Schrödinger's Tory - David Davis is Both Dead Right and Dangerously Wrong

06/09/2012 10:57 BST | Updated 05/11/2012 10:12 GMT

Disquiet at the continued economic malaise has spread to Tory ranks; David Davis delivered a withering assessment of the Coalition's record on economic growth and employment, and proposed a series of reforms to address the failings he identified. Rather like the most famous feline in physics, Davis was utterly right in the former whilst being utterly misguided in the latter - a masterful feat indeed. I don't get to rebut his stance in a set-piece speech, but the flaws in Davis' arguments do need to be exposed.

Davis could hardly have been more insightful in saying the economy "is the preeminent issue that determines the welfare of British citizens," that "the health of that economy is pretty dire," that we are "making heavy weather of deficit reduction" and finally that "Growth prospects look poor" with "Low productivity, no growth, falling real wages." Despite many of his colleagues expressing pride in the government's low cost of borrowing (mis-attributed to the Treasury's deficit reduction strategy when in truth we're seeing a flight to safety from risk-averse investors), few would publicly say that the government's economic policy is working.

Davis joins a growing group of economists, business leaders and commentators, some of whom have previously championed austerity and monetary loosening as the primary means of recovery, who are now anxious for the Chancellor and the Treasury to build an economic alternative - build in a very real sense, as many of the calls for economic renewal centre around the construction of new infrastructure and housing. There remain, however, pockets of (mainly Tory) thinking that resolutely adheres to the discredited orthodoxies of neoliberal economics - typified in many ways by the second half of Davis speech.

Policymakers often look to other countries and other eras for inspiration - Davis is bright enough to have done so, citing German and Swiss experience amongst others. Sadly he cherry picks some aspects of the economic reforms these countries applied (reducing the rights of employees, cuts to corporation tax and business regulation and of course lower public spending) and claims that repeating them here and now would work, but ignores two factors beyond the reforms themselves; the starting point from which the reforms were instituted - the baseline, if you like - and the the international macro-economic context of a booming world economy.

Davis says that because Germany's sparkling growth since 2003 went hand-in-hand with reductions in labour market regulation and business regulation and taxation, we should follow suit and have a "bonfire of regulations, starting with employment law." No matter that international evidence shows that countries with higher growth rates often have higher employee protection than the UK currently does - for Davis, cutting employment law is always the right answer, no matter what our starting point may be. He commits the same fallacy again and again on tax (claiming that the Laffer curve effect of higher revenues following Chancellor Lawson's cut in the top rate of income tax from 60 to 40% could be replicated through a flat tax today) and green regulations - too often to pick apart in detail here.

Davis' speech was a classic exercise in neoliberal orthodox political economy. Treating businesses and consumers as calculating machines that respond rationally to changes in monetary incentives, his vision is for a low-tax, small State economy in which faster and deeper cuts to the public sector will see an unfettered private sector flourish. It doesn't take an in-depth analysis of heterodox economics (an excellent introduction to which can be found in this new IPPR book) to note that this doesn't describe the real world. All the tools in the orthodox economists' box - low interest rates, reduced public borrowing, even quantitative easing - simply haven't worked.

In arguing for yet more of these failed measures, Davis ignores the other factors behind Germany and Switzerland's resilience, which derives from the complex interactions between economic structures and institutions and the rich, diverse environment in which they operate. He ignores powerful state investment banks, massive public support for innovation and research, patient support of nascent industries, less adversarial labour relations, affordable state-backed housing programmes and robust apprenticeship and re-training facilities paid for jointly by the state, unions, firms and workers. Davis doesn't applaud these nations for the real reason they prosper - that they are social liberal political economies with a strong, not small, State.

I have argued that such a political economy - based around the central idea that truly sustainable prosperity is co-produced by an empowering, enterprising state and a private sector more in tune with the needs of its host society - must form part of an economic Plan C. I cannot claim to have a single magic answer to our economic woes (none exists), but I do know that in clear contrast with Davis' orthodox right-wing proposals, the country stands a better chance with a fiscal strategy that's sensitive to growth and living standards, coupled with State-backed investment whilst the private sector repairs its balance sheet, greater equality of power and pay in the workplace, and greater flexicurity in the labour market. Ultimately Davis' economic entanglement can't be both dead and alive at the same time - it is very much dead.