The Supply Side State

16th November, 2012 8:00 am

By Phillip Blond

The Labour Party was founded on the needs of labour. And for most of the 20th Century the interests of waged workers and the interests of capital were held to be diametrically opposed and mutually hostile. Slightly higher wages were all that workers could practically hope for, whereas holders of capital rightly assumed that the benefits of ownership would only accrue to them and people like them.

And the post-war settlement did nothing to open the benefits of capital to all, it only differed from the pre-war through widening workers rewards with health, education and welfare entitlement. And since all these goods were effectively now the states to give it was also incumbent on the state to finance them, but given the UK’s poor growth and productivity record which was because neither capital nor Labour could agree common goals the tax take was not sufficient to cover this expansion. Britain grew at pitiful rates in the 1960s as Keynesian fits and starts produced a ‘stop go’ investment strategy that priced out longer term investment and engendered successive balance of payments crises and devaluation. A failure to broker an effective private and public sector productivity deal produced a wage/price spiral hence and massive inflation in the UK. And since inflation in the 1970s eroded investors long term returns, an effective investment strike further deepened the UK’s anaemic economy and British productivity and performance crashed.

In Europe however the post 45 settlement was radically different – here states saw overcoming the capital labour divide as fundamental to post war productivity. They used the state to force the private sector to invest and they ensured that the public sector did the same – private pension capital and public expenditure were engaged in the same ends, the latter producing through education skilled employees; the former, investment in the infra-structure that these people would work in. Capital invested in labour and labour in capital and both prospered. In the 1960s European economies averaged 6% GDP growth, against the UK’s 2%.

In response Mrs Thatcher in 1979 inverted the priority given to workers by the British state and favoured capital – arguing that in the end this would be to the benefit of everyone. Defeating inflation was the only way to resist investment strike and restore profitable returns to invested capital and therefore productive assets to industry. But the resources of the state were exhausted it could no longer maintain demand, and since UK growth was not productive enough to raise wages to sufficient levels the burden of financing low productivity passed from the state to the individual.

So the economy gradually moved from Mrs Thatcher to New Labour from maintaining capital supply through public debt to maintaining public demand through private debt. America sang the same tune. Europe its prior settlement now ossified into vested interest and bureaucracy increasingly followed suit. Neoliberalism succeeded not through supply side innovations but through privatising the debt demand function. For what deregulation allowed was massive capital inflows not to productive investment but to finance the extraordinary taking on of debt by private individuals and corporations and it was this debt driven growth that kept us in business over the last 20 years.

In short if the period from 1945 – 1979 was public Keynesianism the period from 1979-2008 was private Keynesianism. Across the West from the 1990s onwards as government debt gradually fell, private and corporate debt rose to unprecedented levels. The 2008 crash exposed this fake separation and collapsed both together when the state had to take back the debt (greatly increased through leverage and asset deflation) it had thought effectively privatised. Space prevents a proper analysis but let us say that the state is now in the extraordinary position of having to pay down debt to reassure bond markets that debts are affordable while at the same time creating growth so that – you guessed it – bond investors are reassured that debts are affordable. Austerity and growth are the twin irreconcilable demands being placed on debtor nations.

So what to do? How should a new one nation state behave? Siding with capital over labour ultimately undermines investment and destroys markets just as siding with labour ultimately undermines and destroys the interests of working people. Changes in the nature of modern capitalism make a new settlement between waged workers and the owners of productive capital more urgent than ever.

The 21st century economy could be truly terrifying; computer adaptation may well mean the equivalent of de-industrialisation for the middle classes. Innovation and ownership have been captured by a new oligarchical class. Increasingly our markets look like those of a ‘rentier state’ where offshore monopolies avoid tax whilst we allow them to dominate our markets extracting rents through effective denial of market entry. Success for this type of capital won’t necessarily mean a success for capitalism or democracy. America the most innovative western nation already gives us a vision of our plutocratic future – in 1974 the top 1% of US families owned 8% of US GDP in 2007 it was 23.5%.

To avoid such outcomes requires a One Nation state to reverse some very long term assumptions. Firstly it should not conceive of its primary role as redistribution – since redistribution can never catch up with production, its aim should be the restoration of wealth creation to all. Welfare to low paid work is not nearly enough it should be welfare to own, to trade, to learn. Wages are not enough the return to labour from wages as a proportion of GDP has been falling since 1968.

The true One Nation task must be to pluralise and extend ownership, innovation and education. This requires multiple initiatives. It means creating ‘horizontal’ bottom up trading economies in our most benighted areas facilitating people trading with one another preventing rent extraction from the ‘vertical’ economies that currently scale money up and out of neighbourhoods.

It should mean creating new peer to peer investment vehicles so that wealthier people can invest in local businesses rather than buy to let bubbles and a failing stock market. The left should not view markets or capital as the enemy but as a good that has been restricted to the few. It should look critically at current competition law and the failed agenda of ‘consumer welfare’ that has aided current economic concentration and monopoly formation.

Tax law should be area based so that companies pay a proper return on trade and the ‘little people’ aren’t left with the tax burden. It should radicalise and extend the mutual and co-operative offer so that this sector can really become mainstream. It should seek to restore the city states of the industrial revolution and create an infrastructure that serves rather than centralises so there is as much regional/local autonomy as possible. It means grouping educating and innovating our SME’s – creating not just individual but supply chain competition after all, of the 4.8 million UK private sector businesses, 99.9% of them are small and medium sized enterprises. Crucially it involves a through life educational offer for all citizens so that they can constantly adapt their skills to the rapidly changing world.

We have lived through the disaster of both left and right based Keynesian economics and public and private debt has been used to put off the genuine supply side solution we need: a supply of capital to labour enabling ordinary people to innovate and educate together, investing in their own businesses, their own lives. That alone will create the human capital that can successfully service and direct the 21st century economy. This requires a new power to craft and domesticate capital and to educate and re-endow the economic activity of people with productive rather than just consumptive capacity. This is the true vocation of the One Nation state: to side with the entrepreneur against the rent seeker, creating a plural rather than concentrated economy with multiple centres of vocation, innovation and networked production. A capitalism that benefits all was the true dream of the Rochdale pioneers and that paradoxically will be nothing like contemporary capitalism at all.

Phillip Blond is director of the think tank ResPublica

This piece forms part of Jon Cruddas’s Guest Edit of LabourList

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  • Rubbish. Capitalism cannot benefit all – if you were to somehow find “a capitalism that benefits all” it would not be capitalism, it would be some form or other of socialism. Capitalism accumulates capital, for capitalists; if it started benefitting all it wouldn’t be doing its job…

    The Rochdale Pioneers’ aim was “to arrange the powers of production, distribution, education and government” along co-operative lines: the antihesis of capitalism.

    I’m not even convinced you know what you mean in half of this article… But where the fog of quasi-intellectual obfuscation clears, do you fancy proposing some policies? If a “through life educational offer” is crucial, does that mean you propose free lifelong learning? Or is this going to be built on the burden of private debt?

    When you “restore the city states of the industrial revolution” – presumably you don’t mean resurrect the corrupt, boss-led city councils of the 19th century – what do you propose? Devolution to city regions? Is there a demand for that? Do people in Bradford think they’re part of the Leeds City Region?

    “Peer to peer investment vehicles” will not be terribly attractive to people – you go into “buy to let” or invest in the stock market, not to “benefit all” or benefit “local people” but to make some money. People will only invest in other local businesses if they are pretty close to being guarantted a decent return.

    Why would people suddenly start being communitarian through capitalism? Real people have neither the time nor incentive to behave so irrationally. If you get a lump sum when you’re made redundant, are you going to give it to the woman down the road who’s trying to open a new shop or are you going to invest it somewhere where you’ll know you’ll get a decent return? Unless you’re very rich, you’ll do the latter. And capitalism ensures that only a very small minority of people are very rich. You have to do the latter, because you have to try and live.

    It is not “left” or “right” Keynesianism that is the issue, it is capitalism. Capitalism isn’t working. It has only ever worked for capitalists. If we really want to One Nation economy, then we have to go beyond capitalism and create an economic system that really is for everybody, not for small minority. Let’s call in socialism.

  • AlanGiles

    Well, well, the Red Tory speaks. If I may be serious for a moment, messieurs et mesdames, I am sure many of my fellow LL readers would like to express a real “one nation” vote of thanks to Mr Cruddas for turning one short week of our lives into what has seemed to be an entire month (it reminds me of the joke about the musician who went to the doctor and was mortified to be told that he only had a month to live: “That’s terrible, doctor, isn’t there anything I can do?”. “Well”, said the doctor, “you could try living with a banjo player”.

    “Will that make me live longer?” asked the musician

    “No2, replies the doctor, “but it will SEEM longer”.

    I am sure that all our worries, concerns and questions have been answered (except perhaps for that age old question where did Robinson Crusoe go with Friday on Saturday night?.

    Anyway, we can’t allow this week of deep intellectual conversation pass us by, without saying thank you, and if you feel like coming again………DON’T.

    Anyway, I’d like to pay my own, one-nation tribute by dedicating this music to him, and all blue/purple Labour supporters (not to mention red Tories) everywhere:

  • I wrote what I thought was quite an interesting comment on this… Ah well.

  • Some good policy ideas and suggestions that I would broadly agree with. However, the macroeconomic analysis, I believe, is deeply flawed. To call the policies of 1945-76, yet alone, 1976-present day ‘Keynesian’ displays breathtaking ignorance of Keynes’s work from the GT onwards. Economic policy has been based on either a Hicksian ‘compromise’ of Keynes with neoclassical theory (first period), or Milton Friedman’s free market dogma (second period). All are premised on the ideas of a stable economy based on equilibrium, a wholly predictable future, aggragation based upon a solitary consumer and a solitary product, and a system where banking does not matter. Keynes argued, and Minsky confirmed, the economy was inherently unstable, based on disequilibria, analysis based on behaviour on a macro level with no aggregation, and inclusive of an analysis on the role of debt and banking in functioning economy. If Philip, or anyone else for that matter, searches for any true Keynesian assumptions in any textbook taught at any college, school, or university, you will find a total of, or very near to zero. The dogma of neoclassical economic theory has pervaded academia, politics and business up until the present day. It is utter nonsense to call any of recent periods ‘Keynesian’ in any way shape or form.

    • Thanks Jason,

      I am always more than happy to distinguish between an authors intent and how that prescription is carried out – but I think the degraded view of Keynesianism is very much alive – no matter how much Keynes himself would have been appalled what has been done in his name.

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