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.


4 thoughts on “Wanted: a new approach to economic management. Liberals should lead the way”

  1. So, no mention of Japan and Germany in your pantheon of economically successful countries? How do you hope to help political liberals if you ignore the Sion-Germanic model?

  2. Damn. I meant the SINO- Germanic model – especially for those who understand community politics.

    1. Alas space made my narrative very Anglo-centric.Even then I spent more time setting the scene than I hoped. Still, I think my narrative fits all nations, each in a rather different way. That includes Germany, Japan and China, though I would not go quite as far as saying these nations fit a “SINO-Germanic” model.

      The striking thing about both the German version of the “social democratic” phase was the power of its employers’ organisations. These were able maintain an internal discipline that British (or American) businesses can only dream about. That allowed, for example, an advanced apprenticeship scheme to be implemented without being undermined by poaching between employers, as would happen here. It also held its powerful trade union movement in check, and reduced the role of central government. This enabled Germany to weather the 1970s with much lower inflation, though still with quite high unemployment. A second striking feature is the power of local savings banks, which gave powerful support to local business investment, one of the key factors which allowed a third striking feature: the strength of the mittelstandt. The combination made German social democracy more stable than elsewhere. However it did suffer a major crisis in the 2000s, only partly linked to unification, which led to a series of neoliberal reforms. It is this reform period that makes Germans so intolerant of the Greeks: they feel that if we can undergo hard reforms, so can you. But there is much to learn from Germany, and I hope to draw in this in due course.

      In Japan the employers are even more powerful: they dominate government, and have prevented a strong trade union movement from getting going. This meant that Japan never truly adopted social democracy – its social security systems are weak and its taxes are low. It did not need many neoliberal reforms because it was already there. Instead there were strong social norms to ensure that workers were given adequate pay and job security. This is slowly breaking down however, with the rise of less secure and worse paid temporary jobs, and with the relative decline of Japanese business internationally. The Abe government is therefore contemplating a series of neoliberal reforms to shake up complacent employers. It is politically tricky because of the power of these employers. We may be seeing something similar in the US with the rise of corporate lobbying there.

  3. With a radical left Labour party, the Lib Dems certainly will be the future. Lets be honest, Corbyn’s Labour ‘vision’ only appeals to very specific kinds of Labour members: those who’ve forgotten what Labour actually stood for in the 1970s and 80s, and those so ideologically brainwashed they actually think a left wing authoritarian model would do anyone any good.

    With Farron, and his very convincing line on inequality, the Lib Dems will likely be an electoral force again in 2020. Moreover, the Lib Dems will be able to do more good. It isn’t that the Lib Dems want a smaller government that makes that difference, but a commitment to communities.

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