Decline of Democratic Pluralism

by David Korten

from the book

When Corporations Rule the World

published by Kumarian Press



The Case of Sweden

Sweden is known among the Western industrial countries for its success in achieving prosperity and equity through mixing elements of both capitalist and socialist models within a strong framework of democratic pluralism. Sweden's experience offers instructive insights into the dynamics of pluralism and the consequences of globalization.

Few realize that industrialization came a hundred years later to Sweden than to England. And until the years following World War II, Sweden remained an extremely poor country. In the countryside, many people lived on small farms that, given the poor soil and climate, barely provided them a living. Some died in famines or emigrated. Many others, even well into this century, lived in serf-like conditions on large estates. Illiteracy was widespread. In the late 1940s, it was still common for a family to live in an apartment consisting of one room plus a kitchen (toilet facilities were shared with other families). Even the Swedish royal house was relatively poor by the standards of most of its European cousins.

Sweden's modern success was a creation of the Swedish Social Democratic Party, which melded and sustained a national consensus that kept it in power for forty-four years, from 1932 to 1976.5 The Social Democrats built Sweden's elaborate social welfare system. Their wage policies brought working people into the middle class and created a substantial degree of wage equity and greater equity between the wages of women and men than in any other capitalist country. The Social Democrats placed a high priority on maintaining full employment. To encourage Swedish transnational firms such as Volvo, Electrolux, Saab, and Ericsson to concentrate their operations in Sweden, the applicable real effective tax rate was much lower for profits generated in Sweden than for those generated abroad.

An alliance between the major Swedish industrial corporations and organized labor served as the party's political base and supported the centralized and peaceful negotiation of wages and working conditions y national union and employers' organizations. This alignment produced significant benefits for both big labor and big capital. The arrangement had important structural flaws, however, that eventually destabilized it. One was a tax system that subsidized larger firms that were expanding and investing at the expense of small-scale and family firms. This led to increasing concentration and monopolization of ownership of the Swedish economy. Although wage policies stressed equality within the working class, the gap between the working class and hose who controlled capital grew substantially. At the time, this was considered the price of maintaining the industrialists' commitment to he coalition. In the end, it brought about the coalition's destruction.

When the first shock of rising oil prices hit in 1973-74, the resulting economic slowdown brought a fiscal crisis and triggered popular resistance to higher taxes. During this same period, Sweden was opening its economic borders and becoming a more active player in the international economy. This loosened the bonds that tied capital to local labor and weakened national labor movements.

In the early stages of globalization, the outward expansion of Swedish firms generated new employment at home, and the objectives of the two sides of the alliance did not significantly conflict. But once Sweden's transnationals began to define their own interests as global ether than national, the alliance between blue-collar workers and the owners of capital began to disintegrate. By this time, Sweden's highly educated white-collar workers outnumbered blue-collar workers, and "he younger generation was taking the welfare state for granted- Further weakening the political base of Sweden's Social Democrats.

The growing contradiction between government support for the global expansion of Swedish transnationals and the need to create employment and rising real wages at home could no longer be sustained. In 1976, the Social Democrats lost the election to a three-party center-right coalition government.

When the Social Democrats returned to power in 1982, they were a chastened party intent on promoting policies that would allow Sweden's industrialists sufficient profit margins on domestic investment to keep them "believing in Sweden," a phrase coined by P. G. Gyllenhammar, the chairman of Volvo. Maintaining a belief in Sweden meant increasing the share of the national product going to profits compared with wages so that Sweden's industrialists would find it worthwhile to invest at home. This was accepted as the price of maintaining full employment at a time when unemployment elsewhere in Europe was running at 8 to 9 percent or higher.

The resulting policies pushed corporate profits to previously unimaginable levels. With so much more money in their pockets than could be absorbed by productive investments, Swedish investors turned to speculation, driving up the prices of real estate, art, stamps, and other speculative goods. To stop the upward spiral, the government loosened monetary controls so that the excess funds could spill over into Europe. Money flowed out at such a rate that it helped push real estate prices in London and Brussels to record highs. As the speculative bubble fed on itself, the quick profits offered by speculation drained funds away from productive investments within Sweden. When the bubble in Swedish real estate finally burst, the Swedish banking system lost $18 billion. The bill was picked up by the state and passed on to the Swedish taxpayers.'!

During this period, Sweden's major industrialists played an active role in dismantling the "Swedish model" that had been constructed by the Social Democratic alliance. The Swedish Employers' Federation rejected centralized wage bargaining, which had been one of the model's cornerstones, and allied itself with the Conservative Party. It also bankrolled think tanks espousing a corporate libertarian economic ideology and conducted a major public-relations effort praising individualism and the free market while denouncing the Social Democratic state as oppressive and inept. This led to a weakening of the political apparatus of the state and its ability to define long-term policies.

In 1983, Volvo chairman P. G. Gyllenhammar stepped in to fill the void by forming the Roundtable of European Industrialists, made up of the heads of the leading European transnationals, including Fiat, Nestle, Philips, Olivetti, Renault, and Siemens. The purpose was to define long-term policies for the state and to serve as an international lobby to press for their implementation.

By the end of 1992, the richest 2 percent of Swedish households owned 62 percent of the value of the shares traded on the Stockholm stock exchange and 23 percent of all wealth in the country. While the average Swedish household grew poorer from 1978 to 1988, the richest 450 households doubled their assets. Unemployment had been below 3 percent when the Social Democrats were first voted out of office. It rose to 5 percent in 1992 and was projected to reach 7 percent, even though another 7 percent of the workforce was already engaged in counter-cyclical retraining programs and public employment projects.

From the beginning, the Swedish model contained the seeds of its own destruction. It built a powerful financial elite whose interests were far removed from those of the majority middle class. It bred a sense of welfare complacency among the Swedish people. It failed to install in the younger generation an awareness of democracy's need to be continually re-created through constant citizen vigilance and political activism. And its prosperity had been built on the unsustainable exploitation of Sweden's natural resources of timber, iron ore, and hydroelectric power.

As the elites gained more financial power, they were able to pyramid their claims on the resources of society without making a corresponding productive contribution. As the economic borders were opened, the jobs of those who depended on earning wages for doing productive work became hostage to those who controlled capital. The more the government, in its desperation to keep jobs at home, gave in o the demands of the financial elites, the greater the amount of money hat passed into their hands, the greater their power to dictate public policy in their own interest, and the greater the stresses on the social fabric. The parallels to the U.S. experience ... are striking.

The Swedish experience reveals a lesson of fundamental importance: democratic pluralism cannot long survive extreme inequality.

The Need for Creative Balance

In our complex modern world, a society ruled by a single sector is inevitably dysfunctional. The institutions of the civic, governmental, and market sectors each have their necessary roles in serving the needs of a well-functioning society.

Civic Sector. The civic or citizen sector is composed of a vast array ~f alliances of people acting to demand their rights and to fulfill their responsibilities as citizens. Such alliances include, among others, the many representational organizations that serve personal-interest constituencies-such as labor unions that represent workers, medical associations that represent doctors, or groups such as the NAACP that represent African Americans. They also include the countless voluntary organizations that organize around shared values to advance a public-interest commitment.

In their political roles, civic organizations supplement political parties as varied and flexible mechanisms through which citizens define and articulate a broad range of interests, meet local needs, and make demands on government. In their educational roles, they provide training grounds for democratic citizenship, develop the political skills of their members, recruit and train new political leaders, simulate political participation, and educate the broader public on a wide variety of public-interest issues. In their watchdog roles, they serve, long with the press, as checks on what Larry Diamond described as the relentless tendency of the state to centralize its power and to evade civic accountability and control." The civic sector is the foundation of democratic societies. To a substantial degree, citizen organizations and networks are replacing the increasingly corporate-dominated press in the function of public watchdog.

Although it is civil society that grants the mega-institutions of government and the market their power, the institutions of the civic sector are themselves more limited in their ability to amass concentrations of political and economic power. Unlike the institutions of government and the market, which derive their power from their size and financial resources, the strength of the civic sector is found in the number and diversity of its organizations and the speed and flexibility with which they form complex and shifting alliances around shared values and interests. Through such alliances, civic organizations can achieve powerful scale and leverage.

The cacophony of competing voices within an active civil society can be deafening. However, the ability of civic organizations to form alliances around clearly defined public-interest agendas gives them a distinctive role as catalysts of values-based social innovation-defining, articulating, advocating, and building constituencies for positions that may eventually find their way into the political mainstream.

Governmental Sector. Government is the one sector to which society gives the authority to use coercive power in the public interest. Society cedes to government the power to confiscate assets and to deprive a person of physical liberty and even life. In a democracy, this authority is freely, if reluctantly, granted by the citizens-who have the right to withdraw it at their discretion. It is the legitimate exercise of coercive power that gives government its ability to meet essential needs to maintain public order and national security, collect taxes, and reallocate society's resources to meet public needs-such as the need for sufficient equity to maintain the legitimacy and viability of society's institutions.

Government also has important incapacities. Because of its ability to command resources, it is insulated from market forces and the discipline those forces impose. Thus government is generally less efficient in the production of goods and services than are organizations whose survival depends on their ability to compete in the marketplace. Government's competence is in reallocating wealth-an essential social function-not in creating it.

Governments are political organizations and respond to political power. Even democratic governments serve the public interest only when political power is widely shared within a strong and politically active civil society.

Market Sector. The market sector properly specializes in functions involving economic exchange-producing goods and services for sale in response to market demand. The market has a distinctive competence in creating new wealth through value-added activities and is society's primary source of essential economic entrepreneurship and technological innovation.

However, markets don't tell people with substantial incomes to consume no more than their rightful share of ecosystem resources. They don't tell retailers not to sell guns to children. They don't tell producers that their wastes must be recycled. They don't give priority in the relocation of scarce resources to the basic needs of those with little or no money before providing luxuries for those who have great wealth, indeed, in each instance, they generally do exactly the opposite.

Markets respond to money and financial values. They do not disinguish between profits earned from the efficient production of goods and unearned profits gained by exercising monopoly power, eternalizing social and environmental costs onto the community, privatizing common property resources, or creating artificial demand through marketing campaigns for unnecessary and even harmful products. In other words, markets are blind to many of the needs of healthy human societies and often encourage behaviors exactly contrary to fundamental human interests-and even to the needs of the market itself.

Furthermore, when market power becomes concentrated in very large corporations, these acquire a distinctive form of coercive power that civil society never intended them to have-the power to deprive people of heir means of livelihood. This power represents a social dysfunction hat only a democratically accountable government can correct.

There is no substitute in a complex modern society for the market ~s an efficient mechanism for setting most prices, motivating productive activity, and processing routine economic transactions. However, although markets are useful institutions for implementing public priorities, they are inappropriate institutions for setting them.

Democratic pluralism melds the forces of the market, government, and civil society to maintain a dynamic balance among the often competing societal needs for essential order and equity, the efficient production of goods and services, the accountability of power, the protection of human freedom, and continuing institutional innovation. This balance finds expression in the regulated market, not the free market, and in trade policies that link national economies to one another within a framework of rules that maintains domestic competition and favors domestic enterprises that employ local workers, meet local standards, pay local taxes, and function within a robust system of democratic governance.

The order of precedence among the three primary sectors is fundamental to the healthy and balanced function of society. A civic sector without government and an organized market is anarchy. This is why civil societies create governments and organized markets. Civil society is, however, the first sector. The authority and legitimacy of all other human institutions flow from it. Since government is the body through which citizens establish and maintain the rules within which the market will function in the human interest, government is appropriately viewed as the second sector. The institutions of the market appropriately function as the third sector.

Globalizing national economies and giving free reign to corporate power invert this order. The market becomes the first sector, government becomes subordinated to corporate interests, and the ability of civil society to hold government accountable to the public interest is seriously weakened. When the market reigns, the corporation is king.

Playing by Different Rules

One of the most basic rules of market economics is that participants I in market transactions must bear the full costs of their decisions-in addition to reaping the benefits. In practice, market players commonly go to considerable lengths to capture the benefits of success for themselves and pass the costs to others. This creates a tension between what efficient markets require and what self-interested market participants are prone to do.

Market players are attracted to the corporation as a form of business organization specifically because the legal nature and structure of the corporation tend to exempt both the corporation and its decision makers from accountability for many of the costs of their activities. Actual shareholders, the real owners, rarely have any voice in corporate affairs and bear no personal liability beyond the value of their investments. Directors and officers are protected from financial liability for acts of negligence or commission by insurance policies paid for by the corporation. The generous compensation of top mangers bears little relation to performance, and they are rarely prosecuted for the illegal acts of the corporation. Acts that would bring stiff prison sentences or even death for individuals result-at worst-in small fines for corporations that are generally inconsequential in relation to corporate assets. Civil liability suits pose perhaps the greatest threat to corporate malfeasance, but even here, corporations can marshal massive legal resources in their own defense and they aggressively seek legislation further limiting their liability; if they lose, insurance companies may pick up the tab. It is with good reason that William M. Dugger characterizes the corporation as "organized irresponsibility."

Unlike real people, who are all eventually rendered equal by the grave and whose fortunes are subject to confiscation by inheritance taxes, corporations are able to grow and reproduce themselves without limit, "living" and amassing power indefinitely. Eventually, that power evolves beyond the ability of any mere human to control, and the corporation becomes an autonomous entity unto itself, using its power to "create its own culture, using the lens of career to focus corporate culture on profit, size, and power.'' Those who serve the corporate interest are well rewarded and derive substantial personal power from their positions. But in the end, their power is conferred by the corporation, and they serve the corporation's interest at the corporation's pleasure.

No real person can begin to match the political resources that a large corporation is able to amass in its own behalf. Corporations may lack the right to vote, but that is a minor inconvenience, given their ability to mobilize hundreds of thousands of votes from among their workers, suppliers, dealers, customers, and the public.

The corporate charter remains a useful social innovation that allows us to meet needs that could not be met through other forms of organization. However, like most technologies, it is subject to abuse and has a tendency to take on a life of its own quite apart from the human interest. Left to their own devices, corporations colonize markets and defeat the very mechanisms that theory tells us make the market work in the human interest. We might consider corporations to be anti-market institutions. Thus it is fully appropriate that citizens view corporations with the same skepticism as the early American settlers did, granting corporate charters judiciously, setting clear rules for their function, and holding them accountable for their actions. Most important of all, we must get corporations out of politics.

The owners and managers of corporations have the full rights of any citizen-in their capacity as citizens-to participate in defining public goals and policies. However, corporations themselves, as non-human legal entities created to serve the public interest, have no place using their resources to influence the processes by which citizens define the public interest and set the rules of corporate conduct. Corporations are not people. They are alien to the ways of life and blind to the complex non-material needs of human societies. They should be wholly barred from any form of political participation-a point elaborated in Part VI.

A corporate charter represents a privilege-not a right-that is extended in return for the acceptance of corresponding obligations. It is up to the people, the members of civil society-not the fictitious persona of the corporation-to define these privileges and obligations. We are learning through harsh experience that the survival of democracy depends on holding firmly to this principle.


When Corporations Rule the World