Neo - classical economic policy and social justice

Peder Martin Lysestøl
Associate Professor
Sør-Trøndelag University College


Until recently one of the characteristics of the economic systems in Eastern Europe and the Nordic countries has been relatively equal distribution of income. However, over the last 10-15 years income differences have increased sharply and changes in the economic systems have been implemented that challenge the former ideals of a just distribution. Is this phenomenon much discussed? According to my studies of the Norwegian situation, the problem of a more unjust distribution is not on the political agenda. In this paper I will discuss how the problem of economic justice is dealt with in Norway.

The welfare state was a political and economic project in opposition to the liberal market system of the 1930s. The world economy had been in crises and the trade unions and the socialist parties had called for a new political course. The main aim of the welfare state was to work for a more just society. The focus was the very unjust distribution of income and miserable living conditions of the majority of the population. For most people, social justice meant social stability, work for all and a reasonable distribution of income.

The golden age of the welfare state was characterised by very low unemployment, and a more just distribution of the national income and public services that guaranteed free and universal health, social security and education.

The socio-economic idea of the welfare state still has a strong position among the Norwegian people. How does the Norwegian Government and mainstream thinking solve the contradiction between old ideals of justice and the new reality of a more unjust distribution of income? My hypothesis is that this is done by giving the idea of social justice new content.

Some historical experiences

To define 'justice' and 'socially just' is not an easy matter.1 John Rawls (2005, 83), in his great work about justice says that in general justice should include all social values and they should be distributed equally among the population. The only exception is if unequal distribution is for the advantage for all. However, when moving from abstract philosophical discussions to economic history it will be seen that different theoretical and political forces focus on different aspects of the following general definition: sometimes it is economic freedom; at other times it is distribution of income. Sometimes the people in power insist on inequality because it is 'an advantage for all'. How the different political forces deal with the concept 'socially just' is strongly related to their political or class interests. Some examples from economic history serve to illustrate my point.

Feudal society was an unjust society. All power was with the feudal classes, and the majority of people had neither political nor economic freedom. For the upcoming bourgeois class, their lack of economic freedom was the problem in focus. Adam Smith argued strongly that an 'invisible hand' would distribute the national income in the most effective way. The precondition for this was perfect competition in the markets (Blaug 1962, 55). Thus, the focus was economic freedom.

1 Social justice should not be confused with legal justice. What is just from a legal point of view is decided by the political authority at all times.

The industrial revolution led to great changes in the social composition of the population. The new and numerically larger working class had no political and economic rights, and poverty and unemployment were serious social problems. 'Social justice' for them meant having a job and an income, and a more fair distribution of income. Karl Marx was the first among the socialist thinkers who formulated the aims of a more just society. According to Karl Marx, the precondition for a socially just society was the abolition of capitalism. The relation between classes is more important than the relation between individuals. The focus is on class, not the individual. No class of people shall have the right to exploit the labour power of other people. This is basic when talking about social justice according to Marx. He also states that 'social justice' is impossible in a capitalist society. In a socialist society, the national product can be distributed more equally. The ideal for a socially just society is a society where the social values are distributed: 'From each according to his ability, to each according to his needs' (Marx 1968, 321),

The Marxist concept of social justice challenged the bourgeois society. It was therefore not strange that the Marxist theory of just distribution was countered with alternatives. One strong alternative was developed by Jevon in the USA and Walras and others in Europe in the 1870s (Blaug 1962). This was the 'marginal revolution', with its theories of utility. If all members of society are able to freely maximise their utility then society would be a good society. A society increases its welfare if one person increases her/his utility without reducing the utility of others (the Pareto optimum). It is the free individual who best knows the right combination of free time and work, and combination of goods that give her/him the maximum in terms of utility. According to this theory, social justice exists in a society that gives the individual the possibility to choose freely between alternative economic dispositions. Again, the object in focus is the individual. The social value is the freedom to act.

The working class in Norway strengthened its position during the 1930s. Once again, the distribution of material goods came into focus. The political programme was a more just society, with work for all, social security, and a more fair distribution of income. This was the political base for the welfare state. Even if the trade unions and Marxist parties had a strong influence on the policy of the welfare state, the focus was on justice for the individual and her/his family; the Marxist stress on class contradiction was not in focus. In this welfare capitalist society, the entrepreneur class was allowed to keep private ownership of the means of production.

Characteristic of the welfare state was a strong public sector. In Norway, public expenditure as part of the GDP increased from 11% in 1930 to 50% in 1990. This was only possible through strong taxation and by limiting the economic freedom of the capitalist class. Already in 1948, in The Road to Serfdom, Hayek had strongly warned about the lack of freedom for the individual in a society with a regulating state. In 1962, the economist Friedman (1962, 161) strongly attacked the regulating state and the 'belief in equality of income as a social goal'. Friedman's economic liberalism states that we have to distinguish between:

  1. Equality of rights and opportunity, and
  2. Material equality or equality of outcome.

However, Friedman (1962, 195) stated that even if the focus is on the freedom of men, 'A free society in fact tends toward greater material equality than any other yet tried'. This became the theoretical base for the neo-classical economic theory.

Neoclassical economic policy and social justice

Neoclassical economic policy is characterised by increased freedom for market forces and less state control (Lysestøl & Meland 2003, 16). Typical of this measure is reduced taxation and a policy of reduction in public expenditure related to GDP. In Norway a gradual change to neoclassical economic policy started at the end of the 1970s. In this respect, important policy changes were the liberalisation of the housing market and banking from the beginning of the 1980s and the energy market in 1991. In the golden age of the welfare state, the growth in public consumption was higher than in private consumption. This changed from the beginning of the 1990s. In the period 1988-1992 private consumption increased by 0.3% while public consumption increased by 3.3%. In the four-year period 1993-1997 private consumption increased by 3.7%, while the growth in public consumption reduced to 1.9%. This tendency has been typical up to the present day.

Figure 1 shows the result of more than twenty years of neoclassical policy on total government outlay (OECD 2006). As a percentage of nominal GDP, total government outlay has been reduced from 56% to 42% of the GDP in 15 years. How has the neoclassical policy influenced the distribution of income between the social classes and how has it influenced the income distribution between individuals? These are questions relevant to both Marxian and welfare state influenced policies.

Figure 2 shows the distribution of the factor income. As can be seen from the graph, wages as percentage of factor income had been reduced from nearly 70% at the end of the 1990s to 52% in 2006. In the 1970s, this tendency was even clearer. The income of entrepreneurs was then only 15-20%. Today it has increased to nearly 50%. It is very clear that the wage earners - or to use the Marxian concept, the working classes - have lost the struggle for a just part of the GDP. From a Marxian point of view the development has been socially unjust because the capitalist class has strengthened its position strongly.

One of the important aims of the welfare state was to eliminate poverty and obtain a more equal distribution of income. What has happened with the income distribution in the neoclassical epoch? In the graphs in Figures 3 and 4 income distribution is shown in two ways, with the Gini coefficient and the relation between the 10th and 1st deciles respectively.2 The first report to the Storting (Norwegian parliament) that dealt with the problem of income distribution since the golden age of the welfare state, the Utjamningsmeldinga, warned about the fact that the distribution of income between households was more unequal than before the age of the welfare state (report about income equalising, No. 50 1998-1999). The tendency has become much more obvious since that time. The Gini coefficient is approaching 0.3, a level far from what traditionally has been acceptable for a welfare state. Most probably, in the last three years the economic boom has led to further increases in income differences. Recently published statistics from the Central Bureau of Statistics (2007) show a very strong increase in capital income in 2005. This has influenced the distribution of income strongly, which is clearly seen in Figure 4. The inequality in the distribution of income has doubled over a period of 20 years. Presumably, most people who support the welfare state idea agree that these facts challenge the welfare state ideal for a just distribution.

2 If all individuals with an income are arranged according to the size of their income, the 1st decile is the 10% with lowest income, and the 10th decile is the 10% with highest income.

From just distribution to the fight against poverty

As I have shown through the historical analysis, the focus on the concept of socially justice has changed according to changing political interests. Is the same happening in Norway today? Does the Norwegian Government and mainstream theory support a neoclassical economic policy and at the same time uphold the ideals of social justice? Actually, they do not have to put much energy into the fight for social justice because neoclassical theory (focusing on freedom) dominates both academic life and the media. In this way the authorities have succeeded in diverting attention from the problem of justice and the distribution of income to the problem of bureaucracy and lack of freedom for the individual. The political success for the right-wing liberals, The Progress Party, is proof of how the ideas of economic liberalism have spread to a great part of the population. However, apart from strong ideological propaganda for neoclassical ideals, changes can also be seen in dealing with the concept social justice. The aim of income distribution has not entirely disappeared from public policy. It is still possible to find expressions in public documents that refer to a just distribution of income. In the Government Long Term Programme 2002-2005, the government writes: 'The aim of the Government is a just distribution of income and good living conditions for all' (The Government Long Term Programme, 2002-2005, 231). This aim is elaborated later in the text: 'The Government's policy of distribution shall contribute to an even and just distribution of the total welfare of society'. The new Government (in power for the last two years) has not produced a long-term programme, but in their inaugural address they stated the following: 'The aim of the economic policy shall be work for all, a sustainable development, a more just distribution and a strengthening of the system of welfare' (The Soria Moria declaration 2005, p. 13). This is a centre-left government which in words has to pretend that it is concerned with income distribution. Yet what does it do in practice? No measures have been taken to reduce the greater income differences. Instead, the focus has changed from equal distribution to the problem of poverty. Both the previous and the present government introduced action plans against poverty (The Government's Action plan against poverty). Even the most neo-liberal governments have considered poverty to be a problem while a just distribution of income (meaning a more even income distribution) is against the neoclassical dogma. This was voiced openly in the Storting by representatives from the two right-wing parties: 'the representatives will stress that differences between people are not necessarily something negative'. They argued that people are born unequal and, 'That will also lead to economic differences without being a problem in itself' (Lysestøl & Eilertsen 2001, 146). It is obvious that to do something about the increasing unequal distribution implies higher taxation, an active finance policy and stronger regulation of market forces. This in turn means a policy against the neoclassical order of the day. Minor actions against poverty can be taken even within the neoclassical order. In this way the government can keep on talking about actions against poverty, hoping that this will divert attention away from the problem of distribution.

From individuals to generations

One of the pillars of the Norwegian welfare state is National Insurance. National Insurance was adopted unanimously by Parliament in 1966 and among other thing guarantees the population a reasonable old age pension. The neoclassical policy has resulted in increased pressure on all public expenses, and the old age pension has been one of the bigger items of expenditure in the welfare system. Nearly 30% of the total expenditure relating to social policy is related to old age (Lysestøl & Meland 2003, 72). It is expected that this expenditure will increase in the coming years with the increasing number of people living to an older age.

Many Western countries with some sort of public pension system have introduced a cheaper pension system. This is also the situation in Norway (Report to the Storting No. 5 2006-2007). The aim of the new system is, among other things, to reduce pension costs by nearly NOK 30 billions by the year 2050. If not, the Government foresees higher taxes and unreasonable burden for the working generations. People who argue that the existing pension system is socially just because it equalises income differences are met with the argument that it is unjust for the future generations. The focus is now on justice between generations, not on a just income distribution among individuals or households. The idea of justice between generations is based on generational accounting (Gjersem & Steigum 1994). This change of focus from justice between individuals to justice between generations is another example of how the concept 'socially just' is adapted to whatever best suits mainstream politics.

Implications for social work

The consequences of more than 20 years of neoclassical economic policy have (among other things) been increased inequality and the weakened position of the working classes. For the social work profession, the question is whether this policy will influence social work practice. More than most professions, the Nordic social worker has based his or her work on an idea of a just distribution of income. Social workers and their trade unions have been fighting against poverty and for higher social benefits. By doing so, they have been an important counterweight to business interests and right-wing policy. During the golden age of the welfare state, the ideas of the social work profession were supported by mainstream welfare state thinking. This is no longer the case. Will social work be able to uphold its ideas and principles under this neo-liberal regime? There is no reason to underestimate the strong influence the new policy will have, also on social work.

Peder Martin Lysestøl
Associate Professor


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Central Bureau of Statistics (2007): Household Income 2005. Oslo: Central Bureau of Statistics.

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Gjersem, C.E og E. Steigum jr. (1994): Generasjonsregnskap. Bergen: Stiftelsen for samfunns- og næringslivsforskning.

Lysestøl, P.M. og R. Eilertsen (2001): Den nyliberale revolusjonen. Oslo: De facto.

Lysestøl, P.M. og E. Meland (2003): Velferdsstatens økonomi. Oslo: Universitetsforlaget.

Marx, K. (1968): Critique of the Gotha programme. In Marx, K. & F. Engels (eds.): Selected Works. London: Lawrence and Wishart.

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Rawls, J. (2005): En teori om rettferdighet. Kjøbenhavn: Det lille forlag.

Report to the Storting No. 50 1998-1999. About equalising living conditions.

Report to the Storting No. 30 2002-2005. The long term programme.

Report to the Storting No. 5 2006-2007. Reforming the pension system.

The Government's Action Plan for Combating Poverty. Supplement to the National Budget 2007.

The Soria Moria declaration, 13 October 2005.

Figure 1 General government total outlays as percentages of GDP.

Source: Economic Outlook 2006/2 (OECD 2006).

Figure 2 Wages as percentages of factor income.

Source: National accounts, Norway

Figure 3 The Gini coefficient.

Source: National Bureau of Statistics, Norway

Figure 4 Relation between 10th and 1st decile.

Source: Central Bureau of Statistics, Norway



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