formation, in a country where 90 percent of the workforce is unionized, in a small open economy exporting paper and wood products and other goods to pay for petroleum and other imports, where the culture is permeated by a strong social conscience committed mainly to what Gunnar Myrdal called "the 18th century ideals" (1953: 118; 1960: 15).[2]  Liberty.  Equality.  Fraternity. 

At least since the sudden increases in oil prices in 1973, as Sweden and other advanced economies have faltered, confidence in the conceptual framework provided by macroeconomic thinking has waned.  In Sweden as elsewhere many economists have been advocating a retreat from the dirigisme associated with macroeconomics, and a turn toward leaving social decisions to market forces.  Sweden's entrance into the European Union and its increased integration into the global economy have reduced its capacity to implement autonomous social policies at a national level. Many speak of what Erik Lundberg (1985) called "the rise and fall of the Swedish model."

In their heyday, the Swedish Social Democrats performed miracles.  They achieved the impossible--that is, the impossible according to theories other than their own.  On most versions of classical political economy, including most versions of Marxism, an iron law of wages necessarily keeps wages down, but in Sweden--and in other countries that implemented similar ideas—wages rose rather than fell (Lundberg 1996: 68; Furniss and Tilton 1977: 138-39).[3]  Many would think it impossible, too, to compel the owners of capital to keep their enterprises in place and running when profits were low, when they could take their capital elsewhere to invest it at a higher rate of return.  Yet in Sweden for many years profits were deliberately squeezed between high wages on the one side and high taxes on the other side (Lundberg 1996: 56, 68).  Nevertheless, industry kept running.  It did not leave.  It did not slow down.  It grew.  Is it possible to squeeze profits and maintain full employment?  Sweden showed that it was.

Many think it impossible also to tax the rich heavily without drying up the sources of capital for investment.  Yet in the 1960s Sweden had some of the highest and most progressive taxes in the world, and at the same time one of the world's highest rates of capital formation.  Some say that success in the global economic race is cumulative, so that poor countries that get behind necessarily stay behind.  Yet Sweden, which in the early 20th century was a poor country from which a quarter of the population emigrated to America to escape misery, under the Social Democrats caught up with and passed nations which had been far richer.  To many it seems impossible to practice free trade without dragging down wages to the level of the world's lowest paid workers.  Yet Sweden practiced free trade while raising wages to the point where Swedish wages became among the world's highest.  It is argued that people will not work when taxes are high, because people will prefer leisure to turning over more than half their income to the government.  Yet Sweden has simultaneously had high taxes and one of the world's highest rates of participation in the workforce.

It is said that enormous incentives for executives (such as the huge salaries paid to chief executive officers of U.S. corporations) are necessary to corporate success.  Yet tiny Sweden, a nation of merely 8 million people, managed to be home to multinational corporations that were global winners, while U.S.-based corporations lost market share in almost every category.  It is said that societies cannot involve government bureaucracies and labor unions in business policy decisions without depriving management of the flexibility it needs to adapt to new technologies and changing markets.  Yet Swedish exporters have adapted to new technologies and changing markets faster, not slower, than their competitors.  According to prominent economic theories it is impossible to compress wage scales in a way that makes wages nearly equal without destroying workers' motivations to perform well and learn new skills.  Yet Sweden deliberately adopted a solidaristic wage policy, raising preferentially the wages of the lowest paid, while maintaining and upgrading one of the world's most highly skilled workforces (Lundberg 1996: 79).[4]  It is argued that socialist medicine can only demoralize the medical profession and lower the quality of care.  Yet objective measures such as life expectancy show that health care in Sweden is better, not worse, than health care in countries that rely on capitalist medicine. 

Generally, Swedish social democracy was able to redistribute the benefits of the economy while operating the economy efficiently and productively.  Redistribution did not shut down production.  We do not want to exaggerate Sweden's achievements: ownership of Swedish industry never ceased to be concentrated in a few families. Nevertheless, the meaning of "ownership" was considerably transformed.  Sweden has always had its share of complaints, complainers, and things about which to complain. Nevertheless, Sweden became what its great socialist prime minister Per Albin Hansson called a folkshemmet, a home for all Swedes. 

Even at the height of its glory the Swedish model had its critics. There were always academics, many of them well funded by non-socialist funding agencies, who wrote mathematically elegant empirical studies based on Swedish statistical data, which argued that Sweden would have been even more prosperous than it already was, were it not for the “distortions,” “tax wedges,” “inefficiencies,”  “deadweight losses,” and “hidden costs” imposed on it by the dirigisme of its socialist governments and its strong trade unions.[5]  It was argued that the success of the Social Democrats in coping with the Depression of the 1930s was due less to their Keynesian policies than to the stimulation of Swedish exports by Hitler's rearmament program.[6]  While Sweden led the world on virtually every measure of social welfare, however, the voices of the critics rang hollow.  When the oil price shocks hit an economy that already had structural problems, when the government began to run huge deficits that could only be covered by borrowing abroad, when there were five successive devaluations of the Swedish krona, when unemployment began to be a serious problem, when Swedish Gross Domestic Product per capita dropped from the top tier to the middle tier in the ranks of industrialized nations, then the voices of neo-liberal critics were heard. 

We seek to demonstrate that the resurgence of the influence of conservative economic ideas in Sweden has been due less to their merits than to the exposure of the weaknesses of the quasi-Keynesian Swedish path to socialism.[7]  The historical evolution of the Swedish and global economies, which are best understood in the conceptual framework of a philosophy of cultural action, led to a situation where the limitations of what can be done with macroeconomics, which were always clear in theory, became clear in practice. 

In 1937, a year after the publication of Keynes' General Theory, Erik Lundberg, then one of the younger members of the Stockholm School, published his doctoral dissertation, Studies in the Theory of Economic Expansion.  In it, he later claimed, he revealed the secret of the instability of a free market economy.  When Paul Samuelson wrote his influential Foundations of Economic Analysis (1947), he only added mathematical rigor to macroeconomic concepts Lundberg had developed earlier.  The cause of the built-in instability of a free market economy, according to Lundberg, was "the combination of the acceleration principle (which determined investment) and the consumption function" (1996: 34).[8]

Lundberg was concerned with the same problems that preoccupied Keynes and others at the time.  The idea that free markets automatically set the right prices and produced a balanced equilibrium (conceived by analogy with equilibrium in physics) did not seem consistent with the historical experience of people who were living through the Great Depression.  The microeconomic approach, which tends to start with the individual economic actor and his, her, or its preferences, was beginning to be questioned by and combined with an approach concerned more with what happens when national accounts, which consider aggregates of all transactions in an economy, are kept (Lundberg 1996: 25-26). 

In the background of macroeconomic thinking is the premise that one person's purchase is another person's sale.  Therefore (omitting some complications) when all the purchases and all the sales (including the purchases and sales of labor power for wages) are added up, the two totals must be equal.  In the aggregate, total sales equal total purchases.  Or, total income equals total expenses. 

But people do not spend all their income on making purchases for purposes of consumption.  People save some of their incomes.  Therefore, in the aggregate, the next time around, there will not be enough money circulating for everyone to have the same income they had the first time around.  Unless.  Unless the money that was saved somehow gets back into circulation.  This would happen if it were all invested.  Paul Samuelson in his Foundations of Economic Analysis (1947) expressed such a situation in the formula: 

Y= C + I

In this formula, Y equals national income at current prices, C equals consumer spending, and I equals investment expenditures.  He treats this formula as "clearly" true, abstracting for the moment from sequences as one time follows another, as if taking a still snapshot of an economy (1947: 281).[9]  But in the real world, which is always moving, investment is not necessarily high enough to make aggregate spending high enough to compensate for the gap left by a less-than-total propensity to consume.  We want C and I together to be big enough to total a sustainable Y, so that the national accounts will keep balancing, and the system can keep going another time around. We want people to spend enough to sustain everybody's incomes.  Purchases by consumers or investments by business people (or both), however, may lag.  Therefore, the system is unstable. 

Consistent with this thought, there is an observable recurrent tendency to produce more than can be sold of just about everything, with more of just about everything (including labor power) tending to be offered in the market than willing buyers will buy.  More people than jobs, too many antique malls for the number of people who want to buy antiques, more apples than apple-buyers, more consultants than people who want to consult them, more lawyers than cases, too many restaurants for the number of diners who eat out, more little boys who want to shine shoes and sell gum than tourists who want shoes shined and gum to chew.  On this macroeconomic way of looking at tendencies observed in frequent experience, the standard microeconomic view--that overproduction of something just shows that market signals are telling us that resources should be diverted from producing it to producing something else--is wrong. Overproduction is not just a microeconomic mistake made by apple growers or potato growers or any producers of any particular product (say, to take an even more important example, the parents who produce labor supply by creating babies). A tendency toward “overproduction” is a generic macroeconomic feature of the system as a whole.  We put “overproduction” in quotation marks because experience tells us that there may well be not enough food, in the sense that there are people who need food, at the same time there is “overproduction” of food, in the sense that the food already produced cannot be sold for enough money to pay the costs of producing it. 

Therefore, an interventionist government, a certain amount of dirigisme, is justified for the purpose of implementing policies that will compensate for the system's inherent instability.  Gunnar Myrdal argued at the close of World War II that capitalism left to itself was an inherently unstable system, which had only recovered from the Great Depression because of enormous amounts of government spending during the war. Therefore, the Swedish government should continue after the war to play the stabilizing role in the Swedish economy that it had played during the 1930s and during wartime (Lundberg 1996: 20, 43-44).[10] 

Swedish and other Scandinavian economists developed a variation of macroeconomics that distinguished the 'tradable" from the "nontradable" sector.  For small open economies like theirs, the prices of goods like lumber, which they export, are set by international markets over which they have virtually no influence.  The "tradable" sector is the sector where Sweden is a price-taker, accepting whatever international prices might be with no ability to change them.  The situation is different with “nontradables,” such as, for example, the provision of day care for working parents by Swedish local county governments (Lundberg 1996: 54-55). 

From the time of the formulation of standard components of macroeconomic thinking by the Stockholm School and by Keynes during the 1930s, macroeconomics became a major component of the discourse of social democracy.  It provided the vocabulary and the conceptual framework used by the major institutional policy makers. It allowed for a functional working relationship between socialists and big business. Socialists wanted high wages, a welfare state, and democratic control of the economy. Big business wanted an end to the Depression and a return to economic conditions under which it could operate profitably.  Macroeconomic theory taught that skillful management of the economy could achieve both what socialists wanted and what business wanted.  It also legitimized government intervention in the economy in the form of price supports for farmers, which was important for socialist governments elected with the help of rural votes. 

What was “overproduction” of X or Y commodity from a microeconomic point of view, was from a macroeconomic point of view a symptom of a larger and more general underproduction of the necessities of life.  Sweden, and indeed the whole world, suffered from the great evils of under-utilized resources and under-employment coexisting with poverty.  This was the real inefficiency, and the real objective was to expand the economy on the theory that growth makes it possible for everyone to have more of everything.  Macroeconomics provided conceptual tools for calculating ways to get an economy onto a path of sustained growth. 

There were four major institutional policy makers during the heyday of Swedish social democracy.  They all spoke the same language.  Here we offer a brief introduction to each of these four major policy makers.

One of these four was the SAF, the Swedish employers’ federation.  Many years the SAF insisted upon, and got, nationwide bargaining to establish a frame for wage pacts applicable to all industries.  The national bargain included a no-strike pledge, promising an uninterrupted supply of labor. The SAF also insisted upon, and got, assurances that labor would not seek to perform the functions of management.[11]

One might expect Swedish business to be a truculent partner in policy formation, since it confronts a socialist government and strong labor unions.  One should bear in mind, however, that the private sector in Sweden has been privileged in at least two respects.  First, cartels have been tolerated, and even without cartels the small number of firms per industry made intense price competition of Swedish firms with one another unlikely.  At one time the government even kept an official registry of cartels.[12]  Second, many businesses have enjoyed generous tax breaks, subsidies, low interest loans, and research and development support.  It has been the general policy of social democratic governments in Sweden to assure that private sector corporations, as institutions, have had ample funds.  The personal enrichment of individuals has been curtailed, but the operation of business enterprises has been supported (Lundberg 1996: 79).[13] 

A second major institutional policy maker within Swedish social democracy was the LO, the federation of blue-collar trade unions.  The SAF and the LO insisted together that they should handle wage-setting and many related matters without government participation.  In other matters they worked together with government.  For example, the decision to bring the wages of women workers equal to the wages of men workers was a parallel and joint commitment of the SAF, the LO, and the government.  Policy initiatives tending toward socialism in Sweden typically began in study groups within the LO (Lundberg 1996: 75, 78-82).  After months or years of study a commission report would be approved by delegates representing all of the members of the federated unions (i.e., the majority of the Swedish people).  The Social Democratic Party, loosely affiliated with the LO, would then propose a study in Parliament.  More months or years of study would often follow, often in a mixed commission appointed by Parliament that included representatives of all major sectors of the population.  The SAF and the non-socialist parties in Parliament typically opposed the initiatives that began in the LO, and they usually produced reasons for their views that the socialist members of the mixed commissions ended up agreeing with to some extent.  The result was often a unanimous or nearly unanimous report, followed by the actual implementation in a modified form of ideas that had been somewhat radical when they were first proposed to study groups within the LO.

The Swedish model of social democracy, narrowly defined, is sometimes identified with the concepts first advanced by Gösta Rehn and Rudolf Meidner, two staff economists of the LO.  They proposed, among other things, to raise wages by encouraging the growth of high wage sectors of the economy.  Marginal firms that could not afford to pay high wages were to be allowed to disappear, and their workers were to be retrained and guided toward employment in the internationally successful high-wage sectors of the economy (Lundberg 1996: 50-52).[14]  As time went on, the blue-collar proportion of the work force declined.  White-collar workers, including droves of local government employees, had their own unions, which sometimes cooperated with the LO, and sometimes did not. 

A third major institutional policy maker was the Swedish government itself.  Sweden is a kingdom with a ceremonial king.  It has no president.  The ministers of the government are charged with implementing laws and policies.  The ombudsmen office--ombuds is a Scandinavian institution that has now been replicated in other parts of the world--investigates complaints of official misconduct and generally serves an auditing function to assure that ministers and their assistants obey the laws and perform appropriate services in particular cases.  The parliament conducts studies and enacts revisions of the legal and policy frameworks within which the organs of government and the nation as a whole carry on their activities.  Approving new laws is normally done in the British manner, with the members of parliament belonging to the party or parties which support the current government failing in line to support the positions taken by the Prime Minister.

Swedish social democratic governments have pursued socialism very little by nationalizing industries.  Instead they have built a welfare state providing health care, education, job retraining, pensions, and other public services.  They have relied little on means-tested programs, available only to those who can prove they are poor.  Instead they have made public benefits and facilities available to every citizen, or else tied benefits to working--for example by supporting employment-related retirement plans, sick pay, and unemployment compensation insurance.  The private sector has been reshaped, however, by its numerous interactions with a large public sector, and by the detailed provisions of the tax regime used to raise money to pay for the welfare state.  Tax incentives channel private behavior in directions thought to be conducive to the public good. 

The banking system and particularly the central bank might be included in a short list of major institutional participants in the policymaking processes of Swedish social democracy.  The banking system plays key roles in setting interest rates, credit policies, and the rates at which Swedish currency is exchanged for foreign money.  In a country where strong unions make cutting wages impossible, and where many of the everyday necessities of life are imported, devaluing the currency by changing the exchange rate is a standard method for lowering the de facto wages of workers.  It is a way to make the prices of Swedish exports more competitive in international markets, and a way to discourage Swedes from consuming more than the nation can afford.[15] 

One of the burdens of our argument is that policy decisions depend not so much on the identity of the participants in the deliberations as on the underlying logic of the discourse that guides their reasoning, which in turn is embedded in the wider logic of the surrounding culture.  In the policy formation processes of Swedish social democracy, the discourse of macroeconomics provided key elements of the conceptual framework. 

Swedish statistics are fairly good.  The SAF, the LO, the government, the banks, the political parties, the research institutes, and the media all read the same statistics. There was widespread agreement about what to measure and how to measure it.  There was also widespread theoretical agreement about what was impossible.  The policy puzzle was a fairly well defined game, which consisted of pursuing social objectives subject to constraints that limited what was believed to be possible.  Again we do not wish to exaggerate.  We do not mean to say that alternative conceptual frameworks were absent but rather that a remarkable degree of consensus concerning the nature of social reality was present. 

A first constraint accepted by the consensus was that any viable policy had to stimulate economic growth.  Macroeconomics taught that growth was a condition of the stability of capitalism, and the social democrats knew that even though they might in some sense be gradually transforming capitalism, they were for the foreseeable future engaged in administering it.  Economic stasis was not an option; the economy would either grow or decline.  Growth was also a requirement of Sweden's political compromise.  Only if everybody enjoyed more than they previously enjoyed could poverty be eliminated without bitter disputes over the slicing of the economic pie (Lundberg 1996: 52). 

A second accepted constraint was that inflation had to be avoided, and since the largest component of prices was wage costs, there had to be at least some degree of constraint in raising wages.  Although macroeconomics counseled pump-priming measures to boost aggregate demand, including deficit spending during the 1930s, the glory days of Swedish social democracy came in the period after World War II, when the usual problem to be solved was the "overheated" economy prone to inflationary pressure. 

A third constraint upon which the vast majority agreed was that there had to be capital formation.  Growth required that savings be put to work in investments, and it also required that there be ample savings to invest.  A fourth constraint was acceptance of the notion of "export or die." Sweden had to be competitive in international markets, which meant both staying in the running in many international technological races and keeping Swedish tradable products competitively priced. 

Subject to such constraints, the objective was to build a welfare state, a folkshemmet that would put into practice the ideals of liberty, equality, and fraternity. Especially in its later phases, its progressive supporters also demanded that Swedish social democracy deliver gender equality and responsible stewardship of the environment. 

Presumably there was more than one possible solution to the economic puzzle. Among the several possible solutions some favored the working class more than others. That is why there had to be labor unions and a socialist party.  Among the set of possible solutions, the choices had to be narrowed to the subset of solutions that most served the interests of the poor majority--at least that was historically the original concept, even though as time went on the successes of social democracy first made the poor a minority, and then made the poor virtually nonexistent (with the notable exception of considerable numbers of poor undocumented immigrants).

When the Swedish economy began to falter in practice, criticism of the basic premises of its hegemonic discourse mounted.  Perhaps Marxism, which Sweden had neglected, had some worthwhile concepts to contribute after all, and perhaps other alternatives to mainstream modem discourse should be pursued.  The most prominent dissenting voices came not from the left, however, but from the right, from dissenters more or less in the intellectual traditions of free market liberalism, whose emphases within economics had come to be known as microeconomics.  Their mindset made them skeptical of the basic premise that a few big institutional policy makers could and should steer a nation toward the achievement of socially chosen values.

In the mid-1980s when the Brookings Institution sent a team of American economists to study Sweden, the head of the team, Alice Rivlin, described Sweden's then contemporary malaise and the going hypotheses for explaining it as follows: 

By the early 1980s Swedish policy makers understood that the course chosen in the 1970s was not sustainable. They made major efforts to bring the public deficit down by cutting spending, especially industrial subsidies, to reduce foreign borrowing and improve industrial competitiveness.  Devaluation improved the trade balance, and the Swedish economy shared in the economic revival of the developed countries.

But inflation remains high in Sweden and is eroding the competitive advantages of devaluation. Productivity growth has not recovered. It seems possible that the current economic recovery is only a temporary respite from more fundamental deterioration in Sweden's competitiveness in world markets and its ability to sustain a rising standard of public and private consumption in the long run. 

These concerns have touched off intense scrutiny of Swedish economic policies, scrutiny aimed at fixing blame for past failures and redesigning the nature and mix of economic policies to improve the performance of the economy. Two hypotheses and sets of associated remedies have emerged. One focuses on the impact of microeconomic policy--the influence of wage policy, regulation, taxes, transfers and other subsidies on the decisions of individuals and businesses to work, produce, save, and invest. The hypothesis is that the commitments to equality and full employment have distorted Swedish economic incentives and introduced rigidities that retard adjustment to change. The remedies favor lowering tax rates, reducing transfers and subsidies, and generally eliminating interference with market outcomes.

The other view focuses on macroeconomic policy--the fiscal and monetary instruments that affect the overall level of economic activity, wages, prices, interest rates, and the exchange value of the krona. The macroeconomic hypothesis is that whatever the validity of the microeconomic hypothesis Sweden's macroeconomic policies have fostered consumption at the expense of saving and have accelerated domestic inflation to the detriment of the country's ability to compete in world markets. Remedies include retreating from the strong commitment to full employment to reduce the inflationary bias or allowing the exchange rate to adjust to keep exports competitive (Rivlin quoted in Bosworth and Rivlin 1987: 10-11).

 

Our hypothesis is that it will be helpful to place both the microeconomics discussion and the macroeconomics discussion in the broader context provided by a philosophy of ethical construction, or, in Paulo Freire's phrase, "cultural action."  The concept of ethical construction (or cultural action) is broader and more inclusive than the fundamental concepts of Marxism, microeconomics, and macroeconomics.  We hope it will serve to encourage new thinking, or the revival of old thinking, that will show how to achieve what almost everybody wants: eliminating poverty, keeping it eliminated, a social democracy that is financially and ecologically sustainable.

The ethical ideal to be constructed, that of cooperation and sharing, can be thought of as everyone doing what they should do. When everyone does what they should do, then everyone's needs are met without ecological damage.

Indeed, even if some or all people fall short of doing everything they should do, even then all needs may be met, or most needs may be met, provided that the amount of good-doing is sufficient.  We are assuming that nature poses no insurmountable obstacles to humans living happily in a sustainable environment.  To the extent that insuperable natural obstacles are encountered, as for example, in the inevitability of death itself, then the resulting loss does not count as failure to live up to the ethical ideal, as, for example, in the case of nurses and physicians who do their best to keep a patient alive, but do not succeed.

A free market economy can be thought of as a method humans have devised to realize the ethical ideal.  For everyone's needs to be met (in the whole world or in any given area), at least two conditions must be met: 1) People must know what they should do; and 2) they must be motivated to do it.  A free market economy uses prices to signal to people what they should do, and it uses monetary rewards to motivate them to do it.

It might be said that it would be sufficient for people to be motivated to act in a pro-social way without knowing what they were doing, but this would conflict with the premise stated above in the preface, according to which we regard human needs as being met only when humans are treated as free and responsible beings, and not as automatons. Without exaggerating the extent to which people understand how their actions fit into the overall pattern of culture and nature, we can still insist that for humans to act as humans they must have a certain degree of self-direction and self-consciousness.  A market economy scores high in this respect, since its fundamental unit is the autonomous free individual.

Besides using prices to signal to producers what goods and services they should produce, a market economy brings with it a set of ethical principles in the form of the moral rules of liberal ethics.  These include honesty, keeping promises, resolving disputes by legal means rather than by violence, and respect for property rights, all of which can be summed up in the ideal of “integrity.”  Without a population in which such principles have been instilled, a market economy functions badly or not at all.

A market economy uses monetary rewards to motivate people to work in ways that meet their own and other people's needs, and it does this in a way that in principle respects the freedom and self-determination of each individual.  Market culture's combination of price signals, integrity, and monetary rewards is not the only way to organize human conduct so that human needs are met.  Its characteristic institutions represent an approach that has important advantages and disadvantages compared to other approaches, and compared to various ways in which market institutions may be combined with non-market institutions.

Among the disadvantages of an unmodified free market is that it implies the iron law of wages.[16]  If labor power is sold in a free market, as any other commodity, then it is sold for its market price.  Under classic free market conditions, its market price will drift downward to the cost of its production, which is the cost of the subsistence of the worker. This result is not fundamentally changed when workers must be highly trained.  In that case, competition drives the price of labor down to the point where its monetary rewards just barely cover the cost of subsistence plus training.

When the problem of eliminating poverty and creating prosperity for the majority of the population, who are waged workers or salaried employees, is viewed from the broader perspective of a philosophy of ethical construction, it can be seen that the iron law of wages is only a part, or a special case, of a wider problem.  The market itself is a social institution, which might and might not exist and might and might not function properly.  When it does function properly according to its own characteristic norms--freedom, property, setting of wages by contract, and the like--then, even then, there is no necessary reason why any given worker must be employed at all.  Beyond the iron law of wages, there is the problem of the marginal population.  Marginal people are not in the system at all.  They are not employers because they own no businesses and perhaps no property at all, and they are not employees, because nobody has hired them.  And even beyond that--that is, beyond the possibility of being part of a floating marginal population cut adrift in a property-owning market society, where other people own property and succeed in selling their services but you do not, there is still the possibility of living in an area where property rights and markets are not well established, but where no other form of cooperative human effort is functioning successfully either.  One could be one of the miserable savages Adam Smith imagined and wrote about, condemned to try to subsist alone, without cooperation from other members of the species of any kind. 

Keynes discusses four kinds of motives that tend to make a capitalist economy unstable because people keep cash instead of spending it.[17]  From the viewpoint of ethical construction there is a more fundamental consideration: the constitutive rules of society set the stage for the social performance called "keeping cash" and they authorize people to keep their cash whenever they want to, for one or more of Keynes' four reasons, or for a fifth or sixth reason he did not consider, or for no reason at all.  Failure to perform actions which viewed from a social perspective would contribute to meeting everyone's needs is an ever-present possibility, given human nature, and given the particular set of conventional norms defining human social nature embodied in the constitutive rules of modern economic society.

It may also help to show why we think an ethical perspective is more comprehensive than macroeconomics to comment on a remark by Erik Lundberg. Lundberg wrote, "Savings out of income do not generally constitute a direct demand for capital goods; they can only under certain conditions be transformed into such a demand. It is the investigation of these conditions that constitutes the crux of the theory of capital formation, as well as of any business cycle theory" (1964: 138).  This remark seems to be true, but the choices of the terms “investigation,” “conditions” and “theory” make the problem sound like one in the natural sciences, as if people observed their economies in the way they observe the stars, tracking the wanderings of planets amid fixed constellations.  One way to enlarge the formulation of the problem would be to say that the more general problem is to mobilize resources to meet needs, and that turning savings into capital, and smoothing out the ups and downs of business cycles, are just parts of that more general endeavor.  Speaking of an economy ethically, as a matter of human action, with goals and a potentially infinite number of creative ways to reach them, also lends itself to recognizing that the stuff an economy is made of is norms, conventions, and rules.  Not stars.

From this point of view, both low wages and unemployment can be seen not as economic phenomena to be explained, but as ever-present possibilities, given certain common institutional patterns, and given the human condition.  To understand why unemployment exists, it is not necessary to do regressions on variables hypothesized to be the forces that produce that phenomenon.  Whenever the socially-created rules do not construct institutions that successfully create for people sufficient opportunities to avoid the miserable fate of poverty, then poverty will happen.  Poverty is more a default condition that happens when prosperity is not successfully constructed, than a phenomenon that should be regarded as surprising and send us looking for a cause to explain it.

The iron law of wages is a local law that is implied by certain constitutive rules of modern institutions.  Those institutions are themselves a subset of the wider set of institutional conditions Anthony Giddens (1973) and others call class-divided societies, in which some people control resources and other people are excluded.  Class-divided societies, in turn, are themselves a subset of all human societies, and among all societies one must include those societies, several of which have been reported on by anthropologists, where cooperation functions very little or not at all.  The “mountain people” studied by Colin Turnbull and the Yanomamo of the Orinoco region of Venezuela are examples of cultures where people do not cooperate much at all, neither through market nor through non-market institutional structures.[18]

The macroeconomic policies that amend free market capitalism have a number of remarkable advantages.  Perhaps the greatest of them is that they have contributed to a moral atmosphere in which it now seems natural to measure the "performance" of an economy in terms of, among other things, indicators of social welfare.  To many today it seems natural to speak of the "performance" of a national economy for the benefit of its citizens by analogy to speaking of the "performance” of a corporation for the benefit of its shareholders.  In this respect almost everybody has become a social democrat.  Even those who marshal statistics to prove that labor unions are too powerful and that the welfare programs of the left-of-center political parties do more harm than good, do so on the grounds that the right-of-center policies they advocate will result in superior economic performance, and therefore more welfare for everybody.

The remarkable alliance between economic theory and social democracy that came about in Europe from the 1930s onward was based to a large extent on the premise that the deliberate repeal of the iron law of wages, as an objective of public policy, would not only serve the cause of social justice but would also contribute to the "stability" of capitalism.  Allow us here to say a word about the concept of "stability."

Stability is generally considered desirable because the thing people want to be stable is itself desirable.  Those who consider something undesirable often want to see that thing be unstable, in order to increase the chances that it will disappear altogether. The goal of making capitalism stable is common to those who think capitalism works well, or can be made to work well, and those who think the best way to transform it into socialism is to build on its successes.  Thus the problem to be solved need not be conceived as achieving stability per se, and it might be preferable not to use the word "stable" at all.  One could say instead that in some respects capitalism does not "work" well, and that it is prone to periods of time and to regions in space when and where it hardly "works" at all.  This way of speaking would have the advantage that it suggests that there is "work” to do--i.e., work to meet human needs and preserve the environment. We suggest this change of terminology because it may serve to make it clearer that the problem of improving the performance of the economy is at root an ethical one.

Speaking of how well the economy is "working" also helps to place the instability of free market economies, of which Erik Lundberg thought he had discovered the secret, in the broader context of the relative success or failure of human cultural structures overall in meeting needs in given environmental and technological settings.  Lundberg's view, and economics generally, should be turned inside out, so that "instability," i.e., failure to meet needs, is regarded as the norm, and its correction is conceived more as a human project and less as a quasi-mechanical equilibrium.  Human creativity is called upon to construct institutions that will gradually work better and better.

Another remarkable feature of macro-management of the economy, which is at the same time a measure of its conceptual and practical limitations, is that it does not require cultural transformation, central planning, or changes in ownership.  It is enough to use "policy instruments" to influence the values of certain key variables: interest rates, public spending, tax rates, exchange rates, and somehow wage levels.  It can be accompanied by other policies and programs, and sometimes needs them, but on the whole it is a method to make the economy work better that requires relatively few and small, and therefore relatively achievable, changes.  Although some dirigisme policies may discourage investors some of the time, on the whole they are usually designed to, and usually do, encourage investors more than they discourage them.  The Swedish model was thus of a kind that showed how to do social reconstruction in ways that were achievable, because they worked within the limits of what the capitalist system, as it existed, allowed. 

Yet progressive Swedish socialists have always insisted that the Swedish welfare state was not a substitute for radical transformation of the capitalist system, but rather a method for taking achievable steps toward it.  It may seem that only a few such steps can be taken, because the decision to work with the system as it is presents would-be transformers with only a few, limited options.  It can be argued, however, that there is no reason in principle for supposing that there is only a short list of ways to bend a capitalist economy toward social justice.

It might seem that there is only a short list of ways to bend a capitalist economy toward social justice if one insists on seeing social science as an activity that consists of testing explanatory hypotheses by running statistical tests.  There is only a short list of measured variables in Swedish statistical reports to formulate hypotheses about and run tests on.  Or, alternatively, it might seem that there is only a short list of options if it is decided in advance to leave the basic rules of the institutional background unchanged.

  Yet if one begins with the constitutive rules of the system, as a basis for understanding how it works, and then looks for ways to improve the normative frameworks within which human beings act to meet needs and serve values, then the possibilities for finding creative solutions are limitless.

Capitalism can be viewed (as both Smith and Marx viewed it) as a great series of social inventions, which moved forward the specialization of labor, the organization of tasks, the coordination of production with distribution, the application of science to technology, and the identification of psychological principles that could be relied on to motivate investors, owners, and workers.  For the fact that capitalist systems have not worked perfectly, and have at some times and in some respects turned out to be even worse than the traditional ways of life they supplanted, no special explanation is needed. Failure is normal.  Undesirable unintended consequences, apathy, indifference to the suffering of others, greed, the attraction of ideas that are simple but wrong, and love of the excitement that goes with violence, are normal too.  They should be expected.  They are not surprising in the light of what is already known about human behavior.

Looking at capitalism as a partly successful and partly unsuccessful social construction is a way to view its history as a source of ideas and inspiration for continuing the process of social reconstruction.  Humanity took a great leap forward when the economists of the 1930s figured out a way to run a mainly capitalist mixed economy on the basis of high wages for the majority of the work force.  When World War II ended, partly as a way to fulfill promises made to the masses who had made sacrifices during war time, all the major western nations made a pledge articulated in terms the new economists had created: a pledge to adopt public policies aimed at full employment (Lundberg 1996: 39-40).[19]  The victories of the labor unions and the progressive political parties were facilitated by economists like those of the Stockholm School who showed how what progressives were fighting for could actually be achieved.  The result, the relatively prosperous working classes, the welfare state with health care and pensions for all, the middle masses forming a numerical majority of a nation, was a new kind of society.  It was something no civilization had ever achieved before.

But the task is hardly begun.  Eighty-five percent of humanity, according to Immanuel Wallerstein's (1991) estimate, is still in poverty.[20]  Building a world that works for everybody, in a responsible partnership with the other living species who share the biosphere with humanity, is a long and difficult task of ethical construction.  Before it is completed it will no doubt require the invention of institutional forms that we today have not yet even dreamed of.

In the next chapter we examine the economic strategy of classical Swedish social democracy in greater detail, looking at it through the lenses of the macroeconomic discourse that structured its collective decision making processes, and yet trying to shed light on its successes and failures by holding up its language-games for normative examination against the background of the classical economic theories that macroeconomics criticized. 

Notes