Originally published in Scotland 2021.

By Alistair Davidson

Throughout the independence campaign, Nordic Social Democracy was used as a reference point, a political North Star guiding us to a better Scotland: meetings organised by the group Northern Horizons connected Edinburgh audiences to Scandinavian experts on everything from the welfare state to hutting; Scandinavian writers sent an open letter urging Scots to ignore the No camp’s campaign of fear; newspapers even speculated that an independent Scotland might join the Nordic Council.

Where there has been criticism of Scotland’s Nordic dream, it has focused on the high levels of tax in Nordic societies, and whether Scots would be prepared to pay so much. The tax take in Scandinavia is in the range of 40% - 50% of GDP, whereas the 2014 Scottish tax take was 36% of GDP. The incoming SNP Government has pledged not to raise the rate of income tax, although they may freeze the higher (40p) threshold, a gradual tax increase on the rich. Some SNP politicians argue that before raising taxes, Scotland has to raise wages. This is in fact an appropriately Nordic approach.

While taxation is a key part of the Nordic Model, the emphasis placed on it in Scottish debates is - ironically - peculiarly British. It is rarely noted that the UK’s tax system is in fact more progressive than Nordic systems. Nordic tax systems have high rates of VAT, a regressive tax, and even workers below the median wage pay significant rates of income tax. This is politically acceptable because wages are much higher in Nordic countries than they are in Scotland. Addressing low wages, not raising taxes, is the first step towards a more Nordic country.

A disinterest in manipulating the labour market is just one way in which the spectre of Old Labour still haunts Scotland. Old Labour’s memory still limits what we describe as left and right wing. To be left wing is to favour raising tax, monolithic nationalised industries, uncompromisingly militant trade unions, and centralised bureaucracy. This leftism failed for good reasons, many of them internal.

Tax is a good thing, but not all taxes are good at all times. Nationalisation is progressive, but the British left have at times wasted too much energy trying to protect failing industries that might have been better left to fade away. Fighting trade unions are essential, but undermining Labour governments in the 1970s proved to be a mistake. Centralised public ownership may have its efficiencies, but we should remember that in the 1970s tenants were organising against councils for democratic control of their homes.

The SNP often seems more aware of the vital importance of actively shaping markets than the political left outside of the SNP. In a quiet, collaborative manner, the Scottish Government has set about promoting high-value, high-wage industries, reforming industrial relations, and steadily growing community ownership.

The aim of the Scottish Government’s industrial reforms, designed by Jim Mather together with the trade unions and industry, are to foster “modern, co-operative industrial relations.” To British ears this sounds worryingly like the “partnership” approach of the Thatcher and New Labour eras, in which defeated trade unions gave up their traditional adversarial role, arguably weakening their ability to defend wages and conditions. From a Scandinavian perspective, it doesn’t have to be so - in Scandinavia, powerful unions and businesses, acting with enlightened self-interest, have been able at times to secure relative social peace without the unions abandoning their role as advocates of workers’ interests.

Creating a Scottish model inspired by the Nordics will present challenges for us all. The SNP will have to accept that some conflict between employees and employers is inevitable, and that a high wage society requires employees to be empowered to win those conflicts. Scottish business will have to accept paying higher wages, in return for stability and a skilled workforce. Scottish trade unions will have to move away from the old, centralised vision of social democracy, and begin to think more like the Swedish Trade Union Confederation (ILO), which was every bit as interested in shaping markets as nationalising them.

Following World War 2, the Swedish Social Democratic Party (SAP) adopted an economic programme called the Rehn-Meidner Model, named after the ILO economists Gösta Rehn and Rudolf Meidner. A modified form of Keynesianism, it aimed to secure growth, full employment, and economic equality through powerful trade unions and government intervention.

The main plank of the Rehn-Meidner model was full employment. From the end of World War 2 to the Reagan-Thatcher revolution, European governments saw guaranteeing near-full employment as one of their most fundamental duties - so much so that when UK unemployment rose above 2% in 1972, Ted Heath’s Conservative government launched a desperate - and doomed - “dash for growth.”

During the age of Social Democracy, it was widely agreed that government deficit spending could always create growth and employment, and that the resulting debts could be funded with the proceeds of economic growth. The consensus was undone by the 1970s oil shock, which created inflation without growth, and by President Nixon’s dismantlement of the Bretton Woods system, an international agreement that controlled currency values and sought to eliminate trade imbalances. Without the Bretton Woods capital and currency controls, investors could move money out of countries whose politics they disagreed with.

There has been a concerted effort to make us forget that governments can create employment, and to make us accept massive, permanent unemployment. The Polish economist Michał Kalecki predicted these events as long ago as 1943:

“The maintenance of full employment would cause social and political changes … the ‘sack’ would cease to play its role as a ‘disciplinary’ measure.

“Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence … This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.

“But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.” (Kalecki, 1943)

The government can create full employment, but it is not without challenges. The major economic problem with full employment is that workers can always find work, and so can demand wage increases from their employers. Knowing that inflation is 3% this year, a worker will demand a 4% pay rise. If this happens across the workforce, it will drive up costs and prices, next year inflation will be 4%, and workers will demand 5% pay rises. Knowing this, economists often use “inflation” as a euphemism for “wages.” It is much more politically palatable to talk about controlling inflation than it would be to talk about controlling wages. The Governor of the Bank of England, “Steady” Eddie George, gave the game away in 1998 when he said that “lost jobs in the North are an acceptable price to pay to curb inflation in the South.”

The threat inflation posed to full employment policies caused Gösta Rehn himself to say that “socialists must hate inflation.” The Rehn-Meidner model had two strategies for preventing inflation. Firstly, a small amount of unemployment was allowed to exist, with a generous welfare state to prevent destitution. Secondly, and most importantly, wage negotiations took place on a national basis between trade unions and employers. The same wage would be set for the same work across many different companies. In return for this powerful institutional position trade unions practised wage restraint, controlling inflation by deliberately limiting their wage demands.

As Rudolf Meidner later explained, “We rejected the idea that unions should be disciplined by unemployment. Our preference was for collective self-discipline imposed by the union’s own wage policy” (Meidner, 1993)

One consequence was that less efficient companies, paying excess wages to their workers, would be forced out of business. At this point government training and re-employment schemes (active labour market policy) would kick in to prevent unemployment. Meanwhile, more efficient companies would earn excess profits, as trade unions curtailed their wage demands. The excess profits risked concentrating control of the economy into fewer and fewer hands.

Meidner’s solution to the excess profit problem, opposed by Rehn, was a special tax on profits. This tax would be paid in shares, not cash, and the shares would be paid into “wage earner funds” controlled by the trade unions. His intention was to transition from a capitalist market with private ownership of large companies to a Socialist market, where workers had democratic control of their workplaces.

Although the leadership of the SAP had gradually moved away from Socialism, the dream of peacefully reforming towards a democratic economy was always central to the Swedish Model. Gunnar Adler-Karlsson compared the difference between capitalism and Sweden’s reformist Socialism to the difference between absolute and constitutional monarchy: “Without dangerous and disruptive internal fights… After a few decades they (capitalists) will then remain, perhaps formally as kings, but in reality as naked symbols of a passed and inferior development state.” (Adler-Karlsson, 1967).

Meidner and the ILO underestimated how controversial the wage earner funds would be. Swedish industrialists organised to stop them, importing techniques developed in New Zealand. They frightened Swedes with images of a Soviet-style planned economy, and exploited what Meidner would later accept was a mistake - that the funds were controlled by the trade unions, rather than the workers themselves. By the time the wage earner funds were finally implemented the policy had been diluted into worthlessness.

A modern, less controversial alternative to the Meidner Plan might be sovereign wealth funds. Scottish Government economic advisor Mariana Mazzucato is an advocate of these. Mazzucato notes that most basic research is conducted by governments, while profits are retained by private companies who commercialise the technology. Some governments have experimented with retaining a minority equity stake in businesses built on state-funded research and investments from state development banks. Managed by a sovereign wealth fund, just like Norway’s famous oil fund, equity stakes ensure the state receives a fair return on investment, helping to fund the next round of research and economic growth.

If Scotland is to become a Nordic country, we will need strong trade unions, with the power to demand wage increases, but the wisdom to practice wage restraint. We will need something like the Meidner Plan or equity stakes to balance the excess profit problem. Deeply ingrained British habits and ways of thinking will need to be changed. Progressive politics will have to take a little of the emphasis off tax-and-spend and centralised nationalisations, and take much more interest in market manipulation and management. A national consensus will have to be built across the centre-left parties, progressively minded businesses, and the trade union movement.