liberalism – thinking liberal

Moral outrage against Trump is distracting people from his incompetence

Donald Trump has made a whirlwind start to his presidency, acting much as he did on campaign. This has provoked predictable moral outrage from liberals across the globe. This leaves me with foreboding. It will not stop Mr Trump, or the political movement he represents.

As a Briton I feel a sense of deja-vu. It reminds me of 2010 when the Coalition government took power and launched an aggressive austerity programme, cutting many public sector jobs, benefits and grants to NGOs. There was moral outrage on the left. I remember screaming protestors at the Liberal Democrat conferences in Liverpool and Sheffield in the year that followed. The Lib Dems were particular victims: they were nearly wiped out at the subsequent General Election, and are only just starting to recover, thanks to the distraction of Brexit.

But all that fury came to nothing. The beneficiaries of the Lib Dem meltdown were their Conservative coalition partners, who gained a parliamentary majority as a result. This led to redoubled austerity and Brexit. The left’s response was then to move into even more extreme outrage, by selecting Jeremy Corbyn as Labour’s leader. This has only made the Tories look even more entrenched. For all its outrage the left has lost the argument amongst floating voters.

The left was convinced that the people were behind them in their anger. And, critically, they thought that they did not have to win over conservative floating voters. They dreamt of two things: attracting disillusioned Lib Dem voters; and getting people out to vote who had not voted before. Both strategies failed. Labour did manage to convert large numbers of Lib Dem voters – but in the process they weakened the party so much that many Lib Dem voters switched to the Tories to keep Labour out. And, anyway, since most Lib Dem seats were Conservative facing, weakening the party tended to benefit the Tories. And inasmuch as new voters were found, it was not Labour that benefited. Instead many disaffected voters turned out for the populism of Ukip, and then to vote for Brexit in the 2016 referendum. There is no army of left-wing non-voters waiting to be mobilised.

The hard lesson from this is that in politics passion cannot substitute for savvy. And it is no use just talking to people who agree with you already. That may boost your own feelings of self-confidence, but it will not help persuade the people who need persuading. Interestingly, this is not symmetric. The populist right have succeeded by stoking up anger, and loathing for “liberal elites” – and not attempting to persuade liberals. Such tactics in reverse are ineffective on the left.

I fear liberals in America are making the same mistake with Trump as the left did with the Coalition. Their outrage at Mr Trump’s actions is certainly justified. But to Mr Trump’s voters, many of them former Democrats, what he is doing must look like a breath of fresh air. A politician fulfilling campaign promises! Urgent action on trade and immigration! That there is a lot of outrage and not a little confusion will not concern them. On campaign Mr Trump was repeatedly outrageous, and that harmed his standing not at all. It doesn’t matter if liberals hate him.

And it will be hard for liberals to win the propaganda war. There will be successes for Trump. Look at how the motor companies are changing their tune about jobs in the US; and NATO countries are talking more about their defence budgets; the economy looks just fine. And failures can readily be blamed on the usual suspects. Likewise some distinctly questionable handling of conflicts of interest will arouse shrugs: people sort of knew that would happen when they voted for him.

The smart people in all this are the mainstream Republicans, who control both houses of Congress. They are keeping their heads down and taking the credit as much as they can. It is by no means clear that Mr Trump will last the course. He is old for a first-term president; he is not grounded in the ups and downs of politics; an implosion of some sort cannot be ruled out. But the Republicans, and especially with Vice President Mike Pence, will be there to pick up the pieces, and create a more sustainable version of the Mr Trump’s politics that will lock the liberals out of power.

You can’t, and shouldn’t, stop people being angry of course. But opposition also needs to do two things. First is to avoid personal attacks, on Mr Trump or his supporters. Jokes about the size of Mr trump’s hands, or accusations that those that voted for him were bigots or idiots, need to be toned down and reserved for private conversation. Second, which follows, is that the conversation needs to be about competence rather than morals. The Trump administration (unlike the Coalition, by and large) is astonishingly incompetent at actual policy, as opposed to messaging. To give this criticism credibility it means acknowledging the government’s successes when they occur.

Remember George W Bush. He was the target of a torrent of sneering attacks from liberals – but his power only grew. But when he appeared utterly incompetent in the face of Hurricane Katrina, and then Iraq,that’s when his popularity fell off a cliff. And yet his incompetence had been evident for years before that. I have read a similar account of Italy’s Silvio Berlusconi. Personal attacks did not harm him; scrutiny of his policies did.

So far, opposition to Mr Trump has failed these tests. The president’s executive orders have been badly drafted and are leading to muddle and injustice. But he is able to shrug all this off while liberals indulge in ill-directed anger. While liberals congratulate themselves on the size and noise of their protest marches, Mr Trump’s relationship with his base is intact.

What the left lacks is leadership, both here in Britain and in America. A liberal fightback can be successful. Demographics are in their favour. But they must rally around a clear and competent alternative. Alas none is in sight.

Wanted: a new approach to economic management. Liberals should lead the way

The 1940s fighting the 1980s. There is something desperately stale about the debates over economics in the Labour Party right now. It is a battle between two approaches that have run their course. Meanwhile, on the Conservative side, the 1980s approach is unchallenged. On the principle that these things change every forty years or so, we should be setting our sights on something fresh. What will it look like?

Followers of David Boyle will recognise this narrative. The 1940s ushered in the era of social democracy. This featured economic growth through increases in mass production and mass consumption. An aggressive private sector was balanced by a growing state sector, both in terms of state services and transfers to the less well off. National governments reigned supreme, operating within an international system of fixed exchange rates. Keynesian economic management was unchallenged. Many important national issues were settled by negotiation between government, employers and trade unions – the balance between the three varied from country to country.

In the 1950s and 1960s living standards in the developed world – mainly the USA, West Europe and Japan – advanced steadily across all levels of society. But in the 1970s things fell apart. Environmental constraints took the gloss off the idea of ever upward consumption, especially of energy – as oil prices escalated. The Bretton Woods exchange rate system collapsed, taking the lid off disciplined monetary management. State run services became monstrously inefficient. State bureaucracy was vast and notorious, with not a little taint of corruption, especially (in the UK) over public housing. Arbitrary and misconceived development projects abounded. A massively expensive foray into nuclear power was perhaps the most egregious in this country – a huge waste of public resources for which nobody has ever been held to account.

This led to an economic crisis as the government wrestled with unreconcilable demands, ushering in a period of simultaneous inflation and high unemployment, supposedly impossible under the conventional Keynesian economics of the time . In Britain a major feature of this crisis was a rampant trade union movement, which openly flouted the rule of law with its use of mass strikes and picketing to support inflationary wage increases. Government finances became unsustainable, with the IMF having to stage a rescue in the late 1970s.

The crisis of the 1970s brought about the rise new thinking. This I will call “neoliberalism”. This word has become something of an all-encompassing hate-word on the political left, which has drained it of much of its meaning – but it remains a convenient term. Neoliberalism encompassed a wide variety of perspectives from the far right to the centre-left. It was essentially a rebellion against excessive state power. The state’s attempt to manage the economy was doomed to fail, they said, because of inadequate information and distorted incentives. In its place they advocated solutions based on markets – seen as the most efficient way of to reconcile information on supply and demand – and carefully designed incentives. Taxes should be cut to improve incentives to enterprise and hard work. At its heart was a liberal idea: personal choice should be at the heart of everything.

In Britain neoliberal thinking took off with the administration of Margaret Thatcher, who came to power in 1979. It was given a new lease of life by Tony Blair and Gordon Brown’s New Labour project, as they tried to combine a large state with neoliberal principles of management. How successful , or not, all this was is a matter of deep controversy. But in the early to mid 2000s things seemed to be going well enough, with a record of continuous, steady economic growth and generally improving living standards. Then things started to fall apart with the financial crisis which started in 2007, the aftermath of which still seems to drag us down.

But the styles of economic management only tell part of the story. Behind them lie important important developments in technology and patterns of world supply and demand. In the 1950s technology delivered a host of mass-produced household products, from cars to fridges to brightly coloured fabrics, which provided the basis of both expanded production and consumption. By the 1970s the markets for these products were becoming saturated, with a greater focus on quality and status rather than quantity. From the 1990s the world saw the rise of globalised supply chains, and the explosion of information technology. While economic growth in the old developed world can be questioned (much of it went to a rich elite, or went up in smoke in the crash), there was astounding growth elsewhere, notably in South Korea, China and India. This latter growth followed the adoption of neoliberal policies (though alongside a strong state) and is better evidence of their efficacy than progress in the old developed world.

But regardless of how successful they were, many think that neoliberal ideas have run their course. They do not offer an adequate template for future economic management. Low pay or unemployment is rampant; property values disappear out of reach to most younger people, unless they are helped by parents; large swathes of the country seem stuck in permanent depression; many public services, especially health, are cracking up under increased demand with which the tax base cannot keep up. Meanwhile questions of environmental sustainability persist, especially as it is clear that current levels of global carbon emissions will eventually kill the planet. It is not clear how neoliberal policies will be able to meet these challenges. And many neoliberal ideas look like downright failures – especially financial liberalisation and the attempt to manage public services through markets and numerical incentives.

So it is not surprising that many on the left look back fondly to the heyday of social democracy, conveniently forgetting its failures and the underlying circumstances that made it feasible (expanding demographics; low manufacturing productivity; and so on). But ultimately this is even less convincing. It is quite laughable that the left refers to itself as “progressive”. So what will the shape of the new economic management be?

The first point to make is that the point of it all is improved wellbeing for the general public and especially the least fortunate. We need to completely detach this from the idea that improved wellbeing is based increased levels of consumption of physical things like food, raw materials and energy. This may be so for the poorest in society, but that is a problem of distribution. Most people have more than they need, and many grotesquely more. This is a simple observation, but given how much of the current economic debate revolves around increasing levels of consumption and raising productivity, it does point to the need for a new mindset. Incidentally, reduced consumption of physical things is not necessarily incompatible with conventional economic growth – but focus on growth is not helpful.

The second thing to observe is that improved wellbeing will come from stronger individual empowerment, and stronger local communities. This is common sense, but it is supported by plenty of academic research. It seems to me that the main barriers are unequal power relationships, and dysfunctional services. And these in turn come about through an excessive concentration on specialisation and scale. The neoliberals were right about big, boneheaded national governmental institutions – and even their imitators at more local levels. These are incapable of the effective coordination required to help most people in need. But so many of our private sector choices seem to be based on similar inhuman systems – national and international chains incapable of responding to the needs of whole people. The advance of these institutions is hollowing out local communities while failing to deliver what people really want.

This requires a new management approach that is less focused on national and international institutions, and more on the health and wellbeing of people and their communities. I will build on this in future blogs.

But one thing is very clear. Such a new approach is fundamentally a liberal one. The conventional left, in both its “hard” (think Jeremy Corbyn) and “soft” (think Ed Miliband or Andy Burnham) forms is still to attached to national institutions to be controlled by a small, enlightened elite and serving a grateful nation. Conservatives may be suspicious of the state, but they are very attached to large commercial corporations and global financial markets, which are surely part of the problem and not the solution. There is some hope in the Green movement – though its British incarnation needs to reverse out of the hard left blind alley in which they currently find themselves. But political liberals, especially those who understand community politics, are the closest to reaching the answer. I want to help move them along that path.

Learning from the Rotherham scandal – this should be a moment for humility

The big story in the British news media this week is the Rotherham child abuse scandal. This was occasioned by a detailed report from Professor Alexis Jay. This revealed that some 1,400 children and teenagers had been sexually abused from the 1990s by gangs in this Yorkshire town. The perpetrators were largely from the Pakistani and Kashmiri community and the victims were vulnerable white girls, many in care. Council officials and police ignored repeated reports of this abuse. Similar things seem to have been occurring in other northern towns, as well as further south. The revelations have provoked anger.

But instead of trying to understand the implications of this many-faceted issue, most commentators have used it as a battering ram to push forward their own political agendas.

The right wing agenda, promoted by the press, is to blame “political correctness”. This is because the allegations were initially treated as racist, and treated circumspectly for the sake of “community cohesion”. Implicitly they suggest that the problem was the fault of an immigrant community that was not dealt with robustly enough. Behind this lies a distinctly racist, anti-immigration agenda. But this narrative is at best incomplete. One of the main reasons that allegations were not taken seriously was that the authorities had a shockingly low opinion of the victims, who were treated as “sluts” and authors of their own fate. There is nothing politically correct about such old-fashioned, macho attitudes.

The left wing agenda is well expressed by this article by Suzanne Moore in the Guardian. This downplays the racial dimension, which she says is but one part of a much wider problem of powerful men abusing and denigrating powerless women. Perpetrators are from all races, as are the victims. She then goes on to blame the “neoliberals” for running down children’s services – in spite of providing evidence from her own experience that shows the problem dates back to well before the neoliberals got going. And you would hardly describe Rotherham’s council leaders and the South Yorkshire Police as part of the neoliberal establishment.

But while both lines of attack are self-serving, both also have a grounding in truth. The paternalist, we would say misogynist, attitudes of the rural communities from which the perpetrators were descended were part of the problem. And fear of allegations of racism clearly influenced the authorities. Abuse of young girls goes much wider than this ethnic minority, as does a reluctance for the authorities to act. Overstretch in social services hardly helps.

And it is very easy to use the scandal to go after your favourite villains. In my case it would be the Labour elites of northern cities who run their fiefs on a clientalist basis – including with the self-appointed leaders of ethnic minority groups. And weak and incompetent police leadership. There is plenty to go on for such a line of attack.

But that too would be incomplete. I think we owe it to the victims to question our own attitudes and practices, not just those of people we don’t like. A large part of the problem also lay with middle-class liberals. Getting to grips with this problem involved crossing two boundaries that we hate to cross. First is criticism of ethnic minority groups, which we fear will be seized on by racists to stir prejudice. And second, about which comment has been strangely silent, crossing a class barrier. Victims and perpetrators are largely working class, and these formed the power base of council leadership that failed to act. We are reluctant to get involved across the class barrier, and treat working class communities with general incomprehension.

And that is one reason why it took so long for the problem to be taken seriously at national, as opposed to local level. This is clear from an interview given by Andrew Norfolk, the Times journalist who eventually brought the story to light, on BBC Radio 4’s Media Show . The liberal elites did not want to know, and accused him of racism. This account is backed up by others at the fringe of the story, consider this piece by television journalist Samira Ahmed.

The lesson is this: we are all part of the same, cosmopolitan community. We should not let the barriers of class, religion or ethnic heritage stop interchange and conversation, based on facts. Showing respect is not about treating people with kid gloves and not asking too many questions. We should be open to criticisms of our own values and practices; but we should not be shy of challenging others in an appropriate way. And above all, no individual, of whatever class or ethnic origin, should be treated as “trash”. Even if we don’t like them.

Rethinking Liberalism 7: what are the liberal blindspots?

I started this series of essays because I thought liberalism, to say nothing of Liberalism, was at a low ebb and needed some fresh thinking. I started with the easy bits. Big questions, like the future of capitalism, but not ones that make liberals particularly uncomfortable. This is an old strategy to deal with something big and difficult. If you clean up the easy bits first, what remains looks less intimidating. But I have been a bit underwhelmed with the results, which are well within the spectrum of ideas that are regularly discussed by liberals. After a few weeks break, including a refreshing holiday, I think it is time for a change of direction.

All political philosophies have difficult bits: areas where the principles conflict with each are, or seem inadequate in the rough and tumble of the real world. Socialists want to clamp down on businesses to stop exploitation, and yet crave the tax revenues that will only come if you give businesses some serious rope. Conservatives yearn for a less intrusive government, but are annoyed when they find this gives people the freedom to behave in what they see as antisocial ways – and on which their views tend to be very narrow-minded. Liberalism is no exception. Liberals have blindspots.

I call them blindspots because most liberals behave as if these difficulties aren’t really there. Many have created a sort of alternative reality in which these problems don’t arise. Or they simply change the subject. But this is damaging in two distinct ways. First, it means that we don’t talk about many issues that bother people, and are therefore perceived to be weak or lack credibility. Second, when liberals do get their turn in government, and have to confront these intractable problems, liberal ranks are torn apart. The pragmatists are seen as betrayers of liberal principles; the fundamentalists are seen as people who will not come out of their alternative universe to confront the real world. The British Liberal Democrats in the last four years are a case study in both of these phenomena.

But even identifying what these blindspots are is hard. Because we rarely talk about them in any depth. We seem afraid of what we might find if we do. But this blogger is not running for electoral office, and so should be less frightened of tackling difficult issues. I think my time in this series is most constructively spent identifying and discussing these issues – in the hope that liberals can, in due time, work their way through them to an updated political philosophy. I feel a bit inadequate to the task. I have not read great tracts of John Stuart Mill or even Conrad Russell. But then, maybe spending so much time reading great men can be part of an evasion process.

Anyway, today I will make a start. It is time to move from the abstract. What are the liberal blindspots? Here are few problems to get us going:

Dependency. Liberals feel that people should have equal chances. Poverty is usually not a choice, but stems from some form of bad luck. So we offer help to redress the balance: cash handouts, subsidised housing, and so on. But very often this help creates a relationship of dependency between those being helped and the state. This does not worry socialists – but it does worry liberals because dependency is disempowering; it reduces freedom.
Free riding. Liberals like rights to be unconditional, since that gives individuals the maximum power. But that creates the opportunity for free riding: people who take but do not give back. Since many rights (health care, education, minimum housing standards, etc.) cost money, the opportunities for free riding are manifold. Progressive taxation, asking the rich to pay more, makes things worse. Free riders not only undermine the financial viability of entitlements, they undermine the sense of community solidarity that underpins unconditional rights.
Oppressive communities. Liberals like the idea of strong local communities. These balance the need for a strong central state. They give individuals more weight, and a greater sense of control. Members of strong local communities are generally happier than those of weaker ones. The word “community” even gets into the preamble to the Liberal Democrat constitution – the place that the party’s core values are set out. And yet strong local communities are not liberal, open places. They often promote uniformity and are hostile to outsiders, especially those from other cultures. For many liberalism is a reaction to the oppressive nature of strong communities.
Multiculturalism. This is closely linked. Often immigrants form strong local communities that don’t gel with their neighbours, and challenge liberal values. Conflict often ensues. This is a worldwide problem; neighbouring communities from different cultures may live side by side in peace for a long time, and then there is an explosion. The mechanisms of liberal democracy don’t seem equal to the task. And yet forced integration is illiberal.
Fighting crime. There are bad people out there, who have no interest in promoting a prosperous, inclusive society. They want to steel our money, or even kill us as participants in some imaginary war. These people adapt quickly to the modern world. But liberals often seem more interested in theoretical notions of privacy belonging to a different age.
Postcode lotteries. Universal rights create expectations that vital state services should be more or less the same everywhere. Strong local democracy suggests that different local communities should be able to make different trade-offs that match their own priorities and preferences. But this creates variations that are derisively referred to as the “postcode lottery” – your actual entitlements to universal rights depending on where you live.
Managing businesses. Businesses are at the heart of our society; we don’t just need them, we need them to be prosperous and innovative. This is at the very heart of any strategy to combat poverty. But liberals often see businesses as a threat, to the welfare of their employees, their customers or anybody that gets in the way. Liberals dream of cooperatively owned businesses, grounded in their local communities. And yet, valuable as such businesses may be, they do not provide a credible template for the majority of forward-looking enterprises that society needs.
Migration. Migration of people from other countries provides a flashpoint for most of the issues already mentioned. And yet it is undoubtedly a dynamic force, and a vital escape valve.

I’m sure I could go on. The agonising of liberals over events in Iraq and Israel shows liberals in a bit of a post-colonial muddle – though that affliction is hardly unique to liberals. Still we have enough to get started.

Just looking at the list of problems, I think a can see the outlines of a more general one. Liberals paint a picture of an ideal society, based on Goldilocks local communities with just the right amount of cohesion. We want all countries to follow that idea. But we also believe in universal rights; a fundamental equality of all people. And yet many of these people want to use these rights to take themselves and society in a different direction. Perhaps they have an alternative ideal; perhaps they just want to promote themselves in what they see as a rat race. We are getting to two muddled – the society we are trying to create, and the what should apply to everybody in the diverse here-and-now. And we do not address the issue of how a liberal society coexists with others made up of people who have freely chosen something different.

In this light liberals need to rethink their cherished framework of universal rights. That is what I will attempt in future essays. I’m feeling uncomfortable already. Good.

Austria: a social democracy that works

I have been on holiday to St Wolfgang in Austria in the last two weeks, which explains why I have not posted anything recently (NB the picture is of nearby Hallstatt, not St Wolfgang). This holiday was mainly about fresh air and relaxation. Political reflection was not on the agenda – but I just can’t help myself. Austria is a very interesting political case study.

The country is an overlooked success story. The area that we visited, the Salzkammergut, was pristine. Everything was neat and tidy. The state of public infrastructure, from roads to public footpaths, was excellent as well as highly extensive (hot water is supplied communally, for example – not to mention all those well marked and maintained foot and cycle paths)). This was a major tourist region, but no Cornwall, with tourist affluence co-existing alongside poverty. There was plenty of local industry, and quality medium-level jobs, tucked away on the edges of the villages.

Economic statistics bear this success story out. Income per head in 2013 was 11th highest in the world, according to the IMF – behind the USA, but comfortably ahead of Britain. Unemployment is low (4.7%), the trade balance is positive (2.9% of GDP), and there is a reasonable level of growth (1.4%). The government is in deficit, but the level of 2.8% of GDP looks much better than Britain (4.6%). This is in spite of a high tax take (43% in 2012 according to the Heritage Foundation, compared to 39% in Britain and 27% in the USA). According to the OECD the Gini coefficient, measuring income inequality, was 0.261 after taxes and transfers, one of the lowest (i.e. most equal) in that group (Britain is 0.345, the US 0.378). The really interesting thing about this statistic is that this level of equality has been attained through redistribution. Before tax and transfers Austria’s Gini is 0.472, similar to that of the USA (0.486) and Britain (0.456). Austria taxes the wealthy highly and has a generous level of social security. It is a beacon of social democracy.

This is interesting because we are constantly told by economic liberals that high taxes and high social security is the path to doom and poverty. And, to challenge another piece of received economic wisdom, it does not even have its own currency, being part of the Euro zone. In America, you only have to mention “Europe” to a Republican, and it conjures up an image of economic failure. And yet Austria is no economic failure. It is not like France or Italy, whose economies are struggling. Why is Austria so successful? Well, I don’t know the country that well – but let me make three observations.

The first is that power is highly decentralised. Austria itself is not a large country, with 8.5 million people. It nevertheless has a Federal constitution, with nine states. These are highly visible on the ground (we were staying within a few hundred metres of the boundary between Upper Austria and Salzburg; we also visited Styria), on car number plates, and so forth. Local municipalities levy a payroll tax (about 3%) and as well as property taxes. In Britain, at least, there is a tendency to think that social democracy implies highly centralised governance, as shown by the last Labour governments highly prescriptive diktats on local government.

The second observation is that civic society is clearly very strong. You don’t achieve Austrian levels of order by government diktat and regulations alone. This requires active civic engagement – a bit like David Cameron’s “Big Society”. But what Mr Cameron failed to grasp is that big government (if highly localised) and high civic engagement work well together. Indeed, Austria’s political system looks like a bit of a stitch-up (two dull establishment parties, challenged by right-wing mavericks) – I am sure that it is high civic engagement that holds government services and public infrastructure to account, rather than the electoral process by itself. Again, Britain’s social democrats tend to view civic society as interfering busybodies with a NIMBYist agenda.

So far, this picture reinforces Liberal Democrats conventional wisdom: strong local government, linked to a high level of community engagement. The catch is my third observation: Austrian political culture is not liberal. In fact we would regard it as distinctly nasty. Ukip supporters would feel comfortable here (if you exclude the small government types). Unlike Germany, there is no public angst about Austria’s Nazi episode – though the country was highly complicit (Hitler was an Austrian after all). Immigrants face hostility. Austrians are very hospitable to visitors (more so, in my direct experience, than the Swiss, for example); but visitors go home and do not challenge for jobs and political influence. We did not see much sign of foreign staff in the restaurants and hotels – you meet more Poles in Cornwall. The EU is regarded with suspicion, if not hostility – even if it is accepted as an inevitability. Social attitudes tend to be conservative. In the hotels, the men tended to have the more authoritative jobs, with women running around as skivvies – though the shops tended to be run by highly capable women.

Perhaps the biggest question for British liberals is this. A fairer distribution of wealth and jobs seems to flow from strong local government, based on strong local communities; but is this compatible with more fluid liberal, human-rights based values? Or must strong liberal social values lead to economic liberalism, and the unequal, hollowed out society that seems to be taking root in the US, for example. Can you be both social democratic and liberal at the same time? To that critical question Austria does not provide an answer.

Rethinking Liberalism 6: reinventing the state

So far in my series of essays my conclusions have been quite conventional, if a little left of centre. We need to keep capitalism in a mixed economy; the state will need to get bigger to cope with the demographic challenge; we will have to tax the rich more as middle incomes are squeezed. There’s nothing here that would upset the denizens of Whitehall unduly, notwithstanding the economic liberal tendencies of some. But I think we are badly let down by our system of government. It will have to change radically – and yet the complacency of the Westminster elite is overwhelming. Liberals must rally to challenge it.

Unfortunately one of the best examples of this establishment complacency comes from our own Liberal Democrats. Back in the 1990s I was inspired by anti-establishment rhetoric from our then leader, Paddy Ashdown. The whole system was rotten, he said; we were the outsiders and only we could change it. Then, in 1997 the party arrived as a serious force in Westminster politics. But, somehow, under the leaderships of Charles Kennedy and Nick Clegg (or the brief leadership of Ming Campbell, come to that) this radicalism came to be toned down. In spite of some radical language from both of these leaders, policy was more about trimming the Westminster policy agenda here and there without counting too much controversy. Ideas, such as a local income tax, which might have meant a decisive break from the Westminster-centred way of the world, were quietly buried. By the time Lib Dems took up cabinet jobs in the current coalition, they looked very comfortable in their new Westminster ministries, with the possible exception of Vince cable, the industry minister.

And the public could sense this. My heating engineer, classic old-school lower middle-class, told me that the Lib Dems had sacrificed their principles to get their hands on the prestige of power. Mr Clegg looked as if he was enjoying themselves too much. This feels very unfair, of course. There was a national crisis in 2010, and the compromises of coalition were needed for the country’s sake. And the Liberal Democrats have stopped the Conservatives doing a lot of silly things, like cutting Inheritance Tax. But there’s a grain of truth in the accusation; what about the promise to really shake-up British politics? It’s not clear that senior Lib Dems ever wanted to do more than change the standard Westminster priorities a bit, by pushing education and redistribution up the agenda and making the odd stand on behalf of civil liberties, unless real heat got applied. If there has been any reinventing of government, it is mainly Tory ideas that are driving it. And they are about keeping the basic Westminster architecture in place, but diversifying the delivery (more private contractors and Quangos in place of top-down state hierarchies). The attempt to devolve more power to democratically accountable local bodies has been a particular disappointment. Each step forward is accompanied by at least one step back. The malign orthodoxy of the Treasury, with its insistence on a highly centralised model of power, remains unchallenged by key Liberal Democrats – or so it appears.

Why does this matter? Firstly because the pressures caused by the demographic shift have only started. I have already written about pensions. Health costs will rise too as the ratio of older people increases. And then economic growth will continue to stagnate, for a variety of reasons, including the increasing number of people entering retirement, but for other reasons too. Meanwhile the twin (and related) economic deficits of government finances and trade are unsustainable in the long run. The government has to tax more and spend less. It has to become much more efficient and effective.

The country’s direction of travel is not encouraging. Government cuts have been very painful, and the public is tiring of them. Endless privatisations are affecting the quality of service. The fiscal deficit creeps down, but it is still very large, and he trade deficit is getting worse. This shows that the underlying economy remains weak, and that growth is hardly more sustainable than it was under the last Labour government. No sooner does the economy grow, than does Sterling appreciate to undermine all the rebalancing. Meanwhile the country is sleepwalking into the breakup of the United Kingdom (even if Scotland votes No in September) and exit from the European Union, as political dissatisfaction with the status quo grows. Pulling all the usual levers of power in Westminster seems to be doing not much good.

What have liberals to say about this advancing gloom? The first point is that we want people to have as much power as possible over their own lives. That means we dislike people being dependent on the state. It is here that we differ from the socialist left, who don’t mind if the public has a permanent client relationship to state agencies, as this creates a political constituency both amongst the dependents and the employees who serve them. Liberals should recognise that in a modern society the state must play a very big role – but we also need to push back on dependency. The state should fix problems so that demand for state services reduces.

The second point is that we believe that as far as possible state structures should be fully and democratically accountable to the people they serve. The state does not devolve power to citizens, but citizens delegate power to the various levels of government. This too is difficult in the modern world. Many problems are complex and must be solved at a national and international level – and the further up power is delegated, the weaker accountability becomes.

Have we delegated too much power to transnational bodies like the European Union and the World Trade Organisation – with the threat of more as part of a transatlantic trade deal? I don’t think so – these structures merely recognise the transnational nature of problems and the need to agree international standards and laws. Countries that opt out of these structures don’t seem conspicuously better off as a result. Is Australia, for example, really a better and happier place than Britain? Its recent economic success is as much down to the luck of geography and natural resources as anything else. Does having to dig up vast amounts of prime farmland to get at the coal beneath, while poisoning the great natural wonder of the Barrier Reef, really look like freedom?

No. I think the main problem is that we have delegated too much power to Westminster, and that the Westminster elite is protecting itself rather than solving the countries’ problems. It has created a series of administrative silos that perpetuate problems rather than solving them. To tackle this we need to do three things.

Establish a federal system for United Kingdom, by creating a new English parliament and English government, based outside London, and taking to itself the same set of administrative responsibilities as the Scottish government has.
Radically reform the way public services are commissioned to ensure that solving problems for their clients becomes their prime driving force. This will entail a radically increased role for locally accountable agencies.
Reform the country’s tax system to follow this radical redistribution of responsibilities so that every level of government controls more of its own revenues – alongside a system of transfers to ensure a fair distribution of resources.

Each of these three depends on the others. Federalism is required to break up Westminster complacency; public services will only be properly remodelled if it is not controlled from Westminster; power cannot be decentralised unless tax is decentralised too. I will pick up each of these themes in future essays.

Rethinking Liberalism 4: taxing the wealthy

There is a growing view that”inequality is one of the main problems confronting the modern world. This is quite a change. Distribution of income or wealth (or indeed the difference between the two) was not a major concern in the previously dominant neoclassical economic world view. But now that the benefits of growth in the developed world go almost exclusively to a tiny elite, while median incomes stagnate, this view has become complacent. And the work of the French economist Thomas Piketty has drawn attention to the potential power of the very wealthy. This presents a major challenge for liberals.

The problem is that liberals should have no particular problem with inequality of income and wealth in their own right. We believe in individual responsibility and free choices. We have unequal economic outcomes because people want and choose different things. So what? In fact inequality is cover for a series of issues which liberals should care about. Today I am writing about one of them: the wealthy elite.

The problem is known colloquially as the “1%”, because a disproportionate share of developed world income is going to the top 1% (or 10%; or 0.1% depending on how you want to present the figures). Rather than providing evidence for this assertion, and how it specifically might apply to Britain (perhaps less than in some countries), I will take it as a given, and look at some of the issues of principle that it uncovers.

Why does it matter? To some it is a simple matter of social justice. Inequality is one thing, but the justification for these extremes is another. There is more than a suspicion that the lucky few are winning because of unfair advantages, rather than just ordinary luck and talent. But regardless of this is a further problem. This wealthy elite has the chance to consolidate its advantages with political influence, so as to rig the economy in its favour. The growing influence of big money in politics, and the enormous lobby industry in places like Washington DC, points in this direction. There is an economic problem too: excess wealth is deadweight. The wealthy do not consume as high a proportion of their income as poorer people. And only a small proportion of their savings get channelled into constructive investment (paying people to build things) rather than various forms of speculation in pre-existing assets.

Why is the problem growing? It seems to be a case of a weakening middle. In other words it is not a question of rising poverty, but a hollowing out of the middle class. It is easy to see the culprits: technologies that automate medium-skilled jobs, and globalisation that weakens local bargaining power. Thus we have the problem: the economy becomes more productive, but the benefits do not go to most workers. Can this trend be reversed? That is a central challenge for progressive policymakers, and it is a question I will return to.

But if we take the trend as a given, which I fear we must, then what can be done about it? The answer is clear: redistribution via taxation, public services and transfers. This issue divides politics like no other. On the right, we have “economic liberals”, who think that lower taxes and smaller government will unleash economic growth that will benefit all of society. On the right we have what I will call progressives (not all liberal), who appreciate that with today’s skewed power structures such growth will only benefit an elite, and will in any case be undermined by the deadweight effect of excessive wealth. Like most Liberals, I am in the progressive camp here.

Apart from the deep flaws in the economic liberal logic, progressive thinkers can see something else. The state has no choice but to grow. We have signed up to a society which seeks to (more or less) guarantee minimum levels of access to health care and old-age pensions. The aging of developed world populations will increase the burden of these. And much of the investment needed to keep a modern economy growing, from education to roads and bridges, requires some level of state support. Meanwhile the ability of the middle classes to fund their own needs through savings is under pressure – both because their own incomes are not keeping pace with inflation, and because returns on saving are diminishing, a little appreciated aspect of the “hollowing out” process – with the exception of those able to own property in prosperous parts of the country.

So this comes back a stark truth. Taxes on the rich must rise. This serves to recycle wealth that would otherwise drop out of productive economic flows, and it helps fund the basics the state has to provide. So how to do this? There are broadly three directions: income, assets and capital gains.

Until now, most of the argument has been over income taxes, and in particular the best top rate of tax. When I started my first accountancy job in 1976, the top rate of tax was 83%, which rose to 98% for investment income. Conventional wisdom turned against the wisdom of such high rates. They dropped to 60% and then to 40% in the UK, before rising to 50% in 2010, and then being clipped to 45%. Economists are less sure about the wisdom of cutting such high rates. They did think that cutting tax rates would mean that rates of pay (for the elite) would fall, as it was cheaper to provide the same net salary. In fact the opposite has happened. This seems to point to senior salaries being more about power politics than market forces. Companies paid their executives more because they could; they did not do so when tax rates were high, because they did not like to see so much of the extra money disappearing in tax.

I can see no harm in reinstituting the 50% top rate of tax, though experience suggests that this won’t bring in a huge amount of extra revenue. Such high rates create a tax avoidance industry. There is a problem with very high rates of income tax though: they tend to entrench a wealthy elite, because they make it more difficult for outsiders to join them. The way to become wealthy becomes to to inherit rather than earn. This was the rather interesting conclusion of a quite wonderful contemporary study of the British tax system of the 1970s by Mervyn King and John Kay – which was recommended as a model piece of economic writing 30 years later by the UCL Economics department.

So should we not look at taxing wealth? This is the recommendation of Mr Piketty, who worries that the rate of return on the elite’s assets is too high, and entrenches their dominance. Such a tax would probably be about 1 or 2% per annum – which may not sound much, but is enough to dent annual returns significantly. Such a tax exists in the Netherlands, hardly as basket-case economy. A variation on this general idea is just to tax land – an idea (Land Value Tax) that has an ancient history in the Liberal movement. I personally have a difficulty with taxing a theoretical value of an asset, rather than a realised one – given that the reliability of asset valuations is weakening. But I have to admit the idea is growing on me, especially the land-only version.

A further way of taxing assets is at death. This is theoretically very sound, but too easy to avoid in practice. The rates here can be very high. In order to make this more watertight such taxes should no doubt be applied to large gifts as well. This used to be the case in the UK. But taxing legacies and gifts seems to attract a particular political opprobrium, and we have to tread carefully.

Finally we should mention capital gains: where assets and incomes meet. These are the commonest loopholes in tax systems. Aligning such taxes with income tax seems the best way of dealing with this. But this may undermine the case for an asset tax: the Netherlands does not tax capital gains.

But in discussing such details we must not miss two big and interrelated issues. The first is that our elites tend to be globally mobile. Taxing them will require growing levels of transnational cooperation. And indeed the need to tax such mobile elites puts greater importance on such transnational cooperation. The EU’s tax dimension should grow. Such bodies as the G20 need to focus on the matter too. It is not particularly surprising that so many rich businessmen are in favour of the UK leaving the European Union.

Which brings me to the second issue: politics. The rich seem to be of an economically liberal mindset (which is actually a recent development, as this article in the New Yorker observes). They increasing fund political movements with an economically liberal agenda. This is already poisoning the politics of the USA. It will make taxing the wealthy harder. But not impossible. If the public understands that the alternative is to cut basic pension and health systems the economic liberals will lose. But whereas we used to think that politics in the developed world was getting dull, this growing clash of economic interests will inject real conflict into it. Class war is back.

The Orange Book 10 years on: is this the way to reclaim liberalism?

Today I attended a conference organised by CentreForum to mark the tenth anniversary of its publication of The Orange Book. Viewed in hindsight, the Orange Book was an important political event, that did much to set the tone of the following decade. But does its version of liberalism have what it takes to drive political ideas in the next ten years? On today’s form the answer to that question is no.

The Orange Book was edited by David Laws, currently education minister, and briefly in the Coalition cabinet; other contributors were Vince Cable, Chris Huhne, Ed Davey and Nick Clegg – who are or were all members of the Coalition cabinet, along with a number of other people who became ministers – an event that none would have foreseen at the time. While it took on a broad definition of liberalism, it was its espousal of economic liberalism that caught attention. It was not favoured by the Liberal Democrats’ then management, as a General Election beckoned in 2005. But after Nick Clegg took on the party leadership it came to define the party’s official policy line. It can plausibly claim to frame the guiding principles of the Coalition government itself, and not just the Liberal Democrat element. To the book’s supporters this was a victory of a coherent political philosophy over the mushy protest politics and left-wing opportunism that preceded it. To its opponents the Orange Book’s success was the triumph of a “neoliberal” elite over the party’s core values.

The conference consisted of two panel sessions, with three speakers each, in the morning, a keynote speech by David Laws at midday, with a response by economics journalist Anatole Kaletsky, with a final panel session after lunch.

The first panel consisted of Mark Littlewood, currently of the Institute of Economic Affairs (IEA), a right-wing think tank, but also a former Lib Dem functionary; Tim Montgomerie, a Conservative agitator who founded ConservativeHome; and Vicky Pryce, formerly a government economist and Lib Dem member.

Mr Littlewood led with a lightweight defence of economic liberalism: a formula of smaller government and lower taxes, which, he claimed would lead to stronger economic growth, whose benefits he did not bother to spell out. He felt that the country’s governing philosophy was still social democracy, and that economic liberalism had not been given a true opportunity to show what it could do.

Mr Montgomerie was much more interesting. He pointed out that economic liberals needed to confront two issues which threatened to undermine their system. The first was “social capital”, the family and community structures and the value system without which a liberal economy could not flourish. The second was inequality, of which the most important aspect was the division between those who owned their own houses and those that didn’t. His take on both, and especially the first, had a conservative slant – but the challenge was good. He made the excellent point that the best way of reducing the size of government was reducing demand for it, through a stronger society. This is a point that few in the political elite grasp: the objective of most public services is to reduce demand for them – one reason that they have less to learn from the private sector than may think.

I found Ms Pryce rather less memorable. She made a call for stronger leadership and coherence in government. Our current system was too subject the a “do something” culture, responding to whatever the Daily Mail happened to be beefing about, with individual ministers acting without reference to each other.

The second panel session was meant to focus on public services. It consisted of Paul Marshall, who founded CentreForum and effectively funded the Orange Book; Greg Clark MP, a Conservative minister in the Cabinet Office; and Norman Lamb MP, the Lib Dem Health minister. They never really got to grips with the issue public services, confining themselves to generalities.

Mr Marshall is a hedge fund manager, who also founded ARK, a chain that runs Academy schools. He showed himself to be an economic liberal extremist, which he claimed was necessary for social liberal ends. He promoted the myth (as did Mr Clark) that it was the government’s policy of supporting independent academies that had caused a substantial advance in school standards, especially in London. This is a rather annoying rewrite of history: credit for London schools lies mainly lies is forcing proper accountability on local authorities and established schools, as well a degree of state assistance and support. For Mr Marshall education pointed the way for other services, such as health – that advances could be made through using a diversity of providers. He was right, however, in his passionate denunciation of the complacency within the educational establishment.

Mr Clark proved an interesting speaker. His big idea was decentralisation from Whitehall, on which he claimed a lot of progress had been made with the City Deals that he had worked on with Mr Clegg. Unlike some, he clearly understood the implications of this: that it meant breaking away from the idea that everything had to be done the same way across the country. He did not refer to the Coalition Communities’ Secretary, Eric Pickles, who recently decided to regulate the way in which local governments managed their parking enforcement.

Mr Lamb broadly agreed with this, but seemed a bit wearied by the political difficulties of executing reforms. He felt that our highly centralised government was the wrong way of going about public policy, as the many failures of the NHS had demonstrated.

Mr Laws offered a rather complacent speech, celebrating the success of the Orange Book, while barely acknowledging the challenges to it, such as rising inequality. Mr Kaletsky’s was much more interesting. He understood that the world had changed and that conventional liberal economics was not up to the task. Fiscal policy had to be restored as a policy instrument alongside monetary policy; inequality was not just a matter of social justice but economic efficiency; government would have to both to take up less expenditure and extend its regulatory reach; public pensions and the health service would have to be curbed. While I find this analysis is flawed, it at least challenged the complacency.

In the afternoon the final session had James Cameron, Chairman of Climate Change Capital, Maajid Nawaz, co-founder of Quilliam, and Jeremy Browne MP, a former Lib Dem minister, notorious for his robust economic liberal views. This session raised the issue of sticking to liberal values in an international context. Mr Nawaz said that liberals had to emphasise the global nature of liberal values, and not soften them for cross-cultural sensitivities. Liberals should appeal to individual members of ethnic minority groups, and not approach them via their paternalistic community leaders. Mr Browne put to much emphasis on global competition for my taste – but he did make the point that the Lib Dems were potentially missing an appeal to a younger generation who were both economically and socially liberal. While all speakers emphasised that challenges were increasingly international, and the cross-cultural nature of liberal values, none made the obvious progression that liberals should organise themselves internationally, rather than being stuck on national lines.

Overall impressions? To me this conference showed that the Orange Bookers are nearly out of road in the Liberal Democrats. All the most challenging speakers came from outside the party. The world, and Britain in particular, faces major challenges. The rich are taking too big a slice of the economy, which is slowly throttling overall growth. Everybody else is finding life increasingly precarious. Meanwhile the demographic challenge is threatening to overwhelm what taxpayer funded services can provide and climate catastrophe beckons. These developments are not the result of too large a government and an excess of social democratic policies. They result, at least in part, from the application economic liberalism. The Lib Dems will either sink back into the mushy world of protest politics that it inhabited in 2005, or develop challenging new ideas to confront the problems of now. The Orange Bookers seem to be doing neither, and are in danger of irrelevance.

Rethinking Liberalism 3: defeating intolerance

In my first two essays in this series about rethinking Liberalism, I kept to my comfort zone of economics. I concluded that we need to retain capitalism as part of a mixed economy, but that we need to develop the language of economics so that policymakers become less obsessed with crude productivity and growth. Now I want to step back and look at what troubles me most about our society, both in Britain and elsewhere: rising public intolerance.

In my personal bubble, as a white middle class citizen of British heritage, here in a smart inner London district, it is easy to ignore the problem, or even to deny that much of one exists. It just isn’t visible directly. My neighbours are easy-going. The parents and staff that I meet at the local primary school where I am a governor are very positive about taking a tolerant society forward, notwithstanding its ethnic and social mix. I witness easy interactions between people of different ethnic and national groups everywhere. This is all much better than in my youth.

But venture beyond this and things soon get darker. Take this cry of pain from Asian Lib Dem activist Kavya Kaushik, on the relentless hostility and rudeness she has encountered while canvassing for the party, directed not just at Asians, but East Europeans. This is consistent with what other ethnic minority writers have said; things are getting worse not better. Ukip has done well by tapping into this angst, especially in working class communities. Britain First, an intolerant Facebook grouping, keeps coming up on my newsfeed, and has nearly half a million “likes”. Jewish groups are under increasing fear of attack, exemplified by recent murders at a Jewish museum in Belgium. A recent opinion poll found a growing proportion of people admitting that they had racist views, although the Economist has tried to talk this down.

This phenomenon seems typical of the white working class. But it would be a mistake to think that it is only prevalent there. One of the nastiest media outlets is the very middle class and female-oriented Daily Mail. On a local forum this morning it was a nice middle class woman that drew a connection between a local rubbish dumping scam and the arrival of travellers locally (something that I am sure is baseless, judging by the person that tried it on us).

First a note of caution. I have been careful to use the word “intolerance” as being the primary issue, not “racism”. Intolerant comments are typically introduced by the expression, “I’m not racist but…”. Ukip, and the mainstream newspapers who also promote intolerance, are careful to avoid outright racism, without complete success in the case of Ukip. The flashpoints are cultural (Muslim dress code, for example) or over the impact of immigration on the availability of housing and jobs and the take-up of state benefits. And the intolerance is itself multi-ethnic. Some of the things that I have read an Islamic writer say on state primary education are totally inexcusable (“worse than a toilet, because at least after the toilet you can wash your hands…”). On being challenged by me, incidentally, this writer quoted the Daily Mail. But it all boils down to the same thing – and talking about racism obscures rather than clarifies the problem. And anyway ethnic intolerance is leading to intolerance of anybody who is different, such as benefit claimants, the upper or lower classes, gays and so on, and an orgy of scapegoating, of politicians, bankers and anybody else you don’t know personally.

There is an optimistic way to view this. It is like the anger stage in the seven phases of grief – just a phase that society must get through on the way to becoming more tolerant – and the product of temporary economic tensions. But behind that optimistic view there lurks a nightmare. In the 18th Century the Enlightenment ushered in period of rising tolerance, and especially the integration of Jews to mainstream society. But from the middle of the 19th Century there was a backlash. And this backlash was no temporary phase. It grew and grew until it burst out into mass murder and destruction with the Nazis.

What lies behind the current rise in intolerance? There are two big phenomena, at least here in Britain. The first what I might call a Muslim backlash. This is a complex thing; it is mostly a peaceful but angry battle between conservative Muslims and the rest of society over things like mosques and dress codes. But it also inspires terrorists – and since the 9/11 attack in New York, these have been elevated by our security services to being the greatest security threat the country faces. This backlash generates its own backlash. The second thing is the mass immigration of East European workers since the end of the Cold War, and especially the entry of former Communist Bloc countries to the European Union. This has visibly disrupted job and housing markets.

But I think there is an even more important driver: the insecurities generated by the world’s headlong process of globalisation and technological advance, of which both of these are aspects. People are stirred by events in far-away places (such as Iraq and Israel); jobs are made less secure by the rise of developing world industries and automation; people are more inclined to change their country of residence for better economic prospects or a more conducive climate. This creates both physical and cultural insecurity, as well as economic advances. This is not unlike the situation that persisted in the 19th Century, which fuelled intolerance then.

So what should liberals do? Many mainstream politicians, Labour and Conservative alike, are seeking a middle path. They accept that immigration is a problem; they want to push minority groups to integrate better into the mainstream way of life. This includes promoting “British Values” in schools, which include “tolerance”, as away of promoting universal human values while at the same time nodding to the intolerant appeal to Britishness (see Britain First).

I don’t think this is working. It just encourages intolerant attitudes. “We spoke up by voting Ukip,” they might say “and now at last they are listening. Let me speak some more.” The more politicians talk about immigration as being a problem, the more members of the public think it is OK to be intolerant. That may not be logical, but it does seem to be the way things work. And as for “British values”, the trap is obvious. What the public thinks this means (“no foreign cultures here like Islam”) is different from what the politicians think (“Accept Muslims as being fully British”). It’s all a bit “I’m not racist but…”.

Instead liberal, and Liberal, politicians should concentrate on three things: challenging intolerant attitudes, without the buts; developing broad-based community education; tackling the insecurities.

First is challenging intolerance. This means taking on people who say that immigration is destroying society, that Muslim communities are a threat, that benefit claimants are scroungers, and so on. This is more difficult than it sounds. Most mainstream politicians say the words, but destroy them with a “but”. “This society could not survive without immigration, but it has disrupted communities,” for example. Instead politicians should try and divert the blame for the society’s stresses onto economic insecurity following technological and global development.

Next is community education. Schools, especially primary schools, should be celebrated as places where different communities meet. Pupils should be taught about different religions, world regions and so on. Of course Britain’s own special story must be taught as part of this, but not in such a way as to promote narrow nationalism. And the school curriculum should embrace wide life-skills, such as dealing with people who disagree with you, and taking responsibility for you own fate, rather than always trying to blame somebody else. This is not rocket science. Many of our schools are already doing this. But it is difficult to see how this is compatible with the government’s programme of fragmentation of school management, driven by parental choice – and focus on narrow skills such as literacy and numeracy.

Finally we must tackle the insecurity that drives intolerance. This brings me back to economics, and I will develop my ideas on this in future essays. But in essence I think we need to look for stronger local economies, with stronger local governance – to balance the global dimension with a local one, at the expense of our current national focus.

Rethinking Liberalism 1: capitalism

In my last post I suggest that liberalism, and its British variant Liberalism, had lost its way. To many people it does not address the key issues of today, and looks to be a political irrelevance. I want to address this by thinking about how liberals, and British Liberal Democrats, should deal with these critical issues. In my first essay I will take on the burning issue for the political left: what to do about capitalism?

To get a flavour of how some on the left are thinking, read thus piece by David Graeber in last weekend’s Guardian: Savage capitalism is back – and it will not tame itself. Mr Graeber is a self-described anarchist, who wrote Debt: the first 5,000 years, which I reviewed last year. His view is that the capitalists are taking over the political system, and pushing everybody else into effective slavery (though he doesn’t put it quite like that). Stopping them will take more than a bit of polite political debate and a few tweaks to the tax system. He has jumped on the Thomas Piketty bandwagon, appropriating the French economist’s recent book to his cause. He says that it shows how the capitalism is reverting to it natural state whereby the wealthy accumulate the lion’s share of the riches. Mr Graeber is somebody I find extremely annoying. But he says a lot of perceptive things, and he should always be taken seriously – up the point where he runs dry and turns silly.

What do I mean by capitalism? It is best seen as the marriage of two ideas: maximising the reach of open market trade, and a system of private ownership for accumulating gains from trade. Both ideas are initially appealing to liberals.

Let’s start with markets. To many, the use of free competitive markets is the ultimate form of democracy. Consumers choose freely, and the producers must adapt themselves to consumer demand. This idea has currency on the political right, who think markets should replace many functions of government, and reached into Britain’s New Labour project under Tony Blair. There is some truth to this view, but there are limits. There are two groups of arguments against the extension of open markets: those concerning economic efficiency, and those concerning human preferences.

The arguments concerning economic efficiency are rehearsed often. Efficient markets require information and trust; these can be expensive to maintain. This gives rise to the shape of the developed economy, which is dominated by large organisations that are run using command and control methods, not market exchanges, and by strong governments that are required to maintain the institutions that allow markets to flourish, and supervise the delivery of services that markets cannot provide efficiently.

We talk less about human preferences. Market exchanges are of their nature transactional; they require very little of human relationships. Once the deal is done, the parties walk away from each other. The word “arm’s length” is often used to describe the arrangement, with the suggestion that markets will not be efficient unless transactions are conducted at arms length. Such arrangements do little to satisfy many human and social needs. People choose to limit market relationships to only part of their lives. If we lend a friend a hedge-trimmer, we don’t ask for anything in return, still less establish a fair price – because that would be inimical to friendship.

So markets are constrained by the requirements of efficiency on the one hand, and our preference for cooperative, trusting relationships on the other. But, if we allow for these important constraints, free markets are a vital part a modern, liberal society.

But that is only one side of capitalism. But, as its very name suggests, capitalism is about much more than this. It is about wealth and capital. The profits from trade are retained by owners of businesses, capitalists. The capitalists then invest this wealth. To optimists this is a thoroughly benign process: new businesses are created, which help economies to expand and innovate, benefiting all society. To pessimists the wealth is simply used to maximise status and power. In Mr Graeber’s view an important dimension of this is the loaning of the wealth as a means of establishing power over the debtors – a dynamic that has a long history. Both optimists and pessimists have a point.

On the optimistic side, investment and laons in modern society do not lead to enslavement as they used to. Expanding economies provide many opportunities to pay debt back. Furthermore modern legal systems place severe constraints on the power of creditors. They used to be able to cart your children off as slaves, even after your death. They aren’t allowed to nowadays, and there are many ways, through death and bankruptcy, by which debts are extinguished to the loss of creditors. Furthermore, the instruments of ownership, shares and bonds, are mechanisms by which wealth, and power, can be distributed more widely through society. It is the basis on which the middle classes, who form the bulk of a developed society, maintain a degree of independence.

On the pessimistic side, there is a tendency for wealth to accumulate amongst an elite. And for the last generation, it seems that this elite is growing while the fortunes of the middle and lower classes stagnate – one of the central political challenges of our time. There four interrelated sets of problems that should worry liberals:

The capitalist system is creating an elite who are gaining undue political influence, which is tending to perpetuate their own dominance.
The amassing of wealth, only a small proportion of which is invested in new production, is slowly suffocating the economy as a whole.
The poor, and even not so poor, are finding their market power is diminishing, reducing their overall power and control that they have over their lives.
The relationship between the capitalists and their employees, and, all too often, their customers is often abusive and exploitative.

There are alternative ownership models to the capitalistic one: state ownership; cooperatives including customers and/or workers; non-profit enterprises with non-commercial aims. But each of these carries its own disadvantages; it is difficult to see how a healthy economy can work without a large component under capitalist ownership.

So what are my conclusions?

The capitalist system remains essential to a modern, liberal society. Without it life would spiral into even greater depths of poverty and exploitation.
The capitalist system is only a part of that that modern, liberal society and should be confined to those areas where it is efficient, and where people want it to be. It should be part of a diverse, pluralistic system.
There should be specific measures to counteract excessive power accumulated by capitalists, and protection for those vulnerable to exploitation.

So that set’s a general tone. It is different from the hard left, like Mr Graeber, that wants the capitalist system dismantled entirely. It also differs from the far right, that wants the capitalist system extended into further areas of society, and for the capitalists to be given more power over their employees and customers. But it covers a broad spectrum of views, from mainstream left to centre-right. Any distinctively liberal ideas are going to come from precisely how the problems of modern capitalism are addressed. That is where my future essays will go.