Social Capitalism

Photograph from Specimens of Fancy Turning Executed on the Hand or Foot Lathe (1869) | Edward J. Woolsey / Public Domain

Feathers were ruffled at Davos this year when, during a panel on “How to Trust Economics,” a speaker went rogue, accusing economists of being a “tribal clique” who only quote each other and have “blind faith” in models, however disconnected from real events they may be. The critique came not from an activist infiltrator but the European Central Bank president, Christine Lagarde. (Weeks later, presumably to ease office tensions, she tempered her stance, insisting in backhanded apology that she’d love to “become a member of the tribe as well one day.”)  

In their latest book, Capitalism, Inclusive Growth, and Social Protection: Inherent Contradiction or Achievable Vision? (Edward Elgar, 2023), New School professor Mark Setterfield and coauthors Hagen M. Krämer and Christian R. Proaño do their best to resist the tribalism that afflicts not only “mainstream” economics spheres but supposedly “pluralist” ones too. By combining elements of Marx (distributional conflict), Keynes (effective demand), and Schumpeter (innovation), they offer an analysis of capitalism as a restless and evolving system, whose dynamism can be harnessed towards many different political projects. Paying particular attention to the decimation of labor power and expansion of household debt since the neoliberal boom, they set out the building blocks of a new “social capitalism,” anchored by more equitable relations of production to meet material needs. Economics graduate student Anna Pick met with Setterfield to discuss his challenges to some core foundations of economic orthodoxy.     

Anna Pick: What’s the political punchline of the book? 

Mark Setterfield: That, contrary to what Thatcher and Reagan said, there are alternatives. Our lived experience over the last 40 years—this period that we refer to as neoliberalism—is presented like an inevitable, natural inescapable order. We’re arguing that there are viable alternatives and that some of them may well be preferable.     

Pick: At the beginning of the book, you say that there are some economists (including Schumpeter), that have argued these three thinkers (Marx, Keynes, Schumpeter) are incompatible. What was your motivation in synthesizing elements of their theories?

Setterfield: It’s important to understand that you need to get the theory right in order to be able to diagnose and prescribe. I don’t think that policy can be driven by good intentions alone. There has to be an analytical description of the object of analysis—what it is that you are acting on in order to actually conduct policy. So why then develop a theory that is a synthesis? To my mind, there are a lot of good ideas in what we could broadly think of as “heterodox economics.” So many, in fact, that not all of them necessarily fit together logically. If your objective is to come up with a “best fit” description of how something as complicated as capitalism works, then that task invites synthesis, in the hope that it can then be used to change things for the better. What we’re trying to do is to extract elements from Marx, Keynes, and Schumpeter. They’re not obviously compatible sources, but we think that there are elements in the work of all these authors that can and should be combined because the ensemble of the whole actually makes for a better totality.

Pick: What is the “MKS” (Marx, Keynes, Schumpeter) system? Why could it be a useful paradigm for a policymaker to think through?

Setterfield: Briefly, what we’re doing is taking from Keynes the principle of effective demand, the idea that the economy is fundamentally demand-led; from Marx, the concept of distributive conflict; and from Schumpeter, two elements: the focus on technical change and the associated idea of capitalism as evolving through stages or “long waves.” If you bring together “stages” of capitalism, technical change, a principle of effective demand, and distributive conflict, then you’ve got elements of a theory of capitalist dynamics that can be greater than the sum of those parts.

Pick: What is this framework challenging in relation to the neoliberal policy paradigm? For instance, how does it offer an alternative approach to thinking about capitalist equilibrium and uncertainty? 

Setterfield: The orthodox reliance on equilibrium in economic theorizing emphasizes stability and negative feedback resulting in self-correction. What we’re talking about, in this MKS system, is a system that above all else is intrinsically restless, moving, changing—not just changing but evolving, meaning change, sometimes with radical novelty. 

That leads into the second thing that you’ve picked up on, which is how we understand uncertainty as it is faced by all decision makers, whether they’re households, firms, or policymakers. Again, the orthodox understanding of uncertainty is that it’s reducible to calculable risk: different things can happen, but you know what they are, and you also know the probabilities with which they can occur. So your ability to make decisions is limited by the fact that you don’t have a crystal ball, but not so limited that you can’t actually choose courses of action that are demonstrably for the best—according to the sort of calculus as it were of expected utility maximization, or expected profit maximization, and so on.

I’m talking about uncertainty as something that isn’t reducible to calculable risk, where essentially the future is yet to be made. You don’t know what all future possibilities are. You certainly don’t know what their likelihood of occurrence is, even if you can imagine them, but you’re forced to act in this environment of what Keynes and Knight called “fundamental uncertainty,” because so much of what you do is future-oriented. You are acting today in order for benefits that you only expect to materialize tomorrow or later. That insight invites a number of things—for instance, to acknowledge that behavior is more complicated than cost-benefit analysis. 

Hicks made the famous statement that you don’t know the future, and you also know you don’t know the future. You should be self-aware of your own partial ignorance, which means there are many psychological influences on behavior. How confident are you in any decision that you are undertaking? What are your, as Keynes called them, “animal spirits”—your inclination to essentially go for it regardless of your inability to make a definite calculation on net gain or net loss? You can analyze behavior, as well as institutions, norms, customs, without expecting it to be mechanically operative in the same fashion. The economy becomes a more evolving, less predictable historical entity in this vision.

Pick: I think what you’re saying is that that’s always been true of capitalist economies, that there have always been unknown unknowns. What do you think about the claim that we are in a new era of radical uncertainty—of “polycrisis”—in which all kinds of things that have been relatively stable (at least in recent history in the Global North), including inflation, supply chains, and the climate, look fragile and can interact in complex ways. Do we need a new way of thinking about uncertainty in this moment?

Setterfield: I don’t think we necessarily need a new way of thinking about uncertainty, but what you might be pointing to is that we are currently in some kind of period of interregnum: where, instead of there being a settled system of institutions that are creating regularity out of these causal forces of demand, distributive conflict and technical change, the norms—the rules of the game—have to some extent been ripped up by the great recession and financial crisis. New rules have not been reconstructed in order to create the type of regularity that you might associate with what is sometimes called the neoliberal boom (roughly 1990 to 2007), or during the so-called “Golden Age” (after the Second World War to about 1973). This is to say nothing of the possibility of climate crisis, which looms large regardless of any settlement that we can make about demand formation, distributive conflict, and the pace of technical change. 

Pick: Speaking of crisis, what do you consider to be the most important sources of capitalist crisis in the current age? In particular, what is the role of household debt in creating a more crisis prone period of capitalism?

Setterfield: Over the last 30 or so years, you could, at risk of being a little bit reductive, boil it down to inequality, stemming from the systematic disempowerment of labor that we’ve witnessed since circa 1980, which caused real wages to slow relative to productivity growth. People haven’t seen the benefits of increased productivity. That helps you understand a number of things: that the neoliberal boom from 1990 to 2007 was characterized by growing inequality, stagnation of real wages as exemplified by the disconnect between real wage growth and productivity growth, which then in turn led households towards financial markets—households turned to borrowing to finance their consumption. Looking back, that process was brought to an end in the financial crisis because since then, credit markets have been less inclined to help households borrow.

Now the inequality chickens are coming home to roost. Having delayed the effect of stagnating wages by enabling people to take on debt, people are finally experiencing inequality as an inability to consume. And at the same time, working household distress and debt accumulation have become more obvious. This is part and parcel of the discontent that is being propagated in the political sphere—elites redirecting the discontent towards social cultural outlets, including racism, homophobia, Trumpism, to manage the discontent of the economic losers. So you get an important economic aspect here of a theory of the rise of the far right around the globe, as essentially a result of the creation and then breakdown of this debt dependent household. People who are happily going on holiday and buying Christmas gifts for the kids are less likely to be drawn into that kind of antisocial project. 

Pick: Another way to look at it might be that by creating a material floor, you’re also creating the conditions for a different kind of social life to emerge.

Setterfield: That’s nicely put.

Pick: So maybe we can move onto the solutions you propose. First, what do you mean by “social capitalism”?

Setterfield: Some basic forces of production propel the system and help explain its dynamics—and these give rise to specific social relations of production. But there’s the possibility that you can have different social relations of production compatible with the same forces of production. We’re suggesting that, rather than generating a lot of inequality and then trying to offset it by having households accumulate a lot of debt, we essentially have more inclusive growth in the first instance. That’s something that we’ve witnessed before—it’s what used to be called social democracy. This is a much broader project than just this book, involving inequality along, for instance, gender and racial lines, but we pay particular attention to labor markets. We see the disempowerment of labor as a major cause of the current crisis. 

Pick: Degrowth is gaining some traction amongst certain parts of the environmental Left. Why not give up on the idea of growth altogether?

Then the question is: What is the right rate of growth? The answer to that question is difficult. If we’re talking about a zero rate of growth, and if population continues to grow, then we’re literally talking about declining per capita income over time. Is that socially sustainable? It’s not clear. If we were to go for growth that is no greater than population growth, then we’re trying to hold things at a stationary level of per capita income. Then the problem of growth and distribution reduces to the problem of distribution. How do we distribute that income across individuals? Different societies are going to have different sociopolitical problems, depending on how this fundamentally economic problem is resolved. At the end of the day, it is impossible to overlook environmental constraints on economic activity, but it is equally impossible to neglect some very important questions about economic and social sustainability. 

Pick: I’m interested in your choice of words: “inclusive” and “sustainable.” Some people might worry that they’ve become too diffuse. “Inclusivity” can give the impression that everyone can win, that there’s no zero-sum game involved in terms of distribution. What would you say to that critique?

Setterfield: What we’re taking from Marx is the idea of distributional conflict. When we talk about inclusive growth, even as narrowly as we do in terms of income, we’re not suggesting that you will somehow end distributive conflict. I don’t think that’s realistic, possibly not even desirable, if you understand, in the way that Marx did, that distributive conflict is part of what gives rise to some of the technical dynamism of capitalism. The squeeze on profits that can be brought about by rising wages is one of the things that can promote and direct technical change. But there can be structured forms of conflict that produce more equitable, and more sustainable, outcomes.