Lessons from the global credit crisis for social democrats

On December 15, 2008, I gave the 2008 Den Uyl Lezing (Lecture) in Amsterdam, in an establishment named, not inappropriately, the Red Hat (de Rode Hoed).  For those of you for whom the Netherlands is not the invariant centre of your universe, Dr. Johannes Marten (Joop) den Uyl (9 August 1919 – 24 December 1987) was a Dutch politician, prime minister of the Netherlands from 1973 until 1977, as a member of the social-democratic Partij van de Arbeid (PvdA) – the Dutch Labour party.  The title of my presentation was: “Lessons from the global crisis for social democrats”. 

For those of you interested in reading the paper that I based the den Uyl Lecture on, it can be found here.

Some largely irrelevant personal historical and genealogical gumph

I assume I was not invited to give the den Uyl Lecture because of my personal democratic socialist credentials – I have never been a member of any political party and lost any strong sense of identification with a well-defined political ideology decades ago.   I know many of the past and present leaders of the Dutch Labour party and am friendly with quite a few of them.  The same applies, however, to my associations with the Christian Democrat and the Liberal (Conservative) party. 

Family ties are more likely explanation for the invitation.  My paternal grandfather was involved in the 1925 founding of the socialist broadcasting association in the Netherlands, the wonderfully named VARA, an acronym that translates as Association of Worker Radio Amateurs.  

From the end of the 19th century till the 1960s, Dutch society was organised ‘vertically’ in pillars – a phenomenon known as ‘pillarization’ (verzuiling).  The main denominational and ideological groups in Dutch society (roman catholics, multiple protestant denominations, socialists and liberals (conservatives) arranged much of their social, political, cultural (including educational) and personal lives according to a unique model of ‘voluntary apartheid lite’.  The pillars provided services and practical support as well as means for self-identification and group identification.  Schools, universities, hospitals, sports clubs, youth clubs, retirement homes, funeral societies, trades unions, political parties, newspapers, radio and later also television were all organised on a pillar basis.

The pre World War II period was also a period in continental Europe when even the mainstream democratic socialist party was nothing like the airbrushed social democratic parties of today.  It was anti-clerical, mostly atheist, and anti-monarchy. 

My paternal grandfather worked as a bailiff.  Being a bailiff was something of an usual occupation for a socialist in these days.  During period July 4-7, 1934, the ‘Jordaan riots’ took place  in the Jordaan area of Amsterdam (and in other poor quarters of the city).  This was at least in part a response to a cut in unemployment benefits.  Even then, sound finance and invigorating supply side economics had limited electoral and popular appeal during an economic crisis. My grandfather, Red Klaas (the red referred both to the colour of his hair and to his politics) was the only bailiff allowed by the rioters into the blockaded and barricaded areas of the Jordaan to do his work.  It no doubt helped that he had lived close to the Jordaan, on the Haarlemmerplein, from 1923 till 1932.

My own political and ideological upbringing combined the democratic socialism from my father’s side with the Calvinist protestantism from my mother’s side of the family.  This merger of social democracy and Calvinist versions of protestantism has been a feature of the backgrounds of quite a few British Labour Party stallwarts as well.  Methodism and social democracy have been frequent bedfellows, as have Presbyterianism and social democracy.  The current British prime minister, Gordon Brown, is an example of the latter combo.

My father, Harm Buiter, was an international trade union official for much of his professional life.  He was the first secretary general of the European trade union coordinating secretariat (a precursor of the ETUC) in Luxembourg from 1956 and in Brussels from 1958.  From 1967 until 1971 he was General Secretary of the International Confederation of Free Trade Unions (subsumed in the ITUC in 2006), also in Brussels. 

My father and den Uyl were almost exact contemporaries and knew each other well. I, however, barely knew Joop den Uyl personally. I only met him once, in 1966, when I was a teenager in Brussels. During the years that he was the dominant figure in Dutch politics, I lived abroad in the United Kingdom and the United States of America. I knew about him through the media and through my parents, both life-long members of the Dutch Labour Party. It was really only after den Uyl’s death in 1987, that I began to appreciate the influence of his personality and his ideas. 

Although Den Uyl and I were a generation apart, I see much in him that I recognise. We both grew up in Dutch Calvinist families (his was Gereformeerd, mine was Hervormd; both mean ‘reformed’ – don’t ask!) and for both of us the earliest adult political ideology was that of democractic socialism. Den Uyl rejected his Calvinism and became a religious agnostic. I retained my Calvinism and became a political agnostic.

Back to the lecture

Keen, as always, to be of assistance,  I kept thinking of helpful hints or tips for a social-democratic policy maker faced with the current global financial and economic crisis. Are there any special lessons for social democrats from this crisis, or is the learning process just about the same no matter where you reside on the political and ideological spectrum?

I believe that, along with many lessons that apply regardless of political ideology, there are two key lessons it is particularly important for social democrats to learn.

The first concerns the role of the state in the financial intermediation process and in the maintenance of financial stability.

The second concerns the role of private and public sector incentives in the design of regulation.

As regards both the role of the state and the importance of designing proper incentives to influence public and private actions, social democrats are incurable optimists. A central idea in den Uyl’s world view is that of ‘de maakbare samenleving’ – the makable society – the notion that human society is to a significant extent consciously constructed and that government is a key player in that construction.

No-one who participates actively in politics is likely to reject the view that human society is to some degree ‘makable’. I am, however, much more cautious, some might say pessimistic, about the extent to which human society is makable, let alone improvable, and this comes out clearly at various points in this lecture.  To be an optimist is wonderful. To be naive is dangerous. The Heidelberg Catechism’s view of human nature as “… wholly incapable of doing any good, and inclined to all wickedness …” is a useful antidote to an overdose of ‘maakbaarheid’.

Unless these lessons are learnt, not only will thecurrent crisis last longer than necessary, but the next big crisis, following the current spectacular example of market failure, will be a crisis of state ‘overreach’ and of government failure. Central planning failed and collapsed spectacularly in the East. Stultifying state capitalism and overambitious social engineering may well be the defining features of the next socio-economic system to fail after the current collapse of the Thatcher-Reagan model of self-regulating market capitalism with finance in the driver’s seat.

So there we are. Long ago, I used to be a democratic socialist. I sometimes wish I still could be. But I grew up. I saw human nature for what it is (in part by looking in the mirror, of course), wept and became a political agnostic, without illusions, but always hopeful and not yet cynical.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website