New Jerusalems

The Labour Party and the Economics of Democratic Socialism

Elizabeth Durbin

• Publisher: Taylor & Francis
• Year: 2018
• eBook ISBN: 9780429819674
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

First published in 1985. In the 1930s the Labour Party undertook a deliberate search for a viable economic programme to introduce a democratic socialism to Britain. Against the background of the economic turmoil of the period, a group of young economists working for the party thrashed out the theoretical and practical implications of the Keynesian revolution, the planning controversies and the new market socialism. New Jerusalems examines in detail this collective enterprise in economic policy-making. This title will be of great interest to scholars and students of political history.

---

PART I

---

THE HERITAGE

---

---

CHAPTER 1

---

ECONOMICS, POLICY MAKING AND THE LABOUR PARTY

---

This book examines in detail the intellectual process of economic policy making within the British Labour party during the 1930s. There are two central issues which all democratic political parties face in designing an economic policy: how they should respond to the demands of the electorate, and how they propose to intervene in the economic system. Parties committed to major social reform must also deal with a third issue — how to introduce those changes. Opinions about economic policy are thus influenced by the political and social views of the policy makers and by the nature of the economic, political and social problems which the society faces.

The interactions between economic thinking and policy making are complicated, yet they receive little systematic attention from economists and remain something of a mystery to non-economists. Economic theories shape the causal explanations which economists bring to analyse the economic problems, while political, social and moral values determine their goals and thus influence their policy recommendations. However, the focus on particular problems, the choice between different economic means, and even the use of one economic model rather than another, may also be affected by the values of the economic adviser and by the policy process itself. A second objective of this book is therefore to clarify these complexities and to understand the limitations of economics in policy formation. It is hoped that by using this period as a kind of case study more general conclusions can be drawn about the problems of finding consistent economic policies which may reduce economic and social injustice and help bring about change in advanced industrialized democracies.

Both political and economic analysis are necessary to understand the nature of the Labour party’s achievements in their historical context and to assess the intellectual controversies and contributions to the economic policy-making process. In this chapter the political and economic problems faced by the party in the 1930s are summarized. The role of economic thinking in policy formation is explored in some detail, because it provides the analytic framework for later discussion. In particular, the economist’s usual dichotomy between political goals and economic theory, between normative ends and scientific means, is examined critically to suggest that economists’ views are often influenced by their political values in confusing ways. Finally, the Labour party’s origins and its main ideological strands are briefly reviewed, in order to give some sense of the different policy perspectives which exist within the party.

Democracy, socialism and government intervention in the market system

Two major economic policy issues faced Britain in 1930, the high unemployment associated with the world depression and the overvaluation of the pound following the return to the gold standard in 1925. The Labour party had the further problem of finding a way to introduce socialism to Britain as an alternative to the capitalist system, by the democratic and parliamentary methods to which it was committed. In August 1931 the Labour government, which had been in power since 1929, split over the question of cutting government expenditure, in particular unemployment assistance, in an effort to stem a disastrous run on the pound. As a result, the Labour prime minister, James Ramsay MacDonald, formed a National government with only a handful of Labour followers and won a landslide election in October. The Labour party remained out of power until Churchill formed the wartime coalition government.

The Labour party achieved a broad consensus within its own ranks for the programme reflected in the document For Socialism and Peace, adopted at its 1934 conference, and for the shortened version, Labour’s Immediate Programme, which represented the party’s aims in the first stage of the transition to socialism. Nevertheless, there was considerable disagreement among the democratic socialist economists, both about specific policy issues and about their theoretical justification. As it turned out, the electorate also rejected this programme in the 1935 election, even though the party had consciously struggled to moderate its socialist aims in order to broaden its electoral appeal. It was only after the massive upheaval of war and its effect on social expectations that the party’s commitment to fundamental social reform struck a responsive chord.

A belief in democratic methods means that any political party has to develop policies which will get its candidates elected before any other goals can be accomplished. In the 1930s the Labour party was committed to introducing socialism as the alternative to capitalism. This meant that for election purposes policies had to be designed which would appeal to some of the middle class, for the party could not achieve power by relying on the working-class vote. Furthermore, socialism would have to be introduced in stages because no government could realistically expect to pass in five years all the legislation which would effect such fundamental changes; hence, the ‘Immediate Programme’, or first priorities. Consequently, it was also necessary to work out what economic steps should be taken first, what political reforms were required to accomplish those immediate goals and what programmes would ensure re-election for the second stage. This political strategy of evolutionary reform was reflected in an economic strategy of partial socialization of the existing market system rather than an immediate take-over by the state; hence, the ‘mixed economy’. Throughout this period the party and its policy committees were much preoccupied with the problem of how to accomplish the transition from the current order, which required little explicit government intervention, to one with substantial public control.

For socialist and non-socialist alike, the pressing economic problems faced by Britain raised basic questions about the appropriate role for government in the market system. Since socialists wanted to restructure the market system, the role of government in planning and managing economic affairs was central to their alternative. During the 1920s the British Labour party adopted as its official policy the control of the economy through the nationalization of the means of production, distribution and exchange. It became the task of the 1930s to articulate a practical strategy for accomplishing this goal by democratic means.

At the same time, governments of all political persuasions were trying to tackle the enormous economic and social problems of unemployment resulting from the great depression. Keynes and other economists are credited with developing the theoretical and practical tools which could solve the unemployment problem, and for convincing governments of their responsibility to maintain employment and growth by fiscal and monetary policies. Socialists did not need convincing that the government should manage the economy. Their problem was to define the limits of government intervention. In particular, they struggled over the appropriate means to control the monetary system, the amount of investment and the level of employment, over what industries to nationalize and over what principles to adopt for their management.

The Keynesian revolution during the 1930s appeared to provide answers to the problem of economic management. Some socialist economists recognized that the new analysis could also be used to maintain employment and investment levels as one part of their own overall planning strategy. However, an explicit commitment to Keynesian policies for full employment did not come until 1944–5. Not all socialist economists accepted Keynes’s ideas; some were suspicious of his Liberal connection and of theories which sought to make the capitalist system more workable.

At the policy-making level, the issue of control over the economy was decided implicitly in the party’s debates over the nationalization of the commercial joint stock banks in addition to the Bank of England. At a more academic level, there was a continuing colloquy among socialist economists on the nature and principles of democratic socialist planning. The major difference of opinion lay between those who wanted to use the market pricing system to allocate resources and those who wanted to use government controls to determine output goals and to plan the physical distribution of resources. Other nonsocialist groups had also become convinced of the need for planning to avoid the breakdown of the capitalist system.

Economics and policy making

Economic policy, in so far as it is conscious and rational, is formed in a process which includes defining policy goals, identifying the economic problems to be faced and finding the appropriate programmes and strategies for their solution. This process requires two kinds of abstraction; one is the articulation of goals and policy perspectives, the other is the understanding of how the economic system functions. In order to understand what economists have to say about economic policy, their role as theorists needs to be distinguished from their role in policy making. As theorists, they build abstract models to explain the workings of the economic system, that is, how the system is defined, how it fits together and how it functions. As participants in policy making, economists use their understanding of the economic system to identify economic problems, to explain cause and effect in the area of policy concern and from their knowledge of the important quantitative and qualitative relationships to make estimates of the probable impact of alternative strategies. Economists usually ascribe the responsibility for articulating policy goals to all the other participants in the policy-making process — to political leaders, to party strategists, to administrative and executive officials and to all other interested and influential pressure groups — rather than to themselves.

On the whole economists trained in the Anglo-American tradition are not much given to serious study of their own ways of thinking. This may account for the persistent illusion that economics is a practical science, despite growing evidence to the contrary. Broadly speaking, there are two schools of thought about the proper mode for economic analysis. What might be called the ‘pure science’ school sees the task of the economist as follows: first, to build theories which explain the workings of the economic system, much as physics builds theories to explain, for example, the working of the solar system; second, to develop hypotheses about behaviour from these models; finally, to test the validity of the theories by empirical verification of the hypotheses. To do this requires the analyst to differentiate those variables explained by or explaining the economic system from those other factors which may affect behaviour but which economics does not explain. In short, it is believed that economic explanations are only concerned with ‘market’ variables, such as prices, quantities and incomes. Important ‘non-market’ variables, such as consumers’ preferences, technology and institutional structure, must be assumed ‘constant’ for economic models to be used for predictive purposes.

This purist view, that economics can be conducted as it were in a social and political vacuum, has continuously been challenged by economists of more eclectic viewpoint, particularly those most concerned about policy problems. They find the development of ever more abstract models and complicated techniques less and less relevant to real-world situations. Such economists view their science as one among many other moral and social sciences; they can, therefore, be said to subscribe to the ‘blended science’ school. Their analysis will explicitly include non-economic factors such as political and social institutions and personal characteristics, in an effort to provide a broader, if less rigorous, understanding of human behaviour.

The usual approach of economists to the role of theory in policy formation is to distinguish between a theoretical explanation and a policy goal. Policy goals describe the normative ends which are sought; economic theory analyses the scientific means to achieve those ends. Thus, it is argued, economic models explain the workings of the economic system, but policy is determined by views of how the world ought to be, that is, by moral laws and belief systems which economic theory is not expected to explain. For example, while economic theory can be used to make judgments about efficiency (because economics spells out the conditions for maximizing output with the minimum use of resource inputs), it cannot be used to evaluate the justice of the income distribution generated by that system. However, this distinction becomes confusing when economists do not express their policy advice in these terms, but include their own moral values in their recommendations, sometimes quite unconsciously.

This superficially plausible distinction between positive means and normative ends frequently breaks down in practice for a number of reasons. First, the political process rarely yields precise policy goals. Second, political values are not necessarily independent of economic decisions. Often policy objectives and priorities are formulated as a result of economic choices already made. Third, the decisions to be made are sometimes very complex, requiring considerable technical expertise, so that economists are inevitably drawn into defining objectives as well as means. Fourth, disputes between economists, while apparently about theory and its uses, may conceal their hidden policy agendas. Finally, it should be recognized that non-economists do not always share the economists’ views of the relation between economic theory and policy goals. Politicians, for example, are less concerned with the niceties of theoretical models or estimating procedures and are more concerned to find further justification, the stronger the better, for policies they may want to pursue on political, social or moral grounds. Certainly, it is obvious that the non-economists involved in the policy process use economic analysis and advice for their own purposes, and that these may be very different from the original intent of the economic analyst.

All these problems arise in trying to sort out the reasoning behind economic arguments in the 1930s. Even where there was apparent agreement about political goals, there were disputes about the use of economics or political strategy. For example, while democratic socialist economists agreed about the use of parliamentary methods to bring about socialism, they spent considerable effort specifying their political goals and the strategy to be employed in replacing capitalism. They also disagreed at various times about the wisdom of pursuing expansionary policies, about the necessity of nationalizing the joint stock banks and about the appropriate pricing policy for nationalized industries, as well as the relevant economic models for analysing these policy problems. At the same time, there were major breakthroughs in economic theory, not only in the new Keynesian models, but also in value theory. There were also significant shifts in policy prescription; one of the most dramatic was Keynes’s abandonment of the Liberal party creed of free trade, when he publicly proposed a revenue tariff in 1931.

There are three main sources for differences in opinions about economic policy, those which raise theoretical questions, those related to empirical judgments and, finally, those which reflect different policy goals. The most obvious theoretical differences arise when there are disagreements about how the economic system is seen to operate in the abstract. However, such differences are not always obvious. For instance, in the early 1930s there were violent controversies about increasing or decreasing public expenditure, yet neither side could really articulate their theoretical disagreement for the simple reason that the model relating deficit spending to increases in employment during a depression had not yet been built. Even now there is considerable debate over the exact nature of the theoretical revolution embodied in Keynes’s The General Theory, although most analysts accept that its model of income determination was a major break-through in the understanding of how the economy works at the aggregate level.

Theoretical revolutions of this magnitude, which require major shifts in ways of thinking, are accompanied by widespread changes in definitions and assumptions, as well as in causal explanations. Some of these apparently terminological battles can disguise another kind of theoretical difference; there can be agreement about the model but disagreement about its application to reality. In order to use abstract models to make prognostications about real-world events, two steps are required. First, the problem must be defined, that is, the focus of concern must be identified. Second, the manner in which the model is to be applied must be specified, that is, which factors are expected to vary and in what way, and which are to be held constant. The assumptions made in building a model describe both the focus and the use of the model, which explains why it is so important to make them explicit. When there are serious controversies about basic explanations of the system, it is often difficult to distinguish differences between theories from differences in their application. For example, during the 1930s one source of disagreement was the importance of longer-run considerations in dealing with unemp...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Foreword by Roy Hattersley
• Acknowledgments
• Introduction
• Part I The Heritage
• 1 Economics, policy making and the Labour party
• 2 Market theory and socialist economics
• 3 Economic policy and the Labour party 1918–31
• Part II The Search
• 4 New brooms, new policies: the Labour party 1931–5
• 5 The new generation
• 6 Cole and the New Fabians attack traditional policy
• 7 The New Fabians attack unemployment
• 8 The New Fabians plan for socialism
• 9 The new generation rethinks economic strategy
• 10 Dalton organizes his experts and Labour’s financial policy
• Part III Socialism in Our Time
• 11 The new socialist economics
• 12 Labour’s new programme
• 13 The new economic revisionism
• 14 Conclusions
• Notes
• Select bibliography
• Interviews
• Index