Why Labour needs a new political economy
—There is no doubt in my mind that the recent Labour government suffered from not having a credible, alternative political economy to neoliberalism; that is, it had no alternative view of what role the state should play in the economy. The third way was not a piece of political economy but simply a political positioning statement, as is the ‘big society’. To the extent that we had a political economy, it was neoliberalism plus an enhanced welfare state. As a result we were slow to see how dysfunctional financial markets were becoming and we had few ideas about what role the state should play in supporting economic growth.
I do not think, however, that we should beat ourselves up too much about this failure, for two reasons. First, no one had produced a new progressive political economy since Tony Crosland wrote The Future of Socialism in 1956, and, if one had been produced, I doubt if it would have been enthusiastically received, as neoliberalism so dominated political and economic thought in the last 35 years. The words of John Stuart Mill in his Principles of Economics in 1848 describe for me exactly the situation we faced. ‘It often happens that the universal belief of one age of mankind – a belief from which no one was, nor without any extraordinary effort of genius or courage, could at that time be free – becomes to a subsequent age so palpable and absurd, that the only difficulty is to imagine how such a thing can ever have appeared credible.’
At the same time, I believe that now neoliberalism has been seen to have major flaws, it is vitally important that we develop a new progressive political economy to guide us in the years ahead. The Labour party is never electorally successful when it is seen simply as a party of protest and redistribution. It has also to be seen as a party of economic reform which can increase the growth rate of the country and improve people’s standard of living. In 2015, after five years of failed economic policies, this is going to be even more the case.
I have, therefore, sought in my book Progressive Capitalism to set out what a new progressive political economy should look like.
The cornerstone of this new progressive political economy is a firm belief in capitalism, which for this purpose can best be defined by two simple features. First, it is a system in which most of the assets are privately owned and, second, it is a system where production is guided and income distributed largely through the operation of markets. It is these two features which differentiate the economy we have in most developed countries today from that of either, for example, feudal England or 20th century Russian communism.
There will be some people who will try to portray my book as an attack on capitalism, but it should be seen as a defence of capitalism. A major theme of the book is that the failures of capitalism we have seen in recent years are not an inherent part of it, and can be corrected by a programme of economic reform.
As well as being based on a firm belief in capitalism, progressive capitalism also incorporates what I believe are the three defining beliefs of progressive thinking. These are the crucial role of institutions, the need for the state to be involved in their design in order to resolve conflicting interests and provide public goods, and the use of social justice, defined as fairness, as an important measure of a country’s economic performance.
In particular the state needs to make certain that the four key institutions which affect economic growth are working efficiently. They are the institutions which underpin financial and labour markets; a country’s corporate governance institutions; a country’s education and training system; and its national system of innovation, which can be defined as the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies.
I am mainly interested in the theory of progressive capitalism because I believe it can be used to develop better economic policies and ultimately lead to a country’s better economic performance. Therefore, in the second half of my book I look at how this new progressive political economy can be used by politicians and policymakers to produce economic reform for a country. I do this by analysing and producing reforms for the UK’s equity markets, its system of corporate governance, its national system of innovation and its education and training system, as it is quite clear that in all of these four areas the UK has major institutional deficiencies. Finally, Progressive Capitalism describes the role the state should play in the economy – an enabling one, rather than the command-and-control role of traditional socialism or the minimalist role of neoliberalism.
No one, I believe, wants to go back to the failed policies of the 1960s and 1970s, to a world of national plans, nationalised industries and income policies. But there is a danger that a future Labour government, without a new political economy to guide it, will do little to stimulate growth or will disastrously start intervening in the decision-making of companies, as in the past. I believe, however, that if the Labour party takes on board the new progressive political economy I have outlined, it will help it to draw up a credible programme of economic reform which, in the words on the cover of my book, will enable a future Labour government to ‘achieve economic growth, liberty and social justice’.
David Sainsbury is a member of the House of Lords and former minister for science and innovation. Progressive Capitalism is published on 14 May by Biteback. Buy it at the special price of £11.99 by visiting www.politicos.co.uk/promotions and entering the code: PROGRESSIVE
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