A: The first thing to be said about it is that despite its name, neo-liberalism is neither new nor liberal. It is in fact the reincarnation of the 19th century laisser-faire economic theory. The essence of this creed is a naïve belief in the infallibility of markets and their innate ability to correct themselves. Both propositions have been proven false. After the systemic failure of laisser-faire capitalism and the subsequent Great Depression during the thirties of the last century, this ideology was thoroughly discredited.
It took a whole decade of state intervention (the New Deal in the US and the Nordic model in Scandinavia) and a World War to get capitalism functioning again. The post-war era (1950s – 1970s) is the Golden Age of the social-democratic welfare state. Its success is undisputed. It was a period of rapid economic growth and fair distribution of the economic gains. A period of progress and prosperity. This success was based on rejecting the basic tenets of laisser-faire economics. And accepting instead the vital role of the democratic state in managing the economy and securing increasing equality of income and wealth.
The noe-liberal era started in the eighties as a revolt against the welfare state – a reassertion of the fundamentalist belief in market infallibility. It turned out to be a repeat version of history. The bankruptcy of Lehmans´ Brothers in 2008 signified the end of era. Again this version of unregulated capitalism crashed. It ended in the biggest rescue operation by the state in history. Stimulus packages by the state and quantitative easing (money printing) by central banks on a massive scale rescued us from a new Great Depression.
Instead we are now experiencing the „Great Recession“. What is the difference? A massive bail-out of the financial system by tax-payers – the state. Once again, capitalism had to be saved from the capitalists – by the state. This has revealed neo-liberalism to be what it is: pseudo-science in the service of the super-rich. Just like Soviet-communism it is a fundamentalist dogma, far removed from reality. It has nothing to do with science. And in so far as it is in the service of privileged elites and rejects the role of the democratic state, it is far removed from classical liberalism.
Q: The point of departure seems to be the „Role of the State“: Isn´t it the primary duty of the (democratic) state to uphold the „rule of law“ and the „equality of all before the law“?
A: This is a crucial point. Wealth begets power. The accumulation of wealth and income in the hands of a tiny, privileged elite becomes a direct threat to democracy. The super-rich gradually acquire the power to bend the rules of the game in their favour. Democracy gets captured by plutocracy. Markets are not subject to natural law. They are man-made. Markets are nothing but a set of rules defined and enforced through politics. If the rules are rigged in favour of the super-rich, it undermines not only the democratic system, but the rule of law itself. Let us take a few examples.
The ballooning of the financial sector: During the neo-lib era the financial sector has outgrown the real economy by leaps and bounds. The fire wall between commercial banks and risky investment banking – raised by the New Deal – was torn down. Since then a shadow banking system has ballooned. Deposit insurance by the state – necessary for the security of ordinary savings – was extended to cover risky speculation. This is a direct invitation for „moral hazard“, taking wild risks, trusting that in the case of failure others will cover the cost. This is footloose and fickle capital whose managers are searching the globe for short-term profit, prone to panic at the slightest sign of trouble. Only interventions by governments and central banks have prevented economic disasters repeatedly during the neo-lib era. It has become the rule rather than an exception, to have financial markets being rescued by the state.
All of this has been driven by the urge to keep up share prices and shareholders´dividends, by creative accounting, if necessary. The incentive for market manipulation, insider trading and creative accounting, is often irresistable. Moral hazard is built into the system. High risk begets high profits, but the cost of failure is for others. The seperation of freedom from responsibility is complete.
My country, Iceland, is a case in point. In our case recently privatized banks piled up foreign currency denominated debt to the tune of ten times our GDP, before they collapsed. Many of the owners/managers of those banks have since been prosecuted. Many have been found guilty of criminal behaviour and are now sitting behind bars. They, like their foreign colleagues, caused great harm to a lot of innocent people. Why haven´t more of them been brought to justice abroad as well? Everything is turned upside down: profits are privatized, but the debt is nationalized. What does this say about the rule of law and equality before the law?
Transfer pricing: Almost half of all business conducted in international trade is done inside multinational corporations. They have secured for themselves access to a vast amount of global resources. They are in control of setting prices in the productive chain from the raw material to the finished product. Through „transfer pricing“ they can decide where they realize their profits and pay out their dividends to shareholders. Increasingly they do so in so called tax-havens, or where they get the best deal on tax excemption on financial income.
Those multinationals can more or less decide for themselves if, where or how much tax they pay. In many cases their economic prowess goes way beyond that of the nation states they are dealing with. Again, they have acquired the political power to place themselves above the law. It has nothing to do with „free markets“. There is no such thing. The rules of the market are made by the corporate elite or by politicians in their service. The weakness of most nation states forces them to participate in a tax-competition towards the bottom.
Tax havens: Democratic governments are obliged to uphold the rule of law. They should faithfully uphold the basic principle of equality before the law. Inernational institutions, such as G-20, the World Bank, the International Monitary Fund (IMF) and indeed the European Union, like to present themselves as guardians of a level playing field in the conduct of international business. Why then, should democratic governments, representing the will of the people, impotently accept that the owners of capital, the super-rich, the so-called 1%, if you like, take the law in their own hands and exempt their wealth and their income from taxation for the common good? Why on earth should democratic governments hand out such privileges to the plutocratic elite? How can we expect law-abiding companies and citizens to compete in the market place with competitors who have placed themselves above the law; who have been given, by the authority of the state, or at least by their consent, a priori such advantages, before the race begins?
Extreme inequality: This out-of-control financial system has, during the neo-lib era, generated inequality of wealth and income on such a scale that it is unheard of since before social-democracy started to have an impact. According to a recent report from OXFAM, 1% of the super-rich own more wealth than 99% of mankind. According to the World Bank, 64 individuals own more wealth than the less well off half of mankind. More than half of all financial income (dividends, interest, rent etc.) goes to about 1% of humanity.
At the same time we find that real wages of US workers have stagnated for almost a quarter century, the share of labour vs. capital in the global GDP has dramatically decreased and poverty (related to systemic unemployment) is increasing in the developed countries. Those two trends are interrelated. Short-term profit-seeking, through speculation on the stock exchange and in real-estate, means less productive investment in the real economy and in infrastructure, less job creation and more unemployment, etc..
Q: Are you implying that the power of the global financial elite has grown to such proportions that it is undermining both the democratic system as well as the rule of law?
A: In a capitalist market economy there is a sort of unwritten but underlying „social contract“ that must be complied with, if we are to maintain a minimum of public trust and social cohesion. One of the basic rules is this: You are free to seek maximum profits and reep rich rewards, so long as you risk your own money, and play by the rules. As long as you accept that in the case of failure, you carry the loss yourself. Profit and loss are after all two sides of the same coin. And, it should be added, as long as you pay your taxes and other dues to the social infrastructure of the society which, after all, made you rich. Listen to Warren Buffet who once said famously about his billionaire status: „What would have become of me, had I been born in Bangladesh?“
This is why most people accept a certain degree of inequality as a just reward for enterprise, effort and the willingness to take risks. But if those basic principles are all turned upside down; if the huge profits in boom times are privatized and even tax-evaded, but the losses in hard times are nationalized – then the underlying social contract of a capitalist society is no longer valid. Then we are no longer merely dealing with the consequences of a financial crisis. The financial crisis is then undermining the pillars of the capitalist market economy itself. Then we have a systemic crisis on our hands.
And when the super rich – the so-called 1% – add insult to injury by hiding their accumulated wealth, mainly for reasons of tax-evasion, in so-called „tax-havens“, they have set themselves above the law. Merely the taxable proportion of the billions of dollars stored away beyond the reach of the law would be sufficient to solve the current sovereign debt crisis of the world. A tiny proportion of this hidden treasure would be sufficient to save the people´s welfare states from being ruined. Instead tax-payers of countries worst afflicted by the financial crisis, are now being forced to pay higher taxes and suffer severe cuts in social services – in order to bail out the rich.
This is the greatest challenge to democratic governance since the communist take-over in Russia after the First World War and the fascist insurgency in Europe in the interwar years. It was the weakness of parliamentary democracy in dealing with the consequences of the Great Depression, that led directly to the horrors of the Second World War. Are we really doomed to repeat all those mistakes once again? When will we ever learn?
Q: You have described yourself as a third generation of Nordic social-democrats. It seems the Nordic model has withstood the neo-lib. challange better than most: Is there a secret formula that you can share with us?
A: The basic elements of the Nordic model took shape as a response to the great socio-economic upheavals in the interwar period of the last century. In the West we observed the market failure of unregulated capitalism which led to the Great Depression. In the East we observed the Soviet experiment with state-socialism (abolition of private property and nationalization of the means of production); a centralized command economy run by a police state which enforced the abolition of human rights, democracy and the rule of law.
We rejected both. We decided that we would follow „the third way“. We recognized the utility of a competitive market system, where applicable, to create wealth. But we put markets under strict state control, to avoid market distortions and take care of the general interest. We insisted on public service, rather than for profit solutions, in the provision of education, health care and the running of general utilities (energy, water, public transport etc.). And we used the power of the state as an instrument to keep special interests at bay and to secure fair distribution of the social product in the interest of all.
The means are familiar: Social insurance, free access to quality health care and education, paid for by progressive taxation, active labour market policy to uproot unemployment, affordable housing for all. Those are a few of the main building blocks of the Nordic welfare states. It is the only socio-economic model which emerged in the last century, which has withstood the test of time in the era of globalization in the 21st century.
As noted before the neo-lib. era began as a revolt against the welfare state. According to the neo-lib creed the welfare state, with its strong public sector and high progressive taxes, is ultimately unsustainable.This is meant to hamper growth and innovation, which results in stagnation. The system is said to be inherently uncompetitive. State intervention is said to disrupt the efficiency of markets and hence economic growth. The bottom line is: due to its lack of dynamism, the welfare state is said to be unsustainable in the long run. And the proliferation of state bureaucracy was even said to threaten individual freedom and ultimately end in a totalitarian state (Hayek).
Now we know better. The Soviet Union is no more. And unregulated capitalism is again and again in the throes of existential crisis. The Nordic model has stood the test of time better than both. The facts speak for themselves. Innumerable reports on the performance of nation-states in the competitive era of globalization are there to prove the point. No matter what criteria we apply, the Nordic countries are invariably in the top league.
This applies no less to economic performance than other criteria: economic growth, research and developement, technological innovation, productivity pr. hour of work, job creation, participation in the labour market (specially female participation), equality of the sexes, level of education, social mobility, absence of poverty, health and longevity, quality of infrastructure, access to unspoiled nature, the overall quality of life. Less inequality than in most places. And a vibrant democracy. What do you want more?
Why have the neo-lib doom-sayers turned out to be so spectacularily wrong? Basically because their social Darwinist conception of human nature is limited, if not simply wrong. Man may be selfish and greedy, but he is not incapable of empathy and solidarity. Humans do not function alone. They can only thrive together in a community. We need each other. Workers are more ready to accept the need for obsolesence and innovation in the labour market, if they know they can rely upon unemployment insurance and retraining for another job; if they know that they will not lose their health insurance and the roof over their heads, as well as their pension rights with the old job.
Neo-libs maintain that capitalists need tax incentives to perform. At the same time they believe that unemployment insurance makes the workers lazy. They are wrong. Participation in the labour market is nowhere higher than in the Nordic countries. And we do not have to pay CEOs 400 times the average salary of their employees to induce them to do their duty. Look at Japan. It turns out that the ragbag of neo-lib. ideas is a mixture of myths, scare-mongering and brain-washing in service of the super rich.
Q: In light of what you have already said, why is it then that the social-democratic parties in Europe – also in the Nordic countries – are mostly out of power and on the defensive?
A: Several reasons come to mind. Some of them can be traced to social change, outside our control. Others can be said to be our fault, failure of leadership being one among many. The first is the gradual erosion of our traditional electoral base. The social-democratic parties and the trade unions were an integrated part of the labour movement in the early stages of industrialization and urbanization. Most workers were employed in factories – many stood side by side by the assembly lines. Feelings of solidarity among the working class came naturally to them.
This was when manufacturing industry was the main source of employment in the industrialized part of the world. This is no longer so. Manufacturing has been shrinking. The rise of China, India and other emerging countries has meant that hundreds of millions of unskilled workers have joined the global economy. Manufacturing has been outsourced to China and other emerging countries. China has become the „workshop of the world“. This has weakened the bargaining position of traditional workers in Europe and America.
This is part of the explanation why real wages have been stagnating, while the share of labour in the national product vis á vis return to capital has been decreasing. Why unemployment has been increasing. Why employers have been able to encroach increasingly upon workers´ rights. Why the counterveiling powers – in the terminology of John Kenneth Galbraith – meaning social-democratic parties and trade unions, have been weakened.
This is partly due to the fact that capital is global – it moves freely across borders – but politics are mostly local, hemmed in within the borders of their nation states. You need international co-operation to close down the tax-havens, uproot „transfer-pricing“ or to impose the „Tobin-tax“ on financial transactions across borders. This is why it is in the interest of social-democracy to operate within the European Union. And more than that: to save the European project from the centrifugal forces of extreme nationalism which now are on the march in Europe.
To some extent the social-demoratic parties have become the victims of their own success. Increasing prosperity as well as free access to education means increased social mobility. Big segments of the working class have moved up the social ladder, entering the middle class. Home-ownership, individual working contracts and the growth of specialized professions in the service sectors of society, make most of us more receptive to individualism; less dependent upon class identity or solidarity. „There is no such thing as society – merely individuals“, said the Iron Lady. This reflects social change outside our control. Since we cannot change it, we must adapt to it.
Some reasons for our debacle are simply our own fault.The neo-lib era started as a revolt against the welfare state, which is the embodyment of our ideology. Our mission is to defend labour against capital, the general interest against entrenched privileges, the rights of workers against the power of employers. The bottom line is that we seek to apply the legitimate powers of the democratic state against the unrestrained power of the plutocratic elite. This is what social-democracy is all about. This is how we tackled the systemic failure of unregulated capitalism in the wake of the Great Depression. This is what we have to do again, in a different society, under different circumstances.
And this is what European social-democracy has failed to live up to, in the wake of the international financial crisis. The basic principles of the social contract have been breached. The profits have been privatized but the debts have been nationalized. Tax payers have been forced to bail out the banks – the owners of capital – through higher taxes and in some cases savage cuts in social services. The politics of austerity – a cure which is worse than the dicease in a recession – have been forced upon the people. In many countries the social-democratic parties, not only failed to foresee the crisis, but worse still, failed to stand by the people against the plutocratic elite during and after the crisis.
Q: How do you envisage a winning strategy for the social-democratic movement under the present circumstances?
A: Look at what is happening in the presidential race in America right now. An elderly gentleman, Bernie Sanders, comes out of the blue with a quintessential social-democratic message. The reception is such, that he is well on his way to change the political landscape in this citadel of neo-liberalism. The young and dissillusioned are flocking to his meetings and embracing the cause. Even if he fails to win the White House this time, his campain is a precursor of things to come.
What is happening in America? What was once the land of opportunity – has become the most unequal and class-ridden society among the developed nations. This is a society where the super-rich reside in gated communities, isolated and protected from the rest of society. The poor live in neglected neighborhoods, attend poor schools with little or no prospect for advancement.
There are many indications that American democracy has been captured by the super-rich. With more than 60% of eligible voters not bothering to vote (and more than 80% among the youngest voters) the majority af Americans have lost hope in the efficacy of the American system. Who is in charge in Washingto D.C.? The few hundred congressmen, who depend on contributions from the super-rich for their reelection, or the 40 thousand corporate lobbyists who tend to have the last word on the law of the land? In this setting the Bernie Sanders campain represents the „will of the people“. Will he be able to break through the barricades of power and privilege on Capitol Hill – reclaiming American democracy?
What is Sanders´message? A war on Wall Street. Let us reclaim American democracy from the money moguls. Tax the super-rich. Free access to health care. Tuition-free education for all. A minimum wage. And so on – ad infinitum. A fine social-democratic manifesto! I suggest that European social-democrats pick a page or two from the Sander´s manifesto: An all-out war against the financial elite to reclaim democracy. An unyielding solidarity with Europe´s youth, who have been left to fend for themselves in the queues of the unemployed, bereft of hope. And take up the fight for the environment and our common future on this planet. We don´t have another one.
There are three major cahallenges that lie ahead in the immediate and near future: The first is to sanitize the corrupt financial system and to put it back firmly under democratic control. The second calls for massive investment in clean and renewable sources of energy to replace fossile-fuels as the life-blood of our economies (and to put the plutocratic cliques from the the Saudis to Siberia firmly out of business). The third is to start planning now how to tackle the consequences of the technological revolution which is ongoing all around us. (IT, digitalization and automation).
The prospects of massive and systemic unemployment call for radical thinking about the distribution of income and the responsibilities of the democratic states in such a society. On the agenda should be proposals for „a minimum inheritance for everyone on reaching the age of eighteen“ and/or a minimum „basic income“ for all. Although the idea may sound radical, it has found support in the past under the name „negative-income-tax“ – a proposal made by no less a neo-lib authority than Milton Friedman.
Those three major problems, as well as the relevant solutions, are all inter-related. They call for thorough and carefully designed social-democratic policies as well as strategies for putting them into practice. A precondition for success is a political alliance between social-democrats, trade unions, environmentalists and the radical left among Europe´s neglected youth (such as Podemos in Spain). The road signs are already there. Remember Erlander´s dictum, quoted at the beginning of this article: „The market is a useful servant, but an intolerable master“. And the spiritual leader of the Catholic church agrees: „Money has to serve, not rule“. The rest is mere detail.