Loosening Labour’s golden straitjacket

Economic crisis presents opportunities as well as stark threats for social democracy, writes the Oxf

Like the early Christians, the founding fathers of the Labour Party were sustained by their faith. They believed that a society based on individual self-interest could be transformed into one based on human fellowship.

Bruce Glasier, a contemporary of Keir Hardie, declared that socialism was not about getting but giving. Such utopianism could not survive the harsh realities of government. The Attlee administration, Lab­our’s first majority government in 1945, came to appreciate that, for the foreseeable future, it would have to administer a private-enterprise economy. Labour became, in practice, a social-democratic rather than a socialist party. Yet, because it was unwilling to face up to reality, it remained, from the time of the demise of the Attlee government until the 1990s, directionless, despite being or perhaps because it was able to form governments in the 1960s and 1970s.

Yet social democracy has been the most successful ideology of the 20th century. What, after all, accounts for the great stability of Europe since 1945 and its high rates of economic growth, compared with the turbulence and crises of the interwar years? The basis of the postwar settlement in western Europe, whether administered by Christian Democrats such as Konrad Adenauer in Germany, the Gaullists in France, or Conservatives such as Winston Churchill and Harold Macmillan in Britain, was social democracy, a philosophy which sought to reconcile the competing needs of the people and the market. Yet the success of social democracy was hardly noticed, because its main tenets – a high level of state-provided welfare with taxation to match in an otherwise private-enterprise economy – seemed, for many years, to have been absorbed by all of the mainstream political parties in Europe.

The true hero of postwar politics in Europe is not John Maynard Keynes, and certainly not Friedrich von Hayek, but the forgotten German revisionist Eduard Bernstein. It was Bernstein who formulated modern social democracy, a type of socialism which accepted the market, but insisted that the state had an important role to play in ensuring social justice. Markets where possible, the state where necessary: this has been the slogan of modern social democrats. It was the view that social and economic processes were not spontaneous – but could be controlled by the state – which served to differentiate social democrats from their ideological opponents. In the words of the American political scientist Samuel Huntington, social democracy sought to recreate “through political means the social unity which modernisation has destroyed”.

Over the past 30 years, however, this philo­sophy has been in eclipse. It was replaced by another philosophy, that of neoliberalism. Not only Keynes, but also Bernstein, found himself eclipsed by Hayek and Milton Friedman. In the neoliberal view, any attempt by governments to influence the natural processes of the market would be counterproductive and doomed to failure. Within a basic framework of law and morality, the economy should be left to run itself. People should be allowed to make the most of their capacities and resources, as well as their luck, and should no longer be subject to the overall direction of the state. The social-democratic philosophy of the primacy of the state came to be replaced by the neoliberal philosophy of the primacy of the market.

In Britain, it is possible to pinpoint with some accuracy the moment at which social democracy came to be eclipsed. It happened after the wave of public-sector strikes – the so-called Winter of Discontent – of 1978-79. For these strikes, which kept the dead unburied in Liverpool, sent cancer patients home in Birmingham and left rubbish in the streets in London, could hardly be reconciled with the social and communal solidarity on which the postwar settlement was based.

In 1979, James Callaghan’s Labour government, which had presided helplessly over the Winter of Discontent, seemed to be facing electoral defeat. At one point, however, the polls improved for Labour and it looked as if the party might be in with a chance after all. No, said Callaghan: “There are times, perhaps once every 30 years, when there is a sea change in politics. It then does not matter what you say or do. There is a shift in what the public wants and what it approves of. I suspect there is now such a sea change – and it is for Mrs Thatcher.” And so it proved. Margaret Thatcher was to remain prime minister for more than 11 years; the Conservatives were in power for 18 – the longest period of continuous one-party rule in Britain since the Napoleonic Wars; and Labour was unable to return to power until it had transformed itself into New Labour.

All over the world, social democracy was on the defensive. It was not that social democrats were not in government, but they could only retain power, as in Australia, France and New Zealand, by adapting themselves to the philosophy of the market. Right-wing parties sometimes lost elections, but everywhere they seemed to be winning the argument. “The era of big government is over,” Bill Clinton told Congress in 1996. In 1999 the French president, Jacques Chirac, referred to Tony Blair as “a modern socialist. That means he is five miles to the right of me.” “And I’m proud of it,” responded Blair.

Blair accommodated his party to the market philosophy and to globalisation, which the American commentator Thomas Friedman called a “golden straitjacket” for the left. The success of postwar social democracy seemed to have depended on an equilibrium between production and redistribution, regulated by the state. With globalisation, that equilibrium appeared to have been broken, because capital and production had moved beyond national borders, and so beyond the remit of state redistribution. Pure socialism in one country seemed impossible, as François Mitterrand discovered after 1981.

Critics argued that New Labour accepted too much of Thatcherism. Yet Tony Blair and Gordon Brown succeeded in rejuvenating social democracy while, in a sense, appearing not to do so. From 2001, there was a huge increase in public expenditure, especially on the National Health Service. This led to the first increase in the public-sector share of gross domestic product since the 1970s, the last period of Labour rule. It had been made possible by Brown’s prudential economic policies from 1997 to 2001, which had gained the confidence of the markets, and therefore allowed expansion of the public services to occur safely.

The increase in public expenditure constituted a sharp break with the Thatcher and Major governments, and for a time it even transformed the attitude of the Conservative Party to public services. Until the recession, David Cameron, the Conservative leader, insisted that his party would follow a “prudent” policy in government. By this, he meant it would ensure that the public services were fully protected before embarking on any programme of tax cuts. He now seems to have abandoned this position, accusing Labour of failing to repair the roof while the sun was shining. But he has yet to make clear what public expenditure cuts would be on the agenda for a Conservative government; as recently as last spring, George Osborne, the shadow chancellor, was calling for more financial deregulation and a smaller role for the state.

The recession is forcing the parties to confront stark choices, and it may be that we are facing another sea change in politics: the recession and the credit crunch could well give birth to a new social-democratic moment comparable to that of the early postwar years. For while, in the neoliberal era, governments had to come to terms with markets, they now have to come to terms with the failure of markets. Our economic problems are the product of a long reign of insufficiently regulated markets, of a regime that produced the housing boom and excess lending by banks and other financial institutions. Governments, therefore, can no longer withdraw from markets, but will have to engage with them more closely. Barack Obama, the nearest America has produced to a social democrat, struck a chord with precisely this message. His chief economic adviser, Larry Summers, now declares that the pendulum “should swing towards an enhanced role for government in saving the market system from its excesses and inadequacies”. Bankers today are more dependent on the state than trade unionists ever were.

Yet governments will also have to engage with society more intensely than they did during the years when the market reigned supreme. In times of economic insecurity, people will insist on a firm safety net of social welfare. They will not be prepared to risk all when markets move. The doctrine that we should all help ourselves and rely on the bankers to make us rich has less resonance now than it did during the neoliberal era. We shall return instead to the philosophy of the immediate postwar years: that the doctrine of self-interest needs to be controlled in the interests of society as a whole, and that a country does better when all work together than when it relies on doctrines of competitive individualism.

The fundamental theme of social democracy is that the processes of economic and social change can be controlled by government. The relevance of this philosophy is becoming newly apparent as the recession bites. Combating the recession, therefore, will depend to no small degree on whether the social-democratic leaders of western Europe can breathe life into the dry bones of what seemed, until recently, a dead doctrine.

In Britain, social democrats are hindered because they have been divided since the end of the First World War, when Labour replaced the Liberals as the main party of the left. Social democrats are divided in many European countries as well: but that is a luxury they can afford, under proportional representation. With first past the post the consequences are ruinous.

In Britain, the divisions on the left have helped encourage Conservative hegemony. From 1914 to 1964, there was just one government of the left with a comfortable overall majority, and this even though there probably was a progressive majority in Britain for much of that period, a majority that would have adopted more imaginative policies to deal with unemployment and the threat from dictators. The divisions among social democrats deepened with the breakaway of the Social Democratic Party in 1981, which served to strengthen the political centre at the expense of the Labour Party.

The leading figures who have done most for the Labour Party – Ernest Bevin, Hugh Gaitskell, Tony Blair and Gordon Brown – have done so by forcing it to confront its shibboleths, by telling the party that it cannot afford to retreat to its comfort zone. The same courage is needed today if the recession in Britain is not to inaugurate another long period of Conservative hegemony.

Vernon Bogdanor is professor of government at Oxford University. His book “The New British Constitution” will be published later this year by Allen Lane