Progressive Capitalism in Britain: Pillars for a New Political Economy

by Patrick Diamond (Editor), Tony Dolphin (Editor), Roger Liddle (Editor)

Overview

The debate surrounding economic policy in the UK has recently been heavily focused on determining the appropriate response to the financial crisis and recession. There has been less discussion about the nature of the UK’s political economy.

Leaving the UK’s model of political economy unchanged is, however, not an option in the modern global economy. The existing model has resulted in an unbalanced economy with relatively low productivity and a structural balance of payments deficit. Without reform, these problems will not go away and could worsen. A debate about what Britain’s new economic model should look like is long overdue.

This book—a collaboration between Policy Network and IPPR—aims to fill this gap and poses a series of challenging questions concerning the future of the British economy:

• What are the key principles upon which a progressive political economy in the UK should be based?
• How can government institutions and the role of the state be reformed to ensure they keep pace with a fast-changing economy?
• What can be done to address the market distribution of incomes and assets in order to reduce inequality?
• How can the government better support innovation-led growth?
• How can businesses be encouraged to engage in and support a new model of capitalism that will require significant changes in the way they behave?

The answers to these questions form a significant contribution to the debates about progressive capitalism and inclusive prosperity and set out a way forward for a new political economy in Britain.

Product Details

ISBN-13:	9780992870539
Publisher:	Rowman & Littlefield Publishers, Inc.
Publication date:	02/24/2015
Pages:	94
Product dimensions:	5.30(w) x 8.30(h) x 0.40(d)

About the Author

Patrick Diamond is lecturer in public policy at Queen Mary, University of London. He was formerly an adviser to Tony Blair and Gordon Brown covering policy and strategy. He is author of Labour's Economic Path to Power (2013).

Tony Dolphin is senior economist and associate director for economic policy at IPPR, one of the UK's leading Thinktanks. He previously worked as an economist and investment strategist at Henderson Global Investors, and before that for WorldInvest Limited. Prior to that he worked as an economic adviser at HM Treasury and in what was then the Department for Education and Science. Tony has written and broadcast widely on the economic challenges facing the UK and is a member of the Society of Business Economists.

Roger Liddle is chair of Policy Network and became a life peer in 2010. He was formerly Tony Blair’s special adviser on European policy and subsequently worked for three years in the European commission. He has written extensively on European and British affairs, including The Blair Revolution (with Peter Mandelson, 1996), Global Europe, Social Europe (with Anthony Giddens and Patrick Diamond, 2006) and Beyond New Labour (with Patrick Diamond, 2009), and most recently The Europe Dilemma: the Drama of EU integration (2014), as well as several other Fabian Society and Policy Network pamphlets.

Read an Excerpt

Progressive Capitalism in Britain

Pillars for a New Political Economy

---

By Patrick Diamond, Tony Dolphin, Roger Liddle

Rowman & Littlefield International, Ltd.

Copyright © 2015 Policy Network
All rights reserved.
ISBN: 978-0-9928705-3-9

---

CHAPTER 1

A New Political Economy for Britain

David Sainsbury

In a recent article in Foreign Affairs, entitled 'The Future of History', Francis Fukuyama pointed out that despite widespread anger at Wall Street bailouts, there has been no great upsurge of support for leftwing political parties. This lack of leftwing mobilisation he attributed, I believe rightly, to a failure in the realm of ideas. The financial crash of 2008 revealed major flaws in the neoliberal view of capitalism, and an objective view of the last 35 years shows that the British economy has not performed well compared with the previous 30 years in terms of economic growth, financial stability and social justice. But progressive political economists have not yet put forward a credible alternative. If you want to oppose a bad idea, you have to put forward a credible good one.

Progressive politicians and policymakers need, therefore, to debate what should be the outlines of a new progressive political economy, which is clearly different from the neoliberalism that has dominated political debate for the last 35 years, but which equally is not seen as a return to the failed policies of the 1960s and 1970s. A number of attempts have been made in recent years to describe such a political economy. We have had 'responsible capitalism', 'ethical capitalism' and 'moral capitalism'. But I do not think that any of them have either stated clearly what goals they are seeking to achieve or credibly described what role the state needs to play in order to achieve them. To say simply that one is in favour of responsible capitalism, ethical capitalism or moral capitalism does not advance the argument at all, as no one is arguing for irresponsible capitalism, unethical capitalism or immoral capitalism. It fails what the late Simon Hoggart called the law of the ridiculous reverse.

It might be argued that we do not need to have a view about political economy, that a pragmatic approach to policymaking is all that is needed for political success. I think to take this view is a mistake for two reasons. First, if a political party's programme of reform is going to attract voters, it must be able to state credibly how the state is going to achieve the party's goals. Second, if a political party does not state clearly what its political economy is, then it can be certain that its opponents will pin one on it that is politically disastrous.

A new progressive political economy must be based on a firm belief in capitalism – that is to say on an economic system in which most of the assets are privately owned and production is guided and income distributed largely through the operation of markets. But it must also incorporate three defining beliefs of progressive thinking: the crucial role of institutions; the need for the state to be involved in the design of institutions in order to resolve conflicting interests and provide public goods; and the use of social justice, defined as fairness, as an important measure of a country's economic performance.

It was a great mistake of neoclassical economists not to see that capitalism is a socio-economic system, and that institutions are an essential part of it. The financial crash of 2008 was made far worse by a number of institutional failures, such as the high level of leverage that banks were allowed to have. Endless empirical studies have shown that four institutions have a major impact on the performance of firms and, therefore, on a country's economic growth. These four institutions are the national system of innovation – that is, the network of institutions in the public and private sectors whose activities and interventions initiate and diffuse new technologies; a country's education and training system; the institutions that underpin the governance of firms; and the institutions that underpin financial markets. None of these institutions are today performing their function in the UK economy as well as they should, and they need to be reformed.

The second defining belief of progressive thinking is that the state has to be involved in the design and reform of a country's institutions. Institutions do not evolve spontaneously as neoliberals believe. The state has to be involved because in the case of the institutions that underpin labour and financial markets and corporate governance it has to resolve the conflicting interests of participants. In the case of a country's education and training system and its national system of innovation, they are largely public goods, which have to be provided by the state. Politicians, however, should be careful about trying to cherry-pick the economic institutions of a different variety of capitalism. At first sight it may seem very sensible, for example, for a country like the UK to try to copy the successful technical training system of a country like Germany, but all the evidence shows that such a policy is likely to fail.

The reason why the different institutional forms of capitalism are not scattered randomly across countries, and why some countries have more market-based institutions and others have more non-market based ones, lies in the complementarities that exist between different types of institutions. Technical education in Germany depends to a considerable extent on coordination across firms in an industry, which, in Germany, is achieved by industry associations and trade unions supervising a publicly subsidised training system. This system cannot be transferred easily to the UK because we do not have strong industry associations and trade unions which could deliver such a training system, and we have, therefore, to find our own institutional solution.

Attempts by some countries to switch to another variety of capitalism have also demonstrated that it is an extremely difficult thing to do unless there is huge political commitment. The most explicit attempt to switch to another variety – that of French governments to create a German-style coordinated market economy in France between the mid-1980s and the mid-1990s – was a complete failure. Finally, it is not clear that over the long term there is a systematic variation in the economic performance of the two main varieties of capitalism: liberal market economies and coordinated market economies.

I think it is important at this stage of the argument to understand that the role of the state that I have been describing is an enabling or market-supporting one. It is not the command-and-control role promoted by traditional socialists or the minimalist role of neoliberals.

The third defining belief of progressive thinking is that social justice needs to be used as an important measure of a country's economic performance. Neoliberals assess the economic performance of a country solely in terms of economic growth and freedom. But if one is concerned with the wellbeing of society, I do not think it is possible to argue that a wealthy society with most of its wealth held by the top 1 per cent is better than a slightly less wealthy society with its wealth more evenly spread. I also believe that fairness is a better measure of social justice than equality. It is difficult to devise practical and effective policies to achieve equality in a market economy, because there is a real trade-off between equality and economic growth, and because egalitarianism is not a popular policy even for many low-income people. In my experience, trade unions are much more interested in differentials than in a simple policy of equality of pay for all. It is not, however, too difficult to think of policies that will create a fairer economy by preventing the appropriation of wealth by the directors of companies and investment managers, by raising the minimum wage, and by creating in the UK an effective system of technical education to provide the technicians industry so badly needs.

These are the outlines of what I believe a new progressive political economy should look like, and which I have described in my book Progressive Capitalism. I also believe that western governments that do not adopt it, and instead continue to cling to a neoliberal political economy, will find it difficult to grow their economies in the new global economy in which they find themselves. In the new global economy, which is awash with cheap labour, we will not be able to compete if we 'race to the bottom', with firms competing by seeking ever-cheaper labour, land and capital, and countries competing by deregulating and shrinking social benefits. We also will not be able to produce the good quality jobs we desperately need: jobs with hours and pay that lift families out of poverty, and provide opportunities for training and promotion.

The only way we will be able to compete, improve our standard of living and create good quality jobs is by seeing ourselves as being involved in a 'race to the top', with firms improving their value-added by innovation in existing industries, and by developing the capability to compete in new and more sophisticated industries, where value-added is generally higher. Firms will only be able to do this if governments abandon the neoliberal political economy, which is based on a firm belief that governments have no role to play in the economy, and replace it with a new progressive political economy – progressive capitalism – that sees the state as having a key role to play in providing the conditions that enable dynamic companies to innovate and grow.

David Sainsbury is a member of the House of Lords and a former minister for science and innovation. He is the author of Progressive Capitalism: How to Achieve Economic Growth, Liberty and Social Justice (2013).

CHAPTER 2

The Smart State

Philippe Aghion

Post-second world war European economic and welfare policies had three main pillars. The first was a top-down industrial policy based on national champions and state-owned firms. The second was a Keynesian macroeconomic policy to smooth the business cycle: essentially, whenever there was a recession government would spend more or cut taxes in order to boost consumption, relying on the so-called 'Keynesian multiplier' to boost growth. The third pillar was the welfare system which paid various forms of benefits and credits to top-up low salaries or to enable people to have access to various services that they would not otherwise have had.

This set of policies was very well adapted to the type of catch-up economy that existed in the postwar years, where growth was based on copying and adapting the more advanced technologies and techniques of wealthier economies, particularly the US. However, the rules of the game have now changed. European states no longer exist in a relatively closed, protectionist, and less globalised era.

COMING TO TERMS WITH THE NEW ECONOMIC ENVIRONMENT

European states have caught up with the leading economies and, under pressure from the new emerging economies that are also doing some catching up of their own, have to rely on innovation. European economies can no longer just be imitators; they have to be innovators.

Globalisation has forced states to deliver more and more innovation-led growth. However, innovation-led growth has also undermined the very foundations on which economic and welfare policies have been built. In the innovation economy, Schumpeterian creative destruction means the old model of industrial policy based on national champions and state-owned firms is obsolete because greater competition means that new firms are constantly destroying and replacing old firms. This competition is crucial for the innovation process. Indeed, it is a catalyst for innovation when an economy is at the frontier of production possibilities. The consequence is that states can no longer rely on old-fashioned, top-down Colbertiste industrial policy.

Further, the nature of an open and global economy means that governments can no longer just decide to increase domestic growth by boosting consumer demand because increased demand may well end up being for foreign products, particularly those that are either better quality or less expensive than domestically produced products. States must, therefore, ensure they are competitive.

This means that states can no longer just have a demand-side approach; they also need a supply-side approach. We can no longer only have automatic stabilisers for consumers; we must also have them for firms, to make sure that firms, particularly those that are credit constrained, can maintain their R&D investment over the business cycle. Instead of a Keynesian macroeconomic policy focused entirely on the demand side, we must, therefore, develop a counter-cyclical macroeconomic policy that also helps firms maintain their R&D, employee 'upskilling' and other kinds of growth-enhancing investments.

There must be a new social role for the state, too. Creative destruction means there is a perpetual cycle of job creation and destruction. The new state must be there to help by providing the unemployed with good income insurance and good training so that workers can bounce from one job to another. This role has in the past been fulfilled by trade unions and employers but the new economy will require a more advanced model of 'flexicurity'. Denmark, where they have flexibility in hiring and firing on the firm side, although there is also income insurance and facilities for workers to retrain and find a new job, is a good example of this concept. Firms are penalised if they abuse the system, workers are penalised if they do not actively retrain for a new job or if they refuse the new jobs that are offered to them, and the state co-finances the system, which in turn supports innovation-led growth.

WHAT PROGRESSIVE GOVERNMENTS HAVE TO DO

Governments have to do three things: they need to promote growth; they need to make sure that growth is inclusive and socially just; and they need to reduce budget deficits. But how can they do these three things together?

First, it is high time to depart from the old Keynesian view that governments can invest in all things everywhere. State investments need to be targeted. This targeting can be done in two forms: horizontal targeting, by which we mean investments, such as education, research, and support to innovating small and medium-sized enterprises, which benefit all sectors of the economy. Then there is vertical targeting: support that is focused on priority sectors (for example, renewable energies, biotech, and health). However, if states do sectoral policy, they cannot do it the old way. It has to be a pro-competition sectoral policy, not one of sheltered protectionism. States can promote competition, for example, by making firms compete for state subsidies.

Crucially, to do this, states must ensure that their investments are well governed and produce tangible results. Therefore, subsidies to universities or schools must go along with good governance of these institutions. Similarly, subsidies to particular sectors must be designed and governed so that they do not prevent competition and so that the state can exit from projects that turn out to be non-performing.

If progressives want to achieve inclusive growth while still respecting budgetary discipline, then two evils must be avoided. One is what I call 'primitive Keynesianism' – the idea that demand drives growth, that the only thing that matters is for governments to spend and that, therefore, the supply side does not matter. This is not to say that automatic stabilisers are not important, but we cannot just dismiss the supply side either.

The second evil is what I call the 'tax-and-spend' philosophy – the idea that governments can tax as much as they want, without any negative effect on innovation and growth, especially if part of the tax revenues are used as public subsidies. For example, in France, François Hollande introduced a 75 per cent tax in the belief that taxation either would be neutral or would have its effects offset by the establishment of a Banque Publique d'Investissement. This has proved very wrong, as shown by the decline in private investment and job creation in France in the last few years.

(Continues...)

---

Excerpted from Progressive Capitalism in Britain by Patrick Diamond, Tony Dolphin, Roger Liddle. Copyright © 2015 Policy Network. Excerpted by permission of Rowman & Littlefield International, Ltd..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

---

Table of Contents

About the Contributors vii

Introduction Tony Dolphin 1

A New Political Economy for Britain David Sainsbury 5

The Smart State Philippe Aghion 11

A Progressive Economic Strategy Wendy Carlin 17

Putting in Place an Innovation System That Will Allow the UK to Compete in Global Markets 23

Equipping Young People with the Skills Employers Need 35

Reforming Corporate Governance to Encourage Long-Term Thinking and Investment 51

Developing a Financial System That Meets the Needs of the Rest of the Economy 65

The Political Challenge of Progressive Capitalism Roger Liddle Patrick Diamond 79