Social Democrats and NeoLiberalism: A Case Study of the Australian Labor Party (original) (raw)

Social Democrats and Neo-Liberalism: A Case Study of the Australian Labor Party

Ashley Lavelle
Griffith University

Abstract

Social democratic parties have been agents in the neo-liberal transformation of public policy in recent decades. There has been debate about the reasons why social democrats have embraced market policies, with particular emphasis given to ideological trends, globalisation and electoral factors. This paper aims to shed further light on this debate by examining the case of the Australian Labor Party (ALP), which was a prominent social democratic exponent of neo-liberalism during its time in office in the 1980s and 1990s. In Labor’s case, the primary cause of the shift from pledging social reform and interventionist government to neo-liberalism was the lower levels of economic growth that followed the end of the post-war boom in the 1970s. Social democrats rely on strong economic growth to fund redistributive policies. Thus when recession occurred in the 1970s it eroded the economic base to Labor’s programme. While this paper focuses on the story of the ALP, it may provide some answers as to why social democrats elsewhere have adopted neo-liberalism.

Neo-liberalism has dominated public policy-making since at least the 1980s. Social democrats have often been important players in the global market revolution. By examining the case of the Australian Labor Party (ALP), this paper sheds light on the debate about why social democrats have taken this policy direction.

As with much of the international literature, common explanations for Labor’s 1{ }^{1} support of what is known in Australia as ‘economic rationalism’ revolve around the role of ideology, globalisation or electoral motivations. While these explanations are not without merit, a more important factor was the collapse of the postwar boom in the early 1970s, which removed much of the revenue base for the interventionist policies Labor had previously pursued. Because government intervention was considered much less viable, it is suggested, this eventually gave rise to market-based approaches.

This emphasis on the post-war boom’s collapse is supported by evidence showing that Labor’s retreat from a high-spending ‘programme’ in 1975 was a direct response to the recession, in particular to the reduced economic growth wrought by the eclipse of the post-war expansion. This retreat foreshadowed Labor’s embrace of economic rationalism in the 1980s and 1990s. Explanations that focus on ideological trends, electoral motivations or globalisation as causes of this shift are less persuasive because of their inability to account for the abruptness of Labor’s policy reversal in office.

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1. (1) Political Studies Association, 2005.
   Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA ↩︎

Because social democrats elsewhere are likely to have been similarly affected by the collapse of the post-war boom, the conclusions drawn in this paper about the ALP have potentially wider relevance.

Social Democrats and Neo-Liberalism

Neo-liberalism remains the dominant policy-making approach internationally, and is often associated with the ‘Washington Consensus’, a term devised by John Williamson to describe a neo-liberal agenda in 10 policy areas, including, among other things, fiscal austerity, free trade, foreign direct investment, privatisation and deregulation (Callinicos, 2003, p. 2). Its Australian version, ‘economic rationalism’, normally refers to a policy-making approach that favours markets over government intervention (Carroll, 1992, p. 7), and which pushes policies similar to those comprising the ‘Washington Consensus’ (see Pusey, 2003, p. 1). However, Jupp uses the term more broadly in the area of immigration to describe a policy whose success or failure was measured by economic criteria, including ‘budgetary savings, efficient and effective administration, and outcomes which would increase the national wealth’ (Jupp, 2002, p. 142). For the purposes of this paper, neoliberalism and economic rationalism are used interchangeably, and it is argued that the ALP made early steps towards neo-liberalism in 1975 both in the narrow and broad senses described above.

Political support for the ‘Washington Consensus’ varies (sometimes greatly) from country to country, but recent decades have witnessed a trend internationally towards the neo-liberal model of government (Kane, 2004). As part of this trend, social democratic parties since the 1970s have eschewed tax and social policies aimed at improving equality in favour of markets (Kitschelt, 1994, p. 3; Pennings, 1999, p. 743). Common explanations for the embrace of neo-liberal policies by social democrats - as well as politicians more generally - include ideological trends, globalisation and electoral factors. For instance, the dominance of free-market ideology was stressed by the late Pierre Bourdieu, who spoke of politicians ‘[l]ocked in the narrow, short-term economism of the IMF worldview’, and of the ‘work of “new intellectuals”, which has created a climate favourable to the withdrawal of the state and so submission to the values of the economy’ (Bourdieu, 1998, pp. 5-6). Fellow French academic Susan George views neo-liberalism’s hegemony as ‘the result of fifty years of intellectual work, now widely reflected in the media, politics and the programs of international organisations’ (George, 1997). Many others also see ideological shifts as having played a part, if not the leading one, in the shift to neo-liberalism. 2{ }^{2}

Many writers suggest that traditional social democratic policies are untenable in light of the policy-limiting consequences of economic globalisation. 3{ }^{3} Thus globalisation, which is commonly assumed to mean a reduced role for government, might be seen as a contributor to the adoption of ‘small government’ policies. One weakness of this position has been exploited by Paul Hirst, who gathers empirical evidence revealing an exaggeration of the degree of global economic integration to deny the footloose nature of capital or that governments are unable to implement independent macroeconomic policies (Hirst, 1999, pp. 84-6). As we shall see in the case of the ALP, it was not globalisation that was the primary cause of the shift

to neo-liberalism, but the dramatic changes in economic circumstances following the end of the post-war boom.

Economic and socio-economic factors other than globalisation are also cited in the literature as important influences on social democrats’ adoption of neo-liberalism. Green-Pedersen, et al. suggest that the goals of full employment and the welfare state had become incompatible, which, combined with a sharpening of the employ-ment-equality trade-off, ‘clearly demanded new directions both at the ideological level and at the level of policy’, the end result being the market-oriented ‘Third Way’ advocated by British Prime Minister Tony Blair and his German counterpart Gerhard Schroeder (Blair and Schroeder, 1999; Green-Pedersen et al., 2001, pp. 309-10). In explaining the dissolution of the ‘Keynesian consensus’, EspingAndersen cites factors as various as the impossibility of demand-led growth in one country as well as the erosion of 'the conventional male breadwinner family … fertility is falling, and the life course is increasingly ‘non-standard’ (Esping-Andersen, 1996b, p. 3). More to the point and closer to the argument laid out by the author below, Henderson suggests that many developed countries adopted neo-liberalism not because of shifting ideological influences, but as a result of the ‘malfunctioning or ineffectiveness within the system’ that emerged in the 1970s (Henderson, 1995, pp. 72-3).

Electoral factors also rate a significant mention in the literature. Shipman, although positing a number of explanations for neo-liberalism’s ascendancy, prefers the ‘silent majority’ thesis, which holds that politicians such as Reagan and Thatcher tapped into a mood among voters who had become disenchanted with ‘featherbedded state-sector workers and state-supported non-workers [who] were living a little too well at other people’s expense’ (Shipman, 1999, pp. 431-2). Similarly, Gamble and Wright suggest that Britain’s New Labour embraced neo-liberal policies in part to improve their electoral prospects (Gamble and Wright, 1999, p. 4). Stewart (2002, p. 72) meanwhile writes that ‘social democratic and Labor parties had to espouse the cause of smaller government if they wished to win or to retain office’ (see also Green-Pedersen et al., 2001, p. 309; Hutton, 1999, p. 98; Kitschelt, 1994, p. 6; Pennings, 1999).

What a brief survey of the literature reveals is that common explanations for the embrace of neo-liberal policies by social democrats, and sometimes other politicians, include ideological trends, globalisation and electoral factors. As we shall see later, there may be cause for thinking that these were not the main factors in social democrats’ turn to neo-liberalism. In the case of Labor, similar explanations have been offered for its adoption of economic rationalism. These are critically examined below.

The Australian Labor Party (ALP) and Economic Rationalism

The ALP’s pursuit of economic rationalist policies is generally believed to have commenced in the 1980s and 1990s under the Hawke and Keating Labor governments (1983-96). For some, this period represented a sharp break with the interventionist and public-sector oriented approach of previous Labor administrations, most

recently the Whitlam government (1972-5) elected to power in December 1972 (Maddox, 1989). 4{ }^{4} Central to Whitlam’s platform was heavy federal public spending on areas such as health, education and urban and regional development (known as the ‘programme’). 5{ }^{5} While it was a ‘mildly reformist’ executive that sought no radical altering of the social order (Wilenski, 1980, p. 52), when compared to the neo-liberal Labor governments of the 1980s and 1990s, the Whitlam administration often attracts praise from economic rationalism’s opponents (Hocking and Lewis, 2003). When the upper house of parliament refused to pass the elected government’s budget, the latter was dismissed in November 1975 by the Queen’s representative, the governor-general. 6{ }^{6}

Although these events provoked much constitutional and political debate about the democratic worth of Australia’s parliamentary system, in the ensuing period before its return to government in 1983, the Labor leadership concluded that the Whitlam government had contributed in part to its own downfall as well as the country’s economic problems (see below) by trying to do ‘too much, too soon’, and consequently the party revised significantly its plans for social reform (Lavelle, 2003, pp. 99-140). From 1983 under the leadership of Bob Hawke and then Paul Keating (1991-6), Labor implemented many policies along economic rationalist lines, including tariff cuts, the floating of the Australian dollar, the privatisation of key government utilities, fiscal austerity, a liberalisation of foreign investment regulations and a tightening of rules governing welfare eligibility.

A common explanation offered for Labor’s economic rationalism under Hawke and Keating is the increased support since the mid-1970s for neo-liberal ideas. Michael Pusey, who has been one of the most influential exponents of this view, argues that ‘economists within the [federal] bureaucracy [may] have corralled the reformist and economically oriented Hawke Labor government into a narrowing and increasingly exclusive commitment to an economic rationalism’ antithetical to ALP tradition (Pusey, 1991, p. 7). Pusey’s approach has been subject to criticism (for example, Goldfinch, 1999, p. 16). Yet, many share his view that ideological shifts shaped Labor’s economic rationalist stance during the 1980s and 1990s. 7{ }^{7}

The ALP’s move to the right in the 1980s and 1990s is sometimes seen as motivated in part by electoral concerns (Battin, 1992; Hollier, 2003, p. 421; Kelly, 1992, p. 20). Jaensch sees it as an adjustment to the erosion of Labor’s traditional bluecollar worker base and the embourgeoissent of society (Jaensch, 1989, pp. 60-4), while Scanlon views it partly as a response to falling public support for communitarian policies (Scanlon, 2001, p. 491).

As in the international literature, there is also a tendency amongst commentators to attribute Labor’s retreat from traditional social democratic policies to the policylimiting effects of globalisation. 8{ }^{8} Labor politicians themselves have been amongst those who have interpreted neo-liberalism in this way (for example, Kerr, 2001, pp. viii, 4, 6; Latham, 1998, p. 37; Tanner, 1999, p. 94). This position has gained some support from other writers such as the influential political journalist Paul Kelly (1999).

Other economic forces are also seen as influencing the shift in policy approach. For instance, Scanlon rejects the notion that the change was ideologically inspired. He

nominates ‘administrative overload’, whereby government became bogged down by greater responsibilities without a commensurate rise in resources to meet them, falling commodity prices and trading arrangements between other countries adverse to Australia, as factors driving a ‘more limited approach to government’ under Bob Hawke (Scanlon, 2001, pp. 491-2). Manne, among other things, mentions the ‘deepening mood of economic and cultural pessimism’ that set in during the 1970s (Manne, 1992, pp. 49-50). Meanwhile, Easton and Gerritsen suggest that Labor’s turn to neo-liberalism was a ‘response to a changing international economic policy agenda’. But they argue that it also fitted the circumstances’ requirement for ‘greater flexibility’, and that the ‘demands of internationalisation’ compelled such a shift in policy (Easton and Gerritsen, 1996, p. 23; see also Kelly, 1992, p. 19).

Miscellaneous political explanations can also be found in the literature. For instance, Paul Kelly cites a wide range of factors including, among other things, Hawke and Keating’s need to match the Machiavellianism of their conservative rivals (Kelly, 1992, pp. 19-33). Barrett writes of the ‘tabloidisation’ of the political process as one factor in the lack of visionary policies in Australia since Whitlam’s era (Barrett, 2003, pp. 405-6), while Hollier points to the ‘enforcement of a hegemonic [negative] interpretation of the Whitlam legacy’ in the corporate-owned media (Hollier, 2003, p. 414).

What these different explanations have in common is their emphasis on factors other than reduced economic growth after the post-war boom. It is certainly the case that in the late-1970s there was an ideological shift in favour of the New Right in Australia (including, among other things, free-market enthusiasts and libertarian political thinkers), who above all sought reduced government intervention in the economy (Sawer, 1982a). However, as an overall explanation for the rise of neo-liberalism, it is not convincing, because it raises the question as to why such ideas came to have influence when they did. It was the collapse of the post-war boom that generated a climate more hospitable to neo-liberal ideas, internationally (Callinicos, 2003, p. 2; Swank, 2002, pp. 234-5), and in Australia (Castles et al., 1996, p. 9). Sawer argues that it was both reaction against Whitlam’s policies and the inability of Keynesianism to deal with the combination of inflation and unemployment from 1974 that promoted the ascendancy of the New Right and the turn to reduced government intervention as a solution (Sawer, 1982b, p. 1).

The suggestion that globalisation was the main driver of Labor’s shift to neo-liberal policies is mistaken, for neo-liberal policies of deregulation and freer trade themselves in large part facilitated globalisation (Weeks, 2001, p. 281). It is true that the negative reactions of global financial markets can wreck governments’ policy programmes (Eiley, 1994; Grahl, 2001, p. 8), but social democrats in power succumbed to similar pressures long before globalisation (Callinicos, 2001, pp. 23-8). As with ideology, this explanation cannot account for the abruptness of the Whitlam government’s retreat from interventionist and reformist policies in 1975 (see below).

Similarly, while there is some evidence that Labor politicians in the 1970s and 1980s believed less interventionist policies to be electorally rewarding (see Lavelle, 2003, pp. 131-2), there is little proof that the sudden shift in Labor’s policies in

1975 is explicable in such terms. A more compelling explanation lies in the effects of the post-war boom’s collapse, on which Labor’s redistributive policies had been largely based.

The End of the Post-War Boom

The post-World War Two period was perhaps unique in the history of industrial capitalism for its expansionary character (Hobsbawm, cited in Callinicos, 1999, p. 227). Even capitalism’s most trenchant critics could not deny its positive impact on employment and living standards (Kidron, 1970, pp. 11-2). The pattern was largely mirrored in Australia (Bolton, 1970, p. 283), where the boom featured long years of consistent high economic growth: any slow-downs that did occur were mild and viewed as errors of economic management rather than a natural functioning of the system (Whitwell, 1986, p. 3; Windschuttle, 1979, p. 19). Influential economists proclaimed the end of the ‘business cycle’ (cited in Harman, 1984, p. 10), and high unemployment was considered banished to history through the application of the ideas of the British economist John Maynard Keynes (Stewart, 1967, pp. 251-2).

When the boom officially ended in 1974 (Strangio, 2002, p. 285) with the worst economic slump since 1945, the changes ushered in were of an epochal order. The International Monetary Fund’s (IMF) managing director reported in 1975 that the falling output and rising unemployment were ‘unprecedented in the post-war period as to both magnitude and duration’ (cited in Hayden, 1977, p. 7). Like many other countries, Australia in 1974-5 suffered declining growth, high inflation and rising unemployment (Brezniak and Collins, 1977; Dyster and Meredith, 1990, p. 221). Although in hindsight there were signs in the early 1970s of the immanency of the boom’s collapse, the looming depression was not foreseen at the time of Whitlam’s election in 1972 (Walsh, 1979, p. 17; Whitlam, 1977a, p. 204), and any concerns seemingly had been addressed (Lloyd and Clark, 1976, p. 85; Young, 1979, p. 76). The boom’s end also saw full employment, in existence for almost three decades, depart the scene: between mid-1974 and early 1975 the unemployment rate rose, on a seasonally adjusted basis, from 1.5 to 4 percent (Boehm, 1979, p. 30; Willis, 1980, p. 89). The combination of high inflation, low economic growth and rising unemployment (‘stagflation’) contrasted with previous slumps, which had been characterised by deflation, or falling prices (Bell, 1997, p. 91).

As was the case internationally, it was realised in Australia by the end of the 1970s that things would not return to ‘normal’ (North and Weller, 1980, p. 1; Walsh, 1979, p. 169). The dramatic deterioration in economic conditions from 1974 onwards, in particular the markedly lower levels of economic growth both in Australia and internationally, is shown in Tables 1-3 below.

The end of the post-war phase produced considerable economic and political confusion. According to Alan Day of the London School of Economics, the crisis was so severe as to demand a ‘rethink [of] the whole nature of our economic and monetary system …’ (cited in Barraclough, 1974, p. 14). Traditional Keynesian measures, such as public sector demand stimulation, budget deficits and loose monetary policy, proved incapable of restoring previous growth and employment levels. The

Table 1: Australia’s Economic Performance, Pre- and Post-1974 (Percent)

Notes: GDP is the annual average, calculated from 1960; inflation uses the Consumer Price Index (CPI) calculated from 1953; and unemployment is calculated from 1953.
Source: Bell, 1997, p. 88.

Table 2: Australian and World Economic Performance, 1960s-1990s (Annual Average Percent)

Note: The inflation figure for the 1980s and 1990s excludes interest.
Sources: Gruen and Stevens, 2000, p. 3; IMF, 2001; Thurow, 1996, p. 1.

Table 3: Economic Growth Rates for Six Major Nations

Note: This table shows annual percentage increase.
Source: Kotz, 2001, p. 94.

inexplicability of stagflation in Keynesian terms constituted an ‘anomaly’ in the sense described by the scientist Thomas Kuhn, leading to a paradigm shift (Kuhn, cited in Hall, 1993, pp. 284-5; Sawer, 1982a, p. 1). In fact, Keynesian policies of demand management had little direct part to play in the high, stable growth rates of the post-war years (Harman, 1996, pp. 23-5). A more convincing explanation for the post-war boom points to the very high levels of military spending prompted by the cold war, which had evening-out and stimulatory effects on the world economy (Harman, 1984, pp. 75-121; Kidron, 1970, pp. 48-64). Even nations without especially high rates of arms spending such as Australia benefited from the stability provided to the world system as a whole. Keynesian policies were attempted in any systematic fashion only once the crises began in the mid-1970s (Harman, 1996, pp. 23-5). Their failure to deal with the crisis largely explains why Keynesianism subsequently fell out of favour with most economists (Blinder, 1988, pp. 278-9).

The end of the boom vindicated Marxist critiques of the inherently unstable and anarchic nature of capitalism, tendencies which cannot be overcome by state intervention (for example, Harman, 1984). 9{ }^{9} However, because this was not a tenable position for most mainstream economists, initially, monetarist ideas filled the vacuum created by the failure of Keynesianism. Based on the ideas of economics professor Milton Friedman, monetarism stressed the importance of reducing the money supply in order to lower inflation. This entailed reductions in public expenditure, because these involved increases in the money supply (Scruton, 1982, p. 304). Although monetarism subsequently fell somewhat out of vogue when it failed to prevent recession in the late-1970s and early 1980s (Harris, 1983, p. 88), neo-liberalism - which retains monetarism’s free-market stance - continues to dominate public policy today (Callinicos, 2003, p. 2).

Labor and the End of the Post-War Boom

Although there had been glimpses of neo-liberal policies under the Whitlam government in earlier years - as in the unilateral 25 percent tariff cut in 1973, which was an attempt to stem rising inflation and make Australian industry more efficient (Whitlam, 1985, p. 192) - the first major signs of a longer-term shift to economic rationalist policies occurred in 1975 in response to economic crisis. These signs were in fact visible the previous December, when the government reacted to the recession by deferring a 500500\500 500 million company tax payment involving around 64,000 companies, and by doubling the tax deduction for the depreciation of plant and equipment (Kelly, 1976, p. 77). In January 1975, the government retreated further over the introduction of a capital gains tax and new taxes on company cars (McDougall, 1975, p. 4). The government also established an expenditure review committee prejudiced against any further increases in public spending (Wood, 1975, p. 9).

While these were more a sharp response to economic slump than proof of conversion to neo-liberal ideology hostile to high levels of taxation or public spending, they constituted a shift in the government’s policy approach. Paul Kelly described this as ‘the most dramatic reversal in economic policy in the shortest possible time’ (Kelly, 1976, p. 59). Another press commentator remarked: 'The

Government of reform has been transformed into a Government of laissez faire’ (McDougall, 1975, p. 1). According to Strangio, a consensus had been gathering in the government that ‘market discipline, in the form of a rise in unemployment, was the only way to check Australia’s inflationary spiral’ (Strangio, 2003, pp. 363−4)363-4).

The national biennial ALP conference (the party’s most sovereign decision-making body) of early 1975 also reflected, according to Ormonde (1981, p. 200), ‘a historic change in Labor philosophy’. Whitlam’s address to conference, while insisting that the programme would not be jettisoned, spoke of the ‘special difficulties [the recession created] for a democratic socialist party … [W]e find ourselves now in a position of seeking ways of restoring profitability’ (cited in Rydge’s, 1975, p. 35). The beginnings of a move to neo-liberalism were evident in the decisive defeat of a motion that sought a strengthening of the public sector in favour of a resolution emphasising the restoration of profits in the private sector (Bowers, 1975, p. 6; The Age, 1975, p. 5). The policy shift could be seen in a number of other conference decisions, including a partial retreat from the centralist inclinations of Whitlam in favour of a more devolutionary relationship with the States (Kelly, 1976, p. 89; Reid, 1975, p. 14). Writing for the Australian Financial Review, Robert Haupt noted how ‘depleted is the Party’s drive towards fundamental social reform in Australia’, and he suggested that the party were ‘less willing to interfere with the existing distribution of power in Australian society’ than at any time in the previous decade: ‘Terrigal will go down as the conference of compromise, accommodation and back-down’ (Haupt, 1975, p. 1). The significance of this ‘back-down’ lay in its retreat from the reformist and interventionist policies implemented when Labor first came to power. While not all of the policy decisions taken bear the imprint of neo-liberalism (see Lavelle, 2003, pp. 135-6), the conference as a whole can be seen as part of the beginning of Labor’s abandonment of reformist policies that pre-empted the turn towards market policies.

A more significant indicator of Labor’s shift in office was the 1975-6 budget handed down by then treasurer Bill Hayden, which brought to an end Labor’s ‘expansionist phase’ (Whitwell, 1986, p. 216). The neo-liberal orientation of the budget was brought out in its overriding emphasis on public sector restraint. Spending in most areas increased at a rate lower than inflation (Kelly, 1976, p. 235), while cuts in real terms were made to areas such as urban and regional development (Ackland, 1975, p. 5). The budget’s twin aims were to cut spending and to curb inflation (Davidson, 1975, p. 9). Strangio argues that it ‘heralded the arrival in Australia of neo-liberal economic government’ (Strangio, 2003, p. 364). One journalist used the term ‘economic rationalist’ as early as 1976 to describe cabinet supporters of Hayden’s budget (Oakes, 1976, p. 125). In his delivery, Hayden stated:
[T]he key-note of this Budget is consolidation and restraint rather than further expansion of the public sector.

On the economic front, inflation is the nation’s most menacing enemy.
… We are no longer operating in that simple Keynesian world in which some reduction in unemployment could, apparently, always be purchased at the cost of some more inflation. Today, it is inflation itself which

is the central policy problem. More inflation simply leads to more unemployment (House of Representatives Hansard [HRH], 19 August 1975, p. 53; italics added).

Whitlam claimed that the budget struck a ‘balance between welfare and economic responsibility’, he promised bipartisanship on the question of reducing ‘the rate of growth of government spending’, and he described the Government’s aim as producing ‘an environment conducive to economic growth’ (Whitlam, 1977a, pp. 207-8, 210). This language would be considered economic rationalist in the broader sense described by Jupp (see above). Barrett’s (2003, p. 409) comment that Whitlam’s response to the rise of ‘market fundamentalism’ was ‘creative’ thus not only ignores the empirical evidence, it avoids Whitlam’s own role in the ascendancy of market economics.

Labor and Policy-Making after the Post-War Boom

The ideological decline of Keynesianism had major implications for the ALP: its orthodoxy had allowed Labor to avoid having to choose between mainstream economics and state intervention to raise living standards (Strangio, 2002, p. 39). When in opposition during the late-1970s and early 1980s, Labor extended the partial steps taken towards neo-liberalism in government. It became widely accepted in the party that Keynesianism was ill-suited to these ‘new circumstances’. Whitlam argued in 1976 that ‘old-fashioned remedies would not work as they had once done’, and that the ‘current economic problems are of a peculiarly novel and stubborn kind’ (Whitlam, 1976, pp. 4-5). Another Labor Member of Parliament, Ralph Willis, declared that ‘the ability of governments to influence economic behaviour by traditional economic tools of budgetary and monetary policies is growing weaker and weaker’ (HRH, 14 October 1982, p. 2046). Apparently influenced by the work of James O’Connor (1973), Jones’ colleague, Brian Howe, attributed the economic crises in the 1970s to a ‘fiscal crisis of the state’, which overloaded government with fiscal ‘burdens that it cannot possibly bear’ (cited in ALP, 1981, p. 66). This comment implied that government had to reduce some of its ‘burdens’. Furthermore, if Labor believed that government’s ability to determine events had weakened, it would be inclined to look to market-based solutions.

With hindsight, what seems to have happened is that Labor’s initial response in government to the recession was a precursor to the party’s eventual neo-liberal evolution. While at the time Labor might have seen its public-sector restraint as temporary, the continued low levels of economic growth in the 1970s and 1980s (see Tables 1-2 above) meant that in government it continued in the vein first established in office in 1975. Thus the year 1975 can be seen as a turning point in the commencement of a gradual shift on the part of Labor towards neo-liberalism.

It is not hard to see why: by depriving the state of the large amounts of surplus revenue necessary to fund social reform, the end of the post-war boom threatened the party’s raison d’etre of improving living standards through state intervention. Thus Whitlam told the 1977 national ALP conference that the party’s reforms would have to wait for an improvement in the economic climate:

The growth economy in the fifties [sic] and sixties was both the means and the justification by which Labor could go to the electorate with promises of social reform through an expanded public sector … The economy in the seventies is a different story … We have to moderate our social goals both for the sake of the economy and for the sake of the programs themselves … (Whitlam, 1977b, pp. 7-8; emphasis added).

When Whitlam was elected five years earlier he stipulated that the Programme’s fruition depended on ‘a framework of strong uninterrupted growth’ (cited in Strangio, 2002, p. 261). Labor’s aim, Whitlam recalled, was ‘to finance our new programs from growth. But worldwide inflation and recession frustrated this objective’ (Whitlam, 1977a, p. 204). Elsewhere, he lamented Labor’s failure to achieve power in 1969, which would have granted him an additional three years of growth in which to implement his reforms (Whitlam, 1978, p. 32). The Programme’s dependence on economic growth was reflected in Whitlam’s comment that his government’s introduction of free tertiary education could not have been undertaken in the worse economic conditions of 1978 (Whitlam, 1978, p. 28). One ALP delegate to the party’s 1981 national conference went further by saying that the economic crisis ‘undermined the whole basis of the sort of broad reform programme that the Labor Party has so frequently attempted to advocate in the past …’ (Robinson, cited in ALP, 1981, p. 16).

Whitlam’s conclusion that Labor would need henceforth to moderate its objectives because of the changed economic circumstances was widely shared in the party leadership. Bill Hayden, who succeeded Whitlam as leader in 1977, warned the 1979 ALP national conference that the ‘economic and political climate that incubated the Whitlam years of reform have [sic] simply gone’, meaning that ‘now is not the time for the visionary reform programmes of earlier years’ (cited in ALP, 1979, pp. 350-1). He also stated elsewhere that reform had to be paid for either ‘through increased revenue, or [you] limit yourself to what economic growth will allow for … [which would be] small in the years of the near future’ (cited in McGregor, 1979, p. 7).

Labor’s decision to curtail its ambitions for reform reflected the constraints imposed on a social democratic party operating in a capitalist economy. As Head and Patience explain, because a ‘reform government’s programme is likely to be very expensive’, in the event of an economic downturn there are ‘few opportunities for expensive new reforms, [so] a Labor government is obliged to become more moderate’ (Head and Patience, 1979, p. 5). Thus Bill Hayden declared in 1978 that ‘[e]conomic growth is necessary for us to be able to do all things we wish in the field of Aboriginal Affairs, Social Welfare, the Arts and many other areas’ (Federal Parliamentary Labor Party, 1978, p. 16).

Labor theoretically could have chosen to ignore the changes in economic circumstances and continued to pledge major reform. However, to finance its programme in a period of economic crisis would have required finding revenue from additional sources other than economic growth, such as increased corporate taxation or cuts to big spending items such as defence. Such options are far more likely to generate establishment opposition in tighter commercial conditions, and would

necessarily have challenged the logic of capitalism. Instead, historically, Labor in office has responded to economic crisis by scaling back its programmes, or worse still, implementing policies injurious to many of its constituents. 10{ }^{10}

It would be a mistake to deny altogether the role of electoral factors, ideological shifts, and, to a lesser extent, globalisation, in Labor’s embrace of neo-liberalism (Lavelle, 2003, pp. 131-4). However, only the collapse of the post-war boom, and specifically the much lower levels of economic growth recorded after 1974, can explain the abruptness of Labor’s policy shift while in government. Goldfinch reminds us that, while economic factors may explain the reason for change, they do not necessarily explain ‘why certain policies are adopted rather than others’ (Goldfinch, 1999, p. 3). Yet, a neo-liberal stance, or one advocating smaller government, logically flowed from Labor’s belief that the economic crisis ‘undermined the whole basis of the sort of broad reform programme that the Labor Party has so frequently attempted to advocate in the past …’ (Robinson, cited in ALP, 1981, p. 16). If government was no longer capable of providing the solution, if it had become ‘overburdened’, and if public-sector restraint was viewed as necessary to address economic problems such as inflation, it was just a short step to looking to the market.

Arguably, the failure to return to the conditions of the post-war boom underlie Labor’s continued embrace of neo-liberalism. Recently, Labor’s new federal leader Mark Latham promised to limit ‘the size of government. Too much spending, too much bureaucracy is bad for the Australian economy’ (Latham, 2004). Such statements need to be understood in the context of the continued weakness of the Australian and international economies. Despite hype about the success of the US economy in the 1990s, economic growth levels in most western countries did not reach anywhere near those achieved during the 1950s and 1960s (see Table 3 especially above). Kidron notes that the famed ‘Goldilocks’ US economy of the 1990s (‘not too hot, not too cold’) managed to post an average annual growth rate of just 2.2 percent, compared to 3.5 percent and 4.5 percent during the 1950s and 1960s, respectively (Kidron, 2002, p. 92). The commitment by modern Labor leaders to fiscally austere platforms thus has much to do with the restrictive economic circumstances in which they operate.

This is not to say that only changes in the economic environment can explain social democrats’ current predilection for neo-liberalism. Clearly, there has been an ideological shift in favour of the market. Yet, this has largely been a response to political events. As we saw above, the collapse of the post-war boom and the failure of Keynesianism created a vacuum that was filled, first by monetarism, and later by neo-liberal ideas. More recently, in the aftermath of the fall of the Berlin Wall and the dissolution of the Soviet Union, Francis Fukuyama’s argument that these events heralded the ‘end of history’ and a triumph for the free market resonated with political elites (Callinicos, 2003, p. 1). Social democrats have had difficulty coming up with an ideological alternative to global free market capitalism since 1991 (Emy, 1993, p. 18). Mark Latham commented recently that since ‘the fall of the Berlin Wall we’ve [social democrats] had trouble redefining ourselves’ (Latham, 2003, p. 12). The result is that even parties such as Labor, for whom the market was once seen as an object in need of control and regulation,

now accept Margaret Thatcher’s famous dictum that there is no alternative (Lavelle, 2004).

The Case Study’s Implications for the International Debate

The analysis presented above has implications for how we view the move to neoliberal policies on the part of social democrats in countries as various as New Zealand, France, Italy, Spain and Sweden (Kelly, 1992, p. 31), not to mention New Labour in Great Britain, particularly under the leadership of Tony Blair (Lavalette et al., 2001). Because this case study involved just one country, its conclusions cannot be extended too far. Nevertheless, there is no reason why the negative effects of economic crises on the funding available to the ALP to finance reform would not be felt by social democratic parties in other countries. Like Labor, other social democrats lost the post-war luxury of not having to choose between orthodox economics and government intervention to raise living standards (Scharpf, 1991, p. 23).

For instance, in the case of the French Socialist Party’s implementation in the early 1980s of a variant on Thatcherism, this was less a case of them ‘being forced to their knees by international capital’ (Piven, 1991, p. 9) than a product of the Socialists governing in a period when annual economic growth averaged 2 percent, compared to 6 percent in the years 1950-73 (Ross, 1991, pp. 71-3). The widely held view that Sweden’s generous welfare provisions are no longer ‘affordable’ (Ramia, 1996, p. 64), if not its replication of the ‘international trend towards liberalisation, deregulation, decentralisation and competition’ (Vandenberg and Dow, 1991, p. 27), is unintelligible without the background of the lower rates of economic growth achieved since the end of the post-war boom, and their consequent effects on state finances. According to Paul Pierson, globalisation has had modest negative effects compared to factors such as ‘slower economic growth [which] impedes the growth of wages and salaries, on which the revenues of the welfare state heavily depend’. Pierson goes so far as to say that stagnating service-sector productivity and lower economic growth post-1973 ‘probably go a long way towards explaining the current predicaments of welfare states’ (Pierson, 1998, pp. 544-5).

The precise timing and manner of the ALP’s shift to neo-liberalism no doubt differs from that of other social democratic parties elsewhere (see Scharpf, 1991). It is also important to note that social democrats did not all pursue the same kinds of policies and styles during the post-war period (see Pierson, 2001, pp. 39-63). Yet, the generic objective of all social democrats - of ‘checking the outcomes of markets in the interest of those who are disadvantaged’ (Pierson, 2001, p. 62) - would have suffered grievously from the deterioration in economic growth levels after the post-war boom.

Conclusion

Prominent explanations for the embrace of neo-liberalism by social democratic parties include ideological influences, globalisation and electoral factors. Observers in Australia have attributed similar factors to Labor’s economic rationalist policy

stance during the 1980s and 1990s. This case study shows, however, that the most important factor in Labor’s retreat from interventionist policies was the marked change in economic circumstances in the mid-1970s. The collapse of the post-war boom deprived the ALP of the economic basis to the ‘programme’, which had been predicated on high economic growth rates. Only these economic developments can account for the suddenness of Labor’s volte face in government in 1975, which in turn was a precursor to a fuller rapprochement with free markets in later years.

In a sense, Labor was not forced to abandon reformist policies: it could have opted to pledge cuts to big spending programmes like defence, and to increase taxes on the wealthy and the corporate sector. However, Labor has historically abandoned reform in the face of economic downturn, and in this case it was true to form.

Because the case study involved just one country, its conclusions cannot be extended too far. However, there is some evidence that other social democratic parties which embraced neo-liberalism - although at somewhat different times and to different degrees - did so for similar reasons, something which should not be surprising given that economic crises greatly restrict the options available to reformist parties committed to social change.

The continued dominance of neo-liberalism within the ALP, but also arguably other social democratic parties as well, can thus be seen partly as a result of the underlying crisis that has afflicted the world economy since the late 1960s. Aside from any restrictive effects of globalisation, without a return to the economic growth levels of the post-war boom - a highly improbable prospect given the uniqueness of that period (Harman, 1984, pp. 75-121; Kidron, 1970, pp. 48-64) - it is unlikely that social democratic parties will again implement expansionist policies reminiscent of that era.
(Accepted: 3 February 2005)

About the Author

Ashley Lavelle, Department of Politics and Public Policy, Griffith University, Nathan 4111 Queensland, Australia; email: A.Lavelle@griffith.edu.au

Notes

The author thanks the anonymous referees of the Political Studies journal for helpful comments and criticisms on an earlier version of this paper.
1 The term ‘Labor’ throughout this paper refers to the Australian Labor Party.
2 MacEwan, 1999, pp. 3, 11; Piven, 1991, p. 18; Gray, 1998, p. 23; Swank, 2002, p. 25; Hutton, 1999, p. 98 .

3 Esping-Andersen, 1996a, p. 256; Gamble and Wright, 1999, p. 2; Gray, 1998, p. 6; Hutton, 1999, p. 98; Kitschelt, 1994, p. 7; Piven, 1991, p. 9.

4 This position has been the subject of much debate. See, for example, Johnson, who argues that there is a significant degree of continuity between early Labor governments and the Hawke and Keating governments (Johnson, 1989).
5 For a brief sketch of the Whitlam government’s record see Edwards (1976).
6 Although Australia is independent of Britain with the governor-general usually playing the role of a mere figure-head, the position retains considerable powers under the federal constitution enacted when Australia became a federation in 1901 (Singleton et al., 2003, pp. 31-5).

7 Barrett, 2003, pp. 405-6; Carroll, 1992, pp. 10, 12; Carroll and Manne, 1992, p. 1; Hollier, 2003, pp. 421-2, 428-32; Jaensch, 1996, p. 153; Kelly, 1992, p. 19; Kerr, 2001, pp. 62-3; Manne, 1992, p. 50; Scott, 2000, pp. 80-1; Stretton, 1992, p. 163.

8 Easton and Gerritsen, 1996, p. 23; Goldfinch, 1999, p. 3; Kelly, 1999; McMahon, 2002, p. 22.
9 Based on figures in IMF (2001).
10 The reduced levels of economic growth in the 1970s compared to the 1950s and 1960s reflected a decline in the rate of profit enjoyed by businesses on an international scale (Kidron, 2002, pp. 88, 90). Marx argued that a decline in the rate of profit was a law of capitalist accumulation. There are factors ‘countervailing’ the tendency towards a lower rate of profit, including arms spending, increased exploitation of the workforce and economic crises themselves, which have the effect of cheapening the cost of capital and paving the way for a new period of expansion (see Harman, 1984). While such factors can offset the tendency for the rate of profit to fall for a time - as arms spending did during the post-war boom - they cannot overcome the factors driving the longer-term trend.
11 Witness the Scullin Labor government’s adoption in 1931 of the wage and pension cutting Premier’s plan in the aftermath of the Great Depression (Denning, 1982).

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