THE IRRELEVANCE OF SOCIALISM

For socialists the most puzzling feature of the post-World War I period has always been why the labor movement could not capitalize on its greatly strengthened position by making decisive headway toward a socialized economy. Yet, in retrospect one must recognize that this “failure” was not too surprising at all. While the goal of a socialist economy may at times have served an important rhetorical role for some social democratic parties, it remained largely irrelevant for the conduct of practical economic policies. During prosperous times, there seemed to be no reason to risk a socialist experiment, and, during periods of crises, it seemed unwise to further upset the complex machinery of the developed Western European economies. The political logic of a movement that wanted to improve the economic and social plight of its followers, yet could only see massive economic dislocations in the transition to a socialist economy, instead suggested a program of reformism within the framework of a market economy.

At the end of the war, social democracy was unable to give any concrete content to Marx's contention that the liberation of labor was the precondition for the liberation of society – specifically that public ownership of the means of production would benefit everyone. Germany was the only country in Western Europe in which a socialist revolution might have been politically feasible immediately after the collapse of the Wilhelmine Empire.

One of the primary dilemmas facing social democracy in the 1990s is that governments have to increasingly choose between equality and employment. This marks a critical change from the 1960s and 1970s, when social democracy offered a viable political strategy to simultaneously promote equality and employment for all. The old strategy - epitomized by the Scandinavian countries - was premised on a combination of centralized and solidaristic wage bargaining, flexible monetary policies, and expansion of a labor-intensive and redistributive welfare state. In this chapter I argue that this strategy has been undermined by two broad developments.

First, the rise of new technology and growing competition from newly industrializing countries have caused a diversification of the unemployment risk structure and a bifurcation of the labor force into a highly qualified, secure, and world-market-integrated segment, and a less-qualified, insecure, and sheltered segment. This has shattered the consensus underpinning solidaristic wage policies and the universalistic welfare state. Second, capital market integration has constrained the capacity of governments to run deficits and pursue inflationary monetary policies, thus limiting the incentives for employers and better-paid workers to agree to centralized controls on wage increases. As a result of these changes, pressure is mounting on governments of all stripes to adopt nonaccommodating monetary and social policies with the purpose of deterring wage—price militancy and inducing wage flexibility. Such policies engender greater inequalities, however, leaving social democracy with the difficult dilemma of having to chose between more inequality and lower employment.

During the “golden period” of social democracy, the trend across partisan divides and advanced democracies was to strengthen institutions and policies that facilitated a coordinated accommodation of worker and business interests, thereby forging convergence around a social democratic model of economic and social policy-making. In the 1980s and 1990s, by contrast, convergence in Northern Europe appears to occur around a conservative or “Germanic” model of capitalism, by which wages are set below the peak level (“industry bargaining”), macroeconomic are tied to a strict nonaccommodating policy rule (“monetarism”), and social policies perpetuate status differentials and labor market dependence (“commodifkation”).

The rest of this chapter is an attempt to substantiate these claims both theoretically and empirically, with a focus on Northern Europe and especially the changes that have occurred in Denmark and Sweden since the early 1980s.

As is well known, the proximate reason that the system of central wage negotiations between the Swedish Confederation of Labor (LO) and the Swedish Employers Confederation (SAF) was terminated in the 1980s was that employers, particularly the large multinationals dominating the engineering sector, wanted to terminate it. There are strong grounds, including the economic interests entering into the engineering employers’ actions, for arguing that this is a sufficient explanation for the demise of the system (Pontusson and Swenson 1993; Swenson and Pontusson this volume). In this essay, I explore the possibility that it may not be sufficient. The alternative I suggest is that the macroeconomic consequences of policies implemented by Social Democratic governments during the 1980s made it very difficult if not impossible for those, including the governments, who sought to maintain centrally coordinated negotiations in at least some form to do so in the face of efforts by those who sought to end them. This implies that under different macroeconomic conditions, it might have been possible to maintain some form of centrally coordinated wage bargaining, though not without modifications that would have been necessary to satisfy the main economic interests of those who sought to abolish them. Accordingly, I attempt to show what this counterfactual scenario might have looked like, offering some evidence that policies producing different macroeconomic conditions could plausibly have been implemented and that the necessary modifications could plausibly have been made, and indeed were beginning to be made, so that the conditions for maintaining centrally coordinated wage negotiations would have been considerably more favorable. I suggest, however, that the employers opposed to central negotiations might nevertheless have persisted in their determination to block their continuation in any form and that, if so, it would have been because they had political interests that would not have been satisfied by any modifications in the system of central negotiations short of its demise.

This reexamination of the 1980s experience in Sweden does not offer an explanation of the demise of central negotiations that is radically different from that offered by others. It differs in putting more weight on two factors that the others treat more summarily or not at all: macroeconomic policy and the political interests at stake in centralized negotiations.

Whereas the golden age of postwar economic expansion was a period of relative economic and institutional stability among the advanced democracies, the 1980s and early 1990s marked a period of policy experimentation and attempts at institutional reform. The rise of monetarism in Britain and the United States, the famous U-turn of the French socialists, and the collapse of the Government of National Unity in Italy all represented significant departures from the “postwar settlement” or, alternatively, from the corporatist trajectory of advanced capitalist political economies in the 1970s. The apparent crisis of tripartite or social democratic corporatism since the late 1970s might be attributed to the failure of corporatist experiments in countries, such as France and the UK, which never had the institutional preconditions necessary to the success of corporatist bargaining. Subjected to great political-economic stress, so the argument goes, corporatist arrangements collapse unless they have been consolidated through a long history of organizational adaptation and trust building (cf. Crouch 1993). However, such a view fails to take into account the manifest pressures for change in some of the small corporatist countries of Northern Europe.

The Swedish case stands out in this context. On the one hand, Sweden's postwar development embodied an extraordinarily coherent “model,” linking wage bargaining, macro-economic policy, selective state intervention in labor markets, and a variety of social policy measures. (At least, this is how Sweden came to be conceived by Swedish policymakers as well as foreign observers in the 1960s and 1970s.) On the other hand, Sweden represents one of the most obvious instances of “paradigmatic realignment” or “regime change” among OECD countries over the last 10 to 15 years. In terms of partisan politics, the abandonment of the postwar consensus has been much less confrontational than in the British case. As in the British case, however, we observe a reordering of basic policy priorities and a change in the way that policy makers think about the relations among the principal coordinates of economicpolicy (cf. Hall 1993). The goal of price stability has been upgraded relative to the goal of full employment, and policy deliberations have increasingly come to be informed by the notion of a trade-off between efficiency and equality and by the concomitant idea of public-sector spending and employment as an obstacle to competitiveness and growth.

This chapter is designed to fill a lacuna in most contemporary work in the comparative political economy of unemployment — that is, that little serious attention is paid to the developments of macroeconomic theory that have taken place over the past two decades. During that period much mainstream (at least Harvard/MIT/London School of Economics [LSE﹜) macroeconomics has moved toward a broader New Keynesian (NK) position and away from a simplistic neoclassical (NC) approach - if it had ever really been there. New Keynesian models differentiate themselves from the NC model in the attention they pay to three elements: equilibria in which unemployment is involuntary; the role of aggregate demand and of monetary and fiscal policy; and the operation of open economies.

The first goal of the chapter is analytic: It is to provide an understanding of the differences between the NK and NC approaches in ways that will be useful to political economists working on comparative unemployment. In fact the logical structure of NK models parallels that of the neoclassical; indeed the NC model can usefully be seen as a special case of the NK. In important respects the NC model can be identified with the deregulated approach to labor markets, whereas unionized labor markets fit in more easily with NK models. This gives an analytic tool to discuss comparisons between them.

The second goal stems from this: that most quantitative, comparative, political-economic analyses of unemployment have paid attention to only one of the three differentiating elements of NK models mentioned above - namely, involuntary unemployment in equilibrium. Little attention has been directed toward the role of aggregate demand in causing unemployment; and virtually no interest has been shown in the openness and interdependence of advanced economies. Yet much of the unemployment in Northern Europe in the 1990s has been caused by the sharply deflationary policies of the hegemonic economic power of the region, Germany, combined with the interdependence — as a result of the European Monetary System — and openness of the economies of the region. Since these economies have centralized or coordinated systems of wage bargaining, and since the more deregulated Anglo-Saxon economies have pursued expansionary macroeconomic policies over the same period, political economic analyses of unemployment that focus only on the institutions of wage bargaining give potentially misleading results.

POLITICS, POLICY PREFERENCES, AND ECONOMIC THEORY

Commonly, politics can be understood as a process in which competing groups try to affect the distribution of (political) goods in their favor, within a stable framework of rules and institutions. The analysis of policy making in such stable periods can generally be conducted fairly satisfactorily in terms of the relative political power resources of the competing groups. However, while institutions and policies usually tightly interlock, the cohesion of the institutional network seems to be radically weakened during certain periods. At those critical junctures in history, politics is mainly concerned with the reshaping of the framework of rules and institutions within which political competition is to take place.

In the field of economic policy making, regime changes are marked primarily by a reinterpretation of the relation between policy instruments and outcomes and a redefinition of the responsibilities of political actors. On a general level, two such different regimes can be distinguished. In liberal regimes, such as those of the 1920s and today, maintaining price stability is considered the foremost responsibility of the macroeconomic authorities whereas the causes of unemployment are primarily located in the functioning of the labor market, which implies that the social partners carry the main responsibility for it. In the social democratic regime, which historically separated the two liberal regimes, the assignment of instruments to outcomes is inverted: unemployment is interpreted primarily as a macroeconomic problem.

Few propositions are more widely accepted today among policymakers and economists than the assertion that, by making its central bank more independent from the national government, a nation can secure better levels of economic performance. The financial press has concluded that “the argument for central bank independence … appears overwhelming,” and many nations have made their central banks more independent during the 1990's. Even the new monetary union now being established in Europe is organized around a central bank designed to be highly independent of political control (Goodhart 1995; de la Dehesa et al. 1993; Fratianni and von Hagen 1992; Gros and Thygesen 1992).

The argument for central bank independence rests on three pillars. First, a body of economic theory has been developed to explain why the independence of the central bank enhances economic performance (Persson and Tabellini 1994; Cukierman 1992). Second, several national cases are cited to support this view, of which the most prominent is the Federal Republic of Germany whose Bundesbank also provides the model for the new European Central Bank (Canzoneri, Grilli, and Masson 1993; Fratianni, von Hagen, and Waller 1992). Third, an influential set of empirical studies seems to confirm that, by making the central bank more independent, a nation can secure lower rates of inflation without any adverse economic effects (Alesina and Summers 1993; Grilli, Masciandaro, and Tabellini 1991).

The object of this chapter is to question the current consensus in favor of central bank independence. We proceed by examining each of the pillars on which the case for it rests, beginning with the theoretical rationale, following with a reconsideration of the German case, and concluding with the reanalysis of cross-national data. We close by discussing the implications for economic performance under the European Monetary Union.

Our analysis begins from the contention that monetary policy-making involves a signaling process between the central bank and economic actors. We argue (a) that the advantages of independence turn on the effectiveness of this signaling process and (b) that the effectiveness of the signaling process is conditioned, in turn, by the organization of the broader political economy and, most notably, the extent of coordination in wage bargaining. Although increasing the independence of the central bank will lower the rate of inflation, it will not always do so without adverse economic consequences.

Intensified competition in international markets, increased capital mobility, and changing production technologies are creating new and serious problems for labor movements in the advanced industrial countries (e.g., Streeck 1987, 1993; Locke and Thelen 1995). A large and growing literature has been devoted to assessing the impact of these developments on industrial-relations institutions and practices cross-nationally. While some authors emphasize a common trend toward bargaining decentralization (e.g., Katz 1993), others see continued national diversity (Boyer 1996; Hyman 1994). Previous concerns that current international trends would produce a convergence of industrial-relations systems through competitive deregulation have been partly allayed by empirical studies that point instead to a high degree of stability in bargaining institutions across most of the advanced industrial countries (e.g., Wallerstein and Golden, this volume).

Much attention has been devoted to explaining cases such as Denmark and Sweden that have in fact experienced significant institutional change. But we know that bargaining institutions in cases typically coded as “stable” — such as Germany — have been under tremendous strain lately as well (Turner 1998; Silvia 1996). Institutional resiliency is often chalked up rather unsatisfyingly to institutional “stickiness,” or it is attributed vaguely to the “continuing interests” of various actors in existing arrangements - but without tracing precisely which actors and what interests. As a result, we are left with a continuing overabundance of (“globalization”) theories that tell us why these systems should be breaking down when in fact what we need is a more robust explanation for why — despite these strains - many of these systems are holding together at all.

Germany is a good case to mine for insights and hypotheses into these questions because here the deep ambivalence of employers toward traditional bargaining institutions has been very much on public display. Germany has been invoked as a case in point both for those analysts wishing to draw attention to new strains and pressures in collective-bargaining institutions (Streeck 1995; Mahnkopf 1991), and by those who stress the resiliency of these arrangements in spite of such pressures (Lange, Wallerstein, and Golden, 1995; Turner 1998). In emphasizing one dimension, however, each side has a tendency simply to downplay or ignore the other.

Unlike the crises of the early twenties, and the seventies and eighties, the Great Depression caused the center of gravity of the political system to shift in a social democratic direction. Liberal, conservative, and Christian democratic parties alike came to accept, and often spearhead, the need for economic policy interventionism and the political correction of market outcomes. Initially, it seemed that Western European economies would travel sharply divergent trajectories. While Scandinavian social democrats came to establish political and ideological dominance, the Nazi dictatorship destroyed organized labor in Germany. In Britain and the Netherlands, the liberal regime seemed to have survived with only minor alterations. Yet, despite the vastly different political fate of social democratic parties in the thirties, the new policy regimes all shared a basic rejection of the “liberal” political economy of the twenties. As Peter Temin has argued, “The Depression ushered in an age of moderate socialism, albeit in many variations.” And after the defeat of the Nazi regime, political convergence was added to convergence in economic policies.

In the eyes of many contemporaries the thirties marked a change from a regime based on the trust in the forces of the free market to a regime that recognized the inherent deficiencies of markets and assigned the state the task of correcting market outcomes. That the goal of internal equilibrium instead of a fixed exchange rate now achieved priority seemed the logical, if somewhat belated, consequence of general suffrage.

This book began by outlining a number of hypotheses, generated from group theory, concerning the sort of associational order we might expect to see emerging from post-communist society. Group theory locates the origins of association in the issues and cleavages arising in economic life, with interest group configurations reflecting the structure of capital, employment relations and labour market dynamics. Post-communist societies in the early stages of market transition, it was suggested, were insufficiently differentiated to generate associational activity on pluralist lines. Whilst market transition could be expected to break up the monolithic structures of communist society, it was unlikely to generate the sharply defined cleavages and cohesive social formations that gave birth to associational activity in industrial society. Instead, I postulated a pervasive process of social dealignment and the emergence of rather fluid and atomized societies in which the conditions for interest group formation would be singularly unfavourable.

With politics and society in east/central Europe still in flux, the outline of associational order has yet to emerge in sharp relief. Nowhere have we found even the semblance of a stable, fully functioning interest group system. In some countries, of course, interest group formation is prejudiced by the economic instability and chaos accompanying market transition. Elsewhere it is retarded by the slow pace of political and economic transformation, which leaves society relatively undifferentiated, with an economic elite dominated by a reconstituted nomenklatura and a few successful commercial magnates coexisting uneasily with an impoverished mass.

In the introduction, we saw how systems of interest representation are embedded in employment and labour market relations. Corporatist systems emerge out of interaction between employer and employee, structured through stable networks of exchange between employers' associations and trade unions. As exchange transactions intensify, employment relations cease to be private economy arrangements, becoming institutionalized in the public domain (Crouch 1993: 30). Accordingly, organized interests broaden the scope of their activities. If they are able to enter the political arena, their interaction develops into a network of ‘generalised political exchange’ (Crouch 1993: 3, 53; Marin 1990b; Traxler 1990), facilitating their incorporation into the public policy process. Corporatism thus goes hand in hand with institutionalized employment relations entrenched either in law, as in Germany, or in mutual agreement between employers' associations and trade unions as in the Scandinavian countries.

Democratization and market transitions in east/central Europe coincide with a shift in the west away from institutionalized systems of employment relations. Economic globalization and technological change place a premium on company flexibility, with industrial relations subject to transitional tendencies towards decentralization and deregulation. The pace of change has been subject to considerable cross-national variation. The paradigm case of de-institutionalization is the United Kingdom, where single-employer bargaining is now endemic (Millward et al. 1992), whilst at the opposite end of the spectrum, in the corporatist heartland of Scandinavia, institutional entrenchment has proved resistant to wholesale change.