(Neo)liberalism, Social Democracy, and Sustainable Development
I recently tweeted out something along these lines:
(Neo)liberalism = market economy
Social democracy = market economy + economic rights
Sustainable development = market economy + economic rights + protection of nature
In this post, I wanted to draw this out a little.
(Neo)liberalism (market economy)
The economic story of the nineteenth century centered on the expansion of the free market economy, predicated especially on free trade and the free movement of capital. This is very much the story of classical liberalism. And it was pretty successful. As economist Brad DeLong notes in his new book, Slouching Towards Utopia, the period from 1870 to 1914 was something of an “economic El Dorado,” as strong growth - driven by technology - finally lifted the prospects of ordinary people and allowed them to escape the Malthusian trap.
Yet this period was by no means perfect - it led to massive inequalities as the opulence of the Gilded Age stood in stark contrast to the squalor of the working poor. It was this period that prompted Pope Leo XIII to write Rerum Novarum, the foundational document of modern Catholic social teaching. This encyclical was written in response to the grave injustices thrown up by the process of industrialization.
If this period proves anything, it is that a market economy can create wealth. This is an insight that goes all the way back to Adam Smith in his Wealth of Nations. Smith argued that free markets would be led by an invisible hand to higher wealth and economic betterment. As any economist can tell you, this comes with a lot of caveats. There are plenty of market inefficiencies, whereby the market produces too little (think public goods) or too much (think pollution). But on the whole, the market is decent at producing wealth. It just isn’t very good at distributing it. It isn’t good at promoting social justice. The benefits of higher wealth or technological change can accrue to a tiny sliver of the population, leaving most people no better off. This would be perfectly compatible with how economists view “efficiency.” Clearly, then, the creation of wealth alone is not enough.
This liberal free-market vision enjoyed a renaissance after 1980 with the ascent of neoliberalism, giving rise to an era that has lasted until the present day. Neoliberalism essentially says: remove the suffocating grip of the state and unleash the power of markets. So it promoted not only free trade and the free movement of capital but the removal of protections that had been added on since the period of classical liberalism - union power, the welfare state, high marginal tax rates.
Did neoliberalism succeed or fail? It failed in the advanced economies - it did not lead to higher growth but it did lead to higher inequality and to a greater prevalence of economic crises. Along with technological change, it led to a hollowing out of the working class. Indeed, more than anything else, it is the failure of neoliberalism that is driving the rise of far-right politicians.
But globalization and market reforms did work for many developing countries, especially in Asia - and most especially in China. In 1980, 80 percent of China’s people lived in extreme poverty; today, that number is zero. Never before have we seen this kind of achievement on this scale. To be sure, China did not adopt the neoliberal model. Its form of development retained a high degree of state control and state direction. But it did allow for markets, which helped spur its success.
Social democracy (market economy plus economic rights)
If classical liberalism was the story of the 19th Century, social democracy was the story of the 20th Century. Social democracy accepts the legitimacy of the market economy but seeks to smooth out its excesses through the provision of social benefits and social insurance. Or, in my telling, it’s a market economy plus economic rights.
As Brad DeLong notes, the only rights acknowledged by the market are property rights. If you don’t have much property, then too bad. But people won’t accept this, says DeLong. There will be a backlash as they also demand economic rights. This backlash can sometimes veer in dark directions - as it did with the descent into fascism and communism after the First World War. But, especially after the Second World War, it gave rise to social democracy. This was a positive development. The thirty “golden years” of social democracy marked the high point of economic wellbeing, at least in the global north - strong growth, low inequality, secure financial stability.
As noted by Sheri Berman in her book, The Primacy of Politics, social democracy arose from dissidents within the socialist movement who rejected the Marxist emphasis on dialectical materialism and class conflict. Instead, social democracy would accept the market system, but temper its excesses. It would no longer call for the collective ownership of the means of production. And it would seek cross-class alliances by offering universal benefits as a right of citizenship. For Berman, this is the great success story of the 20th Century. I would also argue that Christian dis-satisfaction with the injustices of the market system played a role in the rise of social democracy, especially given the emphasis on the universal destination of goods (which can be achieved through economic rights).
What are these economic rights? Economic rights came into the human rights field from Catholic influences - the equation of rights with human dignity common in Latin America and continental Europe. It is notable that countries in the liberal Anglo-Saxon tradition tend to play down economic rights (Franklin Roosevelt proposed a second Bill of Rights to codify economic rights in 1944, but it went nowhere).
Economic rights did make it into the 1948 Universal Declaration of Human Rights, which remains the world’s moral charter. Here is what Article 25 of the Declaration says are economic rights:
Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.
These are the rights of social democracy. They inform government commitments to universal healthcare and education, and to protecting people from the vagaries of capitalism through universal social insurance.
It is also worth noting that Catholic social teaching endorsed economic rights, most notably when Pope John XXIII included them in his encyclical Pacem in Terris in 1963. Indeed, for Pope John XXIII, economic rights come first, even before political rights. And they are always linked to corresponding duties. (The link to duties can also be seen the social democratic model, which stresses a sense of reciprocal obligation).
Social democracy began to lose some of its sheen in the 1970s. Growth slowed down, making redistribution more contentious. And inflation undermined a sense of economic security. And so there was a backlash, leading not to something new but to something old - a return to the liberal vision of free markets. In a word: neoliberalism.
Sustainable development (market economy + economic rights + protection of nature)
So far I have argued that (neo)liberalism was the story of the 19th Century (and the late 20th and early 21st Century), and social democracy was the story of the mid-20th Century. What about the 21st Century? Clearly, what we need today is sustainable development. This is a market economy combined with economic rights and protection of nature. And it is embodied in the 17 UN Sustainable Development Goals endorsed by the nations of the world in 2015 (at a session of the UN General Assembly opened by Pope Francis).
Sustainable development essentially calls for a return to social democracy in tandem with environmental sustainability. The gravity of the environmental crisis is now well known, especially in areas like climate change, pollution, biodiversity loss, and control of zoonotic diseases. Here, the moral charter is the encyclical Laudato Si’, penned by Pope Francis in 2015. Laudato Si’ calls for strong international, national, and local efforts to protect the environment, and in doing so, protect economic wellbeing and human flourishing.
I don’t need to go too deeply into the challenge of climate change, as this is well-worn territory. Just to recap the basics: the Paris Agreement - endorsed by the nations of the world - calls for reducing greenhouse gas emissions with a view to curbing the rise of global temperatures to 1.5 degrees Celsius above preindustrial levels. This is going to require a complete decarbonization of the energy system by 2050 at the latest, chiefly by electrifying everything and generating all electricity from renewables.
We are not on target. Latest estimates suggest that, if countries implement their plans, we are on course for 2.5 degrees warning. And this assumes plans will be implemented, which is certainly not guaranteed, as many plans remain aspirational. Inaction would have horrendous consequences for wellbeing - more floods, droughts, fires, diseases, population displacement, and conflicts. Hundreds of millions of people will suffer. And the poor - the people least responsible for climate change - will be on the front lines of disaster.
Decarbonization is therefore a moral obligation. Practically, it calls for the greatest transformation of our economic system in history. We can’t rely on market forces to do the job. The only tool the market can offer is carbon pricing, which is never going to work (just look at the backlashes all over the world to rises in energy prices). Instead, we are going to need massive investments by both government and private sector, underpinned by national plans and state direction. This is going to require a giant leap away from neoliberal thinking.
But will it reduce economic growth? Will it prevent the market from doing its job? There is no reason to think that it will. After all, the adoption of economic rights under social democracy - which led to high taxes, robust welfare states, and strong unions - did not destroy the growth machine. On the contrary, the social democratic era was the most economically successful in history. There is no reason to think differently about the sustainable development era. At a very basic level, the mechanics of decarbonization are bound to lead to higher investment and growth. More broadly, protecting nature does not mean jettisoning the technology-driven market economy.
The continued benefits of markets and technology. Economic rights and social inclusion. Sustainability and the protection of nature. We can have all three. We must have all three.