Breaking the Shackles of Neo-Liberal Orthodoxy

Labour leaders have often been eloquent in articulating a vision of the kind of society they want; it is explaining how that vision is to be realised that seems to be the problem.

We have seen a further demonstration of this sad truth at this year’s Labour conference. Ed Miliband had good things to say about Labour’s goals, but Ed Balls made it clear that those goals would have to be achieved within the constraints of the current neo-classical orthodoxy.

The subordination of lofty aspirations to the harsh and supposedly inexorable dictates of “free-market” economics has a long and sad history in Labour politics. Harold Wilson, for example, destroyed the chances of his 1960s government with his long and ultimately fruitless battle against devaluing the pound.

Jim Callaghan signalled his acceptance that Keynesian economics had run their course when he told the 1976 Labour conference that “you can’t spend your way out of recession”.

The New Labour governments at the turn of the century, of course, had no need to undergo a Damascene conversion. They readily embraced the “free-market” orthodoxy and set about trying to produce a better society on the basis that the filthier the rich, the bigger the crumbs from their table would be.

Ed Balls has placed himself firmly in that tradition by asserting that a new Labour government would allow no let-up in austerity and no resiling from the restraint of public spending. Any progress, it seems, would have to come from re-shuffling the pack, not from cutting a new one.

The commitment to continued austerity is inevitably and correctly seen as validating, of course, the main plank in the Tory platform, and therefore immediately gives rise to the question – why should the voters trust Labour to carry it out when the Tories are available to do it with considerably more conviction?

If the voters did accept Labour’s commitment to maintain austerity, how – they might ask – could Labour promise with any credibility, in an unchanged macro-economic context, to produce different and better economic outcomes? And if Labour were to win power on that basis, why would they want to enter government in a straitjacket of their opponents’ making?

The acceptance by Labour leaders that reducing the government deficit must be the top priority seems explicable only on the basis of either a complete loss of political nerve or a total failure to understand how more successful economies operate.

Austerity policies, as the record shows, are an extremely ineffective way of bringing the deficit down. By reducing the size of the economy, they will inevitably diminish tax revenues, which means that the deficit is therefore bigger than it would otherwise be, both absolutely and as a proportion of a slower-growing GDP.

Further, with low investment in the domestic economy, so that the borrowing and lending of the household and corporate sectors roughly balance each other out, and with no action to address our lack of competitiveness, the consequent foreign payments deficit (and the borrowing from abroad that it necessitates) has to be roughly matched – as an accounting inevitability – by a government deficit.

Cutting public spending, in other words, is beside the point and largely self-defeating as a means of reducing the deficit – even if that is treated as the primary goal of policy. If we really want to get the deficit down, there is no option but to get the economy moving again, not on the basis of an unsustainable asset inflation and brief consumption boom, but of improved levels of investment, competitiveness, and trading performance.

How is that to be done? A complete alternative strategy cannot set out in a couple of hundred words here, but it is certainly not to be helped by reducing government spending. In any case, why do we single out government spending as so dangerous to stability and prudent management, when we look at what happens elsewhere in the economy?

In the real economy (and not that of fevered right-wing imaginations), 97% of our money comes into existence as credit created out of nothing by the banks. That credit is created by the stroke of a computer entry; it rests on nothing other than the banks’ willingness to lend – especially, of course, on house purchase, hence the asset inflation in the housing market.

No one seems to turn a hair at the fact that the money supply is almost totally accounted for by credit created by private companies whose sole purpose is making profits for their shareholders. On the other hand, a government that created credit for public purposes and the good of the economy as a whole (or, as the pejorative term would have It, “printed money”) would be lambasted.

Government-created money is acceptable, it seems, only when – you’ve guessed it – irresponsible lending means that the banks have to be bailed out.   Then, the Bank of England will issue up to £350 billion of “quantitative easing” (equally the product of the “printing press” and, incidentally, having no appreciable inflationary consequences).

If vast amounts of money can be created for private purposes, why is it so outrageous that a government serving the public interest might create money for investment, say, in new productive capacity? That, after all, is exactly what the newly dominant economies of the Pacific Rim – China, Korea, Taiwan, and others – have done and are doing, and exactly what Shinzo Abe in Japan has returned to, after two decades of stagnation while his country applied policies recommended to them by western economists – those same economists who apparently still have Ed Balls in thrall.

Isn’t it time the Labour leadership shook off the shackles of a failed orthodoxy and learnt to think for themselves? They might then identify the means that would enable those desirable ends to be met.

Bryan Gould

25 September 2014