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It's the Political Economy, Stupid!

19/06/2015 14:45 | Updated 18 June 2016

Labour's post-election debate is only six weeks old, but it is already going wrong. It's not just that the choice of a new leader and deputy leader, with all the associated questions of character and personality, is trumping analysis, research and reflection. It's not even that the debate is being almost universally framed in the damagingly simplistic terms of the respective merits of a lunge to the left or a lurch to the right, nor even that the candidates are jostling with each other in the most unedifying fashion to dump bits of a manifesto around which they were allegedly united not so very long ago.

No, it's actually that the leading figures in the party still seem not to have grasped what prevented Labour from displaying 'economic competence' - the psephological acid-test of a political party that wishes to govern. In a nutshell, what Labour needs most fundamentally is to find, fashion, forge, beg, borrow or steal a narrative about the economy that is capable both of challenging the terms of the old debate and setting the framework of the new.

The irony is that Ed Miliband and his team knew this and maybe even understood it better than his would-be successors seem at present to do. In his infamous, but actually very thoughtful, 2011 conference speech he proclaimed the need to end Britain's 'fast buck' capitalism and went on to draw a contrast between businesses as 'predators' or 'producers'. With the hindsight afforded to all members of the commentariat (and bloggers), this was perhaps tactically naïve. Predictably, it led journalists of all stripes to ask for details of which companies fell into which bracket. It was also conceptually flawed in that the contrast was drawn in too sharp and binary a fashion. The point is that capitalism, by its very nature, always possesses both productive and predatory dimensions (which, again with the benefit of hindsight, might have been quite a good response). The trick - and this is always the task of the state in seeking to manage capitalism - is to promote and support the former tendency and regulate and control the latter.

Chastened perhaps by the hostility of the response, Miliband's Labour completely failed after that first big speech to put real flesh on the bones of its early argument. And so, predictably enough, four years on, it allowed its economic campaign to fall back on a number of so-called 'retail offers', some of which were reportedly popular in themselves but which, as a whole, could quite easily be portrayed by opponents (and even, it seems, privately viewed by some shadow ministers) as 'anti-business'. In short, Labour never established that, although it rejected the old, 'fast buck', lightly regulated, consumption-fuelled and debt-dependent model of capitalism that crashed so dramatically in 2007-8, it did still espouse enthusiastically a reformed capitalism, had a strategy for delivering economic growth (whilst recognising the need for sustainability) and wanted all in society (regardless of wealth, ancestry, gender, ethnicity or class) to have the chance to improve their lives in ways that appealed to them. It might then even have dared to talk about aspiration!

Additionally, as we now know only too well (but as many realised at the time given that events unfolded with the awful certainty of the slow-motion reply of a car crash), Labour under Miliband was trapped. For, accepting the terms of the debate once again, it was simply unable to defend itself against the charge that Gordon Brown's government had wrecked the British economy in 2007-8 through a profound fiscal dereliction of duty (brazen overspending). The charge wasn't of course even remotely true. But the allegation stuck. Indeed, it stuck so well that a prominent leadership candidate now asserts 'the need to balance the books and live within our means' much as if Keynes had never lived and she was running for office in the US 'Tea Party'. 'I agree with George' seems to have become the (unspoken) mantra of the moment!

This is bad politics - and not just because it fails to lance the boil of Labour's past and not just because it blithely and unnecessarily concedes what sounds like a major Labour error (the admission of which won't be forgotten in electoral battles to come). No, it is bad politics primarily because it is bad economics. For, under capitalism, governments need to respond to the business cycle by running budget deficits and surpluses at different times and in different conditions. OK, it might be the case that democratically elected politicians typically find it harder to restrain spending and build up surpluses in good times then they do to run deficits in bad times. But, even from this perspective, the most that Labour should be prepared to concede is that the deficit could in retrospect have been a bit lower in 2007-8, and would certainly have been if it somehow had been able to have prior knowledge of the imminence of a genuinely global financial crash caused by the irresponsibility of under-regulated banks!

In fact, as Robert Skidelsky put it just before the election (and then reiterated in his SPERI Annual Lecture just after the election), the real Labour error from the recent past is that it 'overestimated the revenue flows it would go on receiving from a flaky financial services sector, whose largely unregulated expansion it had encouraged, and whose inherent instability it had ignored'. But, as he added, 'this is a judgement after the event' (it's that hindsight thing again, and Skidelsky is honest enough to admit it). The Conservative opposition did not say this at the time, George Osborne as Shadow Chancellor confirming in September 2007 that a possible Conservative government would not only match the overall spending plans of the Brown government but also increase spending on public services.

In one sense this is all history now. But the reality is that it still matters - and post-Miliband Labour should deal with the issue strongly by reasserting the core truths (as well as the limitations) of Keynesianism. A further failure to do so and, even worse, any commitment to a balanced budget at all times (as opposed to balance being achieved over the full business cycle) will tie it irredeemably to the same fallacious logic by which austerity, driven by deficit and debt reduction in double-quick time, is rendered the core test of economic competence.

This should be the easier bit. What is undoubtedly harder, but still essential, is then to build on this basis a fuller argument about how Labour would in future grow the British economy in a different way to the Conservatives, how it would genuinely rebalance it between sectors and regions, how it would take cognisance of the need to reduce the economy's reliance on fossil-fuel forms of energy and how it would seek to draw on the benefits of economic success to create a more unified country and society.

It is only by so doing that it might hope to begin to reject, redress and ultimately to reverse the inequality multiplier that has been the consequence of so much British public policy in recent years, and arguably since the 1980s. These are the key issues which any new Labour narrative must embrace and articulate with determination, persistence and verve.

Here comes the potentially embarrassing bit (although at least we saved it until right at the end of this post). We've had a stab at setting out such a narrative. We've called for the adoption of a new model of capitalism in Britain that we have described as 'Civic Capitalism'. It is in essence a model that asks not what we can do for capitalism, but rather what capitalism can do for all of us as citizens with equal rights and expectations.

It offers no panacea; it is no blueprint; and it certainly doesn't get everything right. In fact, we know the areas where the argument needs to be strengthened probably better than anyone. But we do nevertheless think that Britain, as a country and a society, still very much needs to address the question of how to build a better, fairer and more sustainable model of capitalism than the re-heated pre-crisis package that still seems to reign ascendant in Downing Street - and we suggest with genuine modesty that 'Civic Capitalism' is at least a place from which to begin that discussion.

As for Labour, if it does not move to enter this debate and work out its own position within it, how else does it think it is going to build a convincing economic story to tell to the British electorate in the period between now and the 2020 general election?

Also by Colin Hay, Co-director of the Sheffield Political Economy Research Institute at the University of Sheffield