3. SOCIAL AND CULTURAL INFLUENCES ON ECONOMIC LIFE

It's not Economics, stupid!

Most economists (but not all, the sensible ones were ignored), missed the onset of the last oncoming financial meltdown in 2008. The reasons for this now seem reasonably clear. They were working from theoretical models that failed to factor in real human behaviour. Instead, they worked from an assumption that people, individually and en masse, were economically rational and used concrete information to make rational decisions. They therefore believed that markets enabled people to have sufficient information to make sound decisions - and as everybody had equal access to information, the sum total of their decisions would make markets self-adjusting. No need for government intervention.

Quite simply, they were using the wrong constructs and assumptions; and indeed many of them are still wedded to their flawed ways of thinking.

Why else would so many of them still believe in unfettered free markets?

The answer to this rhetorical question is extremely interesting. It is because human behaviour, especially where wealth and power are concerned, is not rational in the way that many economists want to believe. The reality is that markets are extremely imperfect, susceptible to distortion by herd instincts and the self-centred actions of powerful players.

Any readers who imagine that irrational human behaviour in economic life is a new idea must read: Extraordinary Popular Delusions and the Madness of Crowds is a history of popular folly by Scottish journalist Charles Mackay, first published in 1841. The book chronicles its subjects in three parts: "National Delusions", "Peculiar Follies", and "Philosophical Delusions". Despite its journalistic and rather sensational style, the book has gathered a body of academic support as a work of considerable importance in the history of social psychology and psychopathology.

It takes social sciences, like social anthropology and psychology, to understand the economic behaviour of individuals, crowds, nations (and, especially, investment banks)!

We have examined the ways in which cultures are formed and how they reflect and influence human behaviour. Different human groups will have different environments and different histories. These will have profound, but often invisible effects on their behaviour. The fact that there are very different cultures in the world - and that some cultures cause people to believe their way of doing things is “right” is a cause of a lot of wars and economic misery. And the fact that the most important contemporary economic theories stem from cultures that tend to believe there is a universally applicable ”right” way of doing things explains a lot about why free market ideology took root in America - and through American power, to the rest of the world.

So Culture affects economic behaviour in a wide range of ways. The relationships between culture and economic life are very complex, but very important. Maybe the best way to explore these relationships is to examine one Society and contrast it with some culturally different ones. It is not possible to make simple and direct connections between cultural factors and precise outcomes, but they are indicators of behavioural tendencies and susceptibilities to certain streams of ideas and beliefs.

As well as considering cultural factors such as collaboration, competition and attitudes towards power; it is important to factor in Social Capital, another concept that derives from anthropology and the social sciences.

Social Capital and Economic behaviour

What is Social Capital?

The World Bank believes that: 'Social capital refers to the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions... Social capital is not just the sum of the institutions which underpin a society - it is the glue that holds them together' (The World Bank 1999).

The central thesis of social capital theory is that 'relationships matter'. The salient idea is that 'social networks are a valuable asset'. Interaction enables people to build communities, to commit themselves to each other, and to knit the social fabric. A sense of belonging and the concrete experience of social networks (and the relationships of trust and tolerance that can be involved) can, it is argued, bring great benefits to people.

Trust between individuals thus becomes trust between strangers and trust of a broad fabric of social institutions; ultimately, it becomes a shared set of values, virtues, and expectations within society as a whole. Without this interaction, on the other hand, trust decays; at a certain point, this decay begins to manifest itself in serious social problems... The concept of social capital contends that building or rebuilding community and trust requires face-to-face encounters. There is evidence that communities with a good 'stock' of such social capital are more likely to benefit from lower crime figures, better health, higher educational achievement, and better economic growth.

However, there can also be a significant downside. Groups and organizations with high social capital have the means (and sometimes the motive) to work to exclude and subordinate others.

This caveat is very important. High cohesion within powerful groups may act to the disadvantage of society as a whole. The realisation that very tightly-knit groups like the Mafia, money traders or the UK Conservative Carlton Club might use their cohesion to further their narrow interests and damage those of others has caused social theorists to identify different kinds of social capital.

Two perspectives on social capital

Distinctions have been drawn between "bonding" social capital (also called localized social capital) and "linking" social capital. Bonding social capital refers to the relations within homogenous groups. In other words, these are the strong ties that connect family members, neighbours, and close friends and colleagues.

By contrast, "linking" social capital is more heterogeneous by definition. The ties that link those of different ethnic and occupational backgrounds form "linking" social capital, including formal or informal social interactions. The success of Nordic and some other northern European societies is, amongst other cultural factors, due to relatively strong linking social capital. Many of the problems experienced by the “Anglo” societies seem to be a result of strong bonds between specific groups, to the exclusion of a concern for the overall health of society.

Bonding relationships act as the primary means for the transmission of behavioural norms to family members and friends. Bonding social capital is important for establishing norms, controlling out of line social behaviour and for generating mutual aid. By contrast, linking social capital is important to the success of civil society and it is also recognised as an important source of other benefits for individuals, communities, and societies. It offers members of the society opportunities for participation in heterogeneous groups of people from diverse social classes and opens channels to voice concern in favour of those who may have very little opportunity to reach more formal avenues in order to affect societal changes, for example, in public welfare policies.

Cultural factors, Social Capital and economic behaviour in the “Anglo” Societies.

Strong specific bonds

The United States and Britain show strong evidence of Bonding Social Capital, which has created strong links within such cultural groupings as social classes, neighbourhoods and communities; investment banks and large corporations, single-purpose clubs - and to a significant degree, the wealthy.

Weaker wider attachments

But, they demonstrate much less Linking Social Capital, which is strong in the Netherlands, Germany and Scandinavia. It is this which causes a concern for the health and wellbeing of the wider society and a willingness to give up some personal advantage for the good of the whole.

Trust

Strong linking social capital creates a propensity to trust others, even those who are not within a personal circle of contacts. This also extends to trust in institutions like banks and governments, which respond in kind with concern for the societies that harbour them. Trust therefore becomes self-reinforcing.

As a generalisation, the idea of mutual, self-reinforcing trust is far weaker in the USA and Britain than it is in Scandinavia and some other societies.

As a result, the US, and to a lesser degree Britain demonstrate some marked characteristics:

• A lack of concern by many for the wellbeing of the wider society
• Lower levels of trust in government, some institutions, and social groups that are “different”, leading to relatively low levels of trust in others more generally
• Tendencies towards individualism and short -termism
• Strong competitive, “masculine” behaviour

Economic Outcomes

• Offshoring of production to cheap labour locations. The US and Britain have been particularly active by comparison with the Scandinavian countries, and to a degree, Germany.
  Much offshoring by US and UK corporations seems to have been done without much concern for the wider social outcomes, and the withdrawal of government as mediators and providers of strong support for the “victims” has resulted in high levels of economic decay. The results have been cheaper products, but also a hollowing out of the manufacturing base, causing widespread regional economic and social decay.
• Negative Balance of Payments, high national debt. Offshoring and dependence on imports has driven US and UK Balance of Payments to negative levels not seen in Germany and Scandinavia
• A lack of long term investment in technology and advanced manufacturing industries - also sale of existing companies to foreign competition. This is maybe more evident in the UK, where the financial markets, models of individualistic short-termism, are dominant in the economy, and have been willing to sell to any likely bidder, no matter what the wider economic and social consequences. Another consequence of this has been a reduction in highly paid employment in manufacturing and technology and a growth in relatively low-paid service employment.
• Privatisation of public services. The notion of public service has been degraded in free market countries. Strong belief in the efficiency of the free market has caused extensive privatisation of services in healthcare and social support, and a reduction in such assets as public housing. This tendency is noticeably lower in countries with different cultural profiles.
• Inequality is to some degree also driven by a combination of lack of care for wider social impacts by the wealthy - and justification of high earnings for the minority. Cultural factors such as strong individualism, competitiveness, “Winner takes all”, weak government regulation, belief in the free market, and lack of concern for the wellbeing of wider society have been powerful drivers of rampant inequality.

The Citizen as Consumer

Consumerism is particularly rampant in Britain and the US. Developments in mass advertising techniques, combined with the growth of very large consumer products companies, have led to great changes in mass behaviour.

Documentary producer Adam Curtis's brilliant series, “The Century of the Self”, charts how mass advertising and political manipulation, drawing on psychoanalytical insights, became the norm in the United States and rapidly swept across the Atlantic to Britain, and to a lesser degree, other European countries.

Today, both the American and British economies are highly dependent on consumerism, to the detriment of investment in infrastructure, public services and, in the case of the UK, technology.

Clues as to why this may be so can be found in tendencies towards individualism, a lessening of concern for wider society, in particular, in the plight of the poor and needy. Many in the wider populace have been influenced to believe that they have rights to a “lifestyle” built on housing, automobiles, vacations, clothes, personal image and a wide range of consumables. They are encouraged to compare themselves with celebrities and narrowly defined peer groups. Thus happiness is defined by possessing “goods”, and wider ideas of life satisfaction deriving from relationships and living in harmony with a wider community and the natural world, such as experienced in more “feminine” cultures; have faded from the lives of a majority in “Anglo” societies.

The drivers of consumer societies have been the dominance of big finance and business, the replacement of savings by credit, which, combined with a massive growth in consumer advertising, using a wide range of psychological techniques to generate demand. Adam Curtis described consumerist societies as “happiness machines”.

Politicians (often in thrall to big business) also use the same techniques to manipulate public opinion, in effect turning citizens into consumers of political “products”.

The United States

Economic Power

The US has been an economic powerhouse for more than a century. A main driver of enterprise has been individual entrepreneurs like Henry Ford, who have pioneered whole industries. This is to a large degree still the case today. Innovation, risk-taking and individualism and eccentricity are admired in the founders of Google, Facebook, Apple and many other ventures. The place of the state in fostering enterprise, despite its importance in other economies, has tended in recent decades to be denigrated and downplayed. (This conveniently ignores the fact that the defence industries, heavily supported by the federal government, have been major drivers of technology and innovation, so some of the American enterprise model is built on a sort of fantasy).

Behind much of the innovation and entrepreneurship lie a number of cultural factors. The US culture very much values competitive, even aggressive behaviour, there is a belief in the ideas of “winners” and “winner takes all”. Therefore massive fortunes have been built - and given a suspicion of the state - there has been great pressure for low taxes on the wealthy. The current state of affairs has been helped by a cultural tendency to look forward and not back, so the future is viewed with a degree of optimism, fuelling what has been termed “The American Dream”, a belief that anybody can get lucky and rich, provided they try hard enough. This belief has driven the success of many immigrants, arriving poor and getting rich.

Free Market

Beliefs in the power of the market as a substitute for the state in the economic sphere took root earlyier in the US, before spreading to countries with some cultural similarities. So the role of the state has been strongly cut back. In effect, Federal government has substantially withdrawn from regulation of the market with regard to finance and big business. This has elided with the pressure for low taxes on the rich, and more powerfully, with the belief that restrictions and constraints on the market can be equated with “Freedom”. It can be stated that the more fervent believers in the market see it as replacing the state in most economic spheres - and Free market theory also postulates that markets are self- adjusting, replaces the need for legal and regulatory restraints.

The United States has a culture that encourages Universalism. This is a tendency to believe in the fact that there are rules and constructs that have universal applicability. It is noticeable to outsiders that there has been a strong tendency on the part of the United States to believe that the “American Way”, is superior and universally applicable, especially with regard to a particular brand of capitalist democracy. Moreover, the Universalist tendency observable in America has added potency to beliefs in Free Market theory - in effect a set of economic rules that have universal applicability. These beliefs have also led to sometimes disastrous forays into politico/economic evangelism, leading to many failed attempts (Russia, Iraq, Afghanistan, South America, South-East Asia) to spread the Gospel, both directly and through such institutions as the World Bank and IMF.

INTERNATIONAL COMPARISONS

To start with some statistics

The prime measure of comparative international economic performance is the growth in Gross Domestic Product (GDP).

Taking this measure over the medium term, from 1994 to 2013, the “Anglo” countries perform well by comparison with some other developed countries. A sample is as follows:

By this gross measure, the US and UK appear to perform well by comparison with other mature economies. However there are other perspectives.... In particular, the gross figures disguise the fact that the benefits of growth and performance have been unevenly distributed in the UK, but particularly in the US.

Distribution of prosperity

USA

Gini coefficient

(This is a measure of inequality, a GINI score of 100 would mean that all the wealth was owned by one person).

The importance of these statistics is great. The US and UK have enjoyed overall increases in long term national output that exceed those of most other developed economies, yet the benefits and rewards from this growth have been grossly unequally shared.

In fact, average wages in the US have been almost static from the 1970's, whilst the earnings and wealth of the top 10% have increased massively.

More qualitative and wider social effects

There are some other factors masked by the gross figures:

• The shape of the US and UK economies have changed dramatically. Both show a great increase in relatively low-skilled and low paid service and catering employment and a consequent decrease in skilled and high paid employment, especially in manufacturing. This effect is particularly marked in the UK
• There have been considerable regional effects, some states, cities and regions experiencing huge declines in prosperity, whilst others have prospered.
• The power of democratically elected representatives and national government to shape the national economic agenda has declined markedly. In the case of the UK, power has shifted from Trade Unions, which dominated governments in the 1960's and 1970's; to big finance and corporations. In the case of the US, wealth coming from corporations and individuals now dwarfs all other influences. Voters have remarkably little influence between elections - and then there is a tendency for massive advertising and PR campaigns, funded by wealthy factions to dominate the political agenda.
• The result of increasing power of the industrial and financial industries over government and representative bodies has been a reduction in trust and confidence in democracy on one hand - and an increase in the use of informal social media to undermine official power.

The United States is one of the wealthiest countries in the world, if wealth is measured by overall averages. But this hides great inequality, extremes of wealth and poverty and a society that is becoming increasingly fragmented by gross differences in prosperity.

Compared to some European nations, most of which have lower levels of average Gross Domestic Product, the US has poorer health outcomes, inferior educational standards, higher rates of crime and incarceration, and much lower levels of general trust, in general, but particularly in large institutions and government. This has resulted in citizens losing interest and concern in the wider problems of society and tending to close their focus on their immediate concerns. Voting in national elections has decreased.

Britain, also infected by market fundamentalism, is presently moving in the same direction as the US.

For more specific social and economic data, Go to Society Section, click Data Indices

Some specific comparative factors.

1. Use of national assets. Norway and Britain

Norway is one of the world's richest countries, being rich in oil and gas, fish and Hydro-electric power. With the general consensus of its people, it saved a large portion of its oil wealth in a Sovereign Fund, invested another portion in massive infrastructure projects and gave very little to tax reduction and consumerism. Its national oil exploration and exploitation are mainly under the control of Statoil, which is 67% owned by the Norwegian state. The sovereign fund will provide enough wealth to fund pensions and social benefits in perpetuity. Norway also strictly conserves its fish stocks to ensure that they are sustainable.

Britain shared the oil wealth of the North Sea with Norway. In Britain, the oil wealth was used to lower taxes, fuel a massive boom in consumerism, and there is now a declining asset with little or no conserved wealth for the future. Britain allowed all its oil to pass into private hands, and struggles to afford anything like the levels of pensions and social benefits that the Norwegian national consensus created. Britain's infrastructure is grossly inadequate to meet the demands of the contemporary world and there is an acute shortage of social and affordable housing.

2. Employee relations

The United States and Britain have experienced extremely conflictual industrial relations. The position of trade unions in America has weakened drastically over the last half century. There are now many American companies that prohibit union membership on the part of their employees. There is a long past history of employee exploitation and violent strikes.

Britain has an extremely conflictual history of industrial relations. Gross exploitation of workers in the nineteenth spurred the formation of trade unions. The power of the trades unions grew massively after the Second World War and the era of Socialist government. In the 1960's and 1970's big unions dominated the national economic agenda, to the detriment of performance. Then the Conservative Thatcher government took on the power of the unions in a series of violent confrontations, deregulating and privatising most of the financial and corporate sectors, thus handing over power to big business and the financial markets. Union influence is now relatively weak, except in the public sector, which is under attack from a right wing government.

The salient fact is that employees in general have lost both power and earnings, in the US since the 1970's and more recently in Britain. The share of wealth going to capital and its servants, top managers has steadily increased.

Sweden

The level of union membership in Sweden is high - at 71% - although it has fallen from its peak of 86% in 1995. There are three main union confederations, LO, TCO and Saco, which are divided along occupational and educational lines, but with considerable co-operation between them.

The key focus for collective bargaining in Sweden is the industry level, although more than 90% of employees have part of their pay determined by local level negotiations, and 8% have all their pay determined locally. The overall level of coverage of collective agreements is high - estimated at 90%.

Workplace representation for employees in Sweden is through the local union at the workplace. There is no other channel. Legislation requires the employer to inform and negotiate with the unions at the workplace before making major changes, and many of the practical arrangements for doing so, which elsewhere in Europe are fixed by law, are left in Sweden to local negotiations.

Employees are represented on the boards of almost all companies with more than 25 employees (Sweden has a single-tier board system.) There are two or three employee members and they account for around one third of board members in most companies. They are chosen by the union and are generally the key figures in a whole range of employer-union relations.

Germany

Codetermination in Germany is a concept with a solid history that involves the right of workers to participate in management of the companies they work for. Known as Mitbestimmung, The modern law on codetermination is found principally in the Mitbestimmungsgesetz of 1976. The law allows workers to elect representatives (usually trade union representatives) for almost half of the supervisory board of directors. It applies to public and private companies, so long as there are over 2000 employees. For companies with 500-2000 employees, one third of the supervisory board must be elected.

There is also legislation in Germany whereby workers are entitled to form Works Councils at local shop floor level.

Netherlands

A fifth of employees (20%) are union members in the Netherlands, and the proportion has been gradually falling in recent years. There are two main confederations, the FNV - the larger of the two - and the CNV, initially divided on ideological/confessional lines, although now with good relations. A third grouping, the MHP, represents more senior staff, although it has recently split.

The vast majority of employees in the Netherlands are covered by collective bargaining, mostly at industry level. However, many large companies negotiate their own deals. Negotiators generally follow the recommendations agreed at national level and recent pay increases have been moderate.

Employee representation at the workplace is essentially through works councils elected by all employees. They should be set up in all workplaces with at least 50 employees and more than three-quarters of workplaces of this size have them. (There are other arrangements for smaller workplaces.) Works councils are not directly union bodies, although union members often play a key role.

Works councils have the right to nominate up to one third of the members of supervisory boards in larger companies - above 100 employees among other things. However, neither employees of the companies nor trade unionists dealing with them can be nominated, so the works council nominees are often distant from employees' day-to-day concerns.

Summary.

There is a massive difference between the conflictual nature of industrial relations in Britain and America and the European co-determination model. Some in the “Anglo” countries have argued that having to factor employees into corporate decision taking is a millstone and drag on effectiveness, but in reality there is absolutely no evidence to back up this assertion. In fact, employee involvement may make hard decisions easier to make and implement.

3. Banking

America and Britain

Banking in America and Britain has been dominated by massive integrated investment banks - although there are regional and local institutions in the US. It is the global “Anglo” banks that were the main cause of the financial meltdown of 2008, although the governments of Britain and America can take a large share of the blame for slack regulation that started in the 1080's and grew ever less effective.

In Britain, there are serious issues related to banking investment, especially in smaller and medium-sized companies. Large companies are subjected to the domineering and short- termist pressures coming from the financial markets in both the UK and US.

Germany

Germany's three-pillar banking sector comprises savings banks, co-operative banks and private banks. Apart from a handful of big institutions, such as Deutsche Bank, Commerzbank and HypoVereinsbank (HVB), which is part of the Italian-owned UniCredit group, the lenders are parochial.

Two of the pillars -the 423 savings banks and 1,116 co-operative banks- have come through the recent crisis with barely a scratch. Each of these sectors already has a system of joint and several liability, which means that no individual member bank is allowed to go bust.

German banks, which work on mutual and co-operative bases rather than for shareholders, are well suited to the mixture of households and small companies (known as the Mittelstand) that they serve. That seems to be borne out by their lending record since 2007. Private banks reduced their medium- and long-term lending to companies and households between 2007 and 2012 in favour of short-term loans; (the savings and co-operative banks increased theirs). It helps, of course, that Germany's economy has been performing well.

The savings banks and co-operative banks provide about two-thirds of all lending to Mittelstand companies and 43% of lending to all companies and households. The Landesbanken, which act as wholesale banks for the savings banks, and DZ Bank and WGZ Bank, which do the same for the co-operative banks, step in to provide more sophisticated services, such as hedging and offshore financing.

Sweden

Handelsbanken: 'Thrillingly boring'

The following is an account of the values of Handelsbanken one of Swedens's largest banks, by its CEO, Mr. Bouvin.

Handelsbanken was the first company Mr Bouvin applied to for a job, in 1985.

"I had no idea about the bank's business model at that stage, but was thrilled to be offered a job," he says.

As luck would have it, he soon realised that he'd landed in a company "whose values coincided completely with my own".

Those values - long-termism, and a philosophy of decentralisation encapsulated in the slogan "the branch is the bank" - seem almost too good to be true in a current banking era of fines, debt crises and outsourced customer service.

But Handelsbanken remained above the fray, emerging with a balance sheet strong enough to make European banking regulators purr with delight.

Even one of its institutional shareholders described the group as "thrillingly boring".

No marketing

Mr Bouvin argues that the group's success - it made £1bn in global after-tax profits for the first nine months of 2013 - is down to the bank's belief in the primacy of customer service and localism.

The branch manager is trusted to make prudent lending and investment decisions based on one-to-one relationships with customers.

"Working in the branch network was the best thing I ever did," says Mr Bouvin. "I flourished building customer relationships, and being empowered to make customers satisfied was really great."

This local empowerment - the apparent antithesis of modern automated banking - is core to Handelsbanken's philosophy, first proposed by the bank's then boss Jan Wallander in 1970.

He persuaded shareholders it was in their long-term interests for the bank to grow organically, using profits, not debt, to fund new branch openings.

And the bank does almost zero marketing because, as Mr Bouvin says: "Our customers don't feel better because they can read the bank's name on a football shirt or on the side of a bus."

This next to no marketing keeps overheads down and return on equity up.

At Handelsbanken returning a share of the profits to long-term staff is also key. If the bank exceeds the average profitability rate of its peers, then surplus profits are put into a fund and distributed to all the staff.

But they can only receive these accumulated benefits when they turn 60, thus encouraging long-term thinking and loyalty.

Some long-serving staff retiring now are receiving individual pay-outs in the region of £1.4m, says Mr Bouvin.

4. The roles of government in economic development

In the “Anglo” free market countries, government has been in retreat for decades. Both British and American governments play a macro-economic role and have considerable influence over fiscal policy, although in Britain fiscal matters have been handed to the independent Bank of England, thus reducing government's direct involvement.

But governmental involvement in industrial investment and social security have both decreased considerably. At least, the amounts spent on social security have shrunk to a very small proportion of expenditure in most European countries. These decreases are driven by convictions that high spending on public services are dysfunctional and “crowd out” investment in the private sector, which is purported to be the dynamo that drives an enterprising economy.

This can be contrasted with Germany, Europe's largest economy.

The Federal Government Role in economic policy

The German federal government plays a crucial role in the German economy, sometimes directly and sometimes indirectly through the effects of other policies on the economy. Unlike the Japanese government, there is no single ministry that attempts to direct industrial governance and competitiveness, but government policy can have wide-ranging effects because of the many offices that play a role.

The three principal figures responsible for economic policy are the chancellor, the minister for economics, and the minister of finance. The three positions have rarely been held simultaneously by members of a single party and are usually divided among two or sometimes three parties. Economic policy therefore has to reflect the interests of at least two political parties, with all that this means in terms of compromise and conciliation. It is impossible for any of the three parties to be in a government with the others without yielding something, and government policy has therefore usually contained a mixture of sometimes contradictory objectives that then must be resolved by compromises within the cabinet.

German social security

The “German model” proved to be a success story and became an archetype for several other countries. One of the pillars of this success was the extensive German welfare system. Today, Germany has one of the most comprehensive welfare systems: 26.7 percent of the country's gross domestic product is channeled into public welfare spending. In comparison, the USA invests 15.9 percent, while the OECD average is 20.7 percent. An all-embracing system of health, pension, accident, long-term care, and unemployment insurance provides protection against the financial consequences of the risks of everyday life. In addition, the welfare lifeline offers tax-financed services such as the family services equalization scheme (child benefit, tax concessions) or basic provisions for pensioners and those unable to work. Germany sees itself as a state that considers the social protection of all its citizens to be a priority.

Sweden

Sweden has a developed diverse manufacturing economy aided by timber, hydropower, and iron ore. These constitute the resource base of an economy oriented toward foreign trade. The main industries include motor vehicles, telecommunications, pharmaceuticals, industrial machines, precision equipment, chemical goods, home goods and appliances, forestry, iron, and steel. Sweden is a highly competitive mixed economy featuring a generous universal welfare state financed through relatively high income taxes that ensures that income is distributed across the entire society, sometimes called the Nordic model. Both central and local government play a large role with other stakeholders in formulation economic and social policy, implementing economic and social programmes, and running some businesses.

SUMMING UP

The post-war struggle between two vastly different socio-economic systems ended with the collapse and fragmentation of the Soviet Union. This was hailed as a victory for democratic freedom in the US and many other countries.

This “victory” added impetus to economic theories evolving in America and Britain. These took flight under Margaret Thatcher and Ronald Regan, who viewed themselves as ideological soulmates. Free Market economics was their template for universal success. Author Francis Fukuyama declared the victory of free market ”democracy” marked “The End of History”.

This over-simple account needs to be enriched by more careful scrutiny of the two opposing systems, which under the surface conceal many nuances. Democratic capitalism broke into two main forms - which can be described as Free Market and Social Market variants.

Free market ideology regards the market as all powerful. In effect, this means least government interference in competition and the free interplay of business. The scope of the state should be restricted to national defence and the protection of private property. Free competition was the best way of enhancing overall wealth and protecting the interests of the public. Markets are self-regulating, and should not be interfered with.

A different model of democratic capitalism evolved in a number of other western countries. This version differed from free market thinking in that it was based on the concept of collaboration rather than raw competition. Government was regarded as a guardian of the overall public interest and in collaboration with other significant stakeholders, a significant player in managing the economy. Co-determination, rather than competition or strife, was the guiding principle in industrial and public affairs.

Outside the sphere of Western influence, other socio-economic types evolved. But a common factor linking all systems is political and economic power and how it is exercised.

How do different types operate?

Free Market Societies

There is increasing evidence to show that societies which tend towards a Democratic Free Market model can show strong overall economic performance, punctuated by instability, with booms followed by busts, and increasingly violent oscillations. The capacity of small elites to use their power for their own benefit undermines the democratic system and thus causes growing inequality. Headline strong economies hide increasingly unhealthy societies.

Centralised political systems, some market freedom

Societies that permit economic freedom combined with centralisation of power in the hands of a self-perpetuating elite can also show strong economic growth, regulated by central government. As power is concentrated in a few hands, the majority are shut out from any significant influence and can be oppressed and exploited. A minority become vastly wealthy, and inequality grows.

“Full Monty” centralisation

Centrally directed societies, lacking any form of democratic influence over socio-economic affairs almost always under-perform, due to bureaucratic inefficiency and market failure. The collapse of the Soviet Union is a classical case. It is interesting that the collapse was followed by a chaotic attempt to introduce the free market pushed by western ideologues - and regression back towards an autocratic centralised system.

Social Market societies

Such societies are founded on collaboration between the most important stakeholders. Whilst there are many variants on the social market model, Sweden is a classical example. Economic and social policy is determined through collaboration between trades unions, employers' bodies, local and central government. Enactment of social and economic policy is often devolved to regional government.

Social Market countries seem to have succeeded more than the others in balancing sound economies with healthy societies.

OPINION

All forms of socio-economic systems can work in specific circumstances, for example, central direction of production may be the best way to run an economy in times of severe threat or crisis. Free market economies can perform strongly for extended periods of time, and the whole populace benefits to some degree in boom times.

But only the Social Market model seems to balance economic success and a healthy Society, supporting the wellbeing of a maximum number of citizens.