Beyond Neoliberalism, Nationalism and Socialism

Rethinking the Boundary Between State and Market

Thomas Aubrey

• Publisher: Policy Network
• Year: 2017
• ISBN:
  9781786604781
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

The stunning political upheavals witnessed across the western world over the past year have raised the question of whether the neoliberal economic system that has dominated since the 1980s is about to unravel. During the 1930s, when liberalism last came under attack, two distinct ideologies offered hope to the disaffected in society: socialism and populism based along national lines. Neither turned out particularly well. This collected volume asks whether there might now be another way to reform our economic system to drive inclusive growth without having to return to the failed ideologies of the 20 th century.
It explores the prospect of a political outlook that believes in harnessing the dynamic power of markets, but one that also recognises that markets fail more frequently than some would like us to believe. Such a rethink of our political economy is critical if society is to rebuild its faith in public and private sector institutions, and to prevent extremism emerging once more.

THE FAILURE OF NEOLIBERALISM

PARTNERS FOR A NEW KIND OF GROWTH

Progressive politicians must come together with business and trade unions to build an economy of purpose

Stephen Kinnock

There can be no doubt that 2016 was a watershed year, marked (much like other pivotal years such as 1929, 1945, 1979 and 1989), by an eruption of underlying political and economic tensions that had been simmering away for years.

The year of 1929 saw the Wall Street crash and the beginning of the Great Depression, sparking America’s New Deal, Europe’s totalitarianism, and finally war. In 1945 we saw the progressive postwar consensus resolution of that crash, as politics re-invented itself to build a new economy and society. The unravelling of that consensus began in 1979, both through the emergence of Thatcherism and Reaganism and through Gorbachev’s election to the Politburo. The next pivotal year was 1989, as Tiananmen, Solidarity and the fall of the Berlin Wall seemed to indicate that liberalism, democracy and the free market were set fair to reign supreme, forever more. Indeed, 1989 appeared to mark ‘The End of History’, as Francis Fukuyama so memorably wrote.

Last year represents the political reckoning for the potent cocktail of hope and hubris that was uncorked in 1989. The untamed, unfettered, deregulated forces of globalisation and free-market capitalism that were set loose on the world in the 1990s conspired to create and inflate the various bubbles that eventually led to the crash of 2008. The existing order staggered along for a few years after 2009, but with the benefit of hindsight, the catastrophic fragility of the system should have been clear for all to see. Its foundations had in fact been cracking for decades, and 2016 is simply the year in which the ground finally gave way beneath our feet. The financial crash of 2008 was the earthquake that shook the world, and the electoral upheavals of 2016 have simply been the consequences of the political tsunami that followed in its wake.

The British economy is a prime example of the fragility that has come to define modern capitalism. At first glance things look fairly positive: relatively strong growth, unemployment down, inflation under control. But scratch below the surface and a very different picture emerges (made all the more acute by Brexit): we have a gaping trade deficit, low productivity, ballooning personal debt, creaking infrastructure, an over-reliance on financial services, and the distribution of wealth and resources slopes dangerously towards London and the south east.

The weakness at the heart of our system is that we have lost touch with the first principles that should govern an economy of purpose, and the absence of these core principles has created a vacuum into which the forces of reaction and nationalism have duly stepped. What follows is therefore my attempt to re-affirm the core principles of progressive capitalism, and to then set out three policy area examples to illustrate how those principles could be put into practice.

BUILDING AN ECONOMY OF PURPOSE

Growth has lifted billions of people out of poverty, and it has also improved quality of life for billions more. The market economy is the most effective driver of growth, bar none. Progressive politics must always, therefore, resolutely defend the basic tenets of the market economy.

But we must also recognise that the model is broken: the benefits of growth are not being spread equitably, inequality is endemic, and 2016 has demonstrated, in the starkest possible terms, just how fragile the system is.

If we are to fix our broken model we must get back to first principles, which means re-examining and re-defining what the economy is actually for. In my view, this re-definition should rest on five core principles, meaning that the economy must:

•provide enough money for people to live on, and to feel secure in their lives;

•speak to people’s dignity: that is to say work must not be demeaning and must support a sense of purpose and resilience;

•speak to people’s ambitions, delivering the opportunity for personal and community advancement;

•enhance our common endeavor: we levy taxes on individuals and businesses so that we can deliver public services and correct for market failures;

•operate within our planet’s boundaries.

Through partnership

Having defined the economy of purpose, the question then is how to go about shaping it? Here, ‘partnership’ should be the watchword.

Change does not happen in a vacuum, it is informed by specific interests, objectives and outlooks – all of them human, but not all of them benign. The job of progressive politics is not simply to react and adapt to change; it is to become an engine for change. We know that globalisation, de-industrialisation and the technology revolution have radically altered the world, and we also know that successive postwar governments have failed to harness those forces and channel them into equitable, sustainable and balanced outcomes for ordinary working people.

No single group can hope to tackle these challenges in isolation. In our deeply interlinked and interdependent world, the connections between policymaking, business planning and civil society agendas are almost seamless. But all too often politicians have attempted to shape the political economy from inside the ivory towers of Westminster, and business leaders have tended to see the creation of value in the narrowest possible terms, as opposed to engaging with society at large.

During my time at the World Economic Forum, I saw the power of cross-sectoral collaboration, and it left me in no doubt that if we are to deliver the radical changes to our broken model that are so urgently required, then we must do so through partnership.

Applying the ‘partners for a new kind of growth’ approach, I explore how we should build a modern manufacturing renaissance, reshape corporate governance, and re-invent our state pension system.

BUILDING A MODERN MANUFACTURING RENAISSANCE

In 1970, manufacturing accounted for one third of the British economy; in 2015 it stands at barely 10 per cent. The dramatic decline of our manufacturing sector is the root cause of three deep-seated structural weaknesses in the British economy, namely: the productivity crisis, the trade deficit, and the lack of balance across regions and sectors.

The deeply imbalanced nature of the British economy is arguably the most serious of these three structural weaknesses, because an economy that lacks balance is, by definition, less resilient. It is essential that the government focuses on rebalancing the economy away from services and towards modern manufacturing, so that our economy becomes more resilient and therefore better able to weather the stormy waters of globalisation, the uncertainties of Brexit, and the chilling effect of Donald Trump’s anti-trade presidency of the US.

The driving purpose of the government’s emerging industrial strategy must, therefore, be to rebalance the British economy by building a modern manufacturing renaissance.

Let’s be clear: 21st century manufacturing is not metal-bashing – far from it. Take the steel industry, which is the beating heart of the economy in my Aberavon constituency, thanks to the Port Talbot steelworks. The fact is that the majority of the steel produced in the UK today did not even exist 15 years ago. Far from being a ‘sunset industry’, steel and the vast majority of UK manufacturing is at the leading edge of industrial innovation and technological change. Or take the manufacture of pharmaceuticals, where coding and the use of data to improve the product/service are core skill requirements, thus encompassing a far broader sweep of the workforce.

Let us also recall that the distinction between manufacturing and services is blurring. For example, Rolls Royce might be considered more of a services firm today, given that its revenues are increasingly derived from the servicing of its engines rather the selling of them. Modern manufacturing elides the difference with services, as the most successful businesses often offer packages that involve making things and then offering long-term wrap-around services for what they produce.

If it is to build a modern manufacturing renaissance, the government must come forward with a coherent industrial strategy. Such a strategy will entail a number of elements, including:

Skills

Successive governments have tinkered incessantly with technical education qualifications and standards, to such an extent that the sector is in a mess. It is essential that the new Institute for Apprenticeships and Technical Education is given the time and investment required for success.

Innovation

The UK has a strong research capability and a world-class community of universities, but we struggle when it comes to driving our new ideas and technologies to market. The progressive critique of Conservative industrial policy since 2010 should, therefore, focus on the swingeing cuts to the innovation budget – and particularly Innovate UK and the catapults. Spending on R&D is just 1.7% of GDP, against an EU average of 2.6%. A new compact is now required between government and business, to take spending on R&D to the OECD average of 3% of GDP.

Energy

There is a pressing need for a 10-year plan that lays out the investment path required to build a secure, competitively priced and clean energy supply. It is completely unacceptable and unsustainable that energy intensive industries in the UK pay 40-45% more for their electricity than do their continental European competitors.

Infrastructure

The UK’s inadequate transport and digital infrastructure is a major contributor to the chasm that exists between London and the rest of the country. There is an urgent need for long-term infrastructure plan, which has to be at the heart of the modern manufacturing renaissance.

Finance

The UK’s banking system is fundamentally skewed towards the stimulation of private consumption, asset value inflation and personal debt. A new financial support system for manufacturing is needed, and it should take inspiration from Germany’s spaarkassen: truly local banking that is embedded in the fabric of the regional economy, focused exclusively on lending to startups and SMEs in the manufacturing sector.

Partnership must underpin each and every element of the modern manufacturing renaissance. The strategy and plan must be co-created by business, government, trade unions and communities, so that they are rooted in reality and reflect the real needs.

RE-SHAPING CORPORATE GOVERNANCE

There is a palpable lack of trust between business and society. Take the referendum campaign. We saw 1,200 business leaders, together employing 1.75 million people – including 51 of the FTSE 100 – appeal to the public not to sever our 43-year relationship with Europe, and not to risk job prospects and pensions funds. But their advice was ignored by a decisive majority of the electorate.

There can be little doubt that the breakdown in trust between business and society has been building for decades, but it was the 2008 financial crisis that took levels of outrage to unprecedented levels. The events leading up to the collapse of Lehman Brothers put business firmly on the wrong side of the public, and trust went off the cliff.

So, we must now strain every sinew to rebuild the trust that has been lost, and business has a vital role to play in this process. A vital element of this will be acting to bring an end to ‘quarterly capitalism’, so we must regulate and legislate where appropriate to build a more long-term, investment-driven business culture. For too many boardrooms, the delivery of fast-buck profits to shareholders takes priority over all other considerations, including investment in skills, technology and R&D. To address this we will require a new deal between shareholders, companies, and their workforce, as well as a new deal between the public and private sectors. The reshaping of company law is a necessity, but we must also look at reshaping ownership structures in a manner that empowers managers to think and plan for the long term.

Reshaping corporate governance should be based on amending the Companies Act to include the following:

•A national public interest clause, as a precondition for foreign takeovers, ensuring that the national interest is considered alongside shareholder interest;

•Triple bottom line reporting: people, planet, profit. Companies should not be allowed to incorporate unless their declared purpose strikes a balance between their societal, environmental and financial obligations. This new balanced-purpose precondition should be a statutory measure, and would form the benchmark against which the performance of all company directors would be managed. It would also be deployed to block takeover bids where the leadership team feels that the takeover being proposed would not further the company’s balanced-purpose mission;

•Rewrite article 172 of the Companies Act, to make it clear that company directors are not only required to deliver value for shareholders, but also to society at large. Article 172, as it currently stands, hardwires shareholder primacy into the statutory purpose of the company, whereas shareholder value should be placed on equal footing with societal and environmental value.

The best businesses get it. Emerging trends such as the rise of the aware consumer, increased transparency and the need to attract talent to a business model that inspires pride are combining to lead businesses to understand the need to place ethics and responsibility at the heart of their operations. This represents a real opportunity for progressive politicians to engage with the private sector, to build support for legislative and regulatory reforms, as partners for a new kind of growth.

RE-INVENTING OUR STATE PENSION: THE ANDEAN MODEL

In his interim report, the independent pension reviewer, John Cridland, warned that the state pension bill is set to increase by 39%, to £152bn a year, by 2028. Part of this is down to th...