Economics for the Many – voices from the echo chamber

I promised you I would read and review Economics for the Many, a collection of essays edited by John McDonnell, Labour's Shadow Chancellor. The purpose of the book is to show that Labour is not trying to reheat failed ideas from the past - but it is brimming with new ideas fit for the 21st Century. It doesn't really succeed in that aim, but it does contain some interesting pointers.

My first idea was to review each article in about 200-300 words and produce a series of posts. That was how I started. But I quickly realised that this wasn't going to work. Most of the 16 essays are pretty poor, and readers would have been subject to long tracts of rather sarky criticism. And not much of a thread would have emerged. As I waded through essay after essay, I was gaining more idea about Labour's mythology, but little clarity on what they might do. Even when I could wholeheartedly agree with an essay, such as one supporting political devolution, something seemed missing. It was all too abstract; there should be a passion in ideas. And then, in Chapter 9, the book burst into life, with Democratic Ownership in the New Economy. I could even forgive the cringe-making comments about Jeremy Corbyn and Mr McDonnell, and claims of a  public uprising in the 2017 general election. It had passion, and pointed to practical examples of its ideas working. The central idea was local, grassroots-led action to develop local businesses based on local networks, using cooperatives, anchor institutions (like hospitals) and so on. The following essay, A New Urban Economic System: The UK and the US followed the same ideas and was less gushing but more convincing, again pointing to examples, including Preston in Lancashire. Both had a common thread: based on a think tank called the Democracy Collaborative that gets involved in real world projects, and which co-authored both articles. The book got a bit better after this, but the only essay to match this highlight was the last one: Rentier Capitalism and the Precariat: The Case for A commons Fund by Guy Standing.

This article had much the best overall narrative - developing the idea that capitalism had gone wrong, hoarding monopoly profits and creating a whole class ("the precariat") of insecure jobs. This made a nice change from banging on about austerity (a Tory word, somebody has pointed out to me, suggesting frugality and discipline). It reads like a Marxist tract, but a good one, and much of it could in fact have been written by The Economist. Even if it was fact free and exaggerated it created a strong narrative based on things that are clearly actually happening. Mr  Standing recognises that Labour is not doing a good job of appealing to the precariat, which is either politically apathetic, or taken in by socially conservative populists. Then he develops the case for building a "Commons Fund", which would pay a dividend, which would then develop into a universal basic income (UBI). This is the best constructed case I have read for this idea. It is interesting that it is the only place in the book where UBI, such a darling idea on the left, gets traction, and it is a very mild version of it. No hint here of it replacing welfare benefits.

Two other themes are worth mentioning. First is "financialisation", which was the topic of two essays (by Costas Lapavitsas and Johnna Montgomerie). This awkward abstract noun is taking its place in the left's lexicon. It covers a disparate variety of things, of which the most important is the expansion private debt. This is all part of the neoliberal villainy. The argument is that a lot of growth in the UK is built on private debt, and an influx of financial investment from abroad (typically in London property). This latter has created a high exchange rate which has helped hollow out productive business. There is clearly something in this. Where the essays break down is trying to work out what to do about it. If the process is to be reversed, and levels of private debt cut, then this will conversely be a drag on the economy. Unless it is simply replaced by public debt - but neither essay makes the case for that. The first essay gets the closest by advocating the creation of public sector institutions to take over lending. There may be something in this, but public sector banks have led to some of the biggest wastes of public resources around the world: the operating models are critical, and the essay says nothing about this. It just falls in with a general prejudice through the book that nationalised institutions are good.

Another theme is the development of online platforms, from Google and Amazon to Uber. This is clearly a worrying development,and it is very well described by Nick Srnicek, including the political difficulties of doing anything about it. A badly-written and excessively abstract article by Francesca Bria, who works for the city of Barcelona, takes this forward with the advocacy of more active management of data networks by city governments. This is something policymakers should talk more about. Some networks, such as Uber or Airbnb, could be replaced by locally managed cooperatives that retain profits locally without being less efficient - this dovetails with the Democracy Collaborative's ideas. Others are global issues, but here initiatives like the EU's GDPR can have an important impact.

What of the rest? Prem Sikka puts forwards ideas for improving the tax system. These aren't particularly new, and I don't actually think there is much low hanging fruit for extra tax revenues - but some of the perverse incentives of the system could be fixed. He advocates a version of unitary tax for multinationals, which I have favoured for a long time, but which the British political class has always shied a way from.  Ann Pettifor produced a disjointed essay with quite a lot of lazy rhetoric in it. Her main idea of a "Green Deal" might have a worthy objective but looks like an invitation to mismanagement. Barry Gardiner (Labour's trade spokesman) advocates a middle way on trade policy between protectionism and a free for all, which promotes human rights and helps "vulnerable" economies. Good luck with that. Rob Calvert Jump delivers a flat essay on models of business ownership that people who remember the nationalised industry disasters of the 1970s and the successes of privatisations in the 1980s will be more than a little surprised at. He offers no thoughts on why privately owned companies might be a good ownership model in many contexts. Christopher Proctor has an essay on rethinking economics, with a clear explanation and critique of classical economics (puzzlingly referred to as "neoclassical"), but then fails to develop any ideas about how it is to be replaced, beyond a collection of unexplained initiatives which he says need more work. Ozlem Onaran expands on one these: feminist economics. Actually I don't disagree with her idea that there should be more public spending on what she calls "social infrastructure", but a lot her logic was unpersuasive - one suspects a lack of challenge in the development of her ideas.

So what to make of it? Labour's critics will find their prejudices reinforced. There is no admission that Keynesian stimulus might not be appropriate in many contexts. Low productivity is always down to poor motivation, pay and social conditions, while process design and effective management don't get mentioned. The concept of creative destruction is alien. Most of the ideas are about the state doing things from the centre, rather than empowering individuals and communities. There is little thought on how effective management can be encouraged and the abuse of power curtailed. Facts are few and far between, and silly factoids make their appearance (the £93bn of "corporate welfare" for example in Guy Standing's). And all that rage against austerity and neoliberalism, when the politically uncommitted can see that there are some good aspects to both policies. The overwhelming impression is of ideas being developed in a leftist echo chamber without proper external challenge, for circualtion within that echo chamber. Still there is plenty of scope for liberals to share parts of the analysis and many of the solutions. Lib Dems passed something that looked very like Mr Standing's Commons Fund at its last conference.

For me though, the most important and exciting essays were the Democracy Collaborative's on building local networks to revive local and regional economies that have been hollowed out by modern economic policies. This involves a radical decentralisation of power and properly faces up to the challenge that modern economies face. If Labour's leadership really do pick these ideas up and run with them, I'll be impressed. There is clear scope for a coalition between socialists, greens and liberals here.

But I remain sceptical. Mr McDonnell's big idea at the last conference was the expropriation of shares in public companies to put in employee trusts to pay dividends to workers up to a point. This has little to do with any of the ideas in this book and looks like a gimmick. But we should welcome much of the new thinking nevertheless. These ideas need to be brought out of the left's echo chamber for the discipline of wider public debate.

Labour changes the meaning of austerity

So far, so good. That's my verdict of the remaking of Labour under its new leader, Jeremy Corbyn. I'll say more about the big picture later in the week, after Mr Corbyn's speech later today. This time I want to focus on economics and the performance of the Shadow Chancellor, John McDonnell, who spoke yesterday.

Like Mr Corbyn, Mr McDonnell is a serial rebel and a political outsider - and he is very much Mr Corbyn's right hand man. That is why he was given the job of Shadow Chancellor over the much more politically correct Angela Eagle. Both Mr McDonnell and economics are central to the Corbyn project.

The first thing to note is the new regime's ambition in taking on economics. The previous leader, Ed Miliband, was a bit embarrassed to talk about economic policy. He did not try to defend the previous Labour government's economic policies, nor seriously criticise them for matter, in spite of the opprobrium being dumped on them by the coalition parties. He was late in developing his own economic proposals, and when these came out, they appeared to be "austerity-lite", and not seriously challenging the government's narrative.

Mr McDonnell, on the other hand, wants to take control of the economic narrative. He is enlisting the help of heavyweight economists to both support his own plans, and to undermine the government's version of events. In this he is capitalising on a remarkable fact. Academic economists have been very critical of government policies and "austerity" generally. Indeed government policy seems to be more based on 200 years of Treasury orthodoxy than modern economic insight. This is an opportunity to undermine the government's reputation for competence, and make it look ideological.

Labour is still left with the two paradoxes of anti-austerity economics that I referred to in a previous post.  The first is that by opposing austerity Labour will have to make its peace with the global financial markets that it so despises. Mr McDonnell tackled this head-on in his speech, and in an interview with the Guardian newspaper last weekend. He has nominally adopted the government's trajectory for reducing the UK's fiscal deficit, with its aim of bringing it into surplus by 2020. With a huge rider: he will exclude borrowing to fund capital investment. Depending on how loosely "investment" is defined, this is perfectly sensible public policy, and not, in fact, very different from Mr Miliband's. It reduces dependence on international finance - remembering that the Bank of England's Quantitative Easing policies may come to the government's aid if the economy takes a turn for the worse.

There is, of course, a problem. It means signing up to austerity as most people understand it. And yet opposition to austerity remains his rallying cry. One of the many weaknesses of the left is its love of abstract nouns, especially as things to oppose - austerity, neoliberalism, inequality, and so on. Ordinary working people don't understand what they are on about, but the activists work themselves up obsessively - and at the moment austerity is public enemy number one. But Mr McDonnell and Mr Corbyn have an ingenious answer to this: just change the meaning of "austerity".

To them, the word now applies not to tightening the government's finances overall, but to cuts and tax rises that might affect low and middle income workers. There will be cuts, said Mr McDonnell, but not to the numbers of policemen, nurses or teachers. Instead the cuts would be to "corporate welfare" - tax breaks to businesses, as well as raising taxes on the rich. He was careful not to be too specific about all this.

There are some pretty solid grounds for scepticism here. Mr Corbyn has brandished the figure of £93 billion for corporate welfare, a figure conjured up by the Guardian. Mostly these are allowances or direct support for investment, exports and research and development - all things Labour will want to encourage. And the small print of the Guardian's report suggests not that this is low hanging fruit waiting to be plucked, but that it is, to switch metaphors, a rather overgrown hedge that can be trimmed a little. There is reason to doubt how easy it will be to target other measures to raise taxes, or clamp down on avoidance, without collateral damage to the small and medium sized businesses that the economy so needs. This is what undid Francois Hollande's Socialist government's attempt to do much the same thing.

But it isn't nonsense either. Big business, and the pampered elites that run them, are not a benign force these days. They contribute to the hollowing out of much of the economy by destroying middle ranking jobs and sucking the soul out of towns and villages away from the main commercial centres. They also siphon profits out of the economy rather than reinvest them. Labour will do well to be wary of big business, unlike the earlier regimes of Tony Blair and Gordon Brown. But finding policies that will tilt things against big business without damaging the wider economy will not be easy. I think that tax treatments for intellectual property and debt interest are a better place to look than the Guardian's corporate welfare list. And international cooperation on corporate tax avoidance will help (especially if we can move to unitary taxes, such as the US states apply among themselves).  But such policies will take time.

All this takes us into the territory of my second paradox for anti-austerity economic policy. It calls for more economic growth, and yet bears down on much of the private business that will be needed to generate it. This will be the next challenge for Mr McDonnell and his colleagues. It is fair enough to bear down on many businesses, especially the giants. But Labour also needs to show encouragement and support for more positive businesses, through investing in support infrastructure, improving access to credit for genuine investment, improving public procurement, and through reducing the burden of petty regulation. As yet I see no sign of this - but it is early days.

I remain highly sceptical of the new Labour project. But its leaders have made a competent start, and there is undoubted fresh air. The floor is still theirs.