Why we are turning our backs on social democracy

The financial sector has become a vast dominant beast sucking the life blood out of productive firms and eventually the State itself

Social democracy has been the most powerful political force in Europe since the second World War. Its politics built the welfare state and healthcare systems in west European countries, Along with conservatism it was one of the twin pillars of European politics. Yet conservatism is fracturing in Europe, and trade unions and social democracy are in decline.

The dominance of neo-liberal or rational market economics reversed many of the post-war gains in living standards, and inequality has been growing in recent decades. The share of all income in many western economies going to labour (employees and self-employed) has fallen from 75 per cent to 60 per cent.

The reasons for this reverse cannot be simplistically attributed to weak unions and social democratic parties without recognising the rebalancing of the power against them.

Unions in Ireland, for example, have no right to collective bargaining. The reasons for this power shift are externally driven. The main reason given is the decline of core working-class bases in manufacturing and mining, and the fragmentation of workplaces as jobs were shipped abroad.


In the past the world’s top firms employed hundreds of thousands who were paid well and unionised. Today’s top firms [by value] employ far fewer, with many on insecure contracts. They usually don’t manufacture but outsource, too often to nasty sub-contractors of scale.

The top tech and service firms fight against the right of workers to organise for better pay and conditions while avoiding taxes as part of their obsession with increasing shareholder value. Ironically, this has been compounded by privatisation and outsourcing of many formerly decent public service jobs into anti-union firms.

Life blood

Another reason has been the rise of “financialisation”. The financial sector used to be a sound, prudent source of finance which oiled the wheels of commerce and industry. It has become a vast, dominant beast sucking the life blood out of productive firms and eventually the State itself. Financial deregulation was and remains a major mistake by all politicians, but particularly social democratic parties.

The neo-liberal economic policies which led to the crash of 2008 are only being marginally reformed. Banks, “too big to fail”, are already bigger now than they were then.

A further reason for the rise of capital has been the extraordinary rapid technological change which also boosted globalisation. The rewards of globalisation have been very unevenly distributed. Most of the rewards have been taken by the tech giants, and they have immense power over personal and corporate data and the media. They make vast and often untaxed profits. They now appear to be out of control because regulation has fallen so far behind technological change.

Globalisation has also boosted migration, and many social democratic parties (though not all) have tended to avoid confronting the issues that arise. Ironically, social democrats appeared to take a free-market approach to immigration. They neglected the kind of regulation and intervention they would normally seek in the labour market.

Social democrat parties had built their reputations on establishing broad protective safety nets for all equally. However, increasingly fractured politics has allowed this purpose to be diluted into many single-issue agendas, impacting on the overarching collective identity of equal protection for all. Thus identity politics has weakened the collective appeal of broad left parties.

Overseeing the market

Social democrats also neglected climate change. They ceded their belief in the strong state overseeing the market. They began to believe instead that the market was dominant, and sought to service it, neglecting their support among the working and middle classes.

The state sets the rule in which markets operate. When markets failed in banking, insurance and auto industry, it was the state that rose to the rescue in many countries.

Ireland now has the greatest market inequality in the EU, but thanks to our welfare and taxation system overall inequality is reduced to the average.

The most effective way to reduce Ireland’s high-market inequality is not more welfare but for the State to legitimise trade unions – give them and workers the human right to collective bargaining with all firms.

Unionised firms have higher wages and are more efficient and innovative in areas of competition. Within a decade such market inequality would be reduced and our public services, welfare and tax system would be enhanced.

Inequality is not just a moral issue, but with the top 5 per cent or 10 per cent taking more and more national income from those below, money is ceasing to circulate, to be invested or to create demand. This is reflected in negative interest rates, with too much money chasing fewer investment opportunities.

Recently, the conservative Financial Times called for a “Reset of Capitalism” in a banner headline. “The model has come under strain, particularly the focus on maximising profits and shareholder value. These principles of good business are necessary but not sufficient. It’s time for a reset.”

With climate change and the possible destruction of our planet within a generation, it is time for a radical change, not a reset.

Paul Sweeney is former chief economist with Ictu, and a former member of the Labour Party