IT’S THE ECONOMY,
STUPID!

Theoretical Reflections on Third Way Social Democracy

INGO SCHMIDT

In 1950 liberal economist Joseph Schumpeter delivered a keynote speech titled “The March into Socialism” to the American Economic Association in which he lamented what he saw as an unstoppable political trend (Schumpeter 1950). He and other liberals saw Soviet communism, European social democracy, and the American New Deal as varieties of socialism that had begun to replace free market capitalism during the Great Depression and were on the forward march in the 1950s. In 1978 Marxist historian Eric Hobsbawm echoed Schumpeter’s 1950 address with his own title, “The Forward March of Labour Halted?” Though Hobsbawm’s question was specifically aimed at the British Labour Party, it could have been directed to social democrats in any Western country at the time. Answers were given at the polls: Margaret Thatcher, Ronald Reagan, Helmut Kohl, and Brian Mulroney took offices from James Callaghan, Jimmy Carter, Helmut Schmidt, and Pierre Trudeau, respectively.

Slowly but steadily, the Western world was embarking on a “march into neoliberalism” in the late 1970s and early 1980s. Eastern Europe jumped on this bandwagon after the collapse of Soviet communism in the early 1990s. But then the unexpected happened: a new generation of social democratic leaders such as Lionel Jospin, Tony Blair, and Gerhard Schröder, among others, took office in Western Europe. In Eastern Europe, where communist parties had never dared to call elections, some of these parties, after rebranding themselves as social democrats, were indeed elected to government (Sassoon 1997). European hopes for a new social democratic era coincided with the proclamation of a “second American century” (Zuckerman 1998). Both were envisioned as a mix of knowledge societies and multilateralism that would, finally, replace industrial economies, distributional conflict, and great power politics. It didn’t happen.

In 2001 the so-called New Economy ended in an economic crisis from which it never recovered. Moreover, the War on Terror, declared with much fanfare a year later, replaced hopes for a multilateral world moderated by the United States. The unilateral version of the second American century, though, soon became stuck in military stalemates in Afghanistan and Iraq. Neither economic crisis nor permanent warfare was conducive to social democracy. Throughout the 2000s, social democratic parties lost members, voters, and, in many countries, government power. A look at European Union (EU) member countries illustrates this point: in 2000 the EU had fifteen member countries, of which thirteen had governments that were either led by social democrats or included them as coalition partners. In 2010 social democrats held government power in only nine EU countries while EU membership had risen to twenty-seven.

The revival of social democracy in the late 1990s was therefore short-lived and soon gave way to prolonged decline exacerbated by the Great Recession that began in 2008. Federal elections in Germany in September 2009 left Social Democrats with their lowest results since the end of World War II, and less than a year later, in May 2010, the British Labour Party suffered a crushing defeat. Paradoxically, at the same time, frustration with conservative governments led to the election of social democratic governments in Spain (2004), Portugal (2005), and Greece (2009). These are exactly the countries, though, that have been driven into fiscal crises and draconian austerity programs by a mix of international speculation and International Monetary Fund and EU intervention. Under these circumstances, social democrats’ popularity is likely to dwindle very quickly in these countries. In the United States, Barack Obama, who is as social democratic as a US Democrat can be, was elected upon the promise of “change” in the midst of the Great Recession and is now as busy trying to reign in budget deficits as are his social democratic counterparts in Southern Europe. Social democracy’s short-lived revival in the 1990s, its general decline since the early 2000s, and elections won against this general trend pose several questions: Why was there a revival in the first place? Why didn’t it last? Why couldn’t electoral victories be translated into social democratic hegemony?

The most obvious way to answer these questions would be to ask voters, members, and leaders of social democratic parties. It would also be very ambitious and time-consuming, particularly if answers were sought across the Western world. Only after years of data collection, interpretation, and writing would any answers reach the public. In the meantime, preliminary answers can be derived from debates among intellectuals who are sympathetic with and give advice to social democratic parties. Although intellectuals and politicians are often at odds with each other, there is no doubt that, to some degree, intellectual debates not only reflect the developments in and around parties but also guide political activity. Moreover, a focus on intellectual debate allows the emergence of arguments and ideas that are usually left out of social democratic strategizing.

Consequently, in the first part of this chapter, I explore the arguments that helped to define and redefine social democracy on its way to government power in the 1990s. Globalization and the electoral dilemma posed by the shrinking of social democracy’s long-time social base, the industrial working class, were the two threads running through social democratic discourse at that time. In the second part, I examine the social democrats’ new experiences in government and seek to explain why electoral success didn’t translate into an enduring hegemony. I argue that, contrary to the suggestion of social democratic discourse, neither globalization nor demographic change is key to social democratic success or failure; rather, the key factor is economic growth. No matter how much social democrats changed in other ways, their strategies relied as much on growth in the 1990s as they did during the heyday of social democracy through the long boom from the 1950s to the mid-1970s. Faltering growth rates were followed by electoral decline in both the 1980s and 2000s.

In a nutshell, the globalization thesis suggests that increasing cross-border flows of goods, services, and capital undermine state capacity to regulate economic activity. The electoral dilemma thesis implies that because of the decline of the manufacturing working classes, who have been social democracy’s main social basis since its emergence in the late nineteenth century, electoral coalitions are required to win majorities. Such coalitions, however, include groups that are opposed to social democracy’s welfare state agenda. As a consequence, the balance between market and state has shifted from the latter, which was for decades social democracy’s vehicle for social reform, to the former. The marriage between social democracy and the welfare state, such arguments imply, can’t be maintained. Social democratic success in a globalized and post-industrial world requires an agenda beyond the welfare state and a social basis beyond the working class.

Theoretically, the success of Third Way social democracy in the late 1990s can be attributed to successful adjustments to globalization and demographic change in post-industrial societies. However, since neither of these structural changes has gone away in the years since 2000, one wonders why these adjustments yielded only short-term gains. In fact, the discussion in this chapter of social democratic discourse will show that adjustments to economic globalization and post-industrial societies were not the reasons for social democratic successes in the 1990s. The second part of the chapter tells a different story about the rise and decline of Third Way social democracy. This story ties the fate of social democracy to the equally short-lived second American century and concomitant hopes for continuous prosperity in a New Economy. As it did during the first American century, social democracy built its political agenda on the expectation of long-term economic growth. In this respect, there is actually more continuity than change between social democrats committed to the Keynesian welfare state and those following Third Way social democracy. Unlike the first American century, which coincided with unprecedented prosperity from the early 1950s to the mid-1970s, the 1990s saw more of a bubble than a lasting boom (Brenner 2002), and the current crisis followed the bubble (Guard and Antony 2009). One obvious conclusion from the Third Way experience is that reliance on economic growth is an extremely unreliable basis for social democracies’ electoral success.

It is much less obvious, though, how social democratic parties will respond to the double challenges of economic crisis and electoral decline. They may abandon the position of mass parties of the Left — which they held, communist and New Left challenges notwithstanding, throughout the twentieth century — and transform themselves into another middle-class party. In this case, working classes will either find even less representation in electoral politics, or other parties, left or right, will fill the void (Azmanova 2004; March and Mudde 2005; Thompson 2009). Alternatively, social democrats could try to reinvent themselves as hegemonic parties of the Left. But in times of economic crisis, and probably lasting stagnation, such reinvention would be difficult to achieve without abandoning the reliance on economic growth and attempts at class compromise, a substantial change that may be challenging for parties carrying the baggage of roughly a century of economism and corporatism. Even new parties, wherever people try to build them, will find it hard to break with these traditions. Failure to do so, however, could make the emergence of such parties an even shorter episode than that of Third Way social democracy.

(RE)DEFINING SOCIAL DEMOCRACY

We begin by examining how ideas about long-term social changes, the electoral dilemma thesis (Lichbach 1984; Przeworski 1985), integration of societies and economies across borders, and the globalization thesis (Held 1995; Reich 1992) have contributed to the redefinition of social democracy since the 1980s and 1990s. This redefinition was instrumental in the making of Third Way social democracy (Giddens 1998). To understand the transformations that eventually brought about this new type of social democracy, we must find a definition of social democracy that captures more than just the latest type. Sheri Berman, writing in 2006 when the Third Way had already entered decline, traces what we have observed in contemporary social democracy back to the revisionists in the Second International. She finds two defining characteristics for the political project coming out of those late nineteenth-century battles: the “primacy of politics” and the commitment to “communitarianism” (Berman 2006, 5; Carroll 2005, 8–11; Clift 2002, 467–70). This definition is fairly consistent with the ones provided by Karl Polanyi in the 1940s and Jürgen Habermas in the 1980s. Polanyi saw fascism and war as the result of liberalism’s attempts to build an unfettered market society. From this analysis, he concluded that markets ought to be embedded in political institutions to ensure “freedom in a complex society” (Polanyi 1944, chap. 21). Habermas confirmed Polanyi’s view that the powers of markets and states need to be balanced. However, writing at the dawn of neoliberal hegemony, he was skeptical about the chances of such a balancing act. Habermas warned that the rationality of markets and political systems — aiming at the accumulation of money and power, respectively — would undermine societies’ capacity to put fetters on markets and states (Habermas 1981–84).

It was just a small step from Habermas’s definitions and analysis of social democracy to the conclusion that unfettered markets could turn, as Polanyi had argued, into “satanic mills” (Polanyi 1944, part 2.1) again. One more step, and the prominent role that civil society, or communitarianism, plays in Third Way social democracy becomes understandable (Giddens 1998, chap. 3). Civil society, Third Way intellectuals suggest, delivers the moral resources to counterbalance systemic claims for the maximization of power and profit. However, the step from Habermas to Third Way social democracy brings about a small, but significant, twist. Habermas, echoing New Left criticisms of the state and an administered world, saw the unfettered accumulation of money and political power as a problem. Third Way intellectuals accepted this critique of the state only insofar as it was directed against “old-style social democracy” and the welfare state (Giddens 1998, chap. 1). Apart from that, Third Way philosophy and politics turned a blind eye toward repressive state functions. The result was, to use the subtitle of social liberal Ralf Dahrendorf’s 1999 Foreign Affairs article, “An Authoritarian Streak in Europe’s New Center.”

Third Way rhetoric about social democratic renewal in general, and a break with social democracy’s statist past in particular, distracts from a tension between communitarian claims and statist practices that runs through social democracy’s history, from Eduard Bernstein to Tony Blair. And this is not the only continuity between social democrats committed to the Keynesian welfare state and their Third Way successors. The following discussion of social democratic transformations since the end of the Cold War actually rests on two assumptions. First, social democratic self-perceptions were shaped by the notions of the primacy of politics and communitarianism during both the Keynesian welfare state era and the Third Way episode. Second, underlying these self-perceptions is a continuity of technocratic, corporatist, and statist politics.

Though social democrats advocate for a primacy of politics, they rely on a certain “unacknowledged economism” according to which technical progress is an exogenous factor driving economic development (Wulf 1987). The role of politics, then, is to adjust the institutional superstructure to a shifting economic basis in order to allow a continuation of technical, and therefore economic, progress. To be sure, this technocratic outlook contradicts programmatic claims for a primacy of politics. From a technocratic perspective, politics doesn’t need communitarian foundations but an efficient vehicle to translate the imperatives of economic development into institutional adjustments. Corporatism was such a vehicle. During the reign of the Keynesian welfare state, social democrats preferred corporatist arrangements among states, employers, and unions (Marks 1986). Third Way social democrats have downgraded the role of unions and invited a fair number of civil society groups to such arrangements (Meyer 2007, chap. 2.6). This “extended corporatism” often transcends the borders of nation states and interacts with global civil society. Yet many civil society groups are dependent on state or corporate funding. Thus, the extension of corporatism from the welfare state to (global) civil society further weakened labour in corporatist arrangements instead of, as Third Way philosophy suggests, widening the welfare state agenda beyond questions of income distribution.

With these qualifications in mind, we can now redefine social democracy as a political project that pursues a technocratic corporatism in the name of the primacy of politics and communitarianism. This definition can be used to understand and critique the transformation of social democracy from the Keynesian welfare state to the Third Way. As was mentioned above, the ideas of an electoral dilemma and globalization were crucial for this transformation. Both ideas seem to be straightforward. First, the decreasing numbers of manufacturing workers make it necessary, if elections are to be won, to find voters beyond the industrial working class (Kitschelt 1994). Second, increasing trade and capital flows undermine a state’s capacity to create jobs and redistribute incomes. The abandonment of the Keynesian welfare state is thus unavoidable (Scharpf 1991). Yet the empirical validity of both of these claims is highly contentious (Brooks and Manza 1997; Clift 2001; Korpi and Palme 2003; Hirst and Thompson 1996; Osterhammel and Petersson 2003). In historical perspective, the electoral dilemma and globalization theses reveal major inconsistencies and blind spots.

The Electoral Dilemma Hypothesis

For a start, the perceived need to substitute class politics for broader electoral coalitions is hardly an original idea unique to Third Way intellectuals. Eduard Bernstein (1898) was challenging the Marxist proposition of class polarization at the end of the nineteenth century. Capitalist development, according to Bernstein, leads to the attenuation of class differences. For this reason, any social democratic strategy built on an immiserated working class is doomed to failure. As an alternative, Bernstein suggested a strategy of reform that would appeal to workers, farmers, small business owners, and public servants. Similar ideas were discussed in other socialist parties in the late nineteenth century (see Gustafsson 1972). It should be noted that communist parties that were claiming to represent the revolutionary tradition in the labour movement against social democracy’s revisions expressed very similar ideas when they adopted the “popular front” strategy in the 1930s.

Sheri Berman (2006, chap. 2), in her account of twentieth-century social democracy, accurately presents revisionist debates as social democracy’s departure from class-based socialism. She also shows that the idea of building cross-class support for social democratic parties failed during times of world wars and depression in the first half of the twentieth century. During the postwar prosperity, though, it seems that Bernstein’s vision became reality. Programmatic commitments to the working class and a gradual transformation toward socialism that had outlived late nineteenth-century revisionism were abandoned in the early years of the postwar boom. From then on, social democratic organizations presented themselves to the electorate as “people’s parties” (Berman 2006, chaps. 3, 5, and 8), and not without success: rapid economic growth and the emergent Keynesian welfare state provided rising real wages and increased income security. Moreover, growing numbers of white-collar occupations in private companies and the expanding public sector offered possibilities of upward mobility to a fair number of working-class individuals. These economic and social developments allowed social democratic parties to expand their membership and electoral basis beyond the manufacturing working class. A good portion of the new middle class that developed with the postwar prosperity went to the social democrats. Thus, if Third Way ideas of attracting upwardly mobile middle-class individuals ever matched reality, it was during the long boom from the late 1950s to the mid-1970s. In the 1990s, when Third Way intellectuals denounced support for the Keynesian welfare state as old fashioned, the social advancement of some members of the middle class was built on the plight of the working class. Not surprisingly, Third Way support of the former led to a loss of electoral support from the latter. The electoral alliance between working- and middle-class voters, which made social democracy a hegemonic force during the postwar boom, could not be reinvented in the 1990s.

The inadequacy of the electoral dilemma hypothesis goes beyond its untimely suggestion to build cross-class alliances at a time when these actually started to fall apart. A further weakness is that its proponents look at social democratic parties in isolation without considering the role of other parties, intermediary organizations, and hegemonic projects. More specifically, they fail to recognize the role of party competition for the working-class vote. During the heyday of welfare state development, mass communist parties in France and Italy were actually a stronger representation of the working classes in these countries than were social democratic parties (Magri 1971; Ross 1992). Even in countries where communist parties were always small, social democrats, to retain their position as the dominant voice on the Left, had to keep an eye on their more radical competitors. Similar consideration was given to the New Left and, beginning in the 1980s, to Green parties. Competition for working- and middle-class voters also came from the Right. Historically, some working-class individuals have always identified more with religion or nation than with class and have therefore preferred to vote for conservative parties (Knutsen 2004; Van Voss and Van der Linden 2002). A shrinking working-class vote does not necessarily indicate decreasing population share of that class; it might instead demonstrate dissatisfaction with social democratic policies. The most famous cases of working-class voters deserting social democracy are the elections of neoliberal vanguard fighters Reagan and Thatcher (Davis 1999, chap. 4; Pattie and Johnston 1999).

All of this suggests that parties from across the political spectrum are competing for voters from the same social strata, leading one to conclude that there is no “natural relationship” between social structure and voting behaviour. Although Third Way advocates disparage the economism of Keynesian social democracy and praise post-materialist values instead, the analysis on which they build their claims is totally economistic. It rests largely on the claim that the economic agenda of the working class was, due to this class’s decline, superseded by the post-materialist values of a relentlessly growing middle class. The decline of Keynesian social democracy, however, must not be attributed to a withering of the working class. It can also be explained by changes in the composition of the working class that didn’t find an expression in the political system. The postwar period was marked by a welfare state consensus, which was shared by all parties. Conservatives certainly had more difficulty embracing the Keynesian welfare state than did social democrats, and eventually expressed it in different ways, but the two groups would eventually pursue similar politics. In fact, welfare states in Canada and Germany were built under both liberal and conservative governments. The social democratic hegemony of the postwar era does not necessarily mean that social democrats were in government; even if they were sitting on the opposition benches, governments still pursued the Keynesian welfare state program. The opposite is true for neoliberal hegemony. The welfare state agenda was first abandoned by conservative parties (Hoover 1987), but eventually, as the rise of Third Way politics testifies, social democrats also left it behind. The question is, then, What caused the shift from social democratic to neoliberal hegemony? To answer this question without resorting to the economism of the electoral dilemma or globalization theses, one needs to look at politics and agents. This perspective reveals a far-reaching unmaking of working classes in the countries of Western Europe and North America (Schmidt 2009e; Theriault 2003).

Over decades, from the early days of industrialization to the formation of mass workers’ organizations in the late nineteenth century, workers in these regions had developed common languages, cultures, and organizational practices. The main focus of workers’ organization was the nation state, both for trade unions fighting for legal recognition to improve the conditions of collective bargaining and for parties struggling for the franchise, social reform, or revolutionary overthrow of the capitalist state. Whatever their strategic and tactical differences, all these organizations and their members shared a common understanding of what it means to be working class. Though occupational, skill, gender, and ethnic differences were recognized — and in fact led to bitter disputes on various occasions — the paradigmatic figure in the working class was the manual worker. Working in mines or factories, he was the one who produced society’s wealth and would, potentially, be able to do so without the hierarchy of supervisors and bosses. Third Way theoreticians, trying everything they can to distance themselves from this class, actually echo this understanding in an ironic way. Equating working class with manufacturing and pointing to decreasing numbers of workers, they find it very easy to statistically prove that the working class is gone, perhaps reappearing in emerging industries of the Global South but certainly not a force to reckon with in Western countries.

Early in the twentieth century, it was precisely this kind of working class that threatened to shake the capitalist world. And it did. Starting with the Russian Revolution, theoretical arguments about social reform or revolution became a practical choice, or so it seemed. After World War II, this choice was transformed by the conditions of the Cold War and “nationalized” labour movements in the East and West. Recognizing the Soviet Empire as a force in international relations warded off real or perceived threats of revolution. In exchange, the Soviets had to give up support for revolutionary movements in the West. State socialism was thus contained in Eastern Europe (Saull 2007, chaps. 3 and 4; Thompson 2005, chap. 2). A similar “deal” was struck between capitalists and labour movements in the West: unions were legally recognized and, to one degree or another, institutionalized in emergent welfare states (Buci-Glucksmann and Therborn 1982). The price labour movements paid to become respectable partners in domestic bargaining was similar to the price the Soviets paid for their entry ticket into the world of diplomacy and superpower politics: the abandonment of fundamental social change. Under the “dual regime” of the Cold War and welfare states, any quest for socialist transformation was suspected of being part of a Soviet conspiracy and could be persecuted. Anti-communism was an integral part of Western welfare states. As long as the prosperity lasted, this was a problem for communists, who were persecuted, ridiculed and marginalized, but not for broad layers of the working class, who enjoyed unprecedented increases in living standards and income security (Kössler 2005; Heller 2006, 105–23; Smith 2006, 171–96).

The “Cold War accord” between labour and capital lasted as long as high levels of productivity growth allowed real wage increases without squeezing profits and as long as neither side challenged the status quo. Beginning in the late 1960s, though, a slowdown of productivity growth prompted capitalist appetites to decouple wages from productivity. At the same time, layers of the working class that were not, or didn’t feel, represented by unions and political parties — immigrants, ethnic minorities, women and students — questioned the bosses’ right to manage and asked for civil rights and increased public spending from the state. Such outrageous demands convinced more and more capitalists that it was time to move away from the Keynesian welfare state toward neoliberalism (Crozier, Huntington, and Watanuki 1975).

At this point, leaders and followers of trade unions and social democratic parties had to realize that integration into the welfare state had been a double-edged sword. While the boom was on, corporatist arrangements didn’t deliver equally to all subaltern classes, but they did deliver significant improvements. When the boom was over and new labour and other social movements voiced their interests, it turned out that neither these new movements nor the “nationalized” labour movement were able to win much, if any, progress. Arguably, labour’s integration into the welfare state in the 1950s had been the first step toward its unmaking as a class. Once jobs, wages, and welfare state provisions came under attack in the late 1970s (Smith 2006, chap. 7; Workman 2009), leaders, members, and voters of unions, and social democratic parties alike had to realize that they had “unlearned” how to mobilize and fight for their interests on the streets and picket lines (Upchurch, Taylor, and Mathers 2009). Many younger workers, on the other hand, had never come to see themselves or to act as working class. This is one of the reasons why the wave of labour militancy that swept across Western countries in the late 1960s and early 1970s didn’t trigger the making of a new working class, a class less centred on “male manufacturing” workers than were the older working classes that began constituting themselves in the nineteenth century.

The longer the neoliberal assault on workers lasted, the more young workers came to see themselves as individuals struggling for survival rather than as part of a potentially collective movement. Increasing numbers of them had never seen a union organizer, nor had they ever been involved in job action or drawn to the electoral politics of the old working class. This process of individualization, or atomization, was the second step in the unmaking of the working class. At the same time, the diverse agendas of the new social movements were far from crystallizing around a common denominator; many of their activists were decidedly anti-labour and thus far from creating a new working class (Heller 2006, 204–10). Thus, while only remnants of the old working class hang on to unions and a welfare state project, a new working class has hardly begun to organize and fight (Bronfenbrenner 2007; Kumar and Schenk 2006; Tait 2005).

Historically, social democracy was part of the much broader process of the making of the Western working classes, which also included the development of trade unions and a distinct working-class culture. Communitarianism, which Berman (2006) sees as one of the defining features of social democracy, can be seen as the glue that held parties, unions, and culture together. However, this does not apply to Third Way social democrats, who have a much more technocratic approach to politics. Using research and opinion polls, they manufacture election campaigns without making the long-term effort to engage in the remaking of the working class. This approach may, as the social democratic revival of the late 1990s demonstrates, yield short-term gains, but it is decidedly not enough to build a new social democratic hegemony comparable to that prevailing during the postwar boom.

Communitarian references, usually presented in the more fashionable language of civil society, are merely a cover for deeply entrenched economistic and technocratic practices according to which politics is about adjusting the superstructures of society to autonomous developments of its economic basis. No matter how hard social democratic intellectuals, from Eduard Bernstein to Anthony Giddens, try to offer a purely normative definition of socialism or social democracy, the economism that characterized the Second International — and also the Third — still haunts social democracy today. Nowhere is this more apparent than in the social democratic debate on globalization.

The Debate on Globalization

Notions of civil society are not only applied to domestic politics, where they serve as a rationale to abandon institutionalized labour movements and the welfare state. They are also used to sketch out a transformation from foreign, state-centred policies to global governance (Giddens 1998, chap. 5; Held 2004; Meyer 2007, chap. 5). However, the sticking point in the debate is not so much whether a global civil society is preferable to a statist international-relations regime; the point is rather whether states have the capacity to regulate the economy. Before global civil society talk became fashionable in the 1990s, social democratic intellectuals had already marked the territory for future debates. Key among these markers was the proposition that large corporations had the power to bypass the Keynesian welfare state (Scharpf 1991). According to this view, deficit spending would lead to inflation and, in turn, lower private investment and capital flight. A progressive tax system, designed to reduce income inequality and provide stable funding for the welfare state, was considered another disincentive to investment and reason for tax evasion. Obviously, these views echoed the monetarism and supply-side economics that neoliberals have entertained since the late 1970s. Over the course of the 1990s, globalization became the Trojan horse to smuggle such ideas into social democratic circles, where they triggered extensive debates about the relative power of states and markets (Garrett 1995; Hay 2000; Pierson 2001). A key result of these debates was to identify “varieties” or “models” of capitalism (Coates 2000; Hall and Soskice 2001; Schmidt 2002), ranging from market-led capitalism, through negotiated capitalism, to state-led capitalism. This diversified view on capitalism gave social democrats some relief because it rejected the original proposition that globalization would inevitably lead to a convergence of formerly existing “worlds of welfare capitalism” (Esping-Anderson 1990) toward a ubiquitous Anglo-Saxon model of unfettered market rule. Some contributors to the “varieties of capitalism” debate even went so far as to suggest that corporatism and certain kinds of state intervention could actually contribute to comparative advantages and pointed to the dangers of a political backlash against the outcomes of unfettered global market competition (James 2002; Rodrik 1997). While this approach concedes room for corporatism and political regulations, it shares with neoliberal theorists of globalization the belief in an indispensable primacy of economics (Friedman 1999). Neoliberal capitalists, as much as Third Way social democrats, saw the Keynesian welfare state as a major roadblock toward the full acceptance of this primacy. Following in the tracks of neoliberal policies, only a competition state was considered compatible with globalization’s market imperatives (Cerny 1997; Jessop 2002, chap. 3). Under the perceived constraints of integrated world markets, a remake of the Keynesian welfare state after the neoliberal interlude was not on the social democratic menu, whether voters had an appetite for it or not. Political survival in the face of economic globalization required social democracy’s embrace of the competition state (Merkel 2008). “The Third Way” became the name of this project. It promised a shift from the state-centred primacy of politics to a rebranded communitarianism in the names of civil society and global governance. Moreover, the Third Way was aiming for the adjustment of social democracy and the Keynesian welfare state to the new conditions of globalization and the need for a competitive state. The rationale for this transformation was the primacy of economics.

In 1847 a young Karl Marx declared apodictically: “The hand-mill gives you society with the feudal lord; the steam-mill, society with the industrial capitalist” (Marx [1847] 1986a, 165). Five years later, his analysis of the relations between structure and agency was much more nuanced: “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like a nightmare on the brains of the living” (Marx [1852], 1986b, 103). Ironically, whereas Marx gave up his inclinations to economic determinism, social democratic intellectuals have a long history of hiding a continued determinism behind flaunted commitments to the primacy of politics and communitarianism. The “tradition of all dead generations” weighing on them is that of economistic inklings in Marx and Engels and of the continuous economism of the Second International. Therefore, it may be appropriate to summarize the strategic outlook of Third Way social democracy by paraphrasing Marx’s economistic moment of 1847: assembly-line production gives you the Keynesian welfare state; economic globalization, the competition state. We now move to the second part of this chapter, an attempt to explain the rise and fall of Third Way social democracy in the more nuanced spirit of the 1852 Marx.

THE RISE AND FALL OF THIRD WAY SOCIAL DEMOCRACY

In one case, the Third Way story seems capable of explaining social democratic revival: Tony Blair’s New Labour. Under Blair’s leadership, the British Labour Party was remodelled along lines suggested by Third Way intellectuals like Anthony Giddens before it won a sweeping victory in 1997 (Panitch and Leys 1997). However, knowing that straight Third Wayism wouldn’t sit well with some of their potential voters, France’s Lionel Jospin and Germany’s Gerhard Schröder mixed new social democracy with welfare state rhetoric to get elected (Clift 2005; Wehr 1998). How necessary this watering down of Third Wayism was became obvious once they turned to the “real thing” in government: privatizations and spending cuts sent their electoral support tumbling. At this point, these few hints may suffice to indicate that social democratic revival in the 1990s was not founded on the successful adjustment of party strategy to a declining working class and the emergence of a global economy. Otherwise, not only the British but also the French, Germans, and others should have openly advocated for a Third Way in their election campaigns. (Did not the Social Democratic Party of Germany adopt a program called the New Middle?) Moreover, successful adjustment to structural change should have yielded more than just short-term gains. We may thus conclude that neither globalization and electoral dilemmas nor social democracy’s reactions to these perceived structural changes can explain the rise and fall of Third Way social democracy.

To come to terms with the Third Way episode, we may start with two observations. First, much inspiration for the new social democracy came from Bill Clinton’s “New” Democrats. Clinton’s campaign slogan, “It’s the economy, stupid,” helped him into the White House at a time when European social democrats were still working out their new strategies. Second, the social democratic revival was over as soon as the New Economy boom went bust in 2001. Since then, social democrats have either lost government power or have had great difficulty retaining it. These observations suggest that the fate of the new social democrats was somehow linked to the second, and very short, American century, which began with the end of the Cold War, was in full swing during the Clinton presidency, and ended with the end of the dot-com boom in 2001. Paradoxically, at the same time when Clinton, while maintaining his popularity, steered the United States and the world at large closer to the neoliberal ideal than anyone before or after him, an upsurge of neoliberal discontent fed into the success of Third Way social democracy. This success was carried by unlikely bedfellows: on one side were aspiring middle-class folks who saw the New Economy as ushering in a world of opportunities and on the other side, workers who were either trying to hang on to decent jobs or hoping to upgrade their low-paying jobs. When the boom was over, middle- and working-class people went separate ways. Many of the former thought that an even higher dose of neoliberalism than the one Third Way social democrats had prescribed would help them to protect their social status. In contrast, increasing numbers of working-class people, with no effective political representation in sight, moved toward abstention and passivity.

The Rise of New Social Democracy

The Keynesian welfare state was constructed around a historic bloc comprising industrial capital, institutionalized labour movements, and increasing numbers of middle-class professionals working in the private and public sectors. Recurrent economic crises in the 1970s led to tensions and cracks within that bloc. The conservative decade of the 1980s led to, and was made possible by, the continuing unravelling of the welfare state bloc (Aronowitz 1982). The further this process went, the more the emergent hegemony of neoliberalism was consolidated (Schmidt 2008b). However, it didn’t take long before neoliberalism bred its own discontent, first articulated by a rising tide of street protests, which led to a movement against corporate globalization and eventually to votes for social democrats promising a Third Way beyond neoliberalism and the Keynesian welfare state.

The traces of this discontent, and its internal contradictions, go back to the discontent with the Keynesian welfare state. Most prominent in this regard is the problem of inflation. Rich and affluent middle-class households saw it as a threat to their financial wealth, while poor people struggled with the decreasing purchasing power of their low wages. These frustrations were successfully mobilized against the wage bargain that allowed unionized workers to defend, or even increase, their real wages against inflation. Unorganized workers — often women, immigrants, or ethnic minorities who, under still-prevailing conditions of tight labour markets, turned to rank-and-file militancy — also expressed dissatisfaction (Brecher 1997, chap. 7; Horn 2008, chap. 3). Thus, institutionalized bargaining between industrial capital and organized workers — the hard core of social democratic hegemony in the postwar era — was sufficiently delegitimized (Offe 1984) to launch an attack on unions once the economic crises of 1974–75 and 1980–82 led to soaring unemployment. As a result, average real wage growth was decoupled from productivity increases: in other words, redistribution from wages to profits propped up profit rates. Wage dispersion, measuring the gap between the highest and the lowest wages, also increased. Significantly, inequality between high- and low-paying jobs was strongest in countries where the institutionalization of labour and the welfare state had been weakest. This is why, over time, continental European states came to appear much more social than the Anglo-Saxon countries, where statism was always more relaxed than on the European continent (Pontusson 2005).

Discontent with the Keynesian welfare state was not contained within the immediate conflict between labour and capital. Equally important were conflicts over taxation and public spending (O’Connor 1973). These conflicts proved to be lethal for the alliances between professional middle classes and working classes and those between public and private sector employees. Poor people demanded public spending increases — for example, for social housing, childcare facilities, and better access to secondary and post-secondary schooling. With governments’ acquiescence to these demands, increasing numbers of decently paid workers and middle-class professionals, many of whom owed their social status to the expanded roles and range of public services delivered through the welfare state, felt that they were becoming paymasters of the undeserving. This provided an ideal breeding ground for Reagan’s and Thatcher’s anti-tax populism. In 1976 even the welfare state showcase, Sweden, saw the Social Democrats, after forty uninterrupted years in government, defeated electorally. Growing anti-tax sentiment was one of the reasons for the unexpected turn to the conservatives. Many private sector workers joined the anti-tax electorate once their jobs and wages came under pressure in the mid- to late 1970s. Narrowing the gap between gross and net wages by lowering taxes would, they hoped, allow disposable incomes to be maintained and give their employers room for cutting labour costs. Cost cutting was obviously the way to higher profit rates. Publicly, though, it was presented as a path to job security in troubled economic times. The result of growing anti-tax sentiment and related policies was not, as neoliberal propaganda proclaimed over and over again, a lowering of the state’s share of the GDP. Rather, the result was a shift of the tax burden from rich to poor and spending cuts for the poor. Fiscal policy, instead of being rolled back, was used to serve the middle class and bourgeoisie in their quest for income improvement. Rising inequality under the reign of neoliberalism was thus fed by a shift of bargaining power from labour to capital and by the use of tax policies.

But the transition from the Keynesian welfare state to neoliberalism wasn’t completely driven by economics. Politics played its part as well. One of the paradoxes of the welfare state was that, to the degree that labour power was decommodified, workers dared to care about more than bread-and-butter issues. They felt, to one degree or another, the alienations of the individual in an administered world (Marcuse 1964), and things deteriorated when, beginning in the mid-1970s, unemployment became a much more pressing reality. Now the welfare state revealed its capacity to either grant or deny all manner of benefits. Not surprisingly, many felt that although they still had to pay taxes, they were treated like unwarranted supplicants when they wanted something in return. Under the reign of the Keynesian welfare state, workers had had to struggle with bosses and state bureaucrats. Neoliberalism happily turned its spotlight on the frustrations and anger arising from these struggles to advance its anti-state agenda, promising liberty in a world of individuals communicating and contracting with each other without cumbersome state interference. Neoliberalism also promised that, as a positive side effect, individual interactions unhindered by the state would revive economic prosperity that had been suffocated by the welfare state.

The neoliberal promise of liberty and prosperity was, somewhat unexpectedly, supplemented by the collapse of state socialism in Eastern Europe. Social democrats in the West were very eager to present the Keynesian welfare state as an alternative to state socialism in the East. However, not even the staunch anti-communism that most social democrats demonstrated was good enough to overcome conservative and neoliberal suspicions that social democracy and communism were two wayward children of the same rotten parent — state intervention. Consequently, conservatives and neoliberals jumped at the chance to portray Western remnants of social democracy and the Keynesian welfare state as doomed after Soviet communism had imploded in the East. But the moment of unchallenged neoliberal supremacy was short.

Subterranean discontent with neoliberalism had already begun to develop before the Soviet Empire collapsed. Arguably, the collapse only delayed open articulations of that discontent. The main reason for disaffection with neoliberalism was quite simple: just like other political projects in the past, it couldn’t deliver on the promises that had been made to those following the neoliberal flag. In the early 1980s, neoliberals convincingly argued that some belt-tightening was necessary to prepare economies for a new prosperity after the postwar prosperity had been dragged down by the unholy trinity of big government, big labour, and big corporations. However, higher profits would, after a short period, trickle down and improve income and working conditions for everybody. By the end of the 1980s, in the face of fairly high rates of economic growth, increasing numbers of people at the lower ends of the income hierarchy sensed that the rising tide, instead of lifting all boats, might simply leave them behind (Albelda et al. 1988). Depending on a state’s particular institutional set-up and policy trajectories, big labour had either been marginalized or incorporated into the downscaling of labour and social standards. Big government and big corporations had changed their faces in the transition to competitive states and lean production, but they were still big and had more power over working and poor people than they had had under the reign of the Keynesian welfare state. With hindsight, the postwar mix of prosperity and social democratic hegemony appeared more and more as a “golden age” (Marglin and Schor 1991). People who were struggling to make ends meet increasingly defined a good life as one they could have had, or hoped for, from the 1950s to the 1970s. Yet this didn’t mean that people who were discontented with neoliberalism could be rallied behind a “Bring Back the Keynesian Welfare State” banner. Many of those who would have liked to see this happen had accepted the neoliberal idea that globalization had made negotiated class compromises, redistributive tax systems, and employment policies impossible. Others, responding to the emerging alliance between the competition state and big money, adopted a general attitude of distaste toward the state. Taking neoliberalism’s anti-state populism seriously, they were disgusted to see that although they didn’t receive much tax relief, they did suffer from cuts in public services, yet state support was always available to large corporations when they reported a profit squeeze.

Thus, neoliberalism’s discontented were split between those who considered a Keynesian welfare state impossible and those who didn’t want a statist alternative to actually existing neoliberalism. This was fertile ground for Clinton’s marriage with the New Economy: his 1992 campaign slogan — “It’s the economy, stupid” — catered to disgruntled Republican voters who didn’t want a realignment between Capitol Hill and trade union headquarters, and economic growth, just picking up after the 1990–91 recession, gave new hope to people who thought a welfare state revival had become impossible in a global economy. Clinton’s first election and presidency set the tone for Third Way social democrats in Europe. Riding the New Economy boom, Blair, Jospin, and Schröder attracted optimistic voters who were, or thought they were, ready for the global economy and more skeptical ones who, if only for lack of other alternatives, were hoping that continued growth might eventually have some trickle-down effect and that social democrats would be more willing to allow such a trickling down than conservatives, with their traditionally close ties to big business. Yet the Third Way honeymoon didn’t last long. The first disappointments came even before the end of the New Economy boom put the whole project on a downward slope.

The Fall of New Social Democracy

One common feature of Third Way governments was their commitment to austerity (Glyn 2006, chap. 4; Romano 2006). Taking the notion of balanced budgets much more seriously than their conservative predecessors, who had preferred to preach the gospel rather than apply it, they kept the lid on social spending. Consequently, macroeconomic constraints translated into pressure on individuals to accept lower wages and cuts in benefits. If anything, Third Way governments spent money on subsidizing the expansion of low wage sectors. And there were country-specific disappointments, too. In the United States, calling off health care reform and pushing for neoliberal trade agreements — namely, the WTO — let Clinton voters down (Pollin 2003, chap. 2). The thirty-five-hour workweek in France, which had been a union priority for many years, went hand in hand with labour market deregulation. Moreover, the Jospin government sped up the process of privatization, which inevitably led to confrontation with the unions, which were trying to defend public ownership (Budgen 2002). Schröder, in turn, disappointed voters with his mix of corporate tax cuts, labour market deregulation, and attempts to undercut unions’ collective bargaining power by dragging worker representatives on the company level into a policy of competitive corporatism (Schmidt 2005).

In the field of foreign policy, the 1999 war against Yugoslavia turned out to be an irritant for all social democratic governments (Ali 2000), not because those governments or their voters were necessarily opposed to the war — in fact, opposition against the war was shamelessly weak — but because the US push toward war contradicted Clinton’s commitment to multilateralism. Unlike his predecessor, George Bush Sr., who was clearly committed to great power politics and had launched a war against Iraq in 1991, Clinton presented himself as a man of peace and negotiation. After decades of Cold War confrontation, this message resonated not only domestically but also abroad. Social democratic governments in Europe were therefore bemused when Clinton changed course toward a war of aggression. Voters in Europe, in turn, were baffled when they saw how quickly social democrats followed Clinton’s new direction. The same irritations between Clinton, European social democrats, and European voters flared up over the neoliberal free trade agenda that complemented Clinton’s great power politics. For a while, social democrats presented a European social model as an alternative to US capitalism, which was portrayed as a mix of unfettered markets and ruthless power politics. Popular as the idea of a social model was, and still is, voters were suspicious of its connection with the EU. Since the mid-1980s, European integration had been used as a pretext to slash the national welfare state. Winning government power in the 1990s, social democrats, as it turned out, were willing to top the EU’s institutionalized neoliberalism with corporatist mechanisms such as the Macroeconomic Dialogue but were not willing to change the actual direction of European politics toward job creation and social security (Schmidt 2009d). Thus, attempts by European social democrats to distance themselves from the Clinton Democrats, who had been a major source of inspiration just a couple of years earlier, created new disappointments among voters who were looking for an alternative to neoliberalism.

To be sure, Clinton’s economic and foreign policies could have been expected. After all, his presidency was meant to inaugurate a second American century, built, like the first one, on superior economic and political power. Yet these underpinnings were not as visible as they had been during the first American century, when confrontation with the Soviet Empire made open display of power a preferred propaganda tool. After the Cold War, by contrast, many people around the world were tired of power politics and were also awaiting the peace dividends that Thatcher and Bush Sr. had promised but never delivered. Couching continued aspirations for hegemony in the language of globalization was thus a smart marketing strategy by Clinton and his “New” Democrats. What’s more, neither irritation over Clinton’s open embrace of great power politics nor domestic disappointments with newly elected social democratic governments sufficed to turn the Third Way into a dead-end road immediately. As long as the New Economy boom was going strong, there was hope that prosperity might eventually replace domestic and international conflicts over income distribution with secure jobs and some new kind of social justice. Any such hopes were dashed when the boom went bust in 2001.

Sticking to their competition state agenda (Huo 2009; Merkel 2008), Third Way social democrats made it very clear that they were — to reverse the popular slogan of anti-globalization protestors — putting profit before people. The possibility of escaping the paternalistic welfare state and finding fulfilling employment instead, a core theme of Third Way ideology, rang increasingly hollow to poor workers who couldn’t find any job, to unionized workers whose jobs were downgraded to casual work, and even to middle-class professionals who found the expected returns on their human capital investments vanishing.

Not surprisingly, then, Clinton’s “New” Democrats lost the 2001 election to the far-right Republican George Bush Jr. In the first round of the French presidential elections a year later, Jospin came in a shocking third, behind the neofascist Jean Marie Le Pen. To prevent Le Pen from becoming president, the left vote was mobilized in support of conservative candidate Jacques Chirac. In Germany, Gerhard Schröder, who won a narrow re-election in 2002, called for early elections in 2005 to avoid a foreseeable disaster in the regular elections scheduled for 2006. This move bought the Social Democrats one term as junior partner in a Grand Coalition under conservative Christian Democratic Union chancellor Angela Merkel. Yet in the 2009 elections, German Social Democrats suffered the worst election results since 1949, when the first elections after the Nazi regime were held. Ironically, Blair, who moved the welfare state further toward the competition state than any of his fellow Third Wayers, was re-elected twice, in 2001 and 2005. However, this was only possible because, in their efforts to switch Britain from welfare state–building to neoliberal rollback, his predecessors — Major and Thatcher, in particular — had used up support for the Conservative Party almost completely. In the meantime, however, New Labour became as exhausted as the Conservatives were after eighteen years in office and was consequently voted out of office in May 2010.

Anecdotal evidence from Britain, France, Germany, and the United States should suffice to illustrate the links between economic growth and social democracy’s electoral performance. The inability of social democratic governments to either sustain growth by political means or to meet the expectations of their voters even in the absence of growth led to a decrease in electoral approval and party membership. This doesn’t mean that social democrats can’t win elections. The 2008 election of Barack Obama shows that, if voters are sufficiently disgusted by a conservative government, (social) democratic victories are possible. However, the discrepancy between voter expectations and government capacity to deliver on these expectations are even further apart under Obama than they were under Clinton. This suggests that, with no economic prosperity in sight, social democrats are unable to develop a hegemonic project that could, potentially, mobilize the growing number of people who are discontent with neoliberalism or, even more fundamentally, capitalism.

The apparent inability to use the electoral victories of the late 1990s as the basis for a new social democratic hegemony leads us back to the relations between social democracy, US dominance, and growth. After all, Third Way social democracy set its hopes on a new economy that was engineered in, and exported from, the United States. As during the postwar prosperity, the US was seen as a model for economic growth and, embedded in a network of multilateral organizations, a guarantor of global market exchange. Without a doubt, the US is still global capitalism’s main engine of growth and centre of innovation, providing world markets with a reserve currency and enforcing open market access. However, whereas postwar prosperity saw unprecedented growth and almost unchallenged political and cultural leadership of the United States, the 1990s were rife with doubts concerning the US’s ability to reinvent its hegemonic position on a new economic basis. US growth, and that of other Western countries, was still lower than it had been during the 1970s. Asia — namely, China — emerged as a new centre of economic growth (Arrighi, Hamashita, and Selden 2003). The euro, renminbi, and yen were seen as either potential candidates to replace the US dollar as international reserve currency or as anchors of a fragmenting monetary system (Helleiner and Kirshner 2009). Finally, protests against the WTO, IMF, and regional free trade agreements increasingly denounced globalization as a cover for the US quest for world domination (Panitch and Leys 2004). Considering these challenges to US hegemony in the fields of economics, politics, and culture, which the Clinton government saw as key pillars of the second American century, it is no surprise that his successor, George W. Bush, moved much further toward military-based efforts to reinforce US supremacy (Callinicos 2003). However, the US-led invasions of Afghanistan and Iraq made things even worse. Western allies of the United States were disgruntled by Bush’s shift from multilaterally negotiated world domination to American unilateralism (Habermas 2006). In other parts of the world, the US was first seen as a “naked imperialist” (Foster 2006); later, when it turned out that neither of the wars in Afghanistan or Iraq could be won, the United States came close to resembling what Mao called a “paper tiger” (Mao Tse-Tung 1956). Furthermore, economic recovery after 2001, fuelled by cheap credit and military spending, was the weakest after World War II and eventually led to the most severe crisis since the Great Depression of the 1930s (Schmidt 2008a). To be sure, none of these challenges implies that the United States has been replaced, or will be any time soon, by another hegemonic power. It is much more likely that the combination of weakened US hegemony and rising regional powers in Asia and Latin America will lead to persistent instability (Schmidt 2008b). Moreover, prospects for world economic growth are pretty gloomy. Strong growth in Asia is mostly based on the mercantilist model of industrialization that all Western countries who followed the original industrialization of England went through. In a world economy that is already ridden by overcapacities, the combination of export- and investment-led growth will soon reach its limits (Li 2008).

For social democracy, unstable international relations and economic stagnation is the worst-case scenario. Social democrats from Bernstein to Giddens claimed that the primacy of politics, representing communitarian values in the political and economic system, could tame the self-destructive tendencies of unregulated market economies. But the reality was always different. Social protections could only be achieved when capitalism was prosperous, as during the “one big wave” boom after World War II (Gordon 2000). In times of crisis, social democratic governments have regularly surrendered to the primacy of economics, meaning that they took measures to restore profits and investment even if this hurt their own constituencies. Thus, the limits of capital accumulation also represent limits to social democratic attempts to moderate conflicting class interests. Under present conditions, where working classes lack political representation and the capacity for independent class mobilization, this, of course, implies that capital’s quest for profit dictates the political agenda.

CONCLUSION

In the twentieth century, social democracy was the strongest force on the left. Its ups and downs were a mirror image of the degree to which working-class interests could be articulated vis-à-vis capitalist interests. Yet this articulation was always preconditioned on strong economic growth so that rising wages, including the social wage, and job protection would not hurt capitalist profits. A class compromise during the postwar boom was the best social democracy could deliver. Attempts to return to such prosperity and compromise under the new ideology of the Third Way failed. Economic growth since the 1980s, though not slow by historical standards, has lagged behind the exceptional growth that made social democratic hegemony possible after World War II. With no future growth in sight, future attempts at political conflict moderation will be as unsuccessful as the Third Way was. Under conditions of slow growth, the Keynesian welfare state was transformed into a competition state. Contrary to widespread globalization wisdom, competition states don’t level the playing field for workers from all countries. Instead, continued attempts of Western countries to maintain a competitive advantage over potential competitors in the Global South pit workers from rich countries against those from poor countries. Moreover, this competitive race implies the dangers of fragmented world markets, beggar-thy-neighbour policies, and resulting severe economic instability.

On the other hand, the election of social democratic governments in the 1990s, in the absence of other viable alternatives, indicated a prevalent taste for social security, justice, and job creation. Committed to capitalist accumulation and profits, Third Way social democrats were unable and unwilling to meet their voters’ expectations. Alternatives to neoliberalism and the competition state, it seems, must be built beyond social democratic parties. To be successful, such alternatives have to begin with a remaking of the working classes that were dissolved into small factions or completely isolated workers under the reign of neoliberalism, including Third Way governments. To overcome the competition between workers from rich and poor countries and to counteract the destructive effects of that competition, the new formation of working classes must transcend national borders and international hierarchies. Globalization, as pursued by conservative and social democratic governments, has so far meant the possibility of obtaining equal rates of profit in a highly unequal world. To escape this unequal world and the threats that it represents, even for relatively privileged groups of workers, a globalization of working-class struggles is needed. Only on this basis can political representations thrive and resist absorption by the capitalist state.