Abstract
This article describes the ascension of neoliberal economic ideas in the macroeconomic establishment in Denmark. Based on a systematic analysis of documents from the Danish government and the Economic Council from the 1970s to the early 2000s, the article traces the development of the economic ideas and policy instrument that dominate the analytical process of the Danish macroeconomic establishment. The article applies a Gramscian-inspired framework to track the gradual and uneven process under which neoliberal economic ideas became common sense in the Danish context. This framework challenges some of the assumptions of the ideational focus of much constructivist literature, and offers an alternative analysis focused on the legitimating role of economic ideas. As much of the ideational change took place after policy adaptions to international economic developments, the Danish case provides little support for the theory of the causal power of ideas. Rather, it seems as though economic models and ideas are imported as ‘after the fact’ legitimations of changes in policy.
Keywords
Introduction
The late 20th and early 21st centuries were characterised by the global spread of a programme of market liberalisation (Blyth 2002; Harvey 2007; Mudge 2008; Palley 2004), a development that also spread to traditionally social-democratic countries in Scandinavia, with a turn towards fiscal orthodoxy (Mudge 2018; Ryner 2003; Stahl 2018). This article will offer an empirical investigation of how this development occurred in Denmark, through a historical document study of how and in what form neoliberal ideas came to dominate in the central parts of the Danish macroeconomic establishment inside and outside of the state apparatus. The long-term development of the macroeconomic discussion in the Danish policy arena is documented through an analysis of the theories, models and methods applied by the Ministry of Finance (MoF) and the Academic Advisory Committee of the Danish Economic Council (DEC) in the period 1970–2004. The article focuses on the role of high neoliberalism, before the advent of the 2008 crisis, and traces how, even in the context of Scandinavian social democracy, neoliberal ideas reached the status of common sense.
By exploring the historical development from the crisis of Keynesianism in the 1970s to the early 2000s, the article traces the gradual hardening of a neoliberal consensus in the Danish macroeconomic establishment. While relatively linear in direction, the process was not smooth and free of contention. Instead, we see a highly uneven and contradictory introduction of different waves of liberalisation, where new policy instruments and goals are sometimes implemented before the theoretical justification has gained traction. This uneven process of the formation of a new orthodoxy speaks against a simple ‘causal power of ideas’-approach to liberalisation in Denmark, and points towards the ideological role of economic ideas and theory.
To conduct this investigation, this article will apply a Gramscian-inspired framework to trace the constitution of a set of liberal economic ideas as general common sense in the Danish context. Distinguishing between a strategic and legitimating role of ideas, the article argues that market liberal ideas played a role in sustaining and justifying the liberal turn in Danish economic thinking, rather than a strategic role in initiating the process of change. In this legitimating role, neoclassical economic theory played a central role as the justification and legitimation of the main outlines of policy. It furthermore supported the formation of a sort of common sense, within elite circles, that constrained the scope of legitimate policy debate.
The article goes through several steps. First, the overall theoretical approach of the analysis is presented in section ‘Analysing economic ideas’. This is followed by a methodology section that lays out the sources and mode of analysis. In the analysis, section ‘Historical development’ deals with the main contours of the shifts in common sense that take place in the period, including the chronological and institutional character of this development through the decades. The article concludes with a more general theoretical discussion of the overall role of ideas in the historical trajectory of Danish economic liberalisation, in section ‘Conclusion’.
Analysing economic ideas
One of the most salient debates in the discussion around the dominance of neoliberal policies in recent decades addresses the role of economic ideas and theories (Blyth 2002; Cahill 2013; Clift & Tomlinson 2012; Mirowski 2013). Special emphasis has been placed in recent years on the role of professional economists as producers of a certain kind of authoritative knowledge and expertise that has been central in the liberalisation of economic policy (Backhouse 2009; Fourcade 2009; Fourcade & Babb 2002). 1 The focus of this article will be on the development of economic ideas and analysis in and around the state. Through the use of the Gramscian analytical framework outlined below, the article will place the development in economic expertise in a broader societal context, and analyse the way and extent to which economic ideas have played a role in the development of the neoliberal turn in the Danish economic policy establishment.
Neoliberalism is, of course, inherently a slippery concept, with a complicated history, that is used in different, sometimes conflicting ways in the research literature (Boas & Gans-Morse 2009; Flew 2014). This article will not contribute substantially to this discussion, but aims instead to provide a historically grounded study of how neoliberalism ‘goes local’ (Ban 2016) in the Scandinavian context, and to use this historical case as the basis for a discussion of the some of the more general questions regarding the political influence of economic ideas.
Neoliberalism, as understood in this article, is not seen as a unitary policy platform where all countries converge towards the same model. Rather, with inspiration from Jamie Peck (2010), it should be seen as a varied and inherently unfinished project of ‘neoliberalisation’, where different hybrid models are developed and imported to different settings, and adapted to the local context.
Strategic and legitimating functions of ideas
Any coherent political-economic regime needs a grounding in a set of causal claims, perceived to be true. In macroeconomic policy, these ideas are naturally drawn from the dominant economic theory at the time. Economic science has played a central role in the policy realm in the period since the post-war era because it provides a credible and authoritative description of economic problems and instruments for solutions that draw both legitimacy and perceived neutrality from their origin in academia.
Indeed, there has always been something inherently ideological about the field of macroeconomics. Gramsci’s (2003 [1971]) notion of hegemony is that the particular interest of a group is successfully presented as the general interest (p. 145). In this context, macroeconomics proper has been quintessentially ideological since its inception in the post-war years. Both in its Keynesian and neoclassical variants, the very field of macroeconomics promises the possibility that the state, through the correct set of growth-inducing policies, can create a positive-sum game that transcends political divisions in the nation. In the presentation of a national economy, with the growth of gross domestic product (GDP) as the central goal of economics, there is a tacit assumption that there is one national interest.
Inspired by Radhika Desai’s (1994) work on Thatcherism, I will argue that it is possible to differentiate between the two rather different roles economic theory can play in the process of the formation of policy: the strategic and the legitimating.
In the strategic functions, theories are used as plans or blueprints that deliver solutions or lay out new institutional orders. This is often connected to moments of crisis, where old institutions are seen as non-functioning, and new institutional orders have to be built, while coalitions of parties, class factions and social groups are being redefined.
The other function is legitimating, justifying the policy of the state and presenting it as rational and legitimate to the population as well as the international world system, comprising private market actors as well as states and international organisations. Theories in this way function as means of structuring the justification of the given social order; an essentially ideological function of presenting the institutional order as effective and delivering equitable and just results.
In operating with the strategic-legitimating distinction, it is important not to take this as a distinction between true motivations and external propaganda. Instead, legitimation – that is, formulating the policies of the government in such a way that they appear acceptable to the surrounding world – is one of the most central outcomes of macroeconomic policy. This not only includes legitimation to the wider public, but also to the business sector, and the owners and managers of capital. It is a crucial function for any government to be able to present policies that are considered to be coherent, effective and legitimate. This is important in electoral terms, to survive politically, but in a capitalist economy, it also matters that the owners of capital are on board with the policies, so as to ensure a sufficient level of investment and avoid capital flight.
Construction of common sense
If such a programme can be formulated and supported by sufficiently powerful social forces in a society, it can take the form of an ‘elite common sense’. Here, I use the Gramscian notion of common sense; that is, the set of ideas that are taken for granted and accepted as unproblematic truth (Gramsci 2003 [1971]: 198–199). Evan Watkins (2011) describes this situation in this way: ‘Common sense also becomes a material force insofar it imposes parameters of constraint on what is possible politically in any given moment’. But where Gramsci’s notion of common sense is connected to popular common sense, the same dynamic can be observed in elites. Economic ideas and paradigms, when they enter the political realm, are rarely directed at a popular audience, but rather at the level of the decision makers, managers, bureaucrats, ideologues and administrators who make up the governing and ideology-producing sector of society. If such an economic programme or paradigm can be formulated and is supported by sufficiently powerful social forces in a society, it can take the form of ‘elite common sense’.
Elite common sense is a set of assumptions that does not cover the entire spectrum of debate but sets the limits of what are considered to be valid arguments in the given settings, thereby shaping the scope of political action. Kees van der Pijl (1989) describes how this happened to the Keynesian theory in the post-war period, where the writings of Keynes and other academics were merged into an integrated concept that not only satisfied the preferences of politicians, economic statesmen, and academics, but also could provide capitalist rule with a transcendent formula [. . .] the intellectual legacies of Keynes, Streit, and many others finally merged into a self-evident ‘realism’ and lost their academic particularity. (p. 9)
Later, after the crisis of the 1970s, a new set of common sense was gradually instated with a merger of liberal policies and neoclassical economics. Huw Macartney (2011) defines this new form as ‘“neoliberal common sense”, predicated in the first instance on (positing) a causal link between pro-competitive reform and economic growth’ (p. 109). An approach based on the legitimating effect of economic ideas and the formation of common sense allows a way of understanding the development and significance of economic ideology in societal processes without assuming an idealist approach to the causal primacy of ideational development over economic or geopolitical factors (Cahill 2013). The establishment of a paradigm or ideology as common sense (in either the elite or popular form) can be seen as the conclusion of a successful process of depoliticisation (Burnham 1999).
Case and methodology
This article represents a single case study on the formation of neoliberal hegemony in a national context, with a focus on tracing the development of ideas and common sense through historical document analysis. The timeframe from the 1970s is determined by the subject matter, in the sense that there exists a relatively broad consensus that the global emergence of neoliberal ideas had their roots in the crisis of the 1970s (Blyth 2002; Harvey 2007; Pedersen & Campbell 2001; Stahl 2019b). Whether neoliberalism has been resilient or in terminal crisis after the 2008 financial crisis lies beyond this article’s scope, and the analysis therefore stops before the emergence of the crisis. The specific year, 2004, is chosen because it was the last year that the finance ministry published the ‘finansredegørelse’, before the publication was discontinued.
The Danish macroeconomic establishment
In order to gain a comprehensive understanding of the ideational development in the period of neoliberalism, it is necessary to consider the specific set of institutions making up the macroeconomic establishment in Denmark (see Stahl and Henriksen 2014). Historically, this has been composed of the government, primarily the MoF, and the research divisions of the employer- and business organisations, mainly the Danish Federation of Industry (DI) and the trade unions, primarily through the economic research council of the TUC (AE-rådet) (Asmussen 2007; Due & Madsen 2012; Jensen 2008). Another central player is the Danish Economic Council (DEC), comprised of the country’s most prominent macroeconomists. The Council is a formal state institution, and its advice is featured prominently in the public debate as well as in the central administration. At the same time, the Council has a large degree of autonomy. The Ministry of Economy is the formal head, but since 1969, the board has been de-facto self-perpetuating in its appointments (Kærgård 1996; Stahl 2019a).
There are some characteristics of the Danish macroeconomic establishment that are of particular relevance to this article. First, independent think tanks have a very limited role, except for the research centres directly connected to the interest group organisations mentioned above. Until the formation of the liberal free-market think tank CEPOS in 2005, there was no effective presence in terms of think tanks. This sets Denmark apart, not only from countries such as the United Kingdom, where think tanks have played a major role in the formation of macroeconomic opinion (Desai 1994; Hay 2001), but also from neighbouring Sweden (Blyth 2001; Ryner 2003).
The second important characteristic is the very high level of consensus among the main economic actors. Through the corporative and negotiated system, a general system of consensus building has been created in Denmark, where we often see general agreement over the broad lines of economic strategy and macroeconomic policy, even across business and labour unions. Pedersen and Campbell (2014) describe this consensus as ‘the Brotherhood of Economists’ (p. 197). As a consequence, there is a very high degree of homogeneity at the top of the economics profession in Denmark across universities, the government and the business sector. Furthermore, there is a large degree of connection and integration between the different sectors (Stahl & Henriksen 2014).
Methods and empirical materials
The analysis in this article concerns the development of macroeconomic analysis and the following policies in Denmark. In order to track the development, the analysis focuses on regularly published reports, forecasts and outlooks through the period.
The documents surveyed come from two different sources. The MoF, the central economic coordinating ministry in the government (Jensen 2008), published an annual statement of the economic situation of the country, and the proposed policies and reforms of the government, in the period from the 1970s to 2004. 2 The Danish Economic Council, an independent advisory body headed by leading academics and consulting various social partners, also publishes biannual reports that survey the economic situation of the country and make policy recommendations based on this analysis (Stahl & Henriksen 2014, Marcussen 2002). 3
These reports serve various purposes. The MoF tries to justify the policies of the government through references to economic science, international authorities and common sense. Recent economic history is presented in a way that supports the government’s position. The DEC tries to influence government policy by applying the tools and models of economic science to the available data on the national economy. At the same time as serving these direct purposes, the reports also reveal a more general economic worldview and a set of assumptions and ideas about the nature and efficacy of various policies on certain economic variables. Because the documents surveyed are not constructed to convey an economic worldview, or theories of causal connection between economic phenomena, this information is available indirectly and piecemeal. The focus in the analysis is on how economic theory is used as a tool that allows for new forms of regulation and as a justification for policies, portraying the policies as beneficial to the general public. Inspired by John Campbell’s (1998) work on studying economic ideas, special attention is paid to the movement of ideas from normative statements about action, to uncontroversial cognitive facts (p. 377). A successful introduction of an idea in this context would entail a movement from foreground to background, and from normative statements to cognitive facts.
The documents are analysed to survey the broad changes in the economic worldview from decade to decade. For a systematic survey of these developments, the documents have been sampled at 5-year intervals for thorough analysis of the first general report published that year. The regular sampling allows for a consistent tracing of the long-term development of economic ideas. These samples have been used for the construction of the overall chronological development seen in Table 1, and for the construction of the ideal-type common sense seen in Table 2.
Historical developments.
Source: Danish Ministry of Finance (DMoF) (1970, 1975, 1985, 1990, 1995, 2000, 2004) and Danish Economic Council (DEC) (1970, 1975, 1985, 1990, 1995, 2000, 2004).
FEK: Full employment Keynesianism; NL: neoclassical liberalism.
Stylised modes of common sense.
Source: DEC (1970, 1975, 1985, 1990, 1995, 2000, 2004) and DMoF (1970,1975, 1985, 1990, 1995, 2000, 2004).
FEK: full employment Keynesianism; NL: neoclassical liberalism.
Besides the systematically sampled reports, the analysis is also based on a number of additional materials and reports that cast light on specific theoretical or methodological innovations and debates. These have been identified through citations in the sampled reports or in the secondary literature.
Historical development
The main development in the sampled material is a continued drift towards more market-based and liberal policies throughout the period of 1970–2000. This ideational development does not necessarily mean that all of this was translated into policy directly. The introduction of monetarist ideas and supply side economics into the economic thinking in Denmark did not lead to the radical reforms or redistribution of wealth and income that were seen in the Anglophone world in the 1980s. For instance, the main thrust of privatisation only came later in Denmark, in the 1990s (Lundkvist 2009). Nevertheless, the ideational development is substantial.
As such, it is possible to distil a shift between two modes of common sense: ‘full employment Keynesianism’ (FEK), which was dominant in the 1970s, and ‘neoclassical liberalism’ (NL), which emerged in the 1980s and found its form throughout the 1990s.
The centrality of Keynesianism in the actual macroeconomic policies of the post-war period need not be overstated. It was just as much the compromise between capital and labour, and the active role of the state in brokering consensus, as the instruments of Keynesian demand management as such that defined the political economy of post-war Europe (Eichengreen 2008[1996]). But Keynesianism, nevertheless, provided a language and a set of policies that promised to ensure the smooth operation of the economy as a whole without asking either capital or labour to suffer to an unacceptable extent (Glyn 1995).
At the same time, NL does point to the specific form of moderate neoliberalism that emerges in the Danish context based on formal mathematics and neoclassical reasoning. In contrast to Britain or Germany, non-neoclassical forms of neoliberal reasoning, such as Hayekian liberalism or German ordoliberalism, are very marginal in Denmark. Again, while logical neoclassical economics allows for a presentation of market-oriented policy reforms, this does not necessarily mean that economic liberalism is the only possible interpretation of neoclassical economics.
In the following, I will go through the development from decade to decade, to show how new notions were imported gradually and in contradictory ways. It is noteworthy that even if shifts in the political orientation of the government have a small effect on the rhetoric, the main lines of development towards neoliberal common sense are unilinear over time, irrespective of the political orientation of the government.
The 1970s full employment in times of crisis
The early to mid-1970s were characterised by the continued dominance of FEK. This is evident in the analysis and the economic reasoning of both the MoF and the DEC. At the same time, the period is marked by the advent of the economic crisis and the inability of the classical Keynesian policy tools to re-establish full employment and reduce the deficit on the current account balance. The early 1970s witnessed a situation of consensus between the Economic Council and the MoF around the perspective that the classical arsenal of countercyclical instruments must be used in order to return unemployment to acceptable levels.
4
The DEC stated here that ‘the dominant question is naturally the possibilities of reducing the high unemployment’ (DEC 1975: 55), whereas the MoF advised the use of ‘fiscal stimulus to reduce unemployment to ‘acceptable levels’’ (DMoF 1975: 5). For both the state bureaucrats in the MoF and the economics profession, income policy was seen as the key instrument to maintain the primary policy goals of full employment, trade balance surplus and moderate inflation. Through a direct regulation of wage increases, this policy was supposed to make possible the continued existence of full employment, without wage-driven inflationary pressure. The 1976 DEC report states, If a clear income policy cannot be established, it is hard to avoid the fact that unemployment has a function in a system based on market economy – that of restraining inflation. If a full employment policy is undertaken without income policy, the result will be inflation, maybe even accelerating inflation. (DEC 1976: 22)
In the 1975 report, the DEC defined how ‘the dominant question is naturally the possibilities of reducing the high unemployment’ (DEC 1975a: 55). At the same time, the government stated that the overriding priority was reducing unemployment to ‘acceptable levels’ – at the time defined as 4% (DMoF 1975: 5). In general, the tools used to secure full employment were Keynesian demand management. Until the 1973 crisis, this was primarily in the form of anti-cyclical monetary policy, but after the advent of the 1970 crisis, this also took the form of fiscal stimulus (Mikkelsen 1987: 61). The key problem discussed was the international trade and current account balance. The long-term instruments could in some cases include active industrial policy. This was very scarcely discussed, however, and discussion of economic policy rarely exceeds the span of the 1–2 years that was thought to be needed for any economic policy to take effect (DEC 1976: 21).
The primary fear expressed by economist in the state and DEC during this time was that a situation of prolonged full employment would strengthen labour to a point where wage demands would push up the cost of production and damage international competitiveness (DEC 1976: 25). Anxiety over inflation was also present, but it appears to have been secondary to the issue of international competitiveness. Inflation was far more frequently invoked with regards to its impact on international competitiveness rather than as a problem in itself for the domestic economy.
The 1980s: contestation and adaption
The 1980s stands out as a contested and unstable period, where both the government and the Economic Council were trying to grapple with a shifting economic landscape with a set of analytical tools still drawn from the toolkit of FEK.
This led to divergent intellectual strategies.
The MoF chose to follow the conclusions dictated by the changing pressures from international development, especially the rate hikes by the US Fed under Volker from 1979 (Eichengreen 2008 [1996]: 144), but also more direct political pressure from international organisations. As an example of the latter, pressure from the OECD played a central role (Marcussen 2000). This started with a policy of pushing down wages through a combination of income policies and a turn towards fiscal austerity and strict monetary policy by the social democratic government in 1980 (DMoF 1980: 42). This turn away from expansive monetary and fiscal policy was further strengthened by the arrival of a new right-wing coalition in 1982 that pegged the currency to the D-mark, thereby removing the possibility of independent monetary expansion and devaluation (Asmussen 2007: 68). This turn to fiscal austerity and hard money policy resulted in the first sustained fall in real wages for decades, and led to an initial sharp rise in unemployment (Danmarks Statistik, 2008). Notably, at this point, the argumentation of neoclassical macroeconomics was not being employed, and unemployment was described as a classical trade-off cost as a part of the Phillips curve relationship. It was presented as practical and political, rather than a theoretical divergence from Keynesian ideas (DMoF 1985).
On the contrary, the independent economist in the Economic Council chose to persist with the old orthodoxy. During this period, the Council launched critiques and alternative strategies based on Keynesian macroeconomic analyses and the goal of realising full employment policies, despite the changes in global economic conjunctures. In 1980, the Council opposed the focus of the social democratic government on prioritising inflation over employment, and stated that it was possible to return to full employment within a few years (DEC 1980: 16). To reach this, they advocated for an ‘investment and productivity led path, and thereby a path with expanding employment’ as an alternative to the government’s attempt to ‘cut and tighten our way to an equilibrium on the current account balance, and thereby risk to be caught in long stagnation crisis’ (DEC 1980: 44). Traditional income policy with price and wage control continued to play a central role well into the 1980s as an alternative option to both monetarist policies and fiscal austerity (DEC 1985: 6).
In the wider Danish economics profession, discussions on the effectiveness of the Keynesian framework began in force in the early 1980s. In the main journal, Nationaløkonomisk Tidsskrift, there was a growing number of voices critiquing the efficacy of classical demand management and calling for a turn to stricter monetary policy (Sørensen 1983a; Thygesen 1981, 1983). This new critique primarily cited the monetarist theories of Friedman (1968) and the ‘New Classical Macroeconomics’ of Lucas (1976, 1980) and Barro (1976). The debate was by no means conclusive, and the defence of the Keynesian methodology remained strong (Andersen 1983b; Sørensen 1983b). The Economic Council remained committed to a broadly Keynesian approach and a strategy of full employment into the 1980s. This was the case despite the brief membership of monetarist Niels Thygesen in 1984–1985. From the middle of the 1980s onwards, we see the emergence of the call for ‘structural reforms’ in the MoF. This aimed to change the underlying structure of the economy through long-term market-based reforms that were designed to strengthen domestic competition via deregulation and reducing the size of the public sector (DMoF 1985: 23–24).
Here we see for the first time that the government no longer employed a reasoning based on the demand-focused FEK, and relied instead on supply side argumentation and neoclassical reasoning, based on the perceived effects on microeconomic actors. Neoclassical microeconomics had been present in Denmark since the formation of the establishment of economic departments in the interwar years (Jespersen 2008). However, its methods and consideration played virtually no role in the macroeconomic discussion, and even less in the official debates about economic policy, until the mid-1980s. At first, these new neoclassical elements played only a minor role, and the early adoption of monetarism was largely interpreted within a Keynesian framework as a trade-off. Later, especially with the introduction of long-term analysis, this reasoning takes precedence over the previous Keynesianism.
The continued rightward shift of government policies put heavier pressure on the DEC. Already, with the publication of the 1982 report, the body’s call for devaluation came under heavy fire from the entire spectrum of partners represented in the Council: the economic ministries and the employer organisations and trade unions all criticised this break with the trend towards hard money policy and monetarism (Mikkelsen 1987). The critique was supported by analysis and direct written interventions from the OECD (Marcussen 2000). The presidency took note of this and in the period of 1983–1987, we see a clear adaption to this new monetary orthodoxy. The 1987 special report on the history of the Council describes this as a conscious decision – the presidency sensed the changing winds, and adapted accordingly. It was clear that the alternative would be political irrelevancy (Mikkelsen 1987). From 1988, the call for income policy was abandoned, as the last vestiges of the FEK common sense slipped away in favour of a move towards a ‘higher degree of market based wage structure through economic reforms’ (DEC 1988: 49).
The 1990s, the formation of a new consensus
While the 1980s were characterised by a large degree of divergence and debate over differences in instruments and the priorities of policy goals, the 1990s witnessed the re-emergence of a consensus around the broad outline of macroeconomic policy. From the early 1990s, a new, coherent common sense of NL can be discerned. This common sense matched the new policy goals and instruments that the government had been pursuing since the early 1980s.
This perspective is formulated by the DEC in their 1990 report, as an important explanation of the negative experiences from the 1970s is that supply shocks should be countered with instruments that target the supply side, not the demand side. Some have even made the conclusion that is best to lead the adaption to the market forces, perhaps aided by structural adjustments. (p. 87)
Here, the goal of securing full employment is abandoned in favour of a focus on inflation reduction and trade balance problems. The goal of lowering employment is thought to be primarily achieved through downward pressure on wages through labour market flexibilisation: ‘A lower increase in wage rate will lead to a higher rate in employment. If the wage formation is made more flexible [. . .] it means higher employment and lower structural unemployment’ (DEC 1995: 67). At the same time, this shift to structural policies represented a withdrawal of the state from a role as active coordinator and guarantor to one of frame setter. Simultaneously, however, it also represented a more ambitious state policy than in the FEK common sense, where the role was not only to reduce the impact of market fluctuations and increase output, but also to formulate policies that aim to transform the structural conditions of the economy.
This also provided a new and less ambiguous role for the newly reconstituted DEC. The tenets of neoclassical economics were used as the basis for a number of calls for deregulation, privatisation and public sector reform. This development was summed up by former DEC chair Peter Birch Sørensen as follows: ‘over time, the weight of the reports have gradually shifted towards more emphasis on long-term structural policy issues at the expense of consideration of short-term cyclical policy’. Members of the DEC in 2009 retrospectively described how ‘from the late 1980s onwards the reports began largely focusing on structural problems’ (Sørensen & Rosholm 2009: 10).
This development was to a certain extent driven by the arrival of a new generation of macroeconomists. They directly refuted the post-war Keynesian methodology in favour of Friedman’s monetarism or neoclassical macroeconomics and rational actor models, based on the works of Lucas and Sargent from the early 1980s. Economists such as Torben M. Andersen (1988), who became a member of the chairmanship of the Economic Council in 1993 and later its chairman in 2001–2003, and Peter Birch Sørensen (Sørensen 1983a), who was chairman from 2004 to 2009, played a central role in this development. They are still centrally placed actors in the Danish macroeconomic establishment today (Stahl 2018). However, this shift in common sense around the early 1990s can hardly be explained by the replacement of personnel alone. On the contrary, by this measure, the transition was characterised by a large degree of continuity. This seems to be the case because the shift in common sense did not take the form of replacement of one theory with the other, but rather with a more subtle displacement of the objects, goals and timeframes of macroeconomic policy.
Shifts in time horizon
In this process of subtle displacement, the shift from short- to long-term thinking is particularly crucial. The 1990s witnessed a continuous shift in the focus of policy analysis from a shorter time horizon to a longer one. The timeframe for policies gradually changed from a 2–5-year perspective to 10–20 years. This shift in time horizons is significant. It might not be a great difference in the actual number of years considered, but the theoretical difference is important, because the new long-term focus implies a shift towards neoclassical theory. In the neoclassical synthesis that dominated the economic profession in the post-war era, the short-term was dominated by Keynesian ideas of market failures where government intervention and planning could help steer the economy through the instability and cyclical fluctuations of the market. In the long-term, however, demand and supply were thought to be in equilibrium, and market forces were thus able to create pareto-efficient outcomes if left to themselves (Fine 1998). In this way, the tension between micro and macro within the economic theory of the post-war economics profession allowed for a radical shift in policy outcomes, simply by allowing the assumptions of neoclassical microeconomics to enter the debates on macroeconomics, hitherto dominated by Keynesianism.
Because this development took the form of a shift in time-horizon, and not in direct polemics, it allowed for a relatively radical shift in outlook over the decades, without jettisoning the theoretical consensus that is a hallmark of the DEC and of the wider Danish macroeconomic establishment.
It is necessary here to recognise that moderate Keynesianism always persisted in some form in the macroeconomic debate in Denmark in this period. The models of the Economic Council, as well as the MoF, retained some Keynesian elements during this time (Danmarks Statistik 2012). As an example of this, the presidency continued to describe itself as a mix between Keynesian and neo-classical theories (Andersen 2002; Kærgård 1996). From the mid-1980s onwards, it was nevertheless the long-term analysis that was allowed to do the heavy analytical lifting. The brief deployment of Keynesian stimulus by the recently elected social democratic government in 1993–1994 (Asmussen 2007) does not change the clear tendency in the 1990s, in the main part of the analysis, to focus on the long-term horizon, where the assumptions of neoclassical economics are thought to hold. This entails a shared understanding of the ubiquitous requirement for economic reforms. The language of ‘reforms’ is the consistently used shorthand for the flexibilisation of labour market regulation, the reduction of benefits and a reduction of public sector spending (DMoF 1995: 23; 1990, 17; DEC 1990: 78; 1995: 67–68). This new consensus was eased with the arrival of the New Keynesian, promoted by economists like Krugman and Roemer from the 1990s onwards. Through concepts such as sticky wages and market failures, the New Keynesians adapted the new dominant neoclassical framework, but allowed for a limited use of the traditional instruments of Keynesian demand management (Eatwell & Milgate 2011: 59).
Abandonment of full employment
In FEK, the aim was to secure full employment through the continuous adjustment of economic instruments and negotiation with economic actors – a job that almost solely takes place in the short-term of 1–2 years. In NL, the goal of full employment is given up and the role of short-term policy is mainly to stabilise the economy, avoiding large fluctuations from a natural level of unemployment, set by structural long-term factors. A large part of the shift in common sense therefore took the form of a gradual replacement of the short- by the long-term, as described above. At the same time, the prospect of full employment disappeared entirely from the discussion and the attempt from the 1970s to reach this was used as a negative example by both the Government and the DEC. Instead, the terms ‘structural’ or ‘natural’ unemployment were introduced as a necessity in ensuring economic stability (Skott 1996). 5 In the 1990 report, the DEC refutes any prospect of implementing ambitious policies against the prevalent mass unemployment on the grounds that ‘it is possible to lead a more ambitious employment policy than abroad, without hurting the wage competitiveness and the current account balance’. The report continues that this will lead to ‘insufficient incentives to wage restraint from labour market actors’ (DEC 1990: 68).
The constant call for these reforms points to a redefinition of the role of the state in the economy. The main difference in the policy attitudes between the two periods is less the application of certain instruments of demand management, and more the overall conception of the role of the state in the economy. FEK common sense allowed for an active role of the state in the manipulation of macroeconomic variables through policy or negotiation. Within a neoclassical framework, the levels of investment and employment are determined by agents on the market, and the role of the state is merely that of providing the right framework and institutions to allow the space for market actors and ‘real’ economic activity.
The move towards the long-term in economic analysis was further strengthened by the expansion of the use of formal econometric models. Predictive economic models had been in use in Denmark since the 1970s. The first macroeconomic models of the Danish economy were developed by Ellen Andersen of Copenhagen University, and they would later be developed into the ADAM-model employed by the Danish Bureau of Statistics and the MoF. The Economic Council quickly followed suit with their own SMEC-model (Andersen 1983a; Danmarks Statistik 2012). The use of economic models did not become universal as a practice before the mid-to late 1990s, because the available models were primarily able to model short-term fluctuation only (Jespersen 1991). In the course of the 1990s, the demand for a pure general equilibrium model for long-term structural reforms grew stronger. From 1997, the DREAM (Danish Rational Economic Actor Model) 6 was put into use. It was Denmark’s first pure neoclassical general equilibrium-model with rational individuals and full neoclassical assumptions. From the early 2000s, the DREAM model was used to benchmark most policy initiatives, and its use cemented the almost exclusive focus on long-term supply side reforms.
The 2000s: consolidation of common sense
In the late 1990s, and the early 2000s, the new common sense hardened further. From this point onwards, the instruments and understandings of NL were no longer discussed as policy preferences, but were instead seen as the necessary basis for the formulation of any policy at all.
In this way, reform ideas such as benefits retrenchment and labour market flexibilisation were moved from proposals in need of argumentative defence into the background of assumptions and common sense. In its 2000 report, the MoF presented this common sense as ‘a strong economy, international openness, structural policies and sound finances are not goals in themselves. They are necessary instruments to achieve higher living standard, solid employment, welfare, social cohesion etc’ (DMoF 2000: 9). But the instruments used to reach these goals were the same as the ones proposed to improve the macroeconomic balances in the 1980s. Whereas the early liberalisations were presented as attempts to correct macroeconomic imbalances, in the 2004 report from the MoF, the absence of any macroeconomic problem is used as a reason ‘to focus on the long-term challenges’ (DMoF 2004: 9).
In this way, liberal reform proposals were no longer necessarily tied to any specific policy goals, such as combatting inflation or bettering the current account balance. Instead, they were seen as the necessary remedies to reach any political goals at all. The ideas had been fully depoliticised and turned into elite common sense.
The transition to the complete hegemony of neoclassical thinking can be seen from the early 2000s. Two developments characterise this. First, the complete dominance of the long-term in economic policy planning was heralded by the so-called 2010 plan from 2001, which tied the entire economic reform programme to long-term analysis (DMoF 2001). Parallel to this, we see the introduction and wide application of the pure neoclassical DREAM model from 1997, with its assumption of automatic long-term equilibrium 7 that is especially salient when it comes to the field of labour supply. The assumption that market forces will automatically regulate any given market in the long-term means that any reforms aimed at expanding the labour supply, such as pension reform and the reduction of benefits, are automatically seen as being economically beneficial.
Conclusion
This historical trajectory leaves us with several conclusions. First, we clearly see distinct changes in the dominant economic ideas in the Danish macroeconomic establishment. The transition towards a liberal conception of the economy was a gradual, but consistent development. This development continued throughout the period, despite changes in government between left and right. In that sense, we can speak of an institutionalisation of neoliberal reason, in the form of the complete domination of NL common sense in the main institutions of the macroeconomic establishment. Other studies have pointed towards a similar neoclassical dominance in the use of economic experts in the media (Madsen 2009). This shift in common sense, however, happened gradually, and it was not characterised by a simple replacement of Keynesian ideas with neoclassical ones. What happened was a relatively sudden change in accepted policy instruments from the early 1980s, with a turn towards monetarism. Subsequently, a slower transition happened at the intellectual level, largely driven by the displacement of analysis towards the long-term, and by the greater role of mathematical modelling. At the same time, the focus on long-term supply oriented reforms meant that new areas became the target of macroeconomic policy making, such as education and health. This process of displacement in time and space, rather than the direct replacement of one theory with another, means that the shift between common sense took place in a smooth and gradual way. This process was further strengthened by the consensus-prone nature of the Danish macroeconomic establishment.
The trajectory of neoliberalism as described above does not point towards the spread of ideas as a very central mechanism in the introduction of neoliberal policies. The policies that were dominant internationally, especially the turn towards monetarism and fiscal austerity in the early 1980s, were implemented before the theoretical justification was in place as the new dominant common sense. It was only later, and in a much more gradual manner, that the discursive hegemony of NL was established. This could point towards shifts in economic conditions and geopolitical developments as being more important factors in spreading neoliberalism to Denmark than the direct transfer of ideas. However, the scope of the current investigation does not allow for any hard conclusion in this regard.
If the introduction of neoliberal ideas did not shape the Danish turn towards neoliberalism, this does not preclude the fact that they play a central role in the continued persistence of such policies, especially with the continued strengthening of NL even under social-democratic governments in the 1990s. This points to the central role of the shifts of centre–left parties, in the institutionalisation of the tenets of neoliberalism, from direct political project to elite common sense (Cahill 2013; Mudge 2018). I will argue here that economic theory, both in the case of the post-war Keynesian period and in the neoclassical period, seems to function in a legitimating rather than a strategic role.
Keynesian demand management was never the central feature of the social democratic order in Scandinavia. Both the spectacular rise in public spending and the fall in inequality in the post-war period (Atkinson & Søgaard 2013) seem to have very little to do with the cyclical policies in place, and the realisation of full employment in the pre-1973 years was reached while maintaining a consistent positive fiscal balance (Glyn 1995: 10). Yet the language of mainstream Keynesian economics remained central in the presentation and evaluation of policy, because it proposed a way of explaining how a positive-sum solution for both labour and business was possible through government intervention. As such, it created the legitimacy of active state policies. The same can be said of the neoclassical discourse that gradually came to dominate the macroeconomic establishment in the 1980s and 1990s. At the start of the turn to monetarist policies in the 1980s, these policies were presented in terms of classical Keynesian trade-offs, where combatting inflation and bettering the current account balance were pursued with the acknowledged result of higher unemployment.
It is only from the late 1980s, and with full effect from the 1990s, that argumentation from neoclassical microeconomics presents a new framework for presenting strict monetary policies, market reforms and even fiscal austerity as the only possible way of securing sustainable growth, ruling out any possibility of a long-run conflict between differing policy goals. By reframing the role of government from an active coordinator to a neutral frame-setter, the only scope of pro-employment reform is restricted to supply-side reforms aimed at the flexibilisation of the labour market. Indeed, these policies are even presented as the foundation of social policy goals, such as employment, equality and social cohesion that they would otherwise seem to work against. With the technological support of GE-models, this allows for technical and neutral argumentation that present a much firmer orthodoxy than argumentation based on the discussion of policy goals and trade-offs.
The conclusion that economic ideas functioned more as legitimating than strategic forces in this context by no means implies that they were unimportant. It is a crucial function for any government to be able to present policies that are considered to be coherent, effective and justified – not only in electoral terms, to survive politically, but also to the owners of capital, so as to ensure a sufficient level of investment and avoid capital flight. Indeed, Wolfgang Streeck points out that for the government of a globalised capitalist economy with widespread capital mobility, legitimation to the owners of capital can be as important, if not more important, than to the wider population (Streeck 2014: 21). Following Streeck, the legitimating function remains one of the central tenets of any macroeconomic policy. As such, the claim that economic ideas primarily functioned as legitimating, rather than strategic, is by no means a dismissal of the significance of ideas. Rather, it points towards the need for more empirical studies into the ways in which economic theories and ideas are translated into legitimating discourses in different historical and institutional contexts.
