By BAGEHOT
FOR much of the past two decades, a consensus has defined Britain’s industrial and labour policies; a theory of the country’s place in a globalised economy and of what it does best. It spans politicians of the left (from Peter Mandelson to Ed Balls and even Ken Livingstone as he ran London) and of the right (Margaret Thatcher, Michael Portillo, George Osborne and most of those around them). It is a tome to which most recent arguments about regulation and economic reform are merely annotations.
The story goes something like this. Compared with, say, Germans, Britons are poor at making things. Especially when they have to fund and manage that process themselves, rather than contract it to foreigners. When it comes to buying machinery, making it work, training specialist technicians to operate it and keeping the whole caboodle profitable over many years, Britain is not so hot. It is, however, good at doing stuff for people. Want to start a cleaning business, a restaurant or a call centre? In Britain you can do it cheaply and easily. Want to trade derivatives, provide legal advice or design advertisements? London, Manchester, Leeds, Edinburgh… take your pick. Need a new anti-cancer drug or software programme? Cambridge, Swindon, Cardiff await your investment. Indeed, a big part of all this is Britain’s ability to hoover up foreign cash and offer an attractive meeting-point where firms from third countries can come and do business.
Beneath the skin is a structural analysis sometimes (though not always) referred to as “Varieties of Capitalism”. At its core is the observation that, for historical and cultural reasons, different sorts of Western market economy have developed different strengths that tend to reinforce each other. Germany, Sweden and Japan sport collaborative labour relations, rigid jobs markets, patient capital, whizzy applied-technology centres, vocational education systems and a risk-averse culture. These interlock and make those countries good places for manufacturing. They are best at plodding but fiddly tasks that it takes a long while to learn and investments that pay off only over time. Britain, America and Ireland have a different eco-system: based on fast and fluid investments, generalist skills, strong research universities, a risk-taking culture and a liberal, adversarial corporate governance regime. This most promotes fast-moving, mostly office-based industries with sparklier rewards and scarier risks.
Britain’s governments over recent years have tried to accentuate its strengths. They have been exceptionally open to foreign trade and investment, have calibrated regulation and foreign policies according to the needs of the City of London, have kept the country’s product and labour markets the most liberal in the EU, have first rolled back (Thatcher) and then kept rolled-back (Major, Blair, Brown, Cameron) the role of organised labour. That has had pros and cons. It leaves some British workers poorly protected and forced to compete on price in low-skill service jobs; it means heavy exposure to financial shocks and migration surges. But it also underwrites low unemployment and a large, lucrative pool of employment in high-end service jobs, some of the prosperity from which trickles down (though too little to correct what is, by European comparison, an hourglass-shaped society). An imperfect settlement, certainly, but nonetheless one for which many countries would trade their status quo and which could be very much worse.
Yet the consensus is slipping. For the first time since the Thatcher years, both main parties are questioning it. On the right, Theresa May has committed to restricting foreign takeovers, putting workers on company boards, meddling in executive pay and (further) cracking down on immigration. From Ed Miliband, the former Labour leader, she has lifted “predistribution”: the notion that the state should crank up incomes through regulation, rather than topping them up with welfare. Mrs May has also pooh-poohed Mr Osborne’s bid to turbocharge cities like Manchester and has created a department for “industrial strategy”, a term that often implies ministers deciding which sectors are grooviest at a given moment and always implies a cosier relationship between firms and the state. And she has halted plans for a new, Chinese-backed power station.
Meanwhile on the left, Owen Smith (the more centrist of the two resolutely left-wing candidates for Labour’s leadership) wants to tighten up the labour market, increase taxes on high personal earnings and investment incomes and create a Ministry of Labour. None of the other parties, from the Liberal Democrats and the Greens to UKIP and the SNP, seems to think very differently. As Matthew Parris pointed out in the Times yesterday, this outlook is taking hold in the country at large: “Inch by inch, we economic liberals may be losing ground.”
That many want to rub capitalism with sandpaper is understandable. Britain’s red-in-tooth-and-claw economic model has meant precarious work for millions. It generates greater inequality and worse living standards than the German model. Though it need not be, it is synonymous with a run-down public sphere: closed libraries, dirty streets, overpriced housing, overcrowded and unreliable public transport and a poor work-life balance. It can be especially unforgiving to post-industrial towns. It threatens to make the country too reliant on the whims of autocratic political and business leaders in Beijing, Moscow, Dubai and the like. The Brexit vote, the biggest shock to Britain’s place in the world since Suez (and perhaps before then) was in many ways an itch to these rashes. It is right that the country’s leaders should ask the obvious questions.
But questioning is all they are really doing. Mrs May and Mr Smith talk as if their corporatist, or christian democrat, or social market (or whatever you want to call them) proposals had never occurred to their predecessors. Most of all, the new consensus—Theresanomics?—thus far fails to offer an alternative to the imperfect but buccaneering model that has dominated policy-making for the past decades. Have Britain’s strengths been overrated? Does the country have other strengths, waiting to be tapped, that others have missed? Is Britain, culturally and structurally, less different from its northern European neighbours than previous governments have recognised? Perhaps the answer is yes. If so, let Mrs May and Mr Smith and those of a similar bent give forth. But thus far I am unconvinced. When I asked Professor David Soskice of the London School of Economics, one of the fathers of the Varieties of Capitalism school, whether it made sense to look to northern Europe and Asia for a model of political economy Britain could emulate, he demurred: “No, I don’t think it does. I think we should look to the United States, which has a capitalist system much more similar to ours.”
This matters for two reasons. First, however desirable a shift may be, there are big reasons to doubt whether Britain, the quintessential “liberal market economy” (or LME as the Varieties of Capitalism theorists categorise it), is temperamentally suited to the structures and norms of a Germanic “coordinated market economy”, or CME. Second, there are plenty of ideas in the ether that would help address Britain’s problems while working with, not against, the grain of its existing, LME model: for example, Mr Osborne’s attempt to knit together the big northern cities, measures to help workers in a fast-moving economy retrain and relocate, reforms to boost and improve the quality of university attendance (even at the expense of the country’s perennially flaccid apprenticeship system), a trade policy focused on selling the City to China, perhaps even some first moves towards a negative income tax or citizen’s income. Or in the words of Nick Pearce, a former 10 Downing Street policy head to whose fine blog post on Mrs May and Varieties of Capitalism I am indebted: “May would do better just to loosen the spending taps, and invest in infrastructure, R&D and skills, while leaving corporate governance reform, industrial strategy and regional policy to Heseltinian romantics.”
The point is: Brexit has thrown much into the air. Britain, it is true, needs a detailed debate about its economic future. But the terms of that debate matter. If there are good reasons for the country to try to jolt itself out of its LME eco-system and into a CME one, let Mrs May and her fellow travellers produce them and let Britain conceive its future accordingly. But if there are not—if Britain’s current model is indeed path dependent and ineluctable, if Mrs May and Mr Smith are letting ends obscure means—then the country needs a very different discussion: about how it can make the best of its existing strengths. Time for answers.
