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Green social democracy can rescue capitalism from itself

A growing number of businesses recognise that their self-interest is best served by an economy that is not fatally undermined by climate change.

Drax power station in north Yorkshire, the largest coal-fired station in western Europe. Photograph: Getty Images.

We are living through not one but two crises of capitalism. The first one – the economic crisis which has followed the financial crash of 2008 – everyone knows about. The second is less familiar. This is the crisis of the global environment.

A crisis of capitalism occurs when the dynamics and forces of the system build up costs and risks to such an extent that they end up undermining themselves, creating a self-perpetuating spiral which can only be escaped through state intervention – by governments effectively saving capitalism from itself. 

This is of course precisely what has happened in the economy since 2008. An unsustainable boom in lending and credit, driven by a huge expansion of the financial sector, led to an asset price bubble and subsequent collapse, followed by a retrenchment in spending, leading to loss of output and rising unemployment. The slump into which these events pushed the economy could only be escaped via massive state intervention – initially in bailing out the banks, and then in huge injections of demand, first fiscal (stimulus) then monetary (quantitative easing), a process which is still not complete in any of the major western economies. 

The environmental crisis is now of the same kind. This is most obviously the case in respect of climate change. It is now clear that the global economy cannot continue to burn fossil fuels as its main source of energy: the carbon embodied in them, if released into the atmosphere, will cause changes to the climate not seen since the last ice age. As the Stern Report showed, even leaving aside the human cost, the economic losses caused by such events would be equivalent in this century to the cost of the two world wars and Great Depression of the last. In its continued investment in fossil fuels, capitalism is undermining itself. 

But the crisis is wider than this. If we look at world food and energy prices over the last six years, in 2008 both spiked, then nosedived as the financial crisis took an axe to demand. But since then, while global economic growth has recovered only slowly, food prices have risen back above their 2008 peak, and oil prices are today above $100 a barrel. Why? Because supply cannot keep pace with demand. The environmental crisis now is not just one of excess pollution, but of inadequate supply of resources – the inability of the global environment under present economic conditions to provide enough energy, food and other commodities to meet demand at stable prices.  In the past, environmental costs were largely imposed on the economic periphery – air pollution in poor urban areas or the destruction of rainforests. No more. Now resource scarcity is affecting prices right at the heart of the global economy.

In this sense, the environmental crisis must now – finally – be regarded not merely as a crisis of ecosystems, or of human values, but as a crisis of capitalism, in the sense that the dynamics of capitalist growth are now undermining themselves.

In the face of this new reality, the left needs to enlarge its understanding of both capitalism and social democracy.

Modern social democracy came into being in the 20th century to manage a capitalism which was unable to manage itself. When the financial crisis of 1929 hit, capitalism fell into a slump and could not get out of it without state support – in the US through Roosevelt’s New Deal, in Europe through rearmament and ultimately war. After 1945, social democrats rescued this failing capitalist system from itself by creating welfare states, secondary and tertiary education and national health systems, through strong trade unions and Keynesian fiscal and monetary policy.

Once again it is only governments which can rescue capitalism from the slump into which it has fallen. But the traditional social democratic programme will now not be enough. Today we also need to manage the environmental impacts of a system rapidly destroying the foundations on which it rests. 

In the past this would not have been easy. Traditionally the left saw environmental protection as a luxury which could only be afforded once wealth had been generated.  Environmental policies which imposed costs on industry risked damaging growth and destroying jobs. Environmentalism was a minority middle class movement, with no economic interests underpinning its politics. 

But that is no longer true. Today the most powerful voices in favour of environmental protection are arguably not the traditional green NGOs but the major corporations in the rapidly growing green economy. The UK’s share of this market is the sixth largest in the world, at nearly 4 per cent. Now worth over £120bn, the UK sector is itself growing at around 4 per cent per annum – one of the few major sectors currently doing so. It already sustains just under a million jobs. 

This change in the economics of environmental protection is of vital importance to social democrats. For it changes the politics. 

When social democracy rescued 20th century capitalism from itself it did so through a powerful coalition of forces. At its base was the working class, organised through trade unions and social democratic and labour parties. But critical too was the support of a significant proportion of the business community, and the middle classes who worked in it.  The business class by no means universally supported social democratic parties and governments in the post-war period, but enough of them split apart from their ideologically backward-looking peers to create decisive support for the Keynesian programme and the creation of the welfare state. Yes, this involved giving a larger share of their profits to the workers and to the state in taxes; but the benefits in terms of the growth of demand for the goods and services they produced more than outweighed the cost.

Exactly the same phenomenon is happening now over environmental policy. The traditional business view can still be heard – such policy is bad for business, growth and jobs. But it is now matched by the voice of businesses who will benefit from it, and who understand that their self-interest is best served by an economy that is not fatally undermined by rising resource prices and the impacts of climate change.

So just as social democrats in the 20th century forged a cross-class, cross-industry coalition in favour of the welfare state, so social democrats today need to forge a comparable alliance in favour of the environmentally-based economy. Green politics is no longer simply about a middle class environmental movement: it is now joined by powerful economic interests. Social democrats have to learn from how they built the welfare state economy in the 20th century in order to do it again for the green economy of the 21st.

Michael Jacobs is visiting professor in the Department of Politics at University College London and author of The Green Economy: Environment, Sustainable Development and the Politics of the Future (Pluto Press)

A longer version of this piece appears in the current edition of Fabian Review