Chapter 6

 

Sweden's Rehn-Meidner Model: Too Good to be True,

Or, The Stumbling Blocks of Freedom and Property

 

 

Reliably meeting everyone's needs is a goal difficult to achieve in a capitalist society. 

It is, of course, difficult to meet everyone's needs in any society.  We have used the word "capitalist" in order to call attention to certain constitutive rules of the form of society known as capitalism, which create certain formidable and pervasive difficulties. Although “capitalist” is perhaps the most familiar word we could have chosen for the purpose, it is not the most accurate word.  Capitalism's inherent structural flaws are due to fundamental normative principles that organize not just "capitalist" society strictly so called, but also any "modern," "economic" or "liberal" society.  The basic cultural structures of any such society imply instability and poverty. 

We use the word "implies" here not in the strict logical sense in which "if p then q" and "p" imply "q," but in a scientific sense like that in which gravity implies that bodies fall toward the center of the earth.  The tendencies toward instability and poverty implicit in modernity's basic cultural structures are like gravity.  There are airplanes that defy gravity, and there is Swedish social democracy, which defies the global tendency for most people to be poor most of the time.  Nevertheless, falling toward the center of the earth, instability, and poverty are formidable and pervasive tendencies.

It is true that if one had to select, from among all of the societies known to history and to anthropology, those societies that have best succeeded in reliably meeting everyone's basic needs, one would probably select the modern, economic, liberal, quasi-capitalist social democracies of Northwest Europe.  Sweden would be at or near the top of the list.  Yet this is not necessarily to say that there are no deep-rooted tendencies toward instability and poverty implicit in the basic constitutive rules of even those societies.[1] 

Two constitutive principles that organize modern liberal economic society are “freedom” and “property.”  Freedom implies instability.  Property implies exclusion, which in turn implies poverty.  Freedom and property together define modern liberal economic society's principal method for organizing work and distributing the products of work: the market.  A market is the coming together of owners of property, each of whom is free to choose what to exchange of what she or he owns in order to get something he or she does not own.  Free choice.  Ownership.  Exchange. 

Of what he called "the sphere of circulation," i.e. of the market, "a very Eden of the innate rights of man," Karl Marx wrote the famous words:

There alone rule freedom, equality, property, and Bentham. Freedom, because both buyer and seller of a commodity, say, of labour power, are constrained only by their own free will. They contract as free agents, and the agreement they come to is but the form in which they give legal expression to their common will. Equality, because each enters into relation with the other, as with a simple owner of commodities, and they exchange equivalent for equivalent.  Property, because each disposes only of what is his own.  And Bentham, because each looks only to himself (1990: 83-84).[2]

The British economist E.F. Schumacher in Small is Beautiful called attention to the expectation that in market exchanges the parties look to their own self interest, and not to the broader interests of other people or of the environment, by writing, “[I]n a sense, the market is the institutionalization of individualism and non-responsibility" (1973: 40).

Can this "market" which Marx satirizes and Schumacher criticizes be the same "wonderful bread machine" responsible for the great leaps forward that have made the modern age so much more prosperous and enlightened that any previous age?  Can it be the same market that its admirers praise as "natural" and as "efficient," so that any deviation from setting prices by means of markets is called "artificial," and any government action to modify market prices "interference," and so that making decisions "efficiently" is often conceived to be, by definition, calculating costs and benefits at prices that free markets dictate?  Can it be the same institution that economists take to be not just an example of efficiency, not just a model of efficiency, but the very definition of efficiency, so that any way of making decisions that deviates from the decisions dictated by market prices is by definition “inefficient”?  Yes, it can be, the very same.  This wonderful institution, the greatest social invention of modernity, has its shadow side.  Its shadow goes with it wherever it goes.

Freedom in modernity is an ethical principle that declares that all human persons have a right to be free, quite apart from modernity's tendency to endorse metaphysical principles declaring that all human persons are essentially free (or, as Jean-Paul Sartre put it, echoed by more recent anti-essentialists, persons are free just because they have no essences).[3]  A metaphysics of freedom declares that humans will be unpredictable no matter what society might do to mold them to follow norms of expected behavior.  An ethics of freedom adds another dimension, making expectations of stability in human behavior not just necessarily mistaken, but also disrespectful.  Commitment is problematic.  Within the metaphysics of freedom, using subtle forms of power to make people behave normally--what Michel Foucault calls "normalizing"--is practically necessary, but morally questionable.

This is not the place to discuss ways in which modern civilization has struggled to reconcile an ethic of respect for freedom with the older and still living traditions that tend to be ethics of virtue, or of character. We must note, however, that freedom makes the implementation of macroeconomic policy frustrating.  People often do not do what they are expected to do, while the notion of inculcating an ideology of rational solidarity to educate people to live up to the expectations of policy makers runs against the grain of modern civilization.  The Italian economist Amedeo Amato gave some good examples of these kinds of frustrations, encountered by Italian policy makers in the 1990s as they attempted to reduce inflation.  First, cutting public expenditures was expected to reduce inflation, but the policy failed because legislators and the public would not accept the cuts.  Second, reducing the money supply did not work because, contrary to expectations, private lenders increased lending.  Third, increasing interest rates did not work because it turned out to produce cost-push inflation, instead of, as expected, reducing demand.  Finally, increased taxation of wages would not work because it might lead to wage-push inflation, instead of, as expected, reducing consumer demand (Amato cited in Lundberg 1996: 111-12).

The best laid plans of human beings often do go astray.  The planets can be relied upon to stay in their orbits, and to do what is expected of them, like clockwork, year after year, always arriving at the places where the astronomers predicted they would be, on time and without excuses.  Human behavior, in contrast, is as variable and protean as the AIDS virus.  To introduce even a semblance of reliability and stability humans had to invent--or, on Plato's version, the gods had to invent for them--the institution of promise keeping, which Hannah Arendt (1958) calls the basic cell of social life.[4]  Promises commit the people who make them to resemble planets, to be where they are expected to be, on time, without excuses, and to do what they are expected to do.  Max Weber aptly defined traditional societies as societies where rationality consists in following customary norms.  Traditional societies elaborate in many ways on pledges and oaths, roles and norms, kinship relationships, sacred duties, myths and ideals and stories, and ceremonies, rituals and prophetic dreams.[5]  In this manner, traditional societies create many patterns that define the right way to behave according to the way X Y or Z culture thinks the world should be.  If all goes well, the paradigms of behavior prescribed by a traditional culture's customs produce some tolerably reliable behavior, which in turn produces some tolerably sustainable interaction between humans and the physical environment, so that everyone's needs are met to some tolerable degree.

It remained for modern societies to invent a new variation on the thematic structure of human culture: the anti-norm, laissez faire, respect for the freedom of the human person.  Henceforth any attempt to pattern behavior in a way that would result in reliably meeting everyone's needs would encounter unavoidable logical difficulties posed by modernity's highest and most treasured value: freedom.  Freedom is not just one value among others--as Friedrich Nietzsche, who realized that to be free one must be consistently inconsistent, knew and showed.[6]  Freedom authorizes an open-ended critique of all values. When Gunnar Myrdal, always loyal to 18^th-century European ideals, pronounced himself again and again in favor of freedom, equality, and brotherhood, he must have known that there is something about the very idea of freedom that questions equality and brotherhood.  Equality is manifested in patterns of behavior.  Brotherhood too shows itself in patterns of behavior.  Freedom questions all patterns.

Property rights carry with them, as their shadow side, the right to exclude.  Father Bruno Sechi, a social change activist in Brazil, wrote, "The first and greatest violence is the systematic exclusion of people--a great number of people--from society.  From this violence other violence directly and indirectly flows. Where you exclude, you must establish instruments to control those who are excluded so that they don't invade the peace of those who have access to opportunities and wealth" (Sechi quoted in Swift 1997: 1).[7]  As the permanent possibility of irresponsible conduct is the shadow side of freedom, the permanent possibility of the systematic exclusion of people from society is the shadow side of property rights. 

In their excellent book Democracy and Capitalism (1986), Samuel Bowles and Herbert Gintis cite legal decisions from American courts for the principle that an indispensable part of the meaning of the concept of "property" is the power to exclude. Since in America property rights are constitutionally protected, it follows that the power to exclude others from one's property is constitutionally protected.  The constitutive rule of property rights makes it possible to divide society into haves and have-nots.  If there were no rules specifying who has a right to be where, and empowering owners to exclude non-owners from places the latter have no right to be, then there could be no class of people who, because they own no space, and have no money to rent space from someone else, are allowed to be only in public spaces, to live in the streets.  If there were no rules specifying who owns food, and therefore who has rights to condition providing food to others on being paid, then there could be no class of people who, because they have no money to buy food, go hungry.

It should be clear from this discussion that we believe that the arguments of neoconservative critics who attack people trying to bring about social justice, on the grounds that such efforts undermine "freedom" and "wealth creation," are wholly without merit.  One prominent voice making such an attack is that of Michael Novak (1982; 1993), who argues that it is neither the wealth of the rich nor capitalism itself that causes poverty, but rather that it is misguided socialist measures that are at fault for the continued existence of poverty.  Novak has no patience for ethical critiques of capitalism (such as those issued by the Catholic church) because he believes that these can only lead to the continuation of cultures antithetical to the free-market economy that will surely, if only allowed to flourish unfettered, be the salvation of all.[8]  Given that the constitutive rules that provide the philosophical underpinnings for capitalism--the rules of "freedom," "property," and "rights," which Novak hails as the solutions to poverty--have been in place for centuries, the burden of proof is upon Novak to demonstrate that these have succeeded in eradicating poverty wherever capitalism flourishes.  It cannot be done.

If the establishment of property rights means exclusion, and if it is only with great difficulty that the implication that some people will therefore be poor can be avoided, then the question how a project for building social democracy will deal with property rights must be asked.  Swedish social democracy has had a characteristic perspective on this question.

Swedish social democracy early on, even before the Swedish socialist party came to power, adopted what might be called an "onion" theory of property rights.  For Swedish socialist thinkers, Karl Marx was crude when he supposed, in Chapter 32 of Capital that at some climactic moment "the expropriators would be expropriated" and thereafter the ownership of the means of production would be transferred to the proletariat, who would then proceed to cooperate to meet all human needs.  Marx, and many others, supposed that “property” was a lump, which could be transferred from one social class to another, as a lump of clay is passed from hand to hand.  A more sophisticated analysis shows property rights to be very many distinct particular powers, permissions, and even duties, which define how persons relate to things. "Ownership" is like an onion. It breaks down analytically into a large number of privileges, any one of which can be taken away while leaving the onion apparently intact, but in reality a shade smaller.  For example, when union members achieve the right to "grieve" by appealing to an established "grievance procedure" in the work place, then the company still "owns" the factory, but since its power to deal with workers arbitrarily and with no accountability has been curtailed, the meaning of "ownership" has shifted.  When all the layers of an onion are peeled, it is revealed that there is nothing left, no onion distinct from its peelings.  So it is with ownership.

What we are calling the "onion" theory of property partly explains why many Swedish socialists saw no need to choose between reform and revolution.  Reform was revolution, step by step.  It also partly explains why the Swedish socialists have had very little interest in nationalizing industries.[9]  Conceptually, there is no need for the state to take property away from its owners, if the bundle of privileges that constitutes ownership can be transformed by careful small steps.  Further, conceptually, if it is possible to transform property slowly, layer by layer, then it is better to do it slowly, because, as Rudolf Meidner (1978) wrote, piecemeal reform is more likely than wholesale revolution to avoid mistakes, "involving as it does one element [at a time] in a step-by-step policy, where no step is taken into the unknown but each step is taken only when the ground underneath appears firm" (124).

Macroeconomics and an onion theory of property go well together.  They are both non-disruptive, overtly nonviolent, gradualist, and scholarly ways to make society better by solving practical problems.  While macroeconomics on the whole, like Keynes most of the time, tends to take what Keynes called the "social structure" as given, the concept that property is not a single lump, but a bundle of many privileges, tells us that over time even the most basic constitutive rules of modern society can gradually dissolve, particle by particle, and re-crystallize as something else.

If one sits on a bench at a bus stop for several hours and pretends to be a homeless person, one can achieve a good common sense understanding of the difficulties that stand in the way of reliably meeting everyone's needs in a capitalist society.  The passersby may and may not give the person on the bench a break.  Somebody might offer money, or a job; or an invitation to sleep indoors on a bed in a room; or an invitation to eat.  But maybe not.  Maybe nobody will.  It is up to them.  The passersby are free to choose whether to help or not.  No one has a strict obligation to give anything, and therefore the person on the bench has no assurance that s/he will be given anything.  If s/he offers to work, someone may hire the person on the bench.  But maybe not.  It is their decision.  The person on the bench has no right to be employed at a living wage, because other people have no such duty to employ people at a living wage.  They are free to hire or not, and the wages offered, if any, must be something to which they and the person on the bench both agree.  They--the others—are not like the person sitting on the bench.  They have houses and cars.  They have money.  They own things.  The actual homeless person sits on a bench because s/he does not own a place where s/he could sleep on a bed in a room, and because s/he does not have enough money to rent a place.

If the person pretending to be homeless then bestirs herself and awakens from her reverie, and walks down the street and enters upon the academic precincts of some secondary school, or college or university, or institute of postgraduate studies; and there enrolls in a course of study in the science of economics; still, by following such a course of study, she will not--such is our thesis--fundamentally improve on the understanding of the root causes of poverty that she acquired sitting on a bench at a bus stop pretending to be a homeless person.  Although one would probably never hear it in an economics course, it remains true that the cause of poverty is rights.[10]  “The cause of poverty is rights" is among the most telegraphic, provocative, and hermetic phrases we could have chosen to express our concept.  Any satisfactory unpacking of its meaning would have to propose the ethical construction of an alternative.  It makes no sense to say that rights "cause" poverty if we cannot produce a counterfactual argument that in the absence of the specific interpretation of "rights” we are criticizing, and in the presence of some improved moral order, there would be no poverty.  Although we might be permitted to say that prevailing ideas about rights are, in some sense, the cause of poverty, we certainly could not say that the cure for poverty is an absence of rights.  The cure must instead be an improved moral theory that would endorse some improved concept of human rights.  The improved theory of rights would cleave to the precious concept of the dignity of each human person which modern civilization has laboriously achieved.  It would be a call to parents, philosophers, artists and educators to facilitate the continuation and enhancement of the spiritual and moral construction of a world of cooperation and sharing.

In the current setting of our rights-based culture, however, we are left to encounter the stumbling blocks of freedom and property.  The right to be free and the right to own property.  These constitutive rules of our social order are also axioms and first premises of what is known as "classical" economics, or, alternatively, neo-classical, orthodox, anti-Keynesian, pre-Keynesian, or neoliberal economics.

It might be argued, to the contrary, that the first premises of orthodox economics are not the constitutive rules of modern society, but, instead, universal principles valid at all times and places.  Robert Heilbroner, for example, defines economics as the science of setting priorities and making choices when resources are scarce (1962: 4-5).  On his view, economics has existed for as long as humans have existed, because humans have always had to make choices among alternative uses for scarce resources.  Those who conceive economics to be a universally valid theory of rational choice take a similar tack.  The ancient Chinese, the Incas, the Hopis, and the Hottentots may know nothing of game theory; they may have never heard of the game theory concepts of “maximin” or “minimax”; they may be unable to assign quantitative weights to the values of payoffs, or even unable to rank order their preferences; but nonetheless, it is argued, economic science somehow applies to their lives.

Whatever their merits may be, we regard attempts to construe economics as a universal social science, applicable to all cultures, as universalizing appendices added on later to classical economics, and not as classical economics itself.  It is quite clear historically that classical economics arose together with capitalist institutions, as an important part of their ideology.  An Enquiry into the Nature and Causes of the Wealth of Nations, Adam Smith's founding pioneer document of classical economics, for example, is an expanded version of the last part of his Lectures on Jurisprudence, a work which shows Smith's awareness that the ethical premises of economics are not universal.[11]  Smith's jurisprudence lectures, given at Glasgow University in 1763-64, contain long passages on the Tatars, the Arabs, and other peoples, who, on Smith's own account, knew nothing of freedom, property, or markets as they were understood in British morals, in British common law and Roman civil law, and in the science Smith was about to found in his concluding lectures.  Smith saw himself not as proposing an enlightened theory applicable to any set of institutions whatever, but rather as proposing an enlightened theory applicable to an enlightened set of institutions, namely the institutions of his own time and nation, those of Scotland and England, which he frequently compares favorably to those of other times and nations.

Swedish social democracy, and the macroeconomics of the 1930s generally, arose as a revolt against classical economics.  Here are some quotations from a polemical counter-attack directed against John Maynard Keynes by Henry Hazlitt (1959), who declared himself to be a spokesperson for orthodox, classical economics, and an enemy of the "new" economics.  "Neo-classical" would probably be a better name for his views, but we have decided to accept his terminology and identify him broadly with a tradition called "classical," represented in our own times by mainstream neoliberal economics.  Reading between the lines of these quotations, the reader will fairly easily see that the "causes" and "market forces" whose "results" and "decisions" Hazlitt describes are the actions of free people exercising their property rights.  Hazlitt writes: 

 

Section II of Chapter 2 is notable as the first attempt by Keynes in the General Theory to disprove a fundamental proposition of traditional economics--that the most frequent cause of unemployment is excessive wage-rates. This, of course, for "classical" economics, is merely the parallel of the proposition that the most frequent cause for an unsold surplus of a commodity is the refusal of sellers to accept a price that will clear the market.

. . . .  If our statesmen were really educated in the principles of classical economics, they would understand that unemployment is usually the result of union insistence on excessive wage-rates, or some similar price-cost maladjustment.

. . . . Whenever men are allowed liberty, and freedom of choice, they will make mistakes. Liberty is not a guarantee of omniscience. But neither are the mistakes of free men a valid excuse to take away their liberty, and impose government controls in its stead, on the ground that all wisdom and disinterestedness resides in the people who are going to do the controlling.

. . . .  Frozen wage-rates cause frozen unemployment.  When wage-rates become fluid again, "full" employment is restored.

. . . .  In any case, there is the strongest possible presumption in favor of letting free competitive market forces decide the question.  When unemployment exists, it exists because there is disequilibrium somewhere.  The most likely place is in the wage-rates of the occupations in which the unemployment exists.  This presumption is enormously increased when such wage-rates are arbitrarily held at their existing level by labor-union insistence, which prevents free competitive market forces from operating in those occupations (1959: 17, 152-53, 174, 251, 271; italics in original).

 

Such classical arguments are, on the whole, rather persuasive.  Once the constitutive rules of freedom and property are in place, to be thenceforth taken for granted as part of the unseen and unquestioned background, it follows that labor, like anything else, will be purchased only if somebody wants to purchase it.  Nobody has to buy anything she or he does not want to buy.  If they have no sufficient motivation for hiring workers, employers will not hire.  It is plausible to say that on the whole and in general, if labor is to be sold, its price must be low enough to attract buyers.

Similarly, if roundabout means requiring large initial capital investments are the means that bring goods to markets with the required quality and at the required price to make them saleable, then owners of property must be induced to invest, or to rent out, or, in general, to permit the use of their property.  To run factories, mines, irrigation projects, research and development laboratories, one must pay for the use of property.  Where free owners contract with free owners in markets, then property must have a price, a rent, and the price must be high enough to attract sellers.

Thus, given that the constitutive rules of the capitalist game are taken for granted as part of the unseen and unquestioned background, many of the scientific conclusions of classical economics have the character of descriptions of the inevitable, like descriptions of the orbits of the planets.  All of us are familiar with the following dictum: "It does not matter whether you like it, because that is the way it is, whether you like it or not.  It is reality.  It is what must be.  It cannot be changed." 

On another level, however, classical economics is more than a dismal report on the hard facts of real life.  Hazlitt writes, "Liberty is not a guarantee of omniscience.  But neither are the mistakes of free men a valid excuse to take away their liberty, and impose government controls in its stead, on the ground that all wisdom and disinterestedness reside in the people who are going to do the controlling" (1959: 174).  These words illustrate the second and third of the triple whammy punches of classical economics: not only is it the hard facts of real life, but also 2) this is the way it should be; and 3) the alternative is worse.

The free market should be, because people have a right to be free.  The right to be free includes the right to be wrong.  It even includes, within ill-defined limits, the right to be bad.  Even if we think we know what people ought to do, and what they would do if they were rational and good, we are not authorized to override their freedom in order to force them to do it.  Therefore, even when corporations or free individuals damage the environment, create unemployment, or break up communities, they generally have a right to do it.  Rights, like gods, make holy demands that sometimes require practical material losses for the sake of loyalty to ideals. 

It is also argued that the alternative to letting the market make decisions is worse.  If the basic social structure is assumed, and if civil society is assumed to lack any capacity for transforming itself, then the alternative is Government.  But power corrupts. Humans are fallible.  Officials charged with pursuing other people's welfare will be less zealous than individuals pursuing their own welfare.  Therefore, it is said, turning to Government is worse than leaving decisions to the market.

While we generally find the teachings of classical, neo-classical, mainstream, orthodox economics at least partly persuasive, whenever it is allowed to conceal its premises and silently assume them, there is one major point on which it is not at all persuasive.  We are not in the least persuaded by the notion that if wage-rates went low enough there would be full employment.

This notion flies in the face of experience.  In most of the world most of the time, wages are low and unemployment is high. (Here we are assuming some reasonable measure of unemployment, which includes the discouraged, the depressed, the driven-insane, the informal economies of thieves and street vendors, the landless peasants, the slum-dwellers who live by hustling--and not the rose-colored glasses of official statistics.)[12]  In many parts of the world--the Philippines, for example--many people work full time, sometimes twelve hours a day, and still earn too little to buy the necessities of life.  And still there is unemployment, even when wages could go no lower and still allow workers to keep body and soul together.  In the Dominican Republic, in Uganda, in Zaire, in Bolivia, in India, in Colombia, in Egypt, in all of the territories of the former Soviet Union, in most of the continent of Africa, and now in China, and on and on, there is mass unemployment while wages are low.  In abstract classical theory there is Say's Law, which holds that supply creates its own demand, and therefore there is no involuntary unemployment; and there are notions of equilibrium (a metaphor borrowed from physics), which postulate full employment whenever wage rates match the marginal productivity of labor.[13]  But no theoretical ingenuity can make credible in the real world the argument that low wages bring full employment.

In Europe in the early 1930s, there was mass unemployment.  Millions were hungry and angry. Hitler, Stalin, and Mussolini were on the march. Wages were falling. Orthodox economists tried to explain the situation with their classical theories, and mostly concluded that wages were not falling far enough fast enough.

John Maynard Keynes, a man endowed with a tremendous capacity for work, and a man not convinced by Marxism, which was the main theoretical alternative to classical economics at the time, labored long and hard to prove that classical economics was wrong.  In Sweden, the members of the Stockholm School did the same.  Dag Hammarskjöld criticized classical theories in a long appendix he wrote for a Swedish Royal Commission appointed to study the problem of unemployment.  At the invitation of the socialist finance minister, Ernst Wigforss, Gunnar Myrdal wrote a theoretical appendix to the Swedish government's proposed budget for 1933 in which he argued in favor of active government intervention in the economy.  Alf Johansson published a book in 1934 that argued that lowering wages in a depression would most likely make the depression worse.  Back in 1929 Erik Lindahl had already made a case for government spending and expansionary tax policies to boost aggregate demand.[14] 

One of Keynes' best arguments was the following one, which he made in Chapter 19 of his General Theory, published in 1936: 

The demand schedules for particular industries can only be constructed on some fixed assumption as to the nature of the demand and supply schedules of other industries and as to the amount of the aggregate effective demand.  It is invalid, therefore, to transfer the argument to industry as a whole unless we also transfer our assumption that the aggregate effective demand is fixed. Yet this assumption reduces the argument to an ignoratio elenchi.  For, whilst no man would wish to deny the proposition that a reduction in money-wages accompanied by the same aggregate effective demand as before will be associated with an increase in employment, the precise question at issue is whether the reduction in money-wages will or will not be accompanied by the same aggregate effective demand as before measured in money, or, at any rate, by an aggregate effective demand which is not reduced in full proportion to the reduction in money-wages (1954: 159-60).

Here Keynes illustrates the rationale for macroeconomics, as opposed to microeconomics.  At a micro level, if one considers one employer and one applicant for employment, one might conclude that the lower the wage the more likely it is that the employer will hire.  But at a macro level, if one considers that all industries, taken as a whole, produce in order to sell, and can only sell if there are consumers with money to buy, one might conclude, in certain circumstances, the opposite: the higher the wages, the higher the effective demand for products, and therefore the more employment.

Keynes' prestigious work lent credibility to a vision of a new kind of society, articulated in Sweden in the mid-1940s by the Myrdal Commission, and by a joint committee of the LO and the socialist party.  It would be a non-totalitarian society, preserving the essential liberties cherished by modern civilization.  It would in general respect the boundaries between the public and the private domains, albeit with some incursions of the public on the private unacceptable to strict libertarians.  Most importantly, macroeconomics would be applied to manage the national economy in a way that would benefit the overwhelming majority of Swedes, and arguably all Swedes. Productivity gains would be translated into higher standards of living for workers and larger tax revenues to support government-sponsored health and education programs.[15]  The functions of profit would be socially defined and guided: to raise capital for economic growth, to pay pensions, to channel resources in efficient directions.[16]  Major long-range capital investments would be coordinated society-wide, in order to avoid the instability Myrdal and others attributed to allowing investment to be governed by calculations of short-term profit.  Thus the unrealized potential for meeting everyone's needs created by progress in the natural sciences would be realized because of progress in the social sciences.

Putting macroeconomics into practice was easier to do in Sweden than anywhere else.  Macroeconomics theory asks us to consider the aggregate of all industries and the aggregate of all workers.  It suggests setting wages, and other key variables, at the levels that will most benefit the society as a whole.  In most of the world this theoretical prescription was an academic dream, a speculative theory about what would happen if there were a way to design social policies in a free society in the light of their overall effect on all industries and all workers. But in Sweden all the conditions were ripe.  There was one main employers' federation, the SAF.  There was one main labor union federation, the LO (later came a second federation, the white-collar TCO).  The same political party, the social democrats, stayed in power for decades.  The SAF and the LO together set the wage patterns for all industries and all workers, and the government coordinated its policies with theirs.

Looking a little more closely at what Keynes and the diverse contributions of the members of the Stockholm school asserted, it can be seen that most macroeconomics is about what would happen if certain policies were implemented.  Paraphrasing Keynes in the passage quoted above: Keynes does not say there will be higher wages.  He implies that if some measures could be taken to raise wages, then (provided that other conditions are met) there will be more consumer demand, more investment, more production, and more employment.  Somewhat similar arguments could be made to assert that other policy goals could be achieved by implementing other policies--perhaps even green policies that would reverse the destruction of the environment.

Keynes successfully shows in passages like the one quoted that Say's Law is mistaken. It is not true that if the unions and the government would only leave the free market alone, then wages would sink to their natural level, and then there would be full employment in the best of all possible worlds. 

Yet Keynes does not show that the policies he advocates can successfully be implemented without damaging side effects.  Indeed he could not possibly demonstrate in advance that his prescriptions would work.  It is one thing to have a model (even a model confirmed by historical data) which says that if X does that and Y does this, then Z will be the result.  It is another thing altogether for X to actually do that, and Y do actually do this, and for Z to actually happen.

Keynes attacked classical economics at its weakest point.  The strong points of classical economics remained intact.  Economic actors throughout the world are still taking their micro-viewpoints.  They still act in ways that tend to bid wages down, and overpriced (and even underpriced) labor around the world still tends to remain unsold. Money is still moving into the coffers of people whose economic power enables them to demand rents for their services or for the use of their property.  People still show too little inclination to do what they would do if their actions were programmed to act cooperatively for the benefit of all.  Mainstream neoliberal economics still tends to describe the world as it is.  It predicts that most of the time market incentives will motivate workers and property owners, and that policies that deviate from market pricing will be undermined by the tendencies of human behavior (given prevailing social structures and prevailing cultural norms).

It is only a small exaggeration, and a generalization about many diverse thinkers pardonable under the circumstances, to say that classical economics is an ideology for capitalism built around two main ideas: 1) the idea that if the government and organized labor leave social decisions to be made through prices set in free competitive markets, then the market will take care of us--which is false; and 2) the idea that if the government and organized labor interfere with the free market, in order to set prices and make social decisions according to non-market criteria, then there will be unintended undesirable consequences, and the market will punish us--which is true.

If the constitutive rules of modern society put formidable and pervasive difficulties in the way of building social democracy, which mainstream economics records and reflects, then one would expect, on philosophical as well as on economic grounds, that Swedish social democracy, or any social democracy, would run into trouble--in the form of inflation, falling living standards, stagflation, soaring debt, unemployment, inability to export enough to pay for imports, capital flight, black markets, tax evasion, budget deficits, or in some other form.  Trouble is what happened to Sweden in the 1970s.  But by the time it finally happened Sweden had already enjoyed several decades of progress toward social justice coupled with miraculous prosperity, and during those decades the Swedish Illusion had become entrenched.  Many people, in and out of Sweden, came to believe that Sweden had discovered a theoretically valid approach to macro-managing its economy, which could be expected to succeed indefinitely, delivering more social justice and more prosperity to the Swedish people year after year.  Gunnar Myrdal embraced this Swedish Illusion in the Storrs Lectures he gave at Yale Law School in 1958 (Myrdal 1960).  He was not alone.

The following is a short list of counter-intuitive Swedish achievements in the decades immediately after World War II.  Wages consistently rose.  Profits were squeezed, but industry, far from shutting down or moving, grew.  Full employment was maintained while wages went up and profits were limited.  Progressive high taxes went together with high rates of capital formation.  Sweden's success in selling its products in export markets exceeded expectations.  Free trade did not drag down wages; it helped raise them.  Plants were closed as industry adjusted to changing conditions, with very little hardship for workers.  The welfare state, with all of its tax burdens, grew at the same time that the economy became more productive and more efficient. 

We will focus on just one achievement, which is both representative and key: raising both the wage bite and the tax bite taken out of the revenues of industry (these overlap, because part of the tax bite came out of wages); and at the same time making industry more efficient and more internationally competitive. How did the Swedes do it? 

Common experience around the world shows that industry is run for profit, and that when industrialists find that their profits are threatened by labor unions or by socialist governments or by anything, they tend to react by doing any of a number of things to restore and augment the profits that are the sources of their incomes.  These reactions range from the routine to the reprehensible, such as: raising prices, keeping inventory off the market until prices go up, laying off workers, cutting wages, shutting down plants or threatening to shut them down unless they get a better deal, diverting new investment to locations where the government is more pro-business, taking their capital and their technologies elsewhere, funding right-wing think tanks that generate pro-profit ideology, bribing (or, more politely, funding) politicians, funding pro-business media to spread pro-profit ideas among the population at large, hiring thugs to beat up labor leaders and left-wing politicians, funding dissident colonels in the armed forces, running right-wing paramilitary death squads, and funding political movements and governments that carry out systematic repression and torture.  The economic dislocation and chaos that experience shows to flow from industrialists' responses when their profits are challenged, cause not just the rich to fear socialism.  The middle class and even the working class fear socialistic measures too, because they threaten to upset, or to provoke the upset of, the smooth functioning of the economic machine on which everybody depends for their daily bread.

None of this is surprising within a framework that sees the ethical norms that govern society as the economy's constitutive rules.  Owners of property are on the whole free to do what they want to do, and they generally want to do what they perceive to be advantageous for themselves.

Compared to the experiences of many countries, the building of Swedish social democracy after World War II was a piece of cake.  A first attempt at an explanation might hypothesize that Swedes are unusually nice people.  The Swedish socialists had the courtesy and good sense not to threaten the security or comfort of the upper classes.  The fifteen or so families who own the bulk of Swedish industry are composed of kindhearted Lutherans; who are pleased to see their fellow citizens get pensions, medical benefits, and unlimited free education; and who do not desire to become wealthier than they already are in order to be able to vie in ostentatious display with rock stars.

The nice folks hypothesis cannot explain very much, however, because in the modern world most business decisions are made not by sentiment, nor even by principle, but by accounting.  The directors and officers of a corporation owe shareholders fiduciary duties that require the business to follow generally accepted accounting principles.  The managers are obligated by law to be zealous and prudent in building the bottom line, which is profit.  Besides, Swedish social democracy was not always nice.  It put pressure on weaker firms, which could not afford to pay high wages and high taxes, either to become more efficient or to face bankruptcy.  That was part of its strategy for raising wages and government revenues.

A more significant hypothesis is that Swedish social democracy found ways to modify the accounting rules that govern industry, which bent the whole country in the direction of social justice, and at the same time made the books balance, both for the government and for the private sector.  It was called the Rehn-Meidner model, named after LO economists Gösta Rehn and Rudolf Meidner, and later merged with the EFO model, named after three economists who produced it for a joint LO-SAF commission: Gösta Edgren, Karl-Olof Faxén, and Clas-Erik Odhner.

A first premise of the Rehn-Meidner model is that the Swedish economy can be divided into two sectors: a competitive sector producing goods tradable in the world market (about a third of the economy) and a sheltered sector of goods produced for home consumption, such as houses and public services (roughly the remaining two-thirds of the economy).[17]

Simplifying a bit, with respect to the tradable sector, Sweden has no considerable influence on prices.  Sweden is small, and the world is big. Whatever the selling price is, it is, and Sweden cannot change it.  Therefore, if Sweden can produce at lower cost, or produce more goods at the same cost, the result will be pure gain for Sweden.  The outside world is regarded for the most part as a giant customer, who sets the price, and who will take any quantity, or at least any quantity tiny Sweden can produce.  The key to gains is therefore to produce more at a lower cost.  If, by good luck, the prices in the world market of the goods Sweden sells go up, then so much the better. 

The Swedish economy was deliberately geared to promote productivity gains. Government, employers, and organized labor worked together toward that end.  Each year's productivity gains became a sort of national gain fund, which could then be divided between labor and capital (and directly or indirectly government) through collective bargaining.  As the EFO economists put it, "[A] margin for profit and wage increases is created in the competing [i.e., tradable] sector through the rise of productivity in that sector and the influence from price increases in the world market.  This margin is distributed between wages and profits through collective negotiations been organizations of employers and employees (Edgren, Faxen, and Odhner 1973: 113).[18]

Erik Lundberg calculated the annual productivity gains in the tradable sector to be about 4.2 percent per year during the years 1952-60, and about 8.2 percent per year during the years 1960-68 (1996: 55).  It should be noted that these gains do not all stem from improved production techniques.  They also stem from changing the mix of products to make more of the things Sweden makes best.  Thus, real wages in the tradable sector could, in principle, go up 4.2 percent per year during the 1950s, and 8.2 percent per year during the 1960s.  This would assume that the productivity gain went to labor and capital equally, payment to each going up by the same percentage. 

But what about the two thirds of the economy that is in the sheltered, non-tradable sector?  There the productivity gains were smaller, and, besides, we are not allowed to make the simplifying assumption that the costs of production and the wages paid to the producers have no effect on demand or on prices.[19]  In general, the LO and the SAF implemented a "solidaristic" wage policy.  This meant that the wages of those who were lowest paid were raised first.  As Meidner put it, everyone should get the same pay for the same work, regardless of whether they happen to work for a highly profitable firm or for an only moderately profitable firm.  For this and for other reasons that linked the two sectors, wages tended to go up in the sheltered nontradables sector, moving toward equality of wages nationwide.  Freedom. Equality.  Brotherhood.  Thus the workers in the industries that generated high profits through high productivity gains did not necessarily get the benefit of the highest wage gains.  In fact, they were generally last in line to get wage increases, since their wages were high already.

To counter inflationary pressure, i.e., the tendency for prices to go up and up as wages went up and up, Rehn and Meidner recommended that the government follow a tight monetary policy.  Taxes were deliberately used to prevent inflation by siphoning away excess revenues, which otherwise might have led to extraordinarily high profits and extraordinarily high wage increases.  The tax policies that prevented inflationary pressure by making sure that neither labor nor capital got too much money were also sources of national saving.  The public sector became a major source of capital formation in the economy, and a major source of the job training ,investment in more up-to-date equipment, and technological research that led to still more productivity gains.  Pension funds were another major source of capital formation. 

This tight monetary policy, which held down inflation by keeping money scarce, also had the consequence that there would be less overall demand in the economy.  The Swedish model was not a crude Keynesian model, which would first fight inflation with taxes, and then build consumer demand up again by lowering interest rates or doing something else to get cash in circulation.  No.  Instead, the model targeted islands of unemployment that appeared in the weakest sectors and regions of the economy.

Rehn and Meidner proposed the now-famous "active labor market policy."  When islands of unemployment appeared because the weakest firms failed, government programs stepped in to retrain workers.[20]  Workers were paid almost as much for being retrained as for working, and since wages were being equalized throughout the economy, their new job would be unlikely to pay less than their old job.  The idea was to ease the transition from shrinking sectors of the economy, which were the ones that could not afford to pay high wages and high taxes, to the growing sectors of the economy, which were the ones that could afford to pay high wages and high taxes.

Gösta Rehn in particular managed to sell the idea of using indirect taxes on profits to keep gross profits from being too high as an anti-inflationary measure.  His argument was that by preventing business from having excessively high profits, the government could stiffen employer resistance to employee wage demands, since management would know that the firm could not afford to pay higher wages.  Management would also have every incentive to invest in new plants embodying more technical progress and using more capital-intensive techniques.  What the government took with one hand, it would give back with another, when it was a matter of making Swedish industry more internationally competitive.  Marginal plants would be eliminated, thereby raising average productivity.  Mergers were also encouraged, in order to achieve economies of scale and other advantages enjoyed by larger firms. 

In such a context, Sweden could gain from free trade.  It was already operating at or near full employment at high wages.  It was geared up to produce goods super-efficiently for export.  Bringing in low-priced consumer goods, made in countries with wage-rates far lower than Sweden's, could only raise the standard of living of Swedish consumers.  Foreign-made shoes, for example, posed no threat to the Swedish shoe workers, as long as Swedish shoe workers could be retrained to take higher paying jobs making such products as Saab commuter airplanes and Volvo buses. 

The question remains, however: how did the Social Democrats sucker the bourgeoisie into accepting this deal?  The annual productivity gains were a measure of the fund available for division between labor and capital in collective bargaining.  Labor was expected to limit its legitimate demands, on average, to not more than the increase in productivity.  Thus, if productivity went up five percent, wages could legitimately go up five percent, and profits could also legitimately go up five percent.  In practice, labor tended to demand more, especially in certain sectors and industries, and in practice the debate tended to be not so much over profit share as over whether wage increases were forcing price increases--when wage increases exceeded productivity gains and profits stayed about the same.  The unanswered question is why owners acquiesced in not getting more of the productivity gains themselves, as profits. 

In the 19th century a much different situation obtained in all capitalist countries. Labor was weak, and capital was strong.  Technical improvements in factories, and other factors leading to productivity gains, generally resulted in the workers remaining as miserable as ever, while the owners reaped all of the benefits of increased revenues and/or lower costs and amassed colossal fortunes.  Surely, if Swedish employers had been united and determined, and had used all the power at their command, they could have driven a bargain that would have given labor less and themselves more.  Part of the explanation may be the nice folks hypothesis discussed above.  Another part of the explanation is that the Rehn-Meidner model really was rational and well designed to work for the nation's benefit.  The conscientious and civilized people who opposed it (like Lundberg) recognized that a democratically elected government had a right to give it a try and to see how long it would work. 

But another part of the explanation of the acquiescence of business owners and managers in the implementation of the Rehn-Meidner and EFO models is that it offered wage restraint with respect to the biggest, most profitable, and most dynamic Swedish firms.  The solidaristic wage concept, which meant raising the wages of the lowest paid workers first, also meant that the leading firms had to give fewer and smaller wage increases.  Big businesses paid less, compared to what they would have had to pay, if they had faced their own unions alone, instead of being part of a national pattern that was part of a national policy.  Thus the most powerful employers, who tended to have the most clout within the SAF drew considerable benefit from Rehn-Meidner.[21]  Hapless marginal employers, caught between high taxes and high union wage demands and facing bankruptcy, found Big Business, Big Labor, and Big Government, as well as Rehn and Meidner's implacable logic, allied against them. 

Nevertheless, as Lundberg noted from the beginning, the Rehn-Meidner model was one that could only work as long as Sweden enjoyed exceptional success in foreign trade, accompanied by exceptionally high annual productivity gains.  Absent a miraculous growth of the tradable sector (even beyond the seemingly endless capacity of Swedish social democracy to generate miracles), the discouragement of marginal private-sector employers, combined with a policy of full employment at high wages, could only lead to maintaining full employment by creating a very large public sector, which there would be no way for Sweden alone to pay for.  The model would only work as long as the rest of the world provided a steady demand for Swedish products at solid prices.  It could work only as long as business management acquiesced in accepting a truce in its formidable and pervasive struggle to raise profits at the expense of wages and taxes. Further, much of its success was due to temporary conditions that made it possible to make large productivity gains by phasing out some industries and expanding others.[22]

As it turned out, the Rehn-Meidner model did prove to be unsustainable, as Lundberg expected, and as one might in any case expect from holding its discourse up for examination against the broader historical and ecological background suggested by the normative principles reflected in classical economics.[23] 

As this is written at the beginning of the twenty-first century, what was called the Swedish model is now history in Sweden.  Nevertheless, it continues to be of more than academic interest.  Its success in its time bred optimism around the world.  While Swedish social democracy was still in its heyday, Dag Hammarskjöld moved on to become Secretary-General of the United Nations, and Gunnar Myrdal, together with Alva Myrdal, his wife and lifelong partner in the struggle for social justice, moved on to become the leading exponents of a worldwide anti-poverty program and of what they called a "welfare world”.[24]  They were three of the Swedish social democrats who spread everywhere the faith that democratic planning could achieve prosperity with justice. Their credibility was enormously enhanced by the fact that in their native land it apparently had done so.

Conversely, the failures of the Swedish model and the exposure of its limitations contributed heavily to worldwide pessimism about social democracy's prospects, and to the worldwide advance of neoliberal economics and philosophy.

We have been contending that modernity's basic cultural structures, freedom and property, make the construction of social democracy difficult.  What the Rehn-Meidner model could not transform, and in the end surrendered to, was the basic cultural structure of modern society.  In other words, it could not transform economic reality, which constitutes the power of capital.  This economic reality, in turn, is rooted in the basic baptism of greed, which modern culture has blessed.  We find grounds for a new optimism in today's cultural movements that question the ethical premises of economic society, and seek to build cultures of peace and solidarity; in the cultural action and popular education movements founded by Paulo Freire; in Latin American liberation theology; in similar growth points within Buddhism, Hinduism, and Islam[25]; in the post-materialist counter-cultures of contemporary Western Europe; in deep ecology; in feminism.  "Social democracy" remains, however, the best name for aspiring to a culture of cooperation and sharing under modern industrial conditions.  By calling attention to the need to critique constitutive rules, we aspire to help social democracy rethink, regroup, and move forward. 

Notes