Labour’s challenge is to position the active state and responsible ownership as essential prerequisites of business success in an age of intensive global competition
Among the most insistent questions in British politics is what model of capitalism the UK needs to remain a wealthy and cohesive society. Since the financial crisis, public disquiet about avaricious global capitalism has been palpable. The growing unpopularity of business and large corporations risks undermining the moral compact in favour of open markets. The backlash against the private sector is hardly surprising: when financial institutions broke down following the collapse of Lehman Brothers in 2007, the costs fell not on wealthy financiers but society as a whole in an era when middle income households were suffering an unprecedented squeeze.
The irony is that both bankers and the left have faltered in the wake of the crash. Far from gaining politically from the ‘crisis of capitalism’, the Labour party has been left utterly disorientated. The New Labour model of political economy was shaken to its core, having pledged allegiance both to Thatcherite deregulated markets and an overly complacent social democratic model of ‘tax and spend’. Despite delivering forty four consecutive quarters of nominal GDP growth, Labour’s embrace of 1980s neo-liberalism guaranteed neither economic stability nor the sound productive base necessary to sustain long-term social investment.
The Blair/Brown economic legacy was one of under-investment in key infrastructure, notably transport and energy; a continuing decline in manufacturing contributing to a structural balance of payments deficit; an accelerating regional economic divide; and a speculative property and construction boom financing public and private consumption through highly leveraged government and household debt. Not everything about the pre-2008 model was proved wrong: far from it. Research, innovation and high-tech start-ups flourished; labour market flexibility generally kept unemployment down; Britain’s cities underwent a renaissance; the United Kingdom remained a successful base for global companies. In the meantime, financial services – including the City of London – have bounced back from the crisis as the leading-edge professional services centre in the EU.
Ed Miliband plausibly argues that to return to pre-2008 ‘business as usual’ will not convince voters that Labour has learnt lessons from past mistakes. However, the party has to fight on ground it can realistically win: Labour has to make its central critique of Coalition economic management the failure to address the underlying structural weaknesses of an unbalanced economy, low productivity, and weak balance of payments – all of which limit Britain’s productive potential and accentuate the long tail of inequality. More than that, the British centre-left must espouse a practical vision of an inclusive capitalism around which a lasting public consensus can be built.
As Keynes foresaw in the 1920s, the debate about progressive capitalism concerns the ‘agenda’ and ‘non-agenda’ of government. Governments should do only what is not being done adequately by markets. However, market failure extends well beyond conventional areas of supply-side intervention, notably policies in skills, science, and research. A short term business culture in Britain prevents firms from nurturing new products and services: why is it so much technological innovation originates in Britain, but so few start-ups grow into world-beating high-tech companies? Too few SMEs can access finance for growth: why does Britain have fewer micro businesses than any comparable industrial economy? Despite its financial services sophistication, why does the City seem systemically incapable of channelling savings into long term projects enhancing Britain’s productive potential? Too few sectors are actively championed as beacons of national success: why do French, German and Scandinavian governments celebrate national companies, but British governments generally do not?
A progressive capitalism can only be forged with an enabling state that understands the global environment in which today’s business leaders operate: where survival depends on profitability, where the world is awash with investment opportunities beyond the UK, and where arbitrary interventions in markets and constant changes in government policy discourage the long term investment Britain needs. Businesses that act against the public interest should not escape regulatory action. But it is not the job of governments to pick and choose between ‘predators’ and ‘responsible’ capitalists. Nor is it sensible to treat smaller firms as inherently more virtuous than larger ones: what matters is setting a stable framework in which making a reasonable profit is compatible with the public interest. Labour will not win elections as an anti-business party. The vast majority of the workforce is employed in the private sector. On principle, social democrats have long believed in a flourishing market economy generating the fruits of growth to invest in a dynamic public realm.
The search for a progressive capitalism has a long history drawing on venerable intellectual traditions. Some of the most imaginative and critical thinking has come from the private sector, as well as from academics, policy-makers, civil society, and faith communities. Ideas have also emerged on the right as well as the left about the failings of modern capitalism and markets. The most prominent exponent is John Gray, once himself a vociferous advocate of the Thatcher revolution. Gray highlighted the hubris of neo-liberalism for ignoring the importance of a culture of the common good in sustaining and nurturing market institutions.
The second strand is the tradition of stakeholder capitalism, epitomised by Will Hutton, alongside writers such as John Kay and John Plender. Their ideas have developed in response to the failings of free market economics. Kay, Hutton and Plender are strong critics of shareholder short-termism and Britain’s takeover culture. They argue that investment managers should exercise duties of stewardship, rather than maximising short-term returns; companies should serve the interests of a wider group of stakeholders, not only shareholders; successful businesses are rooted in their communities, acknowledging wider social obligations.
A third strand is the critique of ‘shareholder value’ promulgated by the American business guru, Michael Porter. In an article in The Harvard Business Review, Porter argued of today’s capitalism: ‘A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades’. Porter attests that the private sector continues to conceive value creation too narrowly. The emphasis on optimising short-term financial performance ensures the most important customer needs are missed. Moreover, the broader influences that determine long-term success are too often ignored. ‘Companies must take the lead in bringing business and society back together’, Porter counsels.
Defining a model of inclusive prosperity and progressive capitalism that treats business as part of the solution rather than the problem ought to be at the forefront of Labour’s approach. The party’s challenge is to position the active state and responsible ownership as essential prerequisites of business success in an age of intensive global competition.
The gap Labour must fill in its view of political economy is two-fold. Labour must flesh out the substance of the effective developmental state Britain never created, using public power to promote national competitiveness in a world of cut-throat competition. Previous attempts at industrial activism failed because the British state was ill-equipped to actively shape and steer markets, having its roots in a 19th century liberal laissez-faire state that was inimical to public intervention. A developmental state entails the step by step building of new national institutions, like the successful Technology Strategy Board and the spread of new ‘catapult’ centres helping to turn research breakthroughs into commercially marketable products.
The Treasury blind-spot about not lending to business is unsustainable if UK private banks are not in a position to provide finance for growth. Almost every government in Europe owns a credit institution that can make long-term loans to growing companies, helping innovators through the ‘valley of death’ between developing a product and profitable sales. We need new publicly guaranteed mechanisms for supplying patient ‘equity’ so that successful entrepreneurs do not ‘cash in’ at the first available opportunity, but stay the course to build successful global companies. The aversion to risking public money in order to back British growth companies has to be reversed. Such activism is viewed as too derivative of 1970s-style ‘picking winners’, while at the same time it is acceptable for public policy to artificially inflate the housing market.
A progressive capitalism entails a reformed state where power is not hoarded in Whitehall and Westminster but dispersed throughout the nations and regions of Britain. Moreover, vocational qualifications and apprenticeship standards need to be simplified and made more rigorous by independent national bodies, with a greater role for professional institutes. The funding of high level apprenticeships, particularly in the STEM field, has to be a partnership between public funders and employers from the bottom up.
The second major task for Labour is to secure the backing of business for a model of inclusive capitalism that restores public confidence in the moral virtue of wealth creation where doing well, and properly paying all taxes due, is seen as a societal as well as private, benefit. Labour should win the backing of a new generation of entrepreneurs whose business success depends on building partnerships within their company with committed and highly trained staff, developing long-term relationships with their customer-base. Any viable project to forge a progressive capitalism needs a new model of the firm. Companies may not want to follow the model of the John Lewis Partnership, but its success demonstrates that there are alternatives to the conventional limited liability company which should be actively encouraged. We need a step change in employee ownership throughout the British economy, ensuring that wealth is dispersed into many more hands.
There is a new dialogue to be opened up between business and the centre left about what kind of modern welfare state a vibrant progressive capitalism needs. The downside for individuals of a dynamic, innovating economy is that rapidity of technological change threatens incumbent companies, making skills redundant and destroying jobs in ways no one can presently foresee. Just as the NHS was founded on the principle that no one can have perfect knowledge of whether they will enjoy good health, and therefore collective insurance is the best solution, social security needs to be re-thought for an age of ever more rapid economic change, as individuals seek more choice as to how to balance work and family life.
A progressive capitalism needs long-term investment in infrastructure and productive assets through new approaches to financing public services. It requires world-class health and education investing in skills, science, knowledge and innovation. And it must be complimented by a fairer distribution of capital and assets, an ‘ownership revolution’ that locates control over wealth throughout society instead of narrowly rewarding the political and economic elite.
The aim of a progressive political economy ought to be forging a resilient and balanced economy where people and businesses can plan ahead; delivering more egalitarian outcomes that narrow the inequalities of wealth and ownership which characterise modern capitalist economies; and sustaining growth that is necessary both for rising living standards and improvements in public services. The danger of globalisation is that it will amplify the gaps between the ‘winners’ and ‘losers’ of change, creating a permanently marginalised minority with no stake in the nation’s economic future. The aim is to create balanced and sustainable growth, improving the living standards of those on middle incomes while ensuring that Britain grows together. It requires genuine partnership between the public and private sectors where the state actively invests in economic potential.
No party has yet succeeded in filling the void in Britain’s political economy that opened up in 2008 between the emphasis on central planning and nationalisation, a policy applied between 1945 and 1979, and the market liberal laissez-faire approach pursued in Britain ever since. The ideas around progressive capitalism offer the opportunity to define a more robust and substantial prospectus for the British centre-left. Social democracy wins where it projects an uplifting, optimistic vision of Britain’s future, a conception of national modernisation allied to a vision of social fairness. Ironically, just at the point when some doubt whether government has any future, it has never been more necessary in fashioning a new economic model for the post-crisis age.
This post originally appeared on website of Policy Network.