Liam Byrne: The Tories can stage their festivals but cannot escape their history

This week’s Boris and Theresa show, a ludicrous clash of charisma versus cardboard, is far more than a conference-season game of thrones. Its a sign of things to come. Their clash is not a cause of division; its a symptom of a much deeper confusion within the Conservative party about whether to escape from the deep grip of seven decades of New Right orthodoxy.

Renewal in office is always hard. In office, political parties always face an innovator’s dilemma. Do we string out a winning formula? Or do we take the leap and change?

The Tories’ crisis is deeply rooted in the New Right’s history. Stretching back to the 1930s to economists like Mises, Hayek, and Milton Friedman, the New Right formula of managing money supplies, maximising markets, and minimising states took over 70 years to craft.

But the challenge for the neo-liberal today is this: their formula cannot handle liberalism and its consequences.

The law of comparative advantage is about as close as you get to a consensus amongst economists. And it was this idea that inspired left and right to transform the world economy. Together, we built NAFTA, the World Trade Organisation, and doubled the size of Europe to create a marketplace that linked six billion of the world’s seven billion people. It was quite a fin de siecle.

We bet that trade and tech would deliver the tax we needed to rebuild public services and roll-back inequality. And for many years we were right. But the best explanation for what followed is offered by another Austrian: Joseph Schumpeter.

Seventy-five years ago Schumpeter’s Capitalism, Socialism and Democracy popularised the idea of creative destruction. But too often we forget, Schumpeter forecast the corollary; the destruction of competition and the emergence of vast new oligopolies.

Schumpeter was right. Since the late 1990s, a $20 trillion merger wave inside the US and around the world has created exactly the sort of oligopolies Schumpeter predicted – just as a billion people entered the world labour force and technology costs collapsed. The vast new companies which emerged, bigger than countries, now have unprecedented power to drive forward progress, yes, but also to set prices – and wages.

Why? Because these firms, rationally, do everything they can to destroy the theoretical, nice-to-read in textbooks, utterly abstract perfect competition which is the very foundation for New Right theory. They have acquired, as Obama’s White House put it, “monopsony power”: the ability to dictate wages while workers lose all power to “vote with their feet” and move to different firms paying better, because those alternative opportunities simply did not exist. They are destroying the power of ordinary workers to earn a good life.

We thought the old law of comparative advantage would mean “trade, tech and tax” that would lift all boats. Instead, the old law of comparative advantage became a new law to advantage the comparatively rich.

Proof? Today, half of global wealth is owned by just one per cent of the world’s population; 85 families own more than three billion of the world’s people.

The Conservatives struggle to answer this because they face two fundamental roadblocks to reform.

First, is the challenge of escaping supply side economics. Supply-siders believe many things, but most important is that capital is the key factor driving growth. But this is no longer true. In the 21st century, knowledge is far more important. Proof? Countries with a higher science spend than us – bar Finland – have a far higher rate of productivity growth. Which is why it was such a catastrophic error in the last parliament for the Tory-led government to cut corporate taxes 25 times more than the boost to science spend. We now have to spend £23bn extra a year on science to hit the international benchmark of three per cent of GDP.

The Tories’ second challenge is even more intractable. Across the west, governments are struggling to reconnect productivity growth and wage growth. That task is impossible unless we reform, re-invent and and in some invent the institutions that shape our market place.

Some Tories – those who like Edmund Burke – like institutions. But there is an incredible reluctance amongst Conservatives to build or rebuild them. This is wrong-headed. From the earliest English market charter, we see markets have been and always were social institutions. There are no “natural” laws. Society gets to write the rules.

In my book Dragons, I tell the story of 700 years of British capitalism through the lives of ten of our most influential entrepreneurs. The lesson of economic history that emerges is clear. Entrepreneurs make history by inventing the future. But, down the ages there would have been no British entrepreneurial miracle if it wasn’t for our social technology, which at great moments, had to be invented and re-invented. The “visible hand” of the public realm has always helped the invisible hand of the private market to deliver.

Today, our institutions are not fit for purpose. They do not connect people with progress. If you believe, like me that “talent is everywhere, but opportunity is not” you must believe that we need a new settlement which rewrites the rules of the marketplace around public institutions which democratise the opportunities of this new world; using both monetary and fiscal policy to keep demand high and stable; encouraging long term investment in good jobs; keeping skills at the cutting edge, investing in new ideas; and trading fairly with the world around us.

This is the reformers’ challenge. Today’s Labour Party, moving decisively beyond the policy tools of the Third Way, is up for it. The Tories can have as many festivals as they like. But they can’t escape their history.

Liam Byrne is shadow digital minister and MP for Birmingham Hodge Hill.