Chapter 7

The Revenge of the Iron Law of Wages

 

 In 1967 Frederic Fleisher hailed the miracles embodied in “the new Sweden”:

The new Sweden is the richest country in Europe, with per capita the highest income, the most cars, telephones, television sets, country homes, newspaper print, and wrapping paper.  Life expectancy in Sweden is the longest in the world.  Though the national income per capita is somewhat higher in the United States as a whole, Swedes are now as well off as Americans.  There has been a greater economic leveling out among Swedes, but they also have a rare sense of security. The new Sweden has aimed at developing ways of stimulating incentive, of guaranteeing equal opportunities, and of preventing the partially disabled and the maladjusted from lagging too far behind the general affluence. The new goal is the self-realization of everyone. The citizens are encouraged to develop their creative and productive talents and to experiment with the problems of adjustment in a rapidly changing, highly industrialized society (1967: vii).

A few lines farther on, Fleisher comments on the economic principles that made Swedish affluence possible: "Governmental control of inflation and currency had been practiced in Sweden almost before the ideas of John Maynard Keynes had been formulated and long before Keynesianism was appreciated" (Ibid.: viii).

Then he comments on the Swedish philosophy of social change: "Experts and planners can work with a limited number of unknowns and observe the impact of their experiments quickly.  If they turn out to be failures the country can afford to scrap them. Changes in Sweden are gradual, but intervals of stagnation are rare.  If the effects of pilot projects are encouraging, the course is determined by negotiation and compromise.  The results are often far-reaching transformations of sectors of society" (Ibid.).

It is not surprising that through the United Nations and other international agencies Sweden became a model of economic and social development for the world, and especially for the poor struggling masses of Asia, Africa, and Latin America.  The illusions of the Swedish model were concealed behind undeniable practical success, macroeconomic concepts that were considered scientifically valid at the time, and a philosophy and methodology of social change that seemed impeccably logical.  Thus, worldwide, progress has been blocked by misguided beliefs fortified by the success of Swedish social democracy in the 1950s and 1960s.  The purpose of this chapter is to articulate and diagnose some illusions fostered by the Swedish model, for the purpose of helping the world, and especially the poor struggling masses of Asia, Africa, and Latin America, and especially our poor struggling Mother Earth herself, to move forward toward real solutions.

Although the rise of the Swedish model was remarkable, its fall was prosaic.  The reasons that led Sweden to give up the policies that had served it so well in the decades immediately after World War II, were the same intractable economic problems that plague most modern countries most of the time.  Erik Lundberg described some of them as follows:

. . . [A] sharp decline in Sweden's share of export and home markets, an extreme profitability crisis and a big decline in industrial investment. . . .  Since 1973, a number of industries have been hit by over-capacity breakdowns, coupled with demand failures and profitability crises.  This has happened to iron ore, steel, shipyards, textiles, and to some extent to the timber and woodwork industries.  We find here a number of inter-related issues: international over-investment during the boom years of the sixties and seventies, stagnating demand development especially in investment branches, keen international competition from newly industrialized countries (Lundberg in Dahrendorf 1982: 198-99).[1]

Lundberg notes that Sweden's first response to crisis in the 1970s was to rely on the same Stockholm School and Keynesian policies that had worked for it before. Sweden again turned to active labor market policies aimed at stimulating investment, stabilizing private consumption expenditure, and expanding public works.  These measures had proven successful throughout the 1950s and 1960s, allowing Sweden to enjoy balanced growth with full employment, only moderate inflation, and no major balance-of-payments problems.  In response to the recession of 1974, therefore, "in accordance with the Keynesian tradition, anti cyclical policies were rapidly and energetically applied" (Ibid.).  This time, inexplicably within the boundaries of the then dominant Swedish macroeconomic paradigm, the result was "an almost complete policy failure" (Ibid.). 

Faced with the chronic failure of their planned economy to function as desired, in the 1970s and 1980s the social democrats and the unions were obliged to accept more of the advice of free-market liberals, thus accommodating themselves to the existing ratios of economic power.[2]  At the same time, they tried to change the balance of economic power by taking control of capital and capital formation.  They tried to vest ownership of major corporations in employees through the acquisition of shares by pension plans and other union-controlled funds.  They advocated, and achieved, seats for labor representatives on corporate boards of directors.  Meanwhile, the public sector ballooned.[3]

In 1991, after they had already largely abandoned the classic Swedish model of the postwar years, the social democrats were voted out of office.  The new conservative government appointed a commission of seven non-socialist economists "to analyze the economic crisis in Sweden and to suggest ways to solve it."  Its report was published in English as a book entitled Turning Sweden Around (1994), divided into six chapters called respectively "The Swedish Crisis," "Stability," "Efficiency," "Growth," "Democracy," and "Recovery."  Turning Sweden Around documents the revenge of the iron law of wages.  It finds an unemployment rate of 14 percent, public sector spending running at an unsustainable rate of 70 percent of Gross Domestic Product, a fall from arguably first among industrialized nations in GDP per capita to 14th, a strong inflation bias, recurrent budget deficits, and severe financial and building crises (Lindbeck et al. 1994: 3-10).

In its six sophisticated, well-written, and mathematically accurate chapters Turning Sweden Around repeats again and again one central and pervasive theme: Swedish wages are too high!  To compete in international markets, Sweden must produce goods at competitive prices, which means paying less to workers (either directly or indirectly, through taxes).[4]

The main theme of Turning Sweden Around is not a surprise.  It is common sense. It is the teaching of plain old-fashioned classical microeconomics.  It is a conclusion mandated by the constitutive rules of modern society.

That historical experience revealed the limitations of the Swedish model is not a surprise. What is surprising is that in the 1950s and 1960s so many people believed that the Swedish model was sustainable and generalizable to the rest of the world.  What needs to be explained, therefore, is the specious credibility of the illusions it engendered. 

Please do not misunderstand us.  Common sense says that as a general rule, with limited exceptions, high wages cannot be sustained in an open economy because global competition will require producers to cut costs, and therefore wages.  We do not, however, side with common sense but instead with the visionaries.  We side with R. Buckminster Fuller (1969), who said that what they do not want you to know is: there is enough for everybody (6, 123-24).[5]  With appropriate technologies and cultures of solidarity there can be work for everyone and prosperity for everyone, without ecological damage, even with ten billion people on the planet.  If ten billion is too optimistic a figure, then we will revise our vision to assert: there is no physical reason to prevent humans from reducing natality to bring the population down to five billion, or whatever proves to be the carrying capacity of the planet.

When we say that Swedish social democracy and its international admirers suffered from illusions, we do not mean to say that justice and prosperity for all cannot be sustained.  We mean to say that they cannot be sustained without appropriate technologies and cultures of solidarity.  It was the marriage of social democracy to Keynesian macroeconomics that had to end in divorce.  The illusions of Sweden were illusions about the feasibility of "changing without changing," i.e., of building an ecologically sustainable social democracy on a foundation of modern liberal ethics.

In this chapter we will discuss four kinds of illusions which the revenge of the iron law of wages unmasked: 1) the planning illusion; 2) illusions regarding the functions of profit; 3) an illusion regarding the control of capital; and 4) illusions regarding the mobility of capital. 

 

The Planning Illusion 

 

By "the planning illusion" we mean a certain naïve overconfidence in the ability of modern governments to create distributive justice and general prosperity.  The free market illusion is its mirror image.  Unfortunate souls unable to penetrate the veils of either illusion go back and forth between planning and the free market, expecting to find in one of them, or in some combination of the two, the key to building a way of life that knows no poverty.  The victims of the planning illusion overestimate the power of government.  They are not sufficiently aware that humans are governed far more by the laws of nature and by the constitutive rules of society than by any public officers chosen at the polls. 

Rather than discuss the planning illusion as a diffuse and generic conceptual malady, we will focus on an articulate and specific theory of planning proposed by Gunnar Myrdal in a work published in 1960.[6]  Myrdal's voice carried the enormous prestige of a major architect of the economic policies of a nation that had actually succeeded in creating justice and prosperity.  The story he told about planning could not help but appear to be, and surely was in part intended as, a story explaining Sweden's success.  It is the centerpiece of Myrdal's proposed world anti-poverty program.  It is by and large the doctrine of planning that was adopted after World War II by the United Nations, the World Bank, national governments, and international agencies.[7]  When Myrdal gave his series of lectures at Yale Law School in 1958, his topic was "Beyond the Welfare State."  A good part of the meaning of "beyond" in the title was that it was time to consider the international implications of the welfare state.  As Myrdal developed his theme, it turned out that a central idea running throughout his lectures was "planning." 

His audience knew he was from Sweden, but he did not frame his remarks as a report from Sweden.  He spoke instead for "the West," and for "the western model of planning."  He was able to say with satisfaction that most of the countries of the third world had chosen "the western model of planning" over the Soviet model of planning.  Although Myrdal spoke for the West, his examples and concepts came, first and foremost, from Sweden.

One might object that the United States, twenty times larger than Sweden, and at the time the acknowledged leader of what was called the free world, should have been the main source of whatever the West had to teach the rest of the world.  Myrdal takes account of the size and importance of the United States, and of its role at the time as the principal source of aid to the developing countries.  Nevertheless, he looks upon the USA, and Spain, and even France, as outliers.  Social development in the United States was not typical of the main trends after World War II observed in the majority of advanced Western industrial nations, i.e., West Germany, the United Kingdom, the Nordic Countries, the Benelux countries, Switzerland, Austria, and the British dominions of Canada, Australia, and New Zealand (see, e.g., 1960: 53-61, 98-102).  Myrdal spoke of the USA as if it were a somewhat socially retarded but basically well-intentioned Big Brother, immense in size but slower to learn than his precocious siblings.  What Sweden had learned about collective bargaining, about social security, about cooperatives, about designing pilot projects, about systematically evaluating social programs, about public housing and public health, Big Brother would eventually learn too.  Drawing on Swedish experience to speak for "the West" was thus legitimate for two reasons: first, because Swedish experience was typical of that of the majority of advanced nations; and second, because Sweden was the future.  The trend in other countries was to become more like Sweden. 

A second objection to the stance taken by Myrdal is that "planning," which he viewed as the key to the West's social progress, was an unpopular idea in the West, especially but not only in the United States.  The advocates of the free market outnumbered the advocates of planning, and they tended to identify the latter with the Five-Year Plans of Joseph Stalin, than which there could be nothing worse.

It was not just in Myrdal's mind, however, that in the 1950s, western governments, whose own constituencies were leery of planning, were teaching planning to third world governments.  It was really happening.  Justifying this practice, Myrdal argued that planning was a practical necessity in the West, and it was a practical necessity to teach it to the East and South (1960: 228-49).  In spite of public opinion, it had to be done, and it had to be taught.

Myrdal took it as a premise of his argument that no nation in the world was willing or able to go back to the old belief in leaving the economy alone, waiting for the free market to work its beneficial magic.  That had been the counsel of the laissez faire economists.  Yet Myrdal maintained that after the two World Wars and the Great Depression of the first half of the twentieth century, and after the invention of tools of macroeconomic management in response to and in conjunction with those historic events, no nation could go back to laissez faire. Governments had decided to intervene, and indeed they had to intervene (1960: 19-29, 62-64).

Specifically, every leading industrial country at the end of World War II had officially pledged to follow a full employment policy.  These pledges, enshrined in public documents in every western nation, partly reflected the promise made to the working classes during the war.  The working classes had been assured that the democracy they were fighting for, and in many cases dying for, was not merely a formal democracy, but a democratic future in which they would enjoy freedom from want.  Governmental commitments to full employment also reflected the conviction--which Myrdal did not question--that since John Maynard Keynes and the rise of the new economics, governments knew how to pursue a full employment policy.  Full employment was a promise that could be kept, and, once made, it had to be kept.  Thus Myrdal's theory of planning presupposes, as one of its major premises, Keynesian theory and the Stockholm School's theories, which show how to manage the economy to achieve higher levels of employment.

Having established that government intervention in the economy was necessary because keeping the promise to manage the economy to achieve full employment was necessary, Myrdal went on to argue that it was also necessary to coordinate with one another the various specific interventions that governments make at various times and places. Therefore, planning itself was by definition a practical necessity.  As Myrdal stated it, "Coordination leads to planning or, rather, it is planning" (1960:63).

If all "planning" amounts to is coordinating the several distinct interventions in the economy that a government makes from time to time, it seems easy enough.  It is hard to see how anyone could be against it, except for people who do not want the government to intervene in the economy at all.  Myrdal's stance was well suited to allay any fears his American listeners might have that planning was radical and dangerous.

What lends itself to illusion is that Myrdal associates what is difficult with what is easy.  It is true that there is a connection between planning and full employment.  It is also true that a government committed to full employment must plan.  But it is not true that planning can bring about full employment.  What it really takes to fulfill a government's promise to its working people to provide prosperity with full employment is to deactivate, or seriously modify, market forces firmly rooted in the constitutive rules of society. 

The radical consequences of a full employment policy were discussed by Myrdal's fellow Swedish social democrat Gösta Rehn in the following terms:

If the State has promised to maintain employment at all costs, a group of workers can ignore the fact that their organized wage demands might stamp out a large part of their branch of industry.  They can hold that the State must give them employment, if private enterprise does not because of negative profits.  In a full-employment society it becomes unnecessary for every trade union to have regard to the financial strength of its employers.  Every union can draft a wages policy without concern for the profitability of the work done.  The fact that unions in the past did not usually demand wages that would make too many enterprises unprofitable was of course not due to any moral scruples about the right of capitalists to get a fair profit.  It was due to the realization that too high wage demands mean unemployment, organized either by employers' federations (Lockouts) or brought about through the discontinuation of unprofitable firms.  By definition a full-employment society is a society where the State always saves those threatened by this sort of unemployment, either through the creation of new jobs or through a monetary policy that allows prices to rise enough to restore profits.  Thus no union is any longer compelled to take into consideration the effects of its wages policy on the employment of its members (Rehn in Lundberg, Meidner, Rehn, and Wickman 1952: 39-40).

Rehn must be right to say that if a government really means to keep a pledge to assure full employment, then it must either provide employment or create employment when markets fail to offer as many jobs as there are workers.  Rehn must also be right when he implies that if these things happen, it implies a major shift in the balance of power between workers and employers.  Under such conditions, the law of supply and demand, and its corollary, the iron law of wages, are repealed.  If it seems fantastic to say “[t]hus no union is any longer compelled to take into consideration the effects of its wage policy on the employment of its members," it should be remembered that for several decades the Swedish government actually did what Rehn said it had promised to do.  It offered public employment at high wages when private employment at high wages was not available.  Most governments, however, cannot keep such promises even if they make them, and even the ability of the Swedish government to defy (socially created) economic reality proved to have limits.[8]

To say that governments must deliver full employment because they have promised to do so implies that they can.  As a general rule, apart from exceptional circumstances, to say that governments that swim in the constitutive rules of modern western social structures as a fish swims in water can deliver full employment is to give more credence to Keynesian macroeconomics than historical experience and the logical analysis of its premises justify.

What really happened in Sweden was not that the government was a pioneer in the post-World War II western model of planning, which decided to plan for full employment, and then brought it to pass.  What really happened was that after World War II organized labor in Sweden was in an extraordinarily strong bargaining position.  There was a labor shortage.  Swedish business was in an extraordinarily strong sales position in export markets, partly because Sweden had been neutral in World War II, partly because Sweden's natural resources (forest products and iron ore) were in high demand, and partly for other reasons.  The unions could have used their monopoly of the supply of labor to drive wages through the roof, eventually causing industry to shut down or move elsewhere.  Instead, the unions intelligently (but not without employers threatening, and one time actually carrying out, a nationwide lockout) worked together with business and government to maintain the international competitiveness of Swedish industry, cutting a deal in which labor got a major slice of the pie.  Another major slice of the pie went to the "social wage" through which taxes paid for benefits for working people. Wages in the particular industries that had become immensely profitable could have raced ahead, leaving the rest of the nation behind.  Instead, the employers' federation and organized labor worked together to set nationwide wage patterns, which, in principle and to some extent in practice, raised first the wages of the lowest paid.

Labor, business, and government worked together to build the Swedish welfare state.  If one of the three were to be singled out as having played the leading role, it would have to be organized labor, not government. 

Planning, in the sense of learning how to coordinate a government's diverse policies and programs, can easily be taught to graduate students from the third world who come to study at Harvard, Stockholm, London, Stanford, Toronto, Paris, or Syracuse.  It can easily be taught on-site to middle-level civil servants at World Bank seminars in Jakarta, Bangkok, Dar-es-Salaam, Dakar, Sao Paulo, or Santiago.  Learning how to replicate the conditions that made the success of Swedish social democracy possible, however, is not so easy.  Absent extraordinary circumstances it is not merely difficult.  It is impossible.

In Sweden in the 1970s and the 1980s, the revenge of the iron law of wages showed the limitations of planning. When the Swedish economic crises came, the officers in the ministries of the Swedish government knew perfectly well how to plan.  They had long been good at planning.[9]  Nevertheless, the experience of having economic crises in spite of excellent planning demonstrated that in earlier, better, times, in the 1950s and 1960s, when Sweden was doing extraordinarily well, the mainspring of its success had not been planning. 

 

Illusions Regarding the Functions of Profit 

 

We are suggesting that overconfidence in planning and in the new economics helps explain why the set of policies known as "the Swedish model" seemed to be sustainable.  We are also seeking to illustrate a point about the methodology of research in the social sciences. 

An "illusion," in an important sense of the word, is a false appearance.  If one has an illusion, then one sees what is not there.  Or one does not see what is there.  Speaking metaphorically, what we see can depend on whether our eyes are open, whether we are wearing glasses, whether the glasses are tinted, how the lenses of the glasses are ground; whether we use a telescope, or a microscope, or a magnifying glass; which direction we are looking, how long we wait, whether we have a vivid imagination, and how our nerves interpret the light waves raining down upon the pupils of our eyes.

Less metaphorically, what appears to be real can change as the method changes which is used to ascertain the real.  "Reality" can become "illusion" and vice versa.  What was taken for granted can become problematic.  What was not noticed at all can become the center of attention.

When we write that there is a planning illusion, we are not just saying that certain facts have been overlooked, which, when taken into account, show a certain kind of overconfidence in the powers of governments to be an illusion.  We are advocating a shift in point of view and in research methods.

The point about method that we seek to illustrate is that one's understanding of social democracy can be increased by paying attention to modern society's basic cultural structures, its ethical foundations, its constitutive rules.  To further illustrate our point about method, and at the same time to begin a discussion of the functions of profit, we will comment on some words of Professor Milton Friedman: “[U]nless the behavior of businessmen in some way or other approximated behavior consistent with the maximization of returns, it seems unlikely that they would remain in business for long" (1964: 22).[10] 

In our opinion, Friedman's remark is significant and valid, but he has no right to make it.  As a confessed positivist, Friedman should, in order to play by his own rules, only accept as scientific laws those generalizations that are built upon empirical foundations.  It would not be difficult to gather empirical evidence showing that many firms have not maximized profits, and have stayed in business for a long time.[11]

Nevertheless, Friedman's intuition is valid.  What makes his intuition valid are the basic ethical and legal norms of freedom and property, which allow, authorize, recommend, and in some cases compel the maximizing of profits.[12]  The basic norms of modern society allow people to buy cheap and sell dear, to buy for as little as they have to pay, and to sell for as much as they can get.  Business managers are normally authorized and expected to do the best for the owners, which means maximizing profit.

In the competition of capitalists there is an element of compulsion, reflected in Friedman's remark that those who do not maximize profits are unlikely to remain in business for long.  If a business does not maximize profits while its competitors do, then the competitors will have access to more retained earnings, with which to keep up with new technologies, advertise, and, generally, to compete.  Thus a business that decides to rest content with a moderate profit may find that it is unable to keep up with competitors, and consequently unable to operate at all.  Thus, just considering the constitutive rules of markets, one would consider attempts to maximize profits to be very likely, if not inevitable.

Three Swedish authors who influenced and reflected the classical Swedish model of social democracy were the so-called EFO authors, Edgren, Faxén, and Odhner.  Although their book Wage Formation and the Economy (1973) was about wages, it was necessarily also about profits, because how much money goes to wages affects how much money goes to profits.[13]  Edgren, Faxén, and Odhner were more consistent positivists than Friedman. Their approach was to use historical data to see how profits and wages varied over the years, and then to explore hypotheses concerning what factors might explain the observed variations.  For example, using three different definitions of profit, they show the following figures for Swedish industry for the years 1960-1967.

 

(TABLE 7.1 HERE)

 

Discussing possible explanations of the observed trend, Edgren, Faxén, and Odhner state that the fall in profits is "probably in part to be explained" by rising wages (1973: 126).  On the whole, the EFO authors are cautious in interpreting their data. Sometimes the numbers show no discernible pattern.  Always more studies are needed.

With respect to the normative question what profits should be, the EFO authors are even more reluctant to speak.  They appear to accept the positivist doctrine that questions of value have no scientific answers.  They write:

The distribution of income between labour and capital; the allocation between wages and profit, is a question of power and group interests.  That cannot be resolved by experts in a volume of this kind, but only by negotiation between the contractual parties, in which their natural opposition of interests finds expression.  By threatening strikes and lockouts, and on occasion through strikes and lockouts actually taking place, each party presses its case on the other side (Ibid.: 11).

The EFO authors take the view that within limits determined by what is possible, the rate of profit is determined by a power struggle between capital and labor.  But it is not naked power.  This is Sweden.  The ultimate weapons are the strike and the lockout. There are no streets soaked in blood, no burning buildings, no secret police, no death squads, no civil wars, no political kidnappings, no helicopter gunships attacking civilians, no military checkpoints every few miles on the highways, no torture chambers, no reigns of terror.  It is safe to be a positivist in Sweden--because there is no danger that the idea that value judgments have no cognitive significance will be put into practice.

Without surrendering their credentials as technical experts who express no opinions on values, the EFO authors go on to make some murky scientific observations on what is possible and what is not possible that come within an inch of telling union negotiators how they ought to behave at the bargaining table:

An excessively large wage share--a shift in the distribution of income in favour of wage earners at the expense of business firms--has an effect in the first instance on the capacity of enterprises to finance investment for increased productivity and the expansion of capacity.  Investment can be financed both through borrowing and through the accumulation of equity capital within enterprises.  If the equity/debt ratio . . . of enterprises is not to deteriorate in the long run, however, their capital must grow in step with their total capital stock.  Profitability must suffice to permit an increase in own-capital at that rate, both through self-financing and through the general public and the collective savings funds finding it attractive to take up new issues of shares.  In other words, these factors limit the extent to which the distribution of income can be shifted in favour of wage earners without leading to consequences which in the long run also operate adversely for wage earners, in the form of a lower rate of economic growth, smaller increases in productivity, a reduced ability to pay wages and a weaker employment position in industry (Ibid.: 12-13).[14]

The paragraph just quoted is followed by an equally stern admonition to employers, warning them that if they do not concede reasonable wage increases, they will suffer from instability, disorder, wildcat strikes, raises deviating from norms--all of which is summed up in the pejorative phrase "wage drift."

The moral of the studiously amoral story told by the EFO authors is balance and restraint.  Aristotle would have loved it.  Both sides are admonished, in careful technical prose, to settle somewhere in the middle, without going to extremes.  In classical ethics a person of good character is, by definition, a person who has formed the habit of rationally governing the passions, choosing the golden mean, not too much and not too little. 

With 20/20 hindsight we can see that the EFO authors, whose book was first published in 1970, wrote at the peak of the prestige of the Swedish model, shortly before its decline began. We can also see why they did not see the decline coming.  The lenses of their glasses were ground to keep constitutive rules out of focus. 

Profit-seeking, when carried to extremes, is inconsistent with the good faith bargaining that the EFO authors discreetly advocate.  It is uncivilized.  It violates the spirit of "created harmony" that Myrdal attributed to the modern western welfare state.  It is a vice, not a virtue.  Medieval moral theology named it "avarice" and counted it among the seven deadly sins. 

A major illusion causing the Swedish model to appear to be sustainable was the illusion that privately owned industries, engaging in collective bargaining in the light of the EFO guidelines, could be treated, in effect, as the equivalent of public utilities. Reasonable profits would be fixed at the bargaining table as reasonable utility profits are fixed by public regulatory commissions.  Reasonable profits could be regarded as moderate profits calculated to serve socially necessary functions. 

In reality, the basic legal and ethical norms of freedom and property allow, authorize, recommend, and in some cases compel the maximizing of profits.  The basic norms of modern society allow people to buy cheap and sell dear, to buy for as little as they have to pay, and to sell for as much as they can get.  Business managers are normally expected to do their best for the owners, which means maximizing profits. Maximizing profits is but another name for profit-seeking carried to extremes. 

One should not have assumed that Volvo, for example, would be content forever with reasonable profits. When tempted by an opportunity to take its technology to a low-wage country, where it could reap even greater profits than those it was already reaping in Sweden, Volvo might choose maximizing over moderation.  In fact, it did.

 

An Illusion Regarding the Control of Capital 

 

The Swedish model required a great deal of capital.  The model required capital to keep Sweden ahead, or at least in the running, in several worldwide technology races. The corollary of "Export or die!" was "Obsolete goods cannot be sold!"  Even education became a capital-intensive industry, as years of time and large sums of money were spent developing and testing new textbooks, teaching methods, and laboratory exercises. 

At the same time, the Swedish model cut profits.  Limiting profits was an essential part of its strategy for stabilizing prices, which in turn was essential to remaining competitive in world markets.  It was also an essential part of its strategy for raising wages by shifting employment away from less viable marginal firms and toward winning firms. 

Consequently, Sweden needed capital at the same time that it was inhibiting the growth of capital.  Big business in western capitalist countries has traditionally grown by re-investing its own profits.  Retained earnings has been a more important source of capital for expansion than taking out loans, issuing bonds, or selling shares.  In any case, the same relatively low profits that diminished retained earnings also diminished the attractiveness of firms to investors. 

Sweden compensated for relatively low profits in several ways.  Large budget surpluses made the government itself a major source of capital formation (until the ballooning of public expenses drove government budgets into the red).  Pension funds were another source.  The tax laws peeled some layers off the onion of property rights by telling business it could retain earnings after all, if it would spend them in ways conducive to the welfare of the Swedish people and in ways that enhanced Sweden's competitiveness in world markets. 

Reliance on public and quasi-public capital sources turned out, on the whole, to be more an advantage than a disadvantage, partly because these alternative sources of capital were more reliable sources of funds for basic research and development and for implementing projects with a long time horizon.  In general, countries like Sweden, Japan, the tigers of Southeast Asia, and Germany, where there is major public participation in long term investment planning, have prospered more than the free-marketeer countries in the highly competitive environment of the global marketplace. (It should be noted that after the crises described in Turning Sweden Around, Sweden has bounced back fairly well, although it no longer employs the classical "Swedish model."  As of this writing the Social Democrats are back in office, and Sweden is doing as well as any nation-state at balancing social welfare and international competitiveness in the new world of neo-liberalism and globalization.) 

In the 1970s, while the Swedish model was doing less well than it had been doing in prior decades, efforts to give organized labor more control over capital intensified.  A scheme for employee investment funds was proposed, but not enacted, which would eventually have given the unions control of the major corporations through the gradual acquisition of shares by funds diverted to labor in lieu of excess taxes on profits.  Labor influence over capital actually was increased, through pension funds and similar funds, and through employee representation on company boards of directors. 

Some of us are looking forward to the day when most corporate shares, and generally most sources of passive investment income, will be owned by institutional investors devoted to worthy causes that promote the people's welfare, such as pensions for the old, workers' rights, medical research, liberal education, habitats for humanity, and cleaning up the environment.  Sweden is not the only country that has made a start in this direction.  Nevertheless, it should be conceded that there is an illusion, deeply rooted in metaphors that are overused in the social science and in common everyday speech, that lends itself to exaggerating the benefits of putting the supervision of the processes of capital formation and capital investment into the hands of stakeholders and philanthrophists.  Rudolf Meidner appeared to be a victim of that illusion when he wrote these lines about employee investment funds: 

What is specific to the employee funds is that they provide a new opportunity for also making more democratic those decisions which are arrived at within enterprises, but which affect a firm's relations with the community as a whole, with consumers, local authorities, the total environment, and so forth.  In short, the funds should make it possible to arrive in a democratic manner at those investment decisions which affect what is produced and where. . . .

. . . One might think then that the precise objectives of the employee investment funds could be achieved via labour legislation. But there is an important difference between the right to negotiate and conclude agreements about production decisions on the one hand, and the influence over production which flows from the ownership of capital on the other. He who controls the capital holds the right to initiate and the chance positively to embark on implementing decisions which are thought to be appropriate. In the last resort he who negotiates can only say “No.”  He cannot press in the same way for particular decisions about proposed ventures if the owner of capital is opposed to committing resources of capital. 

This difference, between a positive right to initiate and the possibility of stopping undesirable projects, is illustrated clearly by the fact that the most far-reaching proposal in labour law which has been raised so far concerns a blanket right of veto for the employees, for example over production decisions. . . .  But even if a right of this kind were to be introduced, it is obvious that economic democracy could not be said to have become all-pervasive.  The right would remain, in fact [in the hands of the capitalists] to take decisions as to the size and nature of investments.  Labour legislation cannot therefore be a complete proxy for the power over capital which the employee investment funds would provide (Meidner 1978: 77-78, explanation added).

Before commenting on Meidner's greater good, the positive right to initiate, it is worth noting that even his lesser good, the possibility of stopping undesirable projects, is unattainable for most working people most places most of the time.  In most of the world there are ragtag multitudes of people at loose ends, surviving precariously by hook or by crook.  They staff restaurants with sparse and seedy diners, sleazy bars with a few lonely drinkers, antique shops full of junk, superfluous travel agencies, barbershops, and beauty salons.  They are landless farmers, unemployed prostitutes, sellers of newspapers, telemarketers, door-to-door magazine subscription salespeople, real estate agents, part-time sweepers who sweep up and throw out the trash after laundromats close at midnight, computer amateurs who know just enough to be paid under minimum wage in cash under the table, truck drivers who drive sixteen hours at a stretch and sleep in their cabs, vendors of sundry miracle cancer cures and New Age remedies for anxiety; multi-level marketers selling water purifiers, hand lotions, and expensive shampoos supposed to grow hair on the bald; young men wandering aimlessly from place to place, young women who sell gum, chocolates, and pencils from kiosks.  For most people most places most of the time, joining a labor union and going on strike is not an option either because they have no employer, or because their employer is living almost as precariously as they are, or because the ready availability of replacement labor makes a strike an empty threat, or because labor unions are legally and/or illegally suppressed by violence. 

Sweden is a tiny little country that is a major source of commodities the rest of the world wants to buy.  Most Swedes work in education, in health care, in some other form of government service, or in an industry that produces something buyers really need and want.  Instead of having armies of real estate agents desperately trying to make a living by landing sales, the Swedes put ads for available houses in the windows of the same banks that finance the transactions.  It makes sense for almost everybody to be in a labor union, because almost everybody works for a viable employer.  Pro-labor socialist governments have been in office most of the time for as long as anybody can remember, and since before most people were born.  It is in this context that the negative power of giving labor a blanket veto over production decisions can be faulted for failing to make economic democracy all-pervasive.  In such a context in the 1970s Swedish labor was not satisfied with mere stop power.  It aspired to acquire the go power that was believed to flow from the ownership of capital. 

The story of Swedish labor's efforts to take control of capital is a story of disillusionment.  Power, like a mirage, vanished as it was approached.  By the time the employees' pension money finally made its way into the stock market and started buying shares, it had fallen into the habit of acting like any other money.  It made the same investment decisions based on the same criteria.  The employee board members turned out not to be radical.  They settled down to review accounts and to analyze the options for the future outlined by management much the same as any other directors. 

Those who are inclined to do so may exercise their freedom of speech by saying that the Swedish working class was betrayed by its leaders.  We think it more pertinent to observe that money has a logic of its own, regardless of whose money it is.  And that human life is governed far more by the constitutive rules of society than by who sits in which seats.  It only seemed that the Swedish model could be rescued by worker control over capital because people's minds were too clouded by "power" to focus on "rules." 

 

Illusions Regarding the Mobility of Capital 

 

Jonas Pontusson studied the attempts of Swedish labor to gain more control over capital, and concluded that one of the main reasons for its failure was "because the systemic power of capital thwarted the effects of the legislation that labor achieved" (1992: 225).  Pontusson explains: "Perhaps the simplest way to think about the systemic power of business is in terms of 'exit options.'  Consider codetermination bargaining. Even if the law prescribed that management must reach an agreement with the unions, capital would still retain the option to exit.  If codetermination yielded a bargain that was unfavorable to capital or was perceived as such by management or owners--management would very likely decide to locate new investment in plants with more pliable unions, perhaps abroad" (Ibid.: 233).

But to talk of "systemic power" is to name the problem in a way that sheds little light on the nature of "exit options."  Once again the ubiquitous notion of "power," which is everywhere in modern thought, clouds a focus on rules.  The constitutive rules of modern society prescribe that property owners are free to move their property. Consequently, an attempt to transform society that proposes to change without changing, to achieve social democracy in its classical sense of society producing for itself, producing for the sake of meeting human needs in a harmonious relationship with the earth, while not questioning the basic cultural structure, is based on a philosophy that is not workable. 

Similarly, Rudolf Meidner held the unrealistic view that government legislation could somehow prevent multinational firms from investing abroad instead of in Sweden, as is shown in the following passage: 

We discussed . . . the question of multinational firms, which disturbs many of LO's members.  We can assume that the community's knowledge of and control over these enterprises will have been considerably improved by the time the introduction of employee funds becomes imminent.  Government industrial policy is being steadily strengthened and can be activated in the event of a drop in the private willingness to invest.  Tax policy provides a further instrument for influencing the willingness to invest in a positive way.  If the decision to introduce employee funds is made in the normal democratic manner, this very fact gives the government a mandate to use appropriate policy measures to ensure that the reform does not lead to an investment strike, reduced capital formation, and a drop in employment.  There would undoubtedly be very strong popular support for the idea of taking the necessary countermeasures, should such a situation arise (1978: 119).

Thus Meidner overestimated the sustainability of the Swedish model, and underestimated the ability of capital to move out of Sweden, because he thought the government could exercise "control over these enterprises," that industrial policy could be "strengthened," and that the carrots and sticks of tax policy could "influence" capital to invest "in a positive way." 

In our view the "necessary countermeasures" that must be taken to deal with the virtual certainty that the building of social democracy will encounter investment strikes and capital flight include the ethical construction of a culture of solidarity.  "Ethical construction" is what Paulo Freire called "cultural action" and not far from what Antonio Gramsci called "cultural hegemony" and "moral and intellectual reform."[15]  The next chapter will consider some contributions of two Swedes to the theory and practice of ethical construction: Hjalmar Branting, the first socialist prime minister of Sweden, and the Swedish linguist and anthropologist Helena Norberg-Hodge. 

 

Table 7. 1

 

	1960	1961	1962	1963	1964	1965	1966	1967
Profits (measure 1)	10.7	10.5	9.3	9.2	9.9	9.7	7.9	7.5
Profits (measure 2)	7.8	7.5	6.2	6.1	6.9	6.6	4.7	4.3
Profits (measure 3)	6.4	6.1	4.9	4.8	5.4	5.5	4.0	3.8

 

Source: Egren, Faxén, and Odhner 1973: 125.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes