Just at the point when some question whether the state has a role to play in British life, it has never been more vital – argues Patrick Diamond
What will Britain ’s economic future be after a decade of rising productivity, employment and living standards punctuated by the biggest slump since the 1930s? Until the economic crisis in 2008 – United Kingdom growth outstripped France and Germany, inflation averaged 1.5 per cent, the unemployment rate was half the eurozone average and the rise in per capita gross domestic product meant that Britain rose from last to third place in the G7.
Yet the limitations of New Labour’s economic strategy had become all too apparent as the global financial crisis unfolded. Instinctive caution focused on reassurance made the party too reticent about the case for intervening in markets. The legacy was under-investment in public infrastructure, notably transport and housing; a regional economic divide manifested in the growing disparity between the South East, Northern England and the devolved nations; and a speculative economy built on a property and construction boom and an expansion of public and private consumption financed by debt characterised elsewhere as ‘privatised Keynesianism’.
Post-war governments of left and right had struggled to find ways of moving beyond political crisis and economic stagnation. Thatcherism rejected the inevitability of decline, emboldened by sweeping changes in the global economy. Reforms were initiated that radically restructured British industry accelerating the transition from manufacturing to services, leaving in their wake a long tail of inequality and polarisation. This agenda of privatisation and deregulation was used to promote a newly invigorated British prosperity, the basis of four successive election victories. The strategic choice that now faces Labour is whether to be the party of economic modernisation and renewal, or risk being confined to a futile defence of declining sectors and regions.
The challenge is to frame an activist and developmental state as the critical agent of national prosperity. In the aftermath of the financial crisis, voters across the western world directed their anger not only at over-mighty bankers but over-mighty governments. Labour has to fashion a new argument subtly defining the legitimate role of the state while drawing on the distinction made by Keynes between the ‘agenda’ and ‘non-agenda’ of government, demonstrating that it has the imagination to promote an economic renaissance despite the crisis imperilling the eurozone and the world economy.
That means going beyond the limited supply-side agenda of skills and science, which has bequeathed precarious foundations. Britain excels in technological innovation but has relatively few world-beating high-tech companies. There are fewer small and medium-sized enterprises in the UK than any comparable advanced economy. And while French, German and Nordic governments nurture great national businesses; British administrations make a virtue of standing aside. The boundaries of state action have to be redrawn after the crisis.
The aim of a new left political economy must be to break out of the impasse through forging a more resilient and balanced economy where people can plan ahead and where financial institutions support sustainable wealth creation not unsustainable speculation; delivering fairer outcomes narrowing the inequalities of wealth and ownership that characterise modern capitalist economies; and sustaining growth necessary both for rising living standards and improvements in public services.
However, delivering on these goals requires a fourth, distinctly radical objective: redistributing economic power so that it cannot be hoarded by over-mighty interests or institutions. The search for a more sustainable and productive form of capitalism hardly represents a dramatic lurch to the left. Not surprisingly, some of the most imaginative, indeed critical thinking about the future of markets and the factors driving business success has come from the private sector as well as from non-governmental organisations, economists and policy experts.
Labour will succeed where it links the developmental state with national modernisation, each driving a renaissance of the British economy. Just at the point when some question whether the state has a role, it has never been more vital. This need not imply that a larger share of national income has to pass through government’s hands or that the state has to be ever more centralised. The key is to build a platform of resilience protecting citizens and wealth-generating sectors, without dampening the culture of pluralism and experimentation that is necessary for competitive success. It is about using rules, frameworks and strategic investment imaginatively to change attitudes and behaviour, actively shaping the future contours of British capitalism.
Patrick Diamond is vice-chairman of the British-based Policy Network think-tank and author of Labour’s economic path to power