Compensatory redistribution in the form of the welfare state is not on its own enough to redress the inequalities generated by capitalism.

At the beginning of this debate Poul Nyrup Rasmussen highlighted what several other contributors have agreed is an apparent paradox: the ideology of market fundamentalism lies thoroughly discredited by the failure of its economic project, yet social-democratic parties – ‘as champions of the people and critics of the market’ – seem to be losing ground almost everywhere. Of course the paradox is only apparent, because, as Zygmunt Bauman correctly points out, the reality is that mainstream social-democratic parties have not been seen in these terms for a long time, especially not by parts of society they once regarded as their heartland. (Rene Cuperas makes this point with great clarity in what I think is one of the most useful contributions so far.)

After years of resisting the return of free-market orthodoxy, many social democrats eventually accommodated themselves to it under the banner of ‘new realism’; nowhere more completely than in the UK, where New Labour became an aggressive advocate of financialisation and market primacy. Where scepticism remained, it failed to coalesce into anything resembling a coherent alternative. So, for the most part, the social democrat faces the court of public opinion not as the principled critic vindicated, but as something between an active accomplice and a hapless bystander. The charge is either one of culpability or redundancy.

The good news is that there is no reason why things need remain this way. Political movements shape their own fate through the choices they make, and there is plenty of scope for social democrats to recover lost ground and set the terms of post-crisis politics in Europe and beyond. The democratic left was equally wrong-footed by the Great Depression, albeit mostly for different reasons. Only in Sweden, and to a lesser extent the United States, did it open the way to immediate progressive advance. It wasn’t until after the Second World War, a decade and a half later, that the social-democratic moment truly arrived; although we should certainly not be content to wait that long again.

Of course, the necessary changes will not happen spontaneously. A progressive shift can only be brought about by an intense process of intellectual renovation and political activism. It is here that we ought to be disappointed with the results so far, because the mainstream of European social democracy still appears to be paralysed by confusion and uncertainty. It is beyond Europe that we find the most telling analysis of where we have gone wrong. As the Brazilian social critic Roberto Mangabeira Unger has put it: ‘Social democracy was formed by a retreat. It retreated in its formative period from the attempt to reorganize both production and politics. In exchange for this withdrawal it achieved a strong position within the domain of the compensatory redistribution of income.’ This was the nature of the grand bargain between labour and capital. In exchange for keeping capitalist prerogatives intact, the left would be allowed to build the welfare state.

The crisis of social democracy consists of the fact that globalisation has fractured that bargain and exposed the limits of retrospective compensatory redistribution as a means of promoting social progress, or even of arresting capitalism’s worst excesses. The inequalities of pre-tax wealth and income that are generated by global networks of production and supply are simply too great to be addressed by fiscal measures alone. The sharp decline in the proportion of economic wealth distributed in wages, and the virtual extinction of private-sector occupational pensions, combined with the radical redistribution of the tax burden from rich to poor – all made possible by capital’s new mobility – puts a cap on the ability of social-democratic governments to raise the necessary resources without provoking a sharp backlash from the very people they aim to help. That is why Stefan Collignon’s call to restore mechanisms of social compensation at a European level, although attractive in many ways, falls short of what is needed.

Instead, Unger calls on social democrats to aim once more at a reorganisation of production in order to ‘democratise the market’ and create ‘socially inclusive growth’, so that the economic product can be distributed more equitably at source. This is, of course, a challenge to the third-way belief that the free market should be left to its own devices in exchange for a healthy tax dividend that can be spent on public services. But it is also a challenge to the left, and to Jeremy Gilbert’s assertion that there is only one kind of capitalism and that trying to reform it is a waste of time. Perhaps this is a semantic difference about precisely how we define capitalism, but we can certainly see many different kinds of market economy, both historically and today – markets structured in ways that produce very different patterns of economic distribution and human interaction.

It is onto that terrain that social democracy must now venture. We should look again at the scope for using wage-earner funds and other profit-sharing mechanisms to alter the distribution of growth and reverse declining returns to labour. A few years ago, Robin Blackburn suggested an eminently sensible scheme for using wage-earner funds at a European level to replace vanishing corporate pension provision. That would be a hugely popular cause around which social democrats could rally support. Other things we should aim at include a major expansion of co-operatives and other forms of social enterprise, the democratisation of investment funds to make corporate executives more accountable, and a thorough reform of corporate governance rules to recognise a plurality of interests beyond those of the shareholder.

An essential corollary of this is the need for social democrats to work together at a European level to create the necessary space for social and political innovation of this kind. The European social ethos remains very strong, yet we have to concede that it is weakly represented in the institutions and policies of the EU as they stand. There has, for example, been no real attempt to use the EU’s immense geopolitical presence to alter the terms of globalisation in a progressive direction. That will be necessary if some of the more radical suggestions proposed above are to be seriously explored.

Most of the EU’s external policy tools are feeble, but the one uniquely powerful asset it possesses is its role as gatekeeper to the world’s largest single market. The European market is simply too big for capital to ignore or play off against other markets. Social democrats should be aiming to use that leverage to set the terms of trade and rebalance economic power away from global corporate interests and towards the citizen. Yes, we should want an open global economy, not least as a way of allowing the poorest countries to trade their way to prosperity. But free trade is not an end in itself. There is no reason why we should accept labour exploitation, social dumping, surplus hoarding, speculative capital flows, or any of the other maladies we associate with the Washington consensus model of globalisation.

These are the sorts of ideas around which social democracy could become relevant to the concerns of European voters in the post-crisis age. But politics will not stand still while we debate them. The longer we wait, the more likely it is that voters will find their answers in populist and reactionary solutions that succeed only in taking European society backwards. We have a responsibility to get this right and to do it sooner rather than later.