Er…um Right-wing Liberals (?) and the economic crisis
There has been a discussion in Liberator blog of a supposed right-wing takeover of the Liberal Democrats over the past few years. I can’t comment on the internal political dimension so I devote myself to comment on the economic aspect.
There are those who are critical of an increased emphasis on the free market in the party. I hope I have understood their argument but the principal objection would seem to rest on a 'failure´ of advocates of more market-oriented policies to understand the consequences of the long-lasting economic crisis. That is to say, the alleged “neoliberal” [i] economic orthodoxy was destroyed in the ashes of Lehman Brothers and other financial institutions in 2008 and that the ´right´ of the party are clinging to an outmoded ideology, presumably for some believed misguided philosophical purposes.
Perhaps to an extent the monetarist economic theory has lost its hegemony. Too often the impression was given that capitalism and the free-market has been without flaw. It hasn’t: it has given rise to unrealistic expectations, high levels of personal debt and created a degree of inequality that has become destabilising and likely inhibiting an economic recovery. There was too a failure to deploy the regulatory system that was already in place. To this degree the concept a `free market´ was oversold and its application mismanaged, leaving its credibility tarnished.
To me there was a failure of judgment rather than system. Those systems - including corporations and the state that was meant to regulate them - are made up of people - fallible people. Hubris and perverse short-run incentives both played their part. However in material terms it has provided most of what people want most of the time and has lead to a general leveling-up of living standards, although perhaps not quality of life.
I don’t believe there can be a return to the days before the crisis nor should there be. That skewed way of capitalism must be over. The crisis has gone on too long and will have been transformative in its effects. This crisis has provided a valuable opportunity to look again at how the market economy works and to whom it should benefit. Society and consumers should take precedence over capital. Reforms ought to be corrective in character and should encompass consideration of the variety of organisation that such an economy might need (e.g. increased use of CICs, mutuals and Social Enterprises) as well as how they could work together.
Thought must go into the purpose and extent of regulation. It is justified to avoid market failure in helping the market work in the best possible way but not afford larger more established businesses protection and privilege beyond what is unavoidable. Regulation should stay away from smothering business but should be simple and easy to understand and implement so it is easier to comply than to break the rules. It should promote also consumer confidence so people know what they are buying, is what is what is claimed for it. Caveat emptor is not sufficient.
Looking at Lord Heseltine’s proposals in No Stone Unturned and in Really Facing the Future by David Boyle and Simon Titley, there is a growing consensus that economic decision-making is overly centralised in Whitehall and that should be increasingly devolved to the regions and local communities. This is positive in so far it doesn’t involve increasing the size of Government overall. It is big move and likely to be resisted since the Treasury guards that function jealously. You only need to look at the history of the Department for Economic Affairs (DEA) in the 1960s!
The other area of dispute is the continued austerity pursued by the coalition government. There could have been an alternative had the last Government followed the Keynes 's main contention: evening-out of peaks and troughs of the economic cycle by maintaining a surplus in good times so a spending might be increased temporarily during a recession. Instead those who claim to be his disciples failed to follow his central point, that government directed a structural deficit during a boom thereby room for a fiscal stimulus has been restricted. The IMF's Chief Economist has said that the UK could take on a little more borrowing provided it did not spook the markets. Interest rates are already close to nil, so the monetary route is cut off too. Quantitative Easing (QE) has also its own perils. The government has already tried to move funding priorities from current expenditure to capital projects and serious consideration ought to be given to Vince Cable suggested Plan A+.
An opportunity for a wider alternative has been forfeited in practicality. There is a serious risk in adding to that debt significantly while there continue to be external threats to the economy (Eurozone and the US Fiscal Cliff). This could result in the economy remaining stagnant but burdened with an even higher level of debt to service than even at present. While it is true that government debt ranged from 131% to 182% [ii] of GDP in the 1920s, public spending was also lower as a percentage of national income, ranging from 27% to 36%. Thus the parallels with the 1920s and 1930s are far from clear-cut. Too often Keynes is deployed in arguments for a larger state; and the implication is that would be permanent. It is a strange irony that those who favour the alternative to austerity would place the fate of the economy even further in the hands of bond market speculators.
There is a danger that the good will be thrown out with the bad. This crisis should not be a cue to pull towards a big state – familiar and comfortable for some it might be. The state has a role in national life but we ought to be cautious that state action does not become and end in itself nor serve its own sectional interest. When the last Labour government left office public spending represented 47% of GDP - as a country we were sleepwalking into a command economy. For one, I would not want a night-watchman state but its size should be smaller (perhaps public spending 25-35% of GDP). If the size of the state fails to reduce, there are consequences: continued and increased rationing of public services and that encourages clientelism to circumvent it, which in post-war Italy became destructive to the accountability and transparency of politics. Furthermore, should a citizen hand responsibility to the state for certain intimate matters (e.g. health and personal care), they have surrendered largely any say in how that service might be delivered. This is significantly disempowering The ultimate responsibility must rest with the individual even if for practical purposes it is delegated to the state or another agency.
The changes towards making public services responsive to demand and accountable to its users, may take a generation to put in place the compensating appropriate alternative agencies. The Tories are being over-ambitious perhaps in attempting to shrink the size of the state by such an extent in a five-year term, although in part this is on account of the poor state of the public finances. There are also other long-run factors independent of the economic crisis that strengthens the argument for a smaller more responsive, flexible state i.e. demographic and technological change. There are complex matters and deserve a post on their own.
Wealth creation and the profit motive are not inherently or axiomatically evil; enlightened self-interest should be acceptable but pernicious self-interest must be discouraged. However large corporations don’t behave always in this benign way (e.g. investment banks & media empires) and by their size they can wield political power derived from accrued economic power. The impact of this has been serious for the country. This is a challenge to Economic Liberals to come up with an answer for corporate irresponsibility.
Turning towards public opinion, embarrassingly I haven’t been out canvassing for a while but I don’t recall Friedman or Hayek coming up on the doorstep, nor do I for a minute think that would ever. It is more likely people’s more profound views to be shared with those close to them, rather than party canvassers. In such conversations I sense a level of dissatisfaction but it is directed as much at the state as companies. It is bureaucracy in all sectors that I contend is the problem.
Perhaps my sentence, “I can see no value in the LibDems competing with votes with SWP or Respect as a party of student-dig left.-wing dissidence” was hyperbole. However the left of the party ought to consider carefully the type of support that is like be attracted and repelled by seemingly anti-capitalist and statist statements and policies.
In a poll by Ipsos.-MORI undertaken at the end of last year, slightly over-half of respondents (53%) had sympathised with the “Occupy Britain” only just over half of those - around a quarter (28%) - were favourable towards the protests. That lends strength to the argument in favour of corrective reform over something more far-reaching.
On the whole I consider myself a pragmatic centrist with an Economic Liberal, free market dimension. For me the current economic difficulties challenge – not nullify - free market ideas but the ongoing crisis must prompt the economic liberal view to innovate. The sacrifices have been considerable to get to this point, let’s not squander it.
[i] In my piece Four-Cornered Liberalism: Need all the corners be equal? earlier this year I reject the term “neoliberal” as it applies to my political values, so no need to recount it here.
[ii] In December 1932, the UK (along with France) refused to pay its share of inter-allied debt in relation to the US.
