The Economics and Politics of Social Democracy: A Reconsideration

Questions about the decline of Social democracy continue to excite wide interest, even in the era of Covid-19. This paper takes a fresh look at topic. It argues that social democratic politics faces a fundamental dilemma: short-term practical relevance requires it to accept, at least partly, the very socio-economic conditions which it purports to change in the longer run. Bhaduri’s (1993) essay which analyzes social democracy’s attempts to navigate this dilemma by means of ‘a nationalization of consumption’ and Keynesian demand management, was written before the rise of New (‘Third Way’) Labor and before the Great Financial Crisis of 2007-8. This paper provides an update, arguing that New Labor’s attempt to rescue ‘welfare capitalism’ entailed a new solution to the dilemma facing social democracy based on an expansion of employment, i.e. an all-out emphasis on “jobs, jobs, jobs”. The flip-side (or social cost) of the emphasis on job growth has been a stagnation of productivity growth—which, in turn, has put the ‘welfare state’ under increasing pressure of fiscal austerity. The popular discontent and rise of ‘populist’ political parties is closely related to the failure of New Labor to navigate social democracy’s dilemma.