This article traces the history of ‘crowding out’, and its use as a justification for austerity and state deflation from its origins in the 1920s to its latest post-2010 incarnation. It examines why governments have kept turning to austerity and continue to justify it on the grounds that public sector activity crowds out more productive private activity, despite the accumulated evidence that this traditional pro-market formulation has failed to deliver its stated goals. It examines three other embedded forms of crowding out that have been highly damaging—leading to weakened social resilience and more fragile economies—but which have been ignored by both governments and mainstream political economists.

THE IDEA OF ‘crowding out’ has long been one of the central canons of pro-market economic theory. The concept was first promoted at an international conference of officials in Brussels in 1920 to discuss ‘sound economic policy’ in the postwar years. Given limited capital, asked the British delegation, will ‘Governments or private industry’ use it more productively? ‘The answer is … private industry’.¹ This argument was then placed at the heart of a strategy of state-imposed austerity through cuts in public spending and wages applied in Britain and other nations in the early 1920s.

Following the short-lived boom at the end of the 1914–18 war, Britain, along with much of Europe, faced growing economic turbulence and surging dole queues, along with high levels of public debt from funding the war. With heightened public expectations of social reform, the coalition government Prime Minister, David Lloyd George, initially promised social reconstruction through higher state spending, especially on homes and schooling. Simultaneously, the Prime Minister faced demands from the owners of capital for a return to the pre-war status quo.

During the war, large chunks of the economy had been taken under state control, with the subordination of private profit to steer resources to the war effort. While the public was calling for a better society in return for the sacrifices of war, business leaders were demanding the dismantling of the heightened state intervention of the war years, lower rather than higher public spending, and the reversal of the strengthened bargaining power labour had enjoyed during the war years. Political and industrial clashes were the inevitable outcome.

Deepening recession and the fear of mounting unrest, fuelled by the shadow of Bolshevism, induced panic among the ruling political and corporate classes. In response, the government dropped its commitment to social renewal in favour of a programme of austerity, or state induced deflation. This involved severe cuts in public spending, including reductions in pay for police, teachers and other public servants—cuts dubbed the ‘Geddes axe’ on the advice of a committee chaired by Sir Eric Geddes, the Minister of Transport.

Economic revival, it was argued, depended on lower spending by the state, lower wages and a return to a balanced budget, with state spending matched by tax revenue. If the state had borrowed more to meet its high-profile postwar pledges on housing and education, it was argued, more efficient and more pro-value private activity would have been ‘crowded out’. The measures, based on the idea of an automatic trade-off between state and private activity, were, it was asserted, simply sound economics based on fundamental laws—and not to be tinkered with—of how the economy worked. These ‘laws’ drew on the doctrines of the early classical economists that free markets and minimal state intervention would bring equilibrium, stability, and optimal growth.

Austerity Britain

Since the 1920s, governments have repeated this strategy of austerity—based on the doctrine of crowding out—on several occasions. These include the early 1930s, the 1970s, the 1980s and the post-2010 decade. Despite the time gaps, these episodes have been marked by almost identical justifications and remarkably similar impacts.

One of the constant themes has been a replay of the balanced budget theory of the 1920s and 1930s. Another has been that public spending cuts and lower wages would release scarce resources for the private sector. In 1975, two Oxford economists, Roger Bacon and Walter Eltis, argued in Britain’s Economic Problem: Too Few Producers that Britain’s economic plight stemmed from too many social workers, teachers and civil servants and not enough workers in industry and commerce. Buying into this argument, the new Chancellor of the Exchequer, Geoffrey Howe, told the House of Commons in 1979, ‘[we need to] roll back the boundaries of the public sector’ in order ‘to leave room for commerce and industry to prosper’.2 In June 2010, launching another rolling programme of spending cuts in his first budget, the Chancellor, George Osborne, repeated this claim that public spending ‘crowds out’ private endeavour.

Again, the presumption was that a more robust economy requires more private and less state activity, along with the counter-intuitive idea that austerity was the route to growth and enterprise. The somewhat crude ‘private sector good, public sector bad’ mantra was widely echoed. ‘The next government is going to have many challenges’, wrote the Times in 2010, ‘but tackling a public sector that has become obese … is going to have to be a priority’.³ Channel 4 went a step further with a programme describing state spending as a ‘Trillion pound horror story’, while The Spectator magazine called it ‘the most important programme to appear on British television this year’.⁴

So, does the austerity/crowding out theory stand up? And if not, why has it been so widely applied? The accumulated evidence shows that it is at best a significant oversimplification of the way economies work. Crowding out of private by too much public sector activity might apply when an economy is operating at full capacity and employment, but the doctrine has only been applied in situations of economic crisis, high unemployment and inadequate demand. Even at full capacity, there is still a choice to be made about the appropriate balance between public and private activity.

Heterodox economists, such as John Hobson in the early twentieth century, had offered an alternative route to growth and out of crisis. His work, which had an important influence on J. M. Keynes, showed that recessions were the product of a shortfall of demand stemming from ‘under-consumption’ and ‘over-production’ triggered in large part by a lack of purchasing power among low- and middle-income households arising from extreme levels of wealth and income inequality.⁵

In the 1920s and early 1930s, slamming on the public spending brakes proved counter-productive. It cut demand and slowed recovery, with private as well as public activity ‘crowded out’. The strategy had minimal effect on improving the state of the public finances, but led to a retreat on social programmes, while unemployment never fell below one million in the inter-war years.

A hundred years on, the Osborne cuts have had a very similar, and predictable impact. They also came with a new label: ‘expansionary austerity’, but an identical message—that a smaller state would generate greater stability via lower interest rates, greater confidence and faster growth. In the event, the strategy turned out to be an additional assault on an already weakened economy, with the cuts in public spending having little or no impact on expanding private activity, while damaging the quality of Britain’s social infrastructure and weakening its system of social support.⁶ One critic, David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, concluded that, by destroying productive capacity and making households worse off, the austerity programme simply ‘crushed the fragile recovery’.⁷ In one estimate, rolling cuts in public spending were said to have shrunk the economy by £100 billion by the end of the decade.⁸ Another study showed that if real-terms growth in public spending at the 3 per cent level inherited in 2010 from the previous Labour government had been maintained and paid for by matching tax rises, Britain’s government debt burden would still have been lowered by 2019.⁹

None of this means that crowding out never occurs. It just takes very different forms from the process advanced in neoliberal thinking. There are three alternative and distinct types of crowding out at work that have consistently had a malign effect on both the economy and wider society, yet have not been systematically addressed in the mainstream economic literature or by relevant government departments.¹⁰ First, the idea that markets know best in nearly all circumstances has shifted the balance between private and public activity too far in favour of the former, thus crowding out the latter. Second, an increasing share of private activity has been geared less to its primary function—to building economic strength and creating new wealth—than to boosting personal corporate rewards in a way which fuels inequality, weakens economies and crowds out economic and social progress. Third, there is the way the return of the ‘luxury capitalism’ of the nineteenth century (triggered by the application of pro-inequality neoliberal policies) has come at the expense of the meeting of essential material and social needs.

The balance between private and public activity

The simple notion—private good, public bad—has long been overplayed by neoliberal theorists. Both have a role to play and the real issue is getting the right balance between the two. State spending plays a crucial role not just in meeting wider social goals, but in supporting economic dynamism and stability. Private corporations do not operate in a vacuum. The profits they make, the dividends they pay and the rewards received by executives stem from a too-often unacknowledged interdependence with wider society, including the state. Business provides jobs and livelihoods, while responding to consumer demand. Society provides the workforce, education, transport, multiple forms of inherited infrastructure and often substantial state subsidies.

History shows that while bad decisions are too common, carefully constructed and evidence-based state intervention can have a highly positive impact. Government responsibility lies in helping to shape markets, prevent market abuse, support innovation, share the burden of risk-taking in the development of new technologies, promote public and private wealth creation and protect citizens. It is now time to ask if these functions—from market regulation to citizen protection—have been underplayed.

Britain is a heavily privatised and weakly regulated economy. Among affluent nations, it has a comparatively low level of public spending, including social spending and public investment in infrastructure, relative to the size of the economy.¹¹ A relatively low portion of the economy is publicly owned.¹² With the cut-price sell-off of state assets, from land to state-owned enterprises, the share of the national wealth pool held in common has fallen sharply from a third in the 1970s to less than a tenth today. This ongoing privatisation process has also greatly weakened the public finances. Britain is one of only a handful of rich nations with a deficit on their public finance balance sheet, with net public wealth—public assets minus debt—now at minus 20 per cent of the economy. The balance stood at plus 40 per cent in 1970. This shift has greatly weakened the state’s capacity to handle issues like inequality, social reconstruction and the climate crisis.¹³

The emphasis on private capital as the primary engine of the economy has failed to deliver the gains promised by its advocates. Since the counter-revolution against postwar social democracy from the early 1980s, and especially since 2010, levels of private investment, research and development, and productivity—key determinants of economic strength—have been low both historically and compared with other rich countries. Several factors account for Britain’s relative private ‘investment deficit’. They include Britain’s low wage history, with abundant cheap labour dulling the incentive to invest, and the perverse system of financial incentives that makes it more attractive for executives to line their pockets than build for the future. There is also the preference given to capital owners—an increasingly narrow group—in the distribution of the gains from corporate activity. In the four years from 2014, FTSE 100 companies generated net profits of £551 billion and returned £442 billion of this to shareholders in share buy-backs and dividends, leaving only a small portion of these gains to be used for private investment and improved wages that support economic strength.¹⁴ With UK corporations increasingly owned by overseas institutional investors, such as US asset management firms, little of this profit flow has ended up in UK pension and insurance funds and back into the domestic economy.

Some forms of financial and business activity have played a destructive role. In a remarkable parallel with the 1929 stock market crash and the Great Depression, the 2008 financial crash and the financial crisis that followed were classic examples of the impact of uncontrolled market failure. They were the product of tepid regulation of the financial system that turned a blind eye to a lethal cocktail of excessive profiteering and reckless gambling by global finance. It was only public intervention on a mass scale to bail out the banks—and many of the architects of the crash—that prevented an even greater crisis.

Claims about the overriding benefits of the outsourcing of public services to private companies have been exposed by a succession of scandals involving large British companies like G4S and Serco and by damning reports of the consequences of outsourcing in the NHS, the probation service and army recruitment.¹⁵ Such claims were also undermined by the collapse of two giant multi-billion-pound behemoths—the UK construction company Carillion and the public service supplier Interserve (which employed 45,000 people in areas from hospital cleaning to school meals). In the ten years to 2016, Carillion, sunk by self-serving executive behaviour and mismanagement, liked to boast about another malign form of crowding out—of how it raised dividend payments to shareholders every year, with such payments absorbing most of the annual cash generation, rather than building resilience.

Extraction

A second form of crowding out stems from the return of a range of extractive business mechanisms aimed at capturing a disproportionate share of the gains from economic activity. While some of today’s towering personal fortunes are a reward for value-creating activity that brings wider benefits for society as a whole, many are the product of a carefully manipulated, and largely covert, transfer of existing (and some new) wealth upwards. Early economists, such as the influential Italian economist Vilfredo Pareto, warned—in 1896—of the distinction between ‘the production or transformation of economic goods’ and ‘the appropriation of goods produced by others.’¹⁶ Such ‘appropriation’ or ‘extraction’ benefits capital owners and managers—those who ‘have’ rather than ‘do’—and crowds out activity that could yield more productive and social value. It delivers excessive rewards to owners and executives at the expense of others, from ordinary workers and local communities to small businesses and taxpayers.¹⁷

Extraction has been a key driver of Britain’s low wage, low productivity and growth sapping economy. Many large companies have been turned into cash cows for executives and shareholders. A key source of this process has been the return of anti-competitive devices described as ‘market sabotage’ by the American heterodox economist Thorstein Veblen over a century ago’.¹⁸ In contrast to the claims of pro-market thinkers, corporate attempts to undermine competitive forces have been an enduring feature in capitalism’s history, contributing to erratic business performance and economic turbulence.

Far from the competitive market models of economic textbooks, the British—and global—economy is dominated by giant, supranational companies. Key markets—from supermarkets, energy supply and housebuilding, to banking, accountancy and pharmaceuticals—are controlled by a handful of ‘too big to fail’ firms. The oligopolistic economies created in recent decades are, despite the claims of neoliberal theorists, a certain route, as predicted by many distinguished economists, from the Polish economist Michal Kalecki, to the Cambridge theorist, Joan Robinson, to weakened competition, extraction and abnormally high profit. This new monopoly power, according to one study of the US economy, has been a key determinant of ‘the declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage, and associated financial instability.’¹⁹

Although they helped pioneer popular and important innovations, the founders of today’s monolithic technology companies have turned themselves from original ‘makers’ into ‘takers’ and ‘predators’. Companies like Google and Amazon have entrenched their market power by destroying rivals and hoovering up smaller competitors, a form of private-on-private crowding out of small by more powerful firms. Multi-billionaires in large part because of immense global monopoly power, the Google, Amazon and Facebook founders can be seen as the modern day equivalents of the American monopolies created by the ‘robber barons’ such as J. D. Rockefeller, Andrew Carnegie and Jay Gould through the crushing of competitors at the end of the nineteenth century.

The House of Have and the House of Want

The third type of crowding out follows from the way the growth of extreme opulence for the few has too often been bought, in effect, at the expense of wider wellbeing and access to basic essentials for the many. Today’s tearaway fortunes are less the product of an historic leap in entrepreneurialism and new wealth creation than of the accretion of economic power and elite control over scarce resources. It is a paradox of contemporary capitalism that as societies get more prosperous, many fail to ensure the most basic of needs are fully met.

In Britain, elements of the social progress of the past are, for a growing proportion of society, being reversed. Compared with the 1970s, a decade when inequality and poverty levels were at an historic low, poverty rates have more or less doubled, while both income and wealth have become increasingly concentrated at the top. Housing opportunities for many have shrunk and life expectancy rates have been falling for those in the most deprived areas. Mass, but hit and miss, charitable help has stepped in to help fill a small part of the growing gaps in the state’s social responsibilities. While Britain’s poorest families have faced static or sinking living standards, the limits to the lifestyle choices of the rich are constantly being raised. The private jet, the luxury yacht, the staff, even the private island, are today the norm for the modern tycoon.

In heavily marketised economies with high levels of income and wealth concentration, the demands of the wealthy will outbid the needs of those on lower incomes. More than one hundred years ago, the Italian-born radical journalist and future British MP, Leo Chiozza Money, had warned, in his influential book, Riches and Poverty, that ‘ill-distribution’ encourages ‘non-productive occupations and trades of luxury, with a marked effect upon national productive powers.’²⁰ The ‘great widening’ of the last four decades has, as in the nineteenth century, turned Britain (and other high inequality nations such as the US) into a nation of ‘luxury capitalism’. The pattern of economic activity has been skewed by a super-rich class with resources deflected to meeting their heightened demands.

While Britain’s poorest families lack the income necessary to pay for the most basic of living standards, demand for superyachts continues to rise. The UK is one of the highest users of private jets, contributing a fifth of related emissions across Europe. The French luxury goods conglomerate, LVMH—Louis Vuitton Moët Hennessy—is the first European mega-company to be worth more than $500 billion. Resources are also increasingly directed into often highly lucrative economic activity that protects and secures the assets of the mega-rich. Examples include the hiring of ‘reputation professionals’ paid to protect the errant rich and famous, the use of over-restrictive copyright laws, new ways of overseeing and micromanaging workers, as well as a massive corporate lobbying machine.

The distributional consequences of an over-emphasis on market transactions is starkly illustrated in the case of the market for housing. Here, a toxic mix of extreme wealth and an overwhelmingly private market has brought outsized profits for developers and housebuilders at the cost of a decline in the level of home ownership, a lack of social housing and unaffordable private rents. The pattern of housebuilding is now determined by the power of the industry and the preferences of the most affluent and rich. Following the steady withdrawal of state intervention in housing from the 1980s—with local councils instructed by ministers to stop building homes—housebuilders and developers have sat on landbanks and consistently failed to meet the social housing targets laid down in planning permission. Instead of boosting the supply of affordable social housing, scarce land and building resources have been steered to multi-million-pound super-luxury flats, town houses and mansions. In London, Manchester and Birmingham, giant cranes deliver top end sky-high residential blocks, mostly bought by speculative overseas buyers and left empty. The richest crowd out the poorest, or as Leonard Cohen put it, ‘The poor stay poor, the rich get rich. That’s how it goes, everybody knows.’

There has been no lack of warnings of the negative economic and social impact of economies heavily geared to luxury consumption, most of them ignored. Examples include the risk of the coexistence of stark poverty and extreme wealth: of what the radical Liberal MP, Charles Masterman, called, in 1913 ‘public penury and private ostentation’, and what the American radical political economist Henry George had earlier called ‘The House of Have and the House of Want’.²¹ Then there was the influential 1950s’ warning from the American economist, J. K. Galbraith, of ‘private affluence and public squalor’.²² ‘So long as material privation is widespread’, wrote the economist, Fred Hirsch, in the 1970s, ‘the conquest of material scarcity is the dominant concern.’²³

For much of the last century, policy makers have seen wealth and poverty as separate, independent conditions. But that view has always been a convenient political mistruth. If poverty has nothing to do with what is happening at the top, the issue of inequality can be quietly ignored. Yet, the scale of the social divide and the life chances of large sections of society are ultimately the outcome of the conflict over the spoils of economic activity and of the interplay between governments, societal pressure and how rich elites—from land, property and private equity tycoons to city financiers, oil barons and monopolists—exercise their power. In recent decades, the outcome of these forces has favoured the already wealthy, with the shrinking of the economic pie secured by the poorest. As the eminent historian and Christian Socialist, R. H. Tawney, declared in 1913, ‘What thoughtful people call the problem of poverty, thoughtful poor people call with equal justice, a problem of riches.²⁴

Conclusion

These three alternative forms of crowding out have imposed sustained harm on social and economic resilience. Despite this, governments have continued to apply a long-discredited austerity-based theory of crowding out, while ignoring other, arguably more damaging forms of the phenomena. The latest application of the original theory since 2010 has inflicted ‘vast damage on public services and the public sector workforce’, without delivering the declared goal of ‘crowding in’ through faster recovery and growth, or improved public finances.²⁵

Britain is currently being subjected to yet another wave of austerity, with the 2022 Autumn Statement announcing a new package of projected public spending plans, higher taxes and lower public sector real wages, again in the name of fixing the public finances and boosting growth.²⁶ It’s the same short-term, narrowly focussed strategy that, by digging the economy into a deeper hole and cutting public investment, has failed time and again over the last 100 years.

Meanwhile, other damaging forms of the crowding out of key public services, value-adding economic activity and the meeting of vital needs, driven by over-reliance on markets, excess inequality and dubious private-on-private activity, are simply ignored or dismissed.

Notes

¹ C. E. Mattei, The Capital Order, Chicago IL, University of Chicago Press, 2022, p. 156. ² House of Commons, Hansard, 12 June 1979, col 246. ³ J. Tomlinson, ‘Crowding out’, History and Policy, 5 December, 2010; https://www.historyandpolicy.org/opinion-articles/articles/crowding-out⁴ J. Delingploe, ‘Britain’s trillion pound horror story’, The Spectator, 13 November, 2010. ⁵ J. A. Hobson, The Industrial System, London, Longmans, Green & Co., 1909. ⁶ C. Breuer, ‘Expansionary austerity and reverse causality: a critique of the conventional approach’, New York, Institute for New Economic Thinking, Working Paper no. 98, July 2019. ⁷ D. Blanchflower, Not Working, Princeton NJ, Princeton University Press, 2019, p. 172. ⁸ A. Stirling, ‘Austerity is subduing UK economy by more than £3,600 per household this year’, New Economics Foundation, 2019; https://neweconomics.org/2019/02/austerity-is-subduing-uk-economy-by-more-than-3-600-per-household-this-year⁹ R. C. Jump, J. Michell, J. Meadway and N. Nascimento, The Macroeconomics of Austerity, Progressive Economy Forum, March 2023; https://progressiveeconomyforum.com/wp-content/uploads/2023/03/pef_23_macroeconomics_of_austerity.pdf¹⁰ See S. Lansley, The Richer, The Poorer, How Britain Enriched the Few and Failed the Poor, Bristol, Policy Press, 2022. ¹¹ K. Buchholtz, Where Social Spending is Highest and Lowest, Statistica, 28 January, 2021; https://www.statista.com/chart/24050/social-spending-by-country/¹² OECD, The Covid-19 Crisis and State Ownership in the Economy, Paris, OECD, 2021; https://www.oecd.org/coronavirus/policy-responses/the-covid-19-crisis-and-state-ownership-in-the-economy-issues-and-policy-considerations-ce417c46/¹³ L. Chancel, World Inequality Report, World Inequality Database, 2021. ¹⁴ High Pay Centre/TUC, How the Shareholder-first Model Contributes to Poverty, Inequality and Climate Change, TUC, 2019. ¹⁵ National Audit Office, ‘Transforming Rehabilitation: Progress Review’, National Audit Office, 1 March 2019; https://www.nao.org.uk/reports/transforming-rehabilitation-progress-review/¹⁶ V. Pareto, Manual of Political Economy, New York, Augustus M. Kelley, 1896. ¹⁷ Lansley, The Richer, The Poorer. ¹⁸ T. Veblen, The Theory of the Leisured Classes, New York, The Modern Library, 1899; T. Veblen, The Engineers and the Price System, New York, B. W. Huebsch, 1921. ¹⁹ I. Cairo and J. Sim, Market Power, Inequality and Financial Instability, Washington DC, Federal Reserve, 2020. ²⁰ L. Chiozza Money, Riches and Poverty, London, Methuen, 1905, pp. 41–3. ²¹ C. Masterman, The Condition of England, Madrid, Hardpress Publishing, 2013; H. George, Progress and Poverty, New York, Cosimo Inc., 2006, p. 12. ²² J. K. Galbraith, The Affluent Society, Boston, Houghton Mifflin, 1958, ch. 23. ²³ F. Hirsch, The Social Limits to Growth, Abingdon, Routledge & Kegan Paul, 1977, p. 190. ²⁴ R. H. Tawney, ‘Poverty as an industrial problem’, inaugural lecture at the LSE, reproduced in Memoranda on the Problems of Poverty, London, William Morris Press, 1913. ²⁵ V. Chick, A. Pettifor and G. Tily, The Economic Consequences of Mr Osborne: Fiscal Consolidation: Lessons from a Century of UK Macroeconomic Statistics, London, Prime, 2016; G. Tily, ‘From the doom loop to an economy for work not wealth’, TUC, February, 2023; https://www.tuc.org.uk/research-analysis/reports/doom-loop-economy-work-not-wealth²⁶ Chancellor of the Exchequer, Autumn Statement, 2022, Gov.uk, 17 November, 2022; https://www.gov.uk/government/topical-events/autumn-statement-2022

This article was first published in The Political Quarterly 

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Biography

• Stewart Lansley is the author of The Richer, The Poorer: How Britain Enriched the Few and Failed the Poor, a 200-year History, 2021. He is a visiting fellow at the University of Bristol and an Elected Fellow of the Academy of Social Sciences.

picture credit flickr

The post Rethinking ‘Crowding Out’ and the Return of ‘Private Affluence and Public Squalor’ appeared first on The Progressive Economy Forum.

Ten Years and Counting…

In 2009, we wrote The Spirit Level, based on our work as epidemiologists researching the social determinants of health and wellbeing. We showed, emphatically, that greater equality – a smaller gap between rich and poor – is the fundamental basis of a better society. The more equal of the rich, developed countries have resoundingly better physical and mental health, which is part of the reason why they weathered the storm of Covid-19 better than more unequal countries.

But economic inequality, and its intersection with inequalities related to ethnicity, gender, disability, language, religion and more, is not just a health issue. In The Spirit Level we showed that all the problems that are more common at the bottom of society, that have a social gradient, get worse with greater inequality. And that body of evidence has continued to grow in the years since, based on our own research and the work of many others across the world. In addition to shorter life expectancy, higher death rates and levels of chronic disease, increased obesity, mental illness and poor child wellbeing, more unequal societies suffer from more violence, including homicides, domestic violence, child maltreatment and bullying. Children and young people do less well in school and have lower chances of social mobility and higher rates of dropping out and teenage births. Drug and alcohol abuse, problem gambling, status consumption and consumerism also rise with inequality, while levels of trust and solidarity, and civic and cultural participation decline.

Countries that tend to do well on any one of these measures tend to do well on all of them, and the ones that perform badly do badly on most or all of them. And not only is the impact of inequality wide-ranging, differences between countries are large; and although the poor are worst affected, inequality affects almost everybody.

And that means that the UK is trailing behind the countries to which we usually compare ourselves, on that long list of problems, and that all of us – young or old, male or female, in the North or the South, rich or poor – ALL OF US, are damaged. We are each at higher individual risk, and our whole society is ground down and trapped by inequality: we, and it, fail to thrive.

We’ve used a robust framework analysis to show that this is a causal problem and we’ve done a lot of work to understand the pathways through which inequality does the damage.³ We know that tackling inequality is the central task in responding to the multiple crises we face: the climate crisis, the cost of living crisis, the North-South divide, food insecurity, the gig economy, threats to our democracy.  Inequality is at the heart of it all.

The lost decade

When The Spirit Level was published we were at first heartened by the political response to the research. Politicians across the political spectrum seemed to understand the evidence and inequality seemed to take its rightful place on the political agenda.

But what has happened in the UK since then – a decade of austerity, followed by a global pandemic, and now a cost of living crisis, means we’re just as unequal now as we were then. And every crisis that comes along seems to be another engine of increasing inequality. 

Who suffered from the Global Financial Crisis? Average real incomes declined, and that was particularly true for the youngest and lowest paid workers.  Who were most likely to be exposed to Covid, to be infected, to be really sick, to die? Death rates were twice as high in the most deprived areas of the UK as in the most affluent. And we know who is already suffering most from rising prices, rising interest rates in the cost of living crisis – those on low incomes, on benefits, families with children, especially lone parents and everyone living outside of London and the south east.

And in all three of these crises, it hasn’t simply been a matter of the poor getting poorer.  In these big existential crises, the rich have got richer, a lot richer.  In the years following the Global Financial Crisis, the world’s richest 1% increased their wealth until they owned more than the bottom half of the world’s entire population. Top investors made billions by buying up shares in failing banks, betting against housing markets that were foreclosing on the mortgages of the poor, basically “buying when there’s blood in the streets” to realize massive gains during recovery. The pay of the FTSE 100 chief executives has sky rocketed, unlike that of their workers. During the pandemic, the rich accumulated wealth, including from government procurement under emergency regulations with lowered scrutiny for corruption. Oil and gas companies have made huge profits since the energy crisis began, and their chief executives continue to be paid millions, some of them many millions.- Huge pay and benefits packages and dividends have enriched the chief executives and shareholders of the UK’s water companies despite their abysmal record on tackling leaks, pollution and investment in new reservoirs.

We need the right (left) kind of active government

The Coalition and Conservative governments have certainly been active since 2010. They have actively failed to tackle inequality; they have acted to benefit the rich and harm the rest of us. Their actions speak much louder than their hollow words on levelling up.

An Active Labour Government could do so much to transform our society from the failing, unproductive, harmful state it is in, to one that promotes and, crucially, achieves the welfare and wellbeing of all its citizens. An active government that puts wellbeing first through tackling inequality would see spin-off benefits and savings across health, education, social care, law enforcement and more.

The courage to change

Labour should take heart from the progressive preferences of British citizens. When polled, the large majority of the public are in favour of progressive policies that are too often dismissed as radical, utopian, or unfeasible by the press or the Westminster bubble.

Close to 80% of the British public believe that the gap between those on high and low incomes is “too large” and this has been a consistent trend (varying between 72-85%) over the four decades that the British Social Attitudes (BSA) survey has been running. In 2018, the BSA concluded that “the public are likely to have more of an appetite for policies aimed at addressing poverty and inequality than they did a decade ago.”

The majority of the British public want water, energy, rail, buses, Royal Mail and the NHS to be run in the public sector, and that includes the majority of Conservatives.

Recent academic research on public opinion research in “red wall” constituencies found consistently high levels of support for Universal Basic Income, even when the policy was presented to voters in terms used by its opponents. There is little evidence that voters with conservative social values – those in left behind communities in Labour’s former heartlands – won’t actually support radical social policy.

The vast majority of the public support action on climate change and they are much more worried about the costs of doing nothing than they are about the cost of tackling the problem.

The triple-win manifesto

So what should the Labour Party do?  We are not politicians, or even political scientists or policy experts.  But we do know that Labour needs a bold and compelling vision that brings people onside by painting a picture of a society that can respond to the climate emergency while at the same time transforming people’s lives for the better and creating sustainable  growth.

What follows is by no means an exhaustive list, but six triple-win active policy options include:

• Joining WEGo, the Wellbeing Economy Governments (currently Canada, Scotland, Iceland, New Zealand, Wales and Finland), a collaboration of national and regional governments promoting sharing of expertise and transferrable policy practices for building wellbeing economies.  It is growth in wellbeing that we need, not growth in GDP.
• Committing to actually tackling inequality by taxing wealth, top incomes and financial transactions
• Giving people resilience and stability through a universal basic income and a proper living wage.
• Enacting the Socioeconomic Duty of the 2010 Equality Act
• Promoting fair work and economic democracy within a Green New Deal
• Putting children and young people at the centre of policy: recommit the country to ending child poverty; end selective education and remove charitable status from private schools; properly fund the comprehensive education system; enshrine in law universal free school meals and free holiday meals for families on benefits; and close the digital divide

Labour needs to act fast and boldly, with energising urgency, to make sure that the policies needed to tackle the climate emergency are politically acceptable to the public because they can see that they are part of a transformation to a fairer, better society in which they and their children and grandchildren can flourish.

What inspired progressive political change in the past was a vision of socialism, embodying the belief that a better society is possible for all of us.  The loss of that ideal has meant political hope has dwindled for so many.  Labour must build a new vision, firmly built on the foundations of an egalitarian and sustainable society.

Kate Pickett is a social epidemiologist, co-author of ‘The Spirit Level’ and ‘The Inner Level’ and co-founder of The Equality Trust.

Richard Wilkinson is Professor Emeritus of Social Epidemiology at the University of Nottingham Medical School, Honorary Professor at University College London and Visiting Professor at the University of York.

This article is published with permission from Labour Tribune MPs. It first appeared in a collection of essays published by Labour Tribune MPs in 2022 entitled “THE CHANGE WE NEED : How a Starmer Government can Transform Britain”

Further Reading

Wilkinson RG, Pickett K. The Spirit Level: Why Equality is Better for Everyone. London: Penguin; 2010.

Pickett KE, Wilkinson RG. Income inequality and health: a causal review. Social Science & Medicine 2015;128:316-26

Wilkinson R, Pickett K. The Inner Level: How more equal societies reduce stress, restore sanity and improve everybody’s wellbeing. London: Allen Lane; 2018.

Greater Manchester Independent Inequalities Commission. The Next Level: Good Lives for All in Greater Manchester, 2020: https://www.greatermanchester-ca.gov.uk/media/4337/gmca_independent-inequalities-commission_v15.pdf

Pickett K, Wilkinson R. Post-pandemic health and wellbeing: putting equality at the heart of recovery. In: Allen P, Konzelmann SJ, Toporowski J. The Return of the State: Restructuring Britain for the Common Good. London: Agenda Publishing, 2021.

Wilkinson R. If it doesn’t work for people, it won’t work for the planet. Club of Rome, 2021: https://www.clubofrome.org/blog-post/wilkinson-inequality-sustainability/

Reed H, Lansley S, Johnson M, Johnson E & Pickett KE. Tackling Poverty: the power of a universal basic income, London: Compass, 2022. Available at: https://www.compassonline.org.uk/publications/tackling-poverty-the-power-of-a-universal-basic-income/

Johnson M, Nettle D, Johnson E, Reed H & Pickett KE. Winning the vote with a universal basic income: Evidence from the ‘red wall’. London, Compass, 2022.

Picture credit: flickr

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We are living in an age of chronic uncertainty, in which crises pile into one another, plunging millions of people deeper into insecurity, impoverishment, stress and ill-health. There was the financial crash of 2008, a decade of austerity, a series of six pandemics culminating in Covid, with more to follow, and now the ‘cost-of-living’ crisis as inflation mounts, possibly reaching an incredible 20% by the winter.

Nassim Taleb coined the term ‘black swans’ to designate shocks that were rare, unpredictable and had devastating consequences. Now, they are not rare. But they are uncertain in terms of when, where and why they occur and who will be adversely affected. As such, you and I cannot be confident that we will not be among the victims.

There is something else too. It looks as if a large proportion of the population will be affected. It is predicted, for example, that 45 million people in Britain will be suffering from fuel-related hardship this coming winter, bringing more deaths and ill-health. Natural disasters could hit numerous communities, and being in a job is far from a guarantee of escaping poverty or economic insecurity.

Three deductions should flow from this bleak scenario. First, feasible economic growth will not overcome the threats. Second, old policies are not valid for tackling the new crises. Third, we need to build societal resilience, a new income distribution system and a new social protection system. ‘Targeting’ on a minority would be futile and inequitable.

The post-war welfare state was built on a presumption of Full Employment of men in full-time jobs earning family wages, in which there was a need for compensation for ‘contingency risks’ or ‘temporary interruptions of earnings power’. It was always sexist. But the essence was ex post compensation. This is inappropriate today where the core challenge is chronic uncertainty, for which one cannot devise a social insurance system. What is needed is an ex ante protection system, one which gives everybody guaranteed basic security.

But our politicians are failing to appreciate the nature of the challenge and are resorting to yesterday’s answers to yesterday’s problems. First, the Conservative leadership contenders and the Labour leadership are making overriding commitments to maximising economic growth. Keir Starmer says that the Labour motif for the next General Election will be ‘Growth, Growth and Growth’, and that he will only consider policy proposals from the Shadow Cabinet if they promote growth. Meanwhile, an adviser to several Tory Chancellors says the next Conservative Prime Minister will commit to an ‘absolute priority of maximising growth’.

A phrase that comes to mind is the one used by Michael Gove to characterise Liz Truss: they are taking a holiday from reality. Both the Conservatives and Labour are misdiagnosing the nature of the recurrent crises. Both are chasing the mirage of high GDP growth, wishing away the awful ecological implications. Starmer says the free market has failed. But we do not have a free market. It is rentier capitalism, in which most income flows to the owners of property – financial, physical and ‘intellectual’. Economic growth has to be unrealistically high for the precariat and other low-income groups to gain anything. This is why real wages have stagnated over the past three decades, and why earnings have lagged GDP growth, the difference made up by rising debt.

The income distribution system has broken down. Across all OECD countries, financialisation has accelerated, and is fuelling inflation for its benefit. In the UK, financial assets of financial institutions have risen to over 1,000% of GDP, with most finance used for speculative activity rather than for productive investment.

A rising share of income is going to capital, and more is going in rent, in excess profits. Within the shrinking share going to labour, more has gone to the top, again in forms of rent. The value of wealth has risen sharply relative to income, while wealth inequality is much greater than income inequality.

All the time, the precariat grows. What should exercise progressive politicians is that for a growing proportion of the population income instability and insecurity have grown by more than is revealed by trends in average real wages. A result is that millions of people are living on the edge of unsustainable debt. People lack income resilience. Desirable as that is, raising the minimum wage will not solve that, and nor will trying to be King Canute in banning flexible labour relations.

So what are our politicians proposing in this context of chronic uncertainty, a broken income distribution system and a daunting ecological crisis? What marks all of what they are offering is ad hoc window dressing that seems deliberately intended to avoid the reality that we have a transformation crisis on our hands. Tax cuts would benefit the relatively secure, price freezes would cost the public finances and distort markets, raising the minimum wage would bypass the precariat and those outside the labour market, and targeting more benefits to those receiving Universal Credit would merely bolster an unspeakably punitive and inequitable scheme.

It brings to mind what William Beveridge wrote in supporting his 1942 Report that led to the post-1945 welfare state. ‘It’s a time for revolutions, not for patching.’ So far, our mainstream politicians seem to lack the backbone. The strategy should be one of dismantling rentier capitalism and recycling rental incomes to everybody. Above all, in the foreseeable future of chronic economic, social and ecological uncertainty, the base of social protection should be the provision of ex ante security. People – all of us – must know that, whatever the shock, we will have the wherewithal on which to survive and recover.

This is when politicians should be looking at ways of introducing a basic income for every usual resident. It would not replace all existing benefits, and would have to involve supplements for those with special needs. It would have to start at a modest level, but would be paid to each man and woman, equally and individually, without means-testing or behavioural conditionality. Legal migrants would have to wait for a period, which does not mean they should not be assisted by other means. And to overcome the objection that it should not be paid to the rich, tax rates could be adjusted to make them more progressive.

Before coming to how to pay for it, I want to emphasise the reasons for wanting a basic income for all. The fundamental justification is moral or ethical.

First, it is a matter of common justice. Our income owes far more to the contributions of all our ancestors than to anything we do ourselves. Even Warren Buffet admits that. But as we cannot know whose ancestors created more or less, we should all have an equal ‘dividend’ on the public wealth. After all, if we allow the private inheritance of private wealth, there should be a public equivalent. The Pope has come round to that rationale for his support for basic income. It is also a matter of ecological justice, since the rich cause most of the pollution while the poor pay most of the costs, primarily in diminished health. A basic income would be a form of compensation.

Second, it would enhance personal freedom, including community freedom. Although paid individually, that would not make it individualistic. Experiments have shown that when everybody has basic income, that induces stronger feelings of social solidarity, altruism and tolerance.

Third, it would enhance basic security, in a way that means-tested, conditional benefits cannot possibly do. Politicians seem reluctant to offer ordinary people basic security, which they would always want for themselves and their families. Insecurity corrodes intelligence and induces stress and loss of the capacity to make rational decisions. We are experiencing a pandemic of stress and rising morbidity. None of the existing policy proposals would reduce that.

Finally, there are instrumental reasons. Experiments with basic income around the world have shown it results in improved mental health, less stress, better physical health, more work, not less, and enhanced social and economic status of women and people with disabilities.   

Basic income is not a panacea, but it should be part of a transformational strategy, complemented by putting public utilities, most notably water, back in public hands and by rent and energy price controls. There must also be fiscal reform that would help in the fight against the ecological decay while helping to overcome chronic uncertainty. Progressives should accept that taxes on income and consumption should be raised, because they are relatively low in this country and because more revenue is needed to pay for our public services, and in particular reverse the privatisation of our precious health service.

The call for Universal Basic Services is state paternalism and would not help with the nature of the crisis. People need financial resources to overcome the economic uncertainty and lack of resilience. No government can know the particular needs of particular people, and so subsidising some services would be both arbitrary and distortionary.

However, in addition to higher taxes on income to pay for services, we should think of ‘the commons’, that is, all that inherently belongs to every citizen of the UK, beginning with the land, air, water and sea, and the minerals and energy underneath. Over the centuries, they have been taken from us illegitimately, without us or our ancestors being compensated. This includes all the land that has been ‘enclosed’, the forest and public spaces that are being ‘privatised’, the seabed that is being auctioned off, and the oil and gas sold for windfall gains given away in tax cuts for the wealthy.

This line of reasoning leads to the proposal that levies should be put on elements of the commons that we have lost, with the revenue put into a Commons Capital Fund, which would be charged with making ecologically sustainable investments, from which ‘common dividends’ would be paid out equally to every resident citizen.

The initial base for paying for a basic income would be conversion of the personal income tax allowance, which benefits higher-income earners and contradicts the view that in a good society everybody should be a taxpayer. If the revenue from that were put into the Fund, it would provide enough for £48 a week for every adult. Then add a 1% wealth tax, justifiable because wealth has risen from three times GDP to seven times, wealth inequality is much greater than income inequality and over 60% of wealth is inherited, unearned. A 1% wealth tax would be sufficient to pay a modest basic income. And more revenue could be raised by rolling back on many of the 1,190 subsidies and tax breaks given mostly to wealthy people. A modest Land Value Tax, based on size and value of land, is also justifiable on common justice grounds, especially as the value of land has grown from an already high 39% of non-financial assets in 1995 to 56% in 2020.

Then add a Carbon Tax, vital if we are to reduce greenhouse gas emissions and global warming, but which will only be politically popular and feasible if all the revenue from it is recycled as part of Common Dividends. Other levies into the Fund could include a Frequent Flyer Levy and a Dirty Fuel Levy on all those cruise liners and container ships that keep their engines going all the time they are in port, poisoning the atmosphere and causing widespread throat cancer.   

Here we have the basis of an income distribution system suited to the era, with supplements for all those with extra needs. It is an approach that would open up a vista of multiple forms of work, unpaid as well as paid, putting care at its centre. It would be an era in which basic security was regarded as a fundamental right, and it would be one in personal freedom would be enhanced while precarity would be reduced, the precarity that comes from dependency on a discretionary state and undignified charity. At this moment of omni-crisis, we need to march in that direction.            

Postscript:

In their response to the cost-of-living crisis, the New Economics Foundation proposes ‘free basic energy’ for all households. Besides penalising those outside households, this presumes that all households’ poverty and insecurity is due to high energy prices. For many that will be so, but for some other factors may be more important.

It would also raise moral hazards. Some people may not need the full free allocation, but would be inclined to waste what they did not need, because it was free. The amount given free would have to be based on some ‘average’ household. But many are in non-average households, or are outside them more, for whom the free allocation would be too little or exceed our basic need.

Some people might prefer to cut energy use a little if given the choice of spending on food, debt reduction or extra clothing. Better to enable them to make the choice that suits their particular needs.

The NEF also propose to top-up Universal Credit and legacy benefits. But we know these do not reach many of the poor, due to sanctions, the humiliating application process and long delays. What about the millions in need who would be excluded? Much better than relying on paternalistic measures and behaviour-conditioned targeted benefits would be a basic income, with supplements for those with special needs, coupled with a modest wealth tax and land value tax. 

Guy Standing is a Professorial Research Associate, SOAS University of London and a council member of the Progressive Economy Forum. His new book is The Blue Commons: Rescuing the Economy of the Sea, published by Pelican. He is a technical adviser to the basic income pilot being conducted by the Government of Wales.  

photo credit flickr

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There’s an unpleasant calm before the storm feel to British politics at the minute. Anyone who remembers the period from the end of 2006 through to the debacle of autumn 2008, with the failure of Northern Rock as a half-way point, will be familiar with the sensation: of watching an increasing number of the proverbial warning lights start to flash.

This isn’t, however, a repeat of 2008. (In critical respects, it’s worse – a more fundamental malaise.) Back then, from around 2006 onwards, multiplying defaults in the US housing market were amplified by the complex financial products the same mortgage debts had been packaged into, and then traded between major global financial institutions. Over 2007 and right up to the 15 September 2008 bankruptcy of Lehman Bros, these highly leveraged packages of debt were exploding and bringing down larger and larger financial institutions. By autumn that year, the crisis had spread into the dead-centre of the financial system: the giant, world-spanning investment banks, headquartered in the larger developed economies on both sides of the Atlantic, which now faced bankruptcy. Lehman Bros was allowed by the US government to fail; the shockwaves from the overnight disappearance of one of the world’s largest investment banks were so great as to then mobilise panicked support from the world’s major-economy governments. Various packages were rapidly assembled and, by spring 2009, the Bank of England and the US Federal Reserve had embarked on unprecedented money-printing exercise of Quantitative Easing. (Although sometimes presented as a crisis of “Anglo-Saxon” capitalism, or some similar story about the more risk-taking and unstable US/UK version of capitalism, major European banks like Credit Suisse and Deutsche Bank, had seriously overreached themselves.)

Crucially, the mechanism of crisis here was “endogenous”- meaning it was generated primarily inside the financial system itself. It was a classic debt bubble, as described by Hyman Minsky and others, that was bursting. The years of stability over the 2000s had encouraged the taking of more and more risks by financial institutions in the belief that the bubble would never best. But, as in Minsky’s description of the mechanism for crisis, stability generated later instability: the “Minsky moment” occurred when just a few of those debts could not be repaid – in this case, it was the US “subprime” mortgages that defaulted first – and this wobble was amplified by the huge amounts of debt that the earlier period of stability had built up. That financial crisis was then pushed into the wider economy – a sharp retrenchment of lending leading to less spending which, in turn, pushed economies rapidly into recession.

IMF warnings

This time round, the mechanism is (mostly) running the other way: that succession of disruptions to the real economy might provoke a financial crisis which would act as amplifier for the disruption, but not itself operate as a trigger. In addition, the regulations and additional support for financial systems that have been put in place since 2008 have reduced the presence of “systemic risks”, or at least reduced the systemic risks of the kind that played a crucial role in 2008. The system has been subjected to one, immense shock, when covid first erupted in spring 2020, and, whilst there was a brief wobble in financial markets across the globe, nothing like 2008 recurred.

This doesn’t mean there are no financial risks, with the IMF’s latest Global Financial Stability Report highlighting rising leverage (indebtedness) in corporate and household sectors across the world, the weakly-regulated space of cryptoassets, and the unevenness of the recovery from 2020-21 between the advanced and “emerging market” economies. The latter is already producing strains. Sri Lanka, hard hit by covid, is facing shortages of “food, fuel and medicines” and is heading towards a default on its government debt. The government has approached China and the IMF for additional support, with China already offering a $1bn “swap line” of cheap credit – this arriving on top of the $3.5bn its government already owes to Chinese concerns.

One specific risk highlighted by the IMF across “emerging markets” is a version something that was already seen inside the eurozone in the aftermath of the 2008 crash: the “sovereign-bank nexus” turning rotten. With governments borrowing more, it has been banks in the global south who have loaned the money, leaving them with huge amounts of high-risk government debt on their balance sheet. Should a sovereign default, those banks themselves are at risk of failure. This could lead them to (at the very least) reign in their lending to households and businesses, provoking a recession – and then of course bringing the risk of sovereign default that much closer. Coupled with a slowdown in global trade, and the tightening of monetary policy in the advanced economies, particularly the US, which squeezes export markets for the less-developed world, and makes lending into the less developed less attractive, and the stage is set for an economic slowdown followed, in some cases, by default.

This is a relatively familiar story – one that fits easily into our existing ways of understanding economic crises. Either (as in 2008) a financial crisis causes a shock to demand, provoking recession, or a shock to demand provokes a financial crisis, worsening recession. In both cases the mechanism operates on the demand side. (This, incidentally, is what made austerity such a perverse response to the crash: a crisis driven by a collapse in spending was to be countered by… further cuts in spending.)

Supply-side crisis

Instead, the coming recession is emerging primarily as a result of supply-side factors. The rise in inflation, at least for the large, advanced economies in the OECD, is appearing because of rising import prices of essentials like oil, gas and food. It is not the product of “excess” domestic demand – retail sales are falling in the UK, but the prices paid by consumers are continuing to rise. And then there is the impact of concentration in different industries, enabling mark-ups on goods to stay high, and the hoarding of wealth, particularly of housing wealth: whilst consumers have seen their real incomes squeezed hard by rising prices, many large corporations have enjoyed a bumper few years. House prices, meanwhile, continue their upward march, assisted by the production of vast quantities of new, Quantitative Easing money since early 2020.

In all these cases, the causality runs from supply-side disruptions, led by covid-19, now joined by Russia’s invasion of Ukraine and, increasingly, by extreme weather across the world, that then feed into a grossly unequal distribution of ownership and finally turn into a squeeze on most people’s purchasing power as prices rise faster than their incomes. Throw in, on top of that, rising debt – in part as a result of attempting to maintain purchasing power, but itself turning quickly, via rising repayments, into a squeeze on spending – and the stage is set for a significant downturn in the UK and other advanced economies over the next 12 months.

This may not, as in the textbook demand-side recession, produce huge increases in unemployment, at least in the UK, where the “flexible” labour market has enabled the explosion of bogus self-employment, zero hours contracts, and other more insecure forms of work since 2008. We might well anticipate that if real wages are falling (since prices are rising faster than wages), the incentive for employers will be to maintain existing employment, or at least moderate their attempts to reduce costs by making redundancies. But seeing millions of people maintained in increasingly precarious employment, forced to cut back on their own spending as prices continue to rise, would hardly be a good thing.

The short-run solutions depend on two things, neither of which this government seem willing to achieve: rapid increases in wages and salaries, over and above the rate of inflation, and restrictions on price rises in key goods. Rapid increases in public sector pay, and the National Living Wage, both of which the government can control, would induce pay rises across the rest of the economy. Capping energy price rises in October – which, again, the government can determine – would significantly ease pressure on households. Down the line, a restructuring or simple write-off of unpayable household debt may well prove necessary, freeing up additional consumer spending. A short-run programme of rapid redistribution, from capital to labour and from creditors to debtors, would help get over the immediate hump. In the longer term, a more fundamental shift is needed – away from increasingly expensive non-renewable sources of energy and into cheap, domestically-generated renewables, matched to a programme of efficiency improvements such as providing proper loft insulation.  

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US President Biden has called for ‘regime change’ in Russia, a statement that should recall previous US-led regime change crusades – in Chile (1973), Iraq and Afghanistan, among many. To put it mildly, they have not been unmitigated successes. But the regime change initiative that deserves our scrutiny today was the United States’ most ambitious and most relevant to the latest demand for change, which one would dearly like to see. This is because it embraced Russia and Ukraine thirty years ago.

Let me preface this article by saying that, fortuitously, I witnessed what the USA, the UK and others did on the ground. In 1990, on behalf of the International Labour Organisation (ILO), I organised an international conference on labour policy in Moscow, which emerged as a report just as the Soviet Union was dissolving. I was then appointed director of a programme set up by the ILO to advise governments in the region on social and labour policies in what was euphemistically called the ‘transition’ from ‘communist’ to a ‘market’ economy. 

Based in Budapest, for about four years I interacted with senior government ministers and officials of Russia, Ukraine and neighbouring countries while also having numerous meetings with economists and officials from the USA, other countries and international bodies such as the World Bank, the latter all committed to their version of regime change. It was a bizarre experience. I even met the Queen, the Duke of Edinburgh and the Queen of The Netherlands as they played walk-on parts in helping to legitimise the expensive regime change plans.

From the outset, I strongly opposed what was happening, and gave numerous speeches and published articles and several books to that effect. Today, I believe that the Russian invasion of Ukraine in 2022 is partly attributable to the neo-liberal strategy led by the USA in that period. The precise details of what has been happening were not predicted or predictable, but it was clear at the time that the fault lines leading to today’s quagmire lay in that strategy. One way of putting it is that it failed to lay the ghost of Stalinism, and created fertile ground for its resurgence. 

Shock doctrine

So, what was the foreign-directed strategy? Although different proponents had variants, it enshrined a doctrine fostered by economists at Harvard, LSE and elsewhere known as ‘shock therapy’, designed with one objective, turning Russia and Ukraine into capitalist economies. This was based on three premises. First, it was reasoned that pro-market reforms had to be introduced quickly, so that there was no time for ‘socialist’ forces to regroup and block reform. 

Second, a more technical premise was that priority had to be given to macro-economic policy, backed by aid conditionality to force the Russian (and Ukrainian) government to adhere to it, over and before micro-economic (structural) policy. This was based on the orthodox economic view that macro-stabilisation was a necessary prior for structural reform. This was the dominant reasoning of the International Monetary Fund. The third premise was that there had to be a particular sequencing of the macro-economic reforms. The combination of these three premises was literally the fatal, hubristic mistake.

Before describing what the shock therapy advisers prescribed in their frenzy of activities in Moscow, Kiev, St.Petersburg and elsewhere, I should mention that as soon as I was appointed to my ILO post we mobilised funds to conduct a series of detailed surveys of hundreds of industrial enterprises in Russia (1991-94) and in Ukraine (1992-96), and extensive household surveys covering many thousands of households in both countries. In effect, the data mapped the context and outcomes of the shock therapy doctrine. This seemed an essential task, but the shock therapy advisers charged ahead without worrying about evidence.   

Folly and hubris

It was an exercise of hubristic folly. The first set of reforms in the sequencing were price liberalisation, coupled with removal of price subsidies (except on energy). Bear in mind that production had collapsed, that strict price controls had existed for generations and that the production structure consisted of huge industrial enterprises with monopolistic characteristics, dominating whole sectors and regions. 

The effect of price liberalisation was thus an extraordinary burst of hyper-inflation. While we were working in Ukraine, in one year inflation was estimated at over 10,000%, and in Russia it was estimated at over 2,300%.^[1] The impoverishment was lethal. Millions died prematurely; male life expectancy in Russia fell from 65 to 58 years, female from 74 to 68; the national suicide rate jumped to over three times the high level of the USA. 

In a collective state of denial, the western economic ‘advisers’ were almost Stalinist in their zeal. Their second policy was to slash public spending, with the double objective of squeezing inflationary pressure by curbing monetary demand and weakening the state. This had the immediate consequence of intensifying the rising mortality and morbidity. But it did something else that is affecting the whole world today. Wages and salaries in the public sector fell so low that the state ceased to function. This created a vacuum in which the kleptocrats thrived. I recall government ministers asking for $50 bribes just so they could feed their family. They were easy prey to ruthless gangsters, who in turn were bedfellows with ex-KGB officers, led by the new First Deputy Mayor of St.Petersburg, a certain Vladimir Putin.

One cannot overemphasise the folly of the anti-state ideology, when what was needed desperately was the nucleus of a professional civil service, backed by a proper legal system. But all the RCAs wanted was full-blown capitalism, which they saw as leading to a ‘Russian Boom’, in which ‘democracy and free markets have taken root for good’.

Mass privatisation

The third plank of the shock therapy sequencing was mass privatisation. It began as a bit of a joke, with privatisation ‘shares’ being handed out like confetti. I still have one somewhere, given to me by the Mayor of St.Petersburg. But it soon became a wild-west plunder. The World Bank, USAID, the new European Bank for Reconstruction and Development (EBRD) in London and other foreign bodies allocated vast amounts to assist in speeding up the transfer to the new ‘entrepreneurs’. Over 15,000 state firms were sold off; kleptocrats became oligarchs overnight; their American and other foreign ‘advisers’ became multi-millionaires. This is when the criminality stretched across the Atlantic.

One still has to be circumspect in how one puts this. However, it was widely known that prominent economists in the ‘regime change’ community were linked to the rising oligarchy and making millions of dollars. Eventually, one case was brought to the Massachusetts High Court, where several professors pleaded guilty to insider trading. They paid modest fines, with Harvard paying much more, but the main one was allowed to continue his stellar career. Rest assured, he and others did very well.

Meanwhile, there was the awkward onset of the fourth phase of the sequencing, characterised as the ‘therapy’ after the ‘shock’. This was touted as building a new social policy system, based on standard neo-liberal lines, that is, a residual welfare state with as much privatisation as possible, beginning with pension systems and education. As some of us had argued from the outset, the erection of a universalistic social protection system should have been done before any ‘shock’ policies. Callously, implementing social policies was left to afterwards, and then only done patchily, with interminable delays.  

Carnage

The carnage was palpable. In this period, two personal events occurred that epitomised the madness of what was happening. In 1992, I was invited as a ‘labour market expert’ to give a lecture to Ministers of Finance and Ministers of Education from eastern European countries, organised by the World Bank in a Dutch castle, symbolically with its own moat. There I listened while the Ministers were told what policies they should be introducing if they wanted foreign loans or grants. 

The other event was even more bizarre. In 1993, I was chairing a small conference in France on minimum wages and basic income policies for eastern Europe when I received a phone call from a US Ambassador inviting me to Washington to give a briefing in the State Department. After doing background checks, I accepted and so found myself taken to the basement of the State Department. Sitting at a long table with a ‘minder’, I was surprised to find 12 men come in to sit on the other side. Chaired by an Under-Secretary of State, they identified themselves individually, and most said CIA.  

I told them that their policies were disastrous, that huge numbers of Russians and Ukrainians were dying as a result of shock therapy and that contrary to what they were reporting, real unemployment was about 25%, concealed by the fact that enterprises were retaining the work history books of workers to claim subsidies. I argued that the people with whom they were working at the political level were deeply corrupted, and that they should focus on providing direct aid to ordinary people if a lurch to neo-fascism was to be avoided.

I argued that restructuring of enterprises and the substitution of rules of regulation and law should take precedence over macro-economic reforms and privatisation. I poured as much scorn as I could on claims being made by the World Bank and prominent RCA economists that there was no unemployment, and argued that it was crazy for the Bank to withhold a large loan to aid the unemployed on the presumption that as one Bank report claimed, the unemployment rate was only 1%, backed by the statement, ‘Contrary to initial expectations, unemployment remains not only low but declining.’^[2]  

This was ridiculous. It was clear that the neo-liberal strategy was simply creating a kleptocratic capitalism, a virulent form of rentier capitalism that was taking shape globally. A new class structure emerged, with a plutocracy of oligarchs, a tiny salariat (including educated people trying to build a decent society), a lumpenised proletariat (ageing, atavistic) and a rapidly growing precariat. The oligarchs in Ukraine were split, with Russian-speaking heavies allied to their Russian counterparts in mafia-style conflict with Ukrainian-speaking oligarchs. There were also a few Bulgarians, Romanians and others in their orbit, and they all soon found they could mingle comfortably with the financial and other plutocrats in London, Wall Street and elsewhere. 

Venal kleptocracy

After the State Department meeting, I returned to Hungary. Several months later, I was invited back to Washington to brief the Department of Labor. Afterwards, they gave me a cocktail, and at the back I saw two of the CIA officers who had been in the State Department briefing. I asked them what had happened after the first briefing. One said to me, conspiratorially, ‘Quite frankly, it went right to the top….and he doesn’t believe you.’ He meant President Clinton. 

Several months after that, the Russian elections took place, and the new party of the neo-Stalinist ultra-nationalist Vladimir Zhirinovsky, who advocated invasion of Ukraine, gained 23% of the vote, with the US-backed neo-liberal party reduced to a rump. I sent a one-liner telegram to one of the CIA officers, ‘Does the State Department believe me now?’ I was told later that this caused some wry amusement.^[3]

In sum, the regime change strategy had generated a venal kleptocracy, and in line with that today we have globally a morally indefensible form of rentier capitalism where plutocrats are funding major political parties and politicians in their interest. It is the most unfree market economy ever conceived and it is not sufficient to see the UK as Butler to the World, however apt that description might be. The state is deeply corrupted, and we will not escape the quagmire until a new progressive, transformative politics emerges, one that could mobilise the precariat in all parts of the world. 

The evil being perpetrated by Russia will not be defeated by military means alone. Of course, we should all admire and support the incredibly courageous Ukrainians. But it is a transformation of our own societies that must be achieved. In response to the rush towards an ecological dystopia and a grotesquely unequal and insecure existence for so many, progressives in politics must have a coherent, well-articulated strategy for dismantling rentier capitalism.

Today, neo-liberalism is not the primary enemy. Today is the time for a new radicalism based on principled opposition to the global plutocracy and to the system of rentier capitalism that is based on rapacious plunder. We need a new Renaissance, to revive conviviality, commoning, republican freedom and equality. So far, in Britain and elsewhere, that transformative vision is being held back by excessive pragmatism by old-left parties. However, just as Nature abhors a vacuum, so does the human condition. We need a progressive revolt, one that crosses national boundaries and that is ecologically redistributive. One can see the green shoots, but must just hope there is time for them to grow. 

Guy Standing is Professorial Research Associate, SOAS University of London, a Fellow of the Royal Society of the Arts, and a councillor of the Progressive Economy Forum. His new book is entitled The Blue Commons: Rescuing the Economy of the Sea.

^[1] These and following statistics were collated for two books at the time. See G.Standing (ed.), The Ukrainian Challenge: Reforming Labour Market and Social Policy (Budapest, ILO-UNDP, 1994); G.Standing, Russian Unemployment and Enterprise Restructuring: Reviving Dead Souls (London, Macmillan, 1996).

^[2] This view was backed by leading shock therapy advocates, such as Jeffrey Sachs and Anders Aslund. For references, see my book. 

^[3] [Zhirinovsky remained in the Duma until his death from Covid, ironically on April 6, 2022, with his dream of invasion of Ukraine realised. His original party had been funded by the right-wing French politician, Jean-Marie Le Pen, with whom he remained close.]

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Overshadowed by the appalling news from Ukraine, Chancellor Rishi Sunak presented the annual Mais Lecture in London a couple of weeks ago. Traditionally used by Chancellors (and, sometimes, Shadow Chancellors) as a space to fill out the detail of their economic plans, and (they hope) give the impression of some depth of thought behind them, this was, as other commentators have pointed, out a comparatively rare insight into Sunak’s mind a few weeks of what will be, for him, another Spring Statement severely rattled by external events.

Battered by the pandemic, and subject to the whims of a once all-powerful Prime Minister, Sunak has spent two years in office cranking up government spending whilst offering variations of St Augustine’s prayer: “Lord, make me fiscally conservative, but not yet!” Mais Lecture was no different in this respect, once again promising the faithful that he would soon, very soon, start cutting taxes.

And of course you have to read the whole thing through a potential Conservative Party leadership battle. It helps to read British politics in general through the prism of a never-ending Tory leadership contest: like other semi-democracies, squabbles amongst factions in the ruling party matter far more than debates between the ruling party and the tolerated opposition – whatever the likelihood of any actual changes at the top.

But with Liz Truss letting her Tory MMT tendencies be known early on, judiciously making sure news of her indifference to deficits was leaked to the Times just ahead of Tory Party Conference last year, Sunak had to establish some clear blue water on the question of spending. Truss wants to cut taxes, regardless of the impact on government borrowing. Sunak “firmly believes” in low taxes but is “disheartened… by the flippant claim” that taxes pay for themselves. Tut tut. Once again, low taxes, but not yet.

What’s more striking is, as per usual, what Sunak doesn’t talk about. For a decade Tories noisily insisted that the government debt and the government’s deficit were the most important problem in the world, and that all other government spending could be sacrificed to shrinking both. Former Chancellor George Osborne used his own Mais Lecture to spell out the argument for immediate action on government spending, back in 2010. Osborne offered a cogent and closely-argued case for finding the poorest and most vulnerable in society and fiscally waterboarding them for a decade.

Never mind that the gurus he cited, Kenneth Rogoff and Carmen Reinhart, turned out to have made a spreadsheet error in their calculations on the impact of government debt on growth which rendered their most eye-catching claims useless. And never mind, too, that by the time he left office, Osborne had overseen the longest decline in living standards since the dawn of industrial capitalism, even as the government debt burden continued to rise. What matters here is the intellectual framing of the discussion around the role of government in the economy as entirely negative: that government, with its shocking debts and yawning deficits, was little more than a deadweight on a long-suffering private sector, yearning to be free.  Aided and abetted by a compliant media, who didn’t know better, and the Institute of Fiscal Studies, who should’ve known better, the economic illiteracy of the story mattered less than its political purpose in justifying the reshaping of the British economy back around the interests of its financial system in the years after the 2008 crisis.

So tightly were austerity’s mind-forged manacles that it took the triple shock of Brexit, Jeremy Corbyn and covid to break them. Brexit gave us a Tory Prime Minister who wanted to talk about the “burning injustices” of the economy. Corbyn, in turbulent years after the 2017 election, gave us a different Tory Prime Minister who consistently increased spending. And covid has given us a Tory Chancellor who scarcely references the government debt.

The contrast between Osborne and Sunak, then, is stark. The current Chancellor reflects a new consensus, apparent across the business press in recent months, that government spending in the future is going to be higher: on (his words) “health, pensions and social care” for an ageing population; on the “legacy of covid” in annual vaccination programmes, antivirals, and testing; on education; on government infrastructure investment, praised by Sunak; and of course on the military, where demands have been raised for a 25% increase in the current budget.

This isn’t the austerity economics of the 2010s. It is a higher-spending, bigger-state Toryism that means, come 2024, the difference between the two main parties’ spending plans – widening in elections 2015 onwards – is likely to be substantially reduced. Reduced, too, will be their rhetoric on the fundamentals of the economy: both accept a significantly increased role for government investment, including on renewable energy; both accept the need for  intervention in the economy to address inequality, beyond using the tax system alone (aka “Levelling Up”); both accept the idea that intervention can address the productivity problem. And both have decided to foreground economic growth as the key to a successful economy.

Market morality

It’s here that Sunak gets interesting, once we get past the boil-in-a-bag Treasury policy prescriptions for growth. Sunak wants to cut taxes on investment by businesses, invest more in “adult skills”, and spend more on R&D – so far, so familiar, although Sunak at least throws in the possibility of scooping up “entrepreneurs and highly skilled people” from all over the world, post-Brexit.

Instead it is when Sunak tells us about his desire to create a “new culture of enterprise” that we should be paying more attention. Sunak’s carefully-curated public image has been of a man somewhat wary of big ideas and book-reading (“all my favourite books are fiction”), but it is to Adam Smith he turns to make the link between culture and economic growth: not via the Wealth of Nations, but its forerunner, the Theory of Moral Sentiments: that a free market not only ensures outcomes that are economically efficient, but that markets themselves are grounded in morality, Sunak here referencing the late Jonathan Sacks’ own Mais Lecture. The process of market interaction itself (says Sunak) shapes morals and therefore culture. “Moral responsibility,” he claims “can only come from being exposed to the consequences – whether good or bad – of our own actions.”

This isn’t a conventional, libertarian-inclined defence of the free market, often associated with the Wealth of Nations, in which freely-transacting individuals are magically guided by the “invisible hand” to produce the best possible outcome for society. This “invisible hand”makes no claims about the morality of your choices, simply that everyone’s preferences will be met best if we allow it do work its mysterious magic. Sunak says this is reading Smith wrong: “Smiths account of the market economy, is not as some have suggested a values free construct which rationalised social choice.”

But this argument for market morality is also not quite that of Sacks’ original Mais lecture, which was a slightly more conventional take on how free markets, desirable as they for producing economic growth and productive cooperation, also require stable social institutions: family, religious organisations, community groups, and so on. We get on with our social interactions, the market sorts out that section of them we call the economy, and the greatest happiness of the greatest number is ensured. We learn our morals and “habits of cooperation” in “the domain of families, congregations, communities, neighbourhood groups and voluntary organisations”.

The invisible hand of Sunak, on the other hand, has a decidedly morally interventionist streak. We will have better moral characters if we allow a market-type process of rewards and punishments to shape them, facing the “consequences… of our own actions”. Happily, the shaping of our characters in turn shapes a culture which then creates the conditions for economic growth through the “universal and laudable desire to better the condition of ourselves and those we love”. A free market fosters an “enterprise culture” which will, in turn, make Britain more receptive to economic growth delivered by a succession of terrific new technologies, lead by Artificial Intelligence (as always).

Note the firm limits to “laudable” bettering here, and what it should be aiming for; and whilst Sunak identifies the need for government to provide some minimum level of support where needed, the boundaries for government action are constrained. Whereas Sacks suggests that economic growth, engendered by the free market, is just one part of a what makes a good society, and that this culture provides the necessary foundations of the market, Sunak’s rather darker argument is that the desirable culture is one that produces growth, and that market outcomes themselves are crucial to shaping that culture.

Sunak may talk up economic growth. He suggests he is an optimist on its future. But if the growth pessimists he cites are right, we left with only the moral claims. What he establishes here looks more like the moral and intellectual framework for a low-growth and significantly more authoritarian version of capitalism.

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On the economic front, this period saw the theories of John Maynard Keynes provide the sound intellectual framework for the views which trade unionists had always instinctively known to be right.

Trades Union Congress, The History of the T.U.C. 1868-1968, p. 85

The bond between Keynes and workers – obvious to trades unionists in 1968 – is obscured in the latest commentary on working hours by Keynes’s own biographer, Lord Skidelsky.

As the pandemic eases, Lord Skidelsky on 17 February warned Daily Mail readers that it was “deluded to think that working from home and a four-day week is anything other than a looming disaster for the UK.” Twice he appeared to condemn “Labour leaders [that] have long advocated a world where their members work fewer hours for more money”.

Er, yes. And – up to a point – workers have been incredibly successful.

The available data (shown on the charts here) suggest that real wages advanced decisively from around the beginning of the nineteenth century. And, likewise, hours have fallen continuously from roughly the same point. Henry Pelling, the author of A History of British Trade Unionism (1963, p. 24), reckons this is the point at which trade unions became a force to be reckoned with: “The extent and efficacy of combinations in the later eighteenth century” he observes, “provoked the active hostility of parliament”. By 1833 the ‘Factory Acts’ began gradually to restrict working hours. Even Karl Marx, no great believer in the reforming virtues of the bourgeois state,[1] celebrated the “legally limited working day, which at lasts makes clear ‘when the time which the worker sells is ended, and when his own begins’. Quantum mutatus ab illo [What a great change from that time, from Virgil’s Aeneid]” (Marx, 1976, p. 416).

But Lord Skidelsky only judges trends in hours against Keynes’s prediction that ‘our grandchildren’ might enjoy working only a 15-hour week.  He thus sidesteps the still profound achievements that have so far been made. Moreover, his reasoning here is important. Keynes may have anticipated increasing automation (so permitting more efficient production), but Skidelsky argues he failed to anticipate the insatiable demand for goods and services on the part of workers (meaning more production necessary overall). With the latter meaning upward pressure on hours, Keynes’s idea of a 15-hour week was, sadly, wrong.

However, it doesn’t therefore follow that those who advocate reduced hours today, have, in Lord Skidelsky’s words, a “dismal understanding of economics”. Apparently ignorant of the insatiable appetite of their members for more work and more consumption, union leaders are alleged to reason simplistically as follows:

The demands of trade union leaders for a four-day week are still rooted in the idea of work-sharing. In their eyes, the labour force should be spread as widely as possible to ensure there is no unemployment. Each worker ‘needs’ a job, so by cutting the number of working hours, the number of jobs increases.

In effect Lord Skidelsky is arguing that trade unions adhere to the lump of labour/wage fund fallacy, which can be traced back to at least Ricardo in 1815. Nor is he the first to do so: Sidney and Beatrice Webb claimed likewise from their ivory tower at the London School of Economics. This is the belief that the quantity of work and wages represent nothing more than the total capital of society divided by the population, and takes no account of the complex dynamism of capital itself.

As the economic historian R.V. Clemens pointed out as long ago as 1961, the accusation is unfair to trade uinon leaders: “[a]s for the wage fund theory, union leaders never accepted it in any significant sense, since it was shattered by practically everything they did”.

Ironically Lord Skidelsky’s argument simply modifies the lump/fund fallacies, with technology and taste allowed to change the size of the lump/fund over time. If the workers want ‘indoor toilets’ or more than ‘two sets of clothes’, Lord Skidelsky asserts they will have to work more, not less, because there is only so much capital to go around.

Keynes’ alternative

Keynes’s approach was very different. In the General Theory he took these factors as ‘given’ and not relevant to the argument he was making (“we take as given the existing skill and quantity of available labour, the existing quality and quantity of the available equipment … the tastes and habits of the consumer …”, p. 245). He showed that increasing aggregate demand would lead to a permanently stronger economy. His primary focus was releasing previously contained (and disrupted) aggregate demand through a lower long-term rate of interest, a point I was at pains to make in Keynes Betrayed.

In contrast, the so-called ‘Keynesian’ economists who took his work forwards after the Second World War, have tended instead to focus exclusively on the role of government expenditure. The labour movement (and many ‘post-Keynesian’ economists today, e.g. Stockhammer and Lavoie, 2013) have given more emphasis to the role of higher pay in stimulating aggregate demand. ‘Wage-led growth’ is a critical priority for the Trades Unions Advisory Committee to the OECD – see the report ‘Framing the Recovery: Pathways for a World in Transition’ submitted and presented to the OECD liaison Committee in February 2022. Today ‘wage-led growth’ is a critical priority for the Trades Unions Advisory Committee to the OECD.[2]

Trade union leaders have, since the movement began, understood the basic macroeconomic truth that higher pay will not only be better for workers but better for the economy. And as we have always argued – for example most recently in A future that works for working people – reduced hours are then an additional way to share that increased prosperity. As the charts show, so it has proved in practice.

It is all too easy to revert to the orthodoxy of the industrial revolution, that somehow technology alone set us on the trajectory to today’s prosperity. And even ‘Keynesian’ economists impose the same underlying scenario on their gravely diminished Keynes.

But Keynes’s theory and the view from the labour movement tells us that causality is the other way around. Advanced technology hasn’t created more prosperity, more prosperity has advanced technology!

Slowly improving labour conditions and some rebalancing away from wealth meant a greatly advantaged economy, and set in motion a virtuous cycle of higher pay, more consumption, increased activity, improved technology and lower hours. The consumption was not insatiable, it just reflected what an economy operating less badly could deliver. Workers do not demand unending and unlimited consumption, they demand what they have always demanded – their fair share of what they themselves produce. 

Keynes’ idealism against the struggle for power

Keynes’s 15-hour prediction is of greater interest from the point of view of his failure to influence policy.  As his more streetwise colleague Joan Robinson put it:

The great trouble with Keynes was that he was an idealist. He thought that when people could understand his theory, could understand how the capitalistic system actually works, they would behave in a reasonable manner and operate the system in such a way as to produce favourable results, to produce in particular a high and stable level of employment.

Kahn, 1984, pp. 203-4

For some decades after the Second World War policy was closest to – but still a good distance from –Keynes’s and Labour’s ideal; from the 1980s, as we all know, Thatcher and Reagan led the charge in reversing Labour’s advance. This, as we also know, was not a question of rational economics, but a struggle for power between competing interests.

Incidentally, if we project hours to 2021 at the pace of improvement over 1945 to 1975 then by 2021 a 20-hour week would now be the norm.

Lord Skidelsky not only does not discuss the long-term trend, but also neglects to mention what happened in the most recent decade. In a unique and disastrous departure from a two-century old trajectory, both real pay declined and hours rose. The likely explanation is that people have had to work more hours because pay has for the first decade gone into reverse. Skidelsky’s argument does not account for this change.

We should regard this reversal as indicative of the end point of the decisive restoration of the dominance of wealth over labour and, with it, the diminishing influence of any sane economics. Further: any perceptions around the impact of the pandemic must be tempered by the understanding that COVID19 ensured that wealth enjoyed even greater gains.

Three cheers to those who have secured reductions in the working week for unchanged pay.  However it remains unlikely that the majority of the workers in an economy with 14 million children in poverty will be able to duck out of the labour force very easily – let alone enjoy the comfort of an en-suite bathroom. The existence of zero hours’ contracts simply tells us how far down the road to casualisation we have travelled and the sooner they are banned the better. Workers on these exploitative contracts do not ‘want to work more’ as Skidelsky claims, they want to be paid properly and to enjoy the security their parents’ generation took for granted.

We have been grateful for Lord Skidelsky’s dogged campaigning against austerity policies for the past 13 years. But, as trade union leaders of the past understood, the common ground between Keynes and the Labour movement goes much deeper. The need is to begin again to construct an economy that puts workers in front place, while constraining wealth. Keynes does not lambast workers for wanting to escape the present, profoundly dysfunctional economy, he is on their side.

References

Clements, R. V. (1961) British Trade unions and popular political economy 1850 – 1875. Economic History Review.

Kahn, Richard E. (1984) The Making of The General Theory, Cambridge University Press.

Lavoie, Marc and Engelbert Stockhammer (2013) Wage-led Growth: An Equitable Strategy for Economic Recovery, Palgrave Macmillan and the International Labour Office.

Marx, Karl (1976) Capital: A Critique of Political Economy, Volume One, Penguin Books in association with New Left Review.

Pelling, Henry (1963) A History of British Trade Unionism, Penguin Books Ltd.: Harmondsworth

Ricardo, David (1817) On the Principles of Political Economy and Taxation.  

Tily, Geoff (2010 [2006]) Keynes Betrayed, Basingstoke: Palgrave Macmillan.

Trades Unions Advisory Committee (2022) ‘Framing the Recovery: Pathways for a World in Transition’, submitted and presented to the OECD Liaison Committee with Non-Governmental Organisations, 21 February 2022: https://tuac.org/news/oecd-tuac-liaison-committee-meeting-policies-for-framing-the-recovery-en-fr/

TUC (1968) The History of the T.U.C. 1868-1968 A Pictorial Survey of a Social Revolution

TUC (2018) A future that works for working people: https://www.tuc.org.uk/research-analysis/reports/future-works-working-people

[1] Many thanks to my colleague Rob Maisey for helping further to bridge between Keynes and left.

[2] See the report ‘Framing the Recovery: Pathways for a World in Transition’ submitted and presented to the OECD liaison Committee in February 2022

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PEF Council member Prof. Stephany Griffiths-Jones is a member of Chilean President Gabriel Boric’s group of economic advisors. With Boric winning a resounding victory in the Chilean Presidential elections, we reproduce here a translation of Stephany’s recent interview for CTIX magazine Chile. Conducted before the second round of the election, Stephany discusses the left’s economic programme for the country, and the challenges a new President is likely to face.

Interview conducted by Andy Robinson. Original (in Spanish).

Stephany Griffith-Jones, one of the most eloquent promoters of the role of the state and public banks in the equitable development of South American economies, joined a group of advisers to Gabriel Boric, Chile’s presidential candidate, before the start of his second round campaign for the Presidency. The decision to appoint Griffith-Jones – a professor at the University of Sussex and collaborator with Nobel Laureate Joseph Stiglitz at Columbia University in New York – is proof that Boric build on not only ideas from the 2019 protest movement, but also experts close to Concertación and Nueva Mayoría, who led the centre-left governments of Chile’s slow transition from dictatorship.

It is also proof that, at the age of 35, Boric is aware of the importance of working with experienced economists such as Griffith Jones, Born in Prague in 1947, great-niece of Franz Kafka, and whose family emigrated to Chile the following year, we spoke about Boric’s dilemmas in needing to both respond to the demand for change in Chile, and to stabilise the economy.

It seems that Gabriel Boric is facing a problem. He is a candidate for change, a movement that has taken to the streets of Santiago to protest the neo-liberal model. But if he wins, he will come to power in a difficult budget situation that leaves little room for progressive budget policy…

Yes. At the moment the budgetary situation is very difficult. The fiscal deficit is already at 13% of GDP… Piñera went from one extreme to another in his response to the pandemic. He did nothing at first, and a lot of low-income people were in real trouble. This is where the first withdrawals from pension funds were introduced, to help low-income people in great difficulty. [Chile’s Congress authorised raids on the country’s privatised pension funds during covid, turning them into a “piggy-bank”, with about $50bn or 25% of their value withdrawn to date.] But then, in 2021, Piñera went to the other extreme. He gave generous support, perhaps too much, to many, even people who were not so poor. And consumption skyrocketed. Chilean GDP will grow this year between 11% and 12%. The economy is totally overheated.

What should be done?

Boric has committed himself to significantly reducing the budget deficit in one year and respecting the budget already approved by Parliament. It is a sign of his moderation. In the coming years, he wants to raise taxes gradually and increase the collection of existing taxes – higher direct taxes, and lower indirect taxes. Indirect taxes, such as value added tax, account for more than 50% of Chile’s total tax revenue, well above the OECD average. There is also a commitment to combat tax evasion, which in Chile is twice the OECD average, but this requires more tax inspectors.

The problem is more general. Latin America is experiencing a moment of polarization. It is necessary to break a model that was very unpopular, but the economic reality of countries like Brazil or Chile leaves very little space, and both Lula and Boric have moved closer to the centre.

Yes, at first many people thought that Boric would be too radical. But now perhaps the greatest fear is that he can not do enough.

Despite this, he is portrayed as radical in many media …

It’s true. The media talk about far right and far left. We must reject this false dichotomy, because Boric is a Social Democrat. [Right-wing candidate Jose Antonio] Kast is an extremist. In economics, he is quite radical; to reduce taxes when the deficit is 13% of GDP is downright daring. In politics, he is even more extreme. One of his deputies said that women should never have had the right to vote. Unbelievable. Kast proposed restricting the right to abortion, even for women who were raped, and forgiving Pinochet-era torturers.

But Boric is a European-style Social Democrat. I met him first at a conference to discuss the Scandinavian model of government. He has been more on the left, but he is aware of the current budget problems and is very open to discussions with all sides. That said, he is very committed to the need for redistribution.

Given the polarity and rejection of the system, do you think it can be a double-edged sword to enjoy the support of the main political figures from Concertación?

No. That’s very positive for Boric. Leftists will vote for him anyway. The problem is attracting the votes of most of those in the middle. Although the most important thing is to attract young people who demonstrate, but sometimes do not vote. Participation in the first round was very low. In the past, the center and the left always won when they merged. It can be expected to be the same this time. Boric acknowledged the contribution of the Christian Democrats (PDC) and it was a very good move. He met Ricardo Lagos [centre-left president from 2000 to 2006] and Michelle Bachelet [centre-left President from 2006 to 2010, and from 2014 to 2018]. They were wonderful to him. Much of the center and left have already joined the campaign. And the Christian Democrats support him even though they say they would not enter government with him. It is also true that the fact that Kast is percieved as disastrous made the reunion easier.

It is strange to compare the victory of the left in the Constituent Assembly with the results of November in the parliamentary elections. How did this happen?

Yes, 78% of voters voted [on 25 October 2020] in favor of a new constitution. Voting in the Constituent Assembly [over 15 and 16 May 2021] was a great victory for the left. But then, just a year after the referendum, the same voters voted for a parliament that was divided between left and right. There is therefore a lack of consistency. If Boric wins, he will have problems with Congress, which will likely try to block proposals such as the budget and tax reform.

Will there be more leeway afterwards?

I think so, after the first year. Boric and his supporters are very committed to the ecological transition. Chile is lucky because it has lithium, which is essential for batteries, and copper, which is essential for the energy transition. In addition, there is great potential for further development of solar and wind energy. It is necessary to give priority to certain sectors for that transition, supporting their development, and Kast does not understand this. Development banks must be mobilized for the green transition. And financial regulation can be used to incentivize commercial bank loans to companies with low-carbon investments.

Public investment is key. For example, Boric wants to invest heavily in building an extensive rail network. Then there is hydrogen. Hydrogen can be produced sustainably in Chile because there are many ways to generate renewable energy. We can use green hydrogen in mining to have green copper.

Is there not a risk that the energy transition will create demand for metals and lead to more extraction and dependence on the export of raw materials?

The idea would be to move up the value chain. Manufacture batteries, incorporate more technology and knowledge. Scandinavian economies, which in the past were like Chile, dependent on exports of raw materials such as wood, managed to move up the value chain and develop rapidly. So it is necessary, for example, to produced more refined copper, to manufacture higher value-added cables.

Why would the left do it better than the right?

Because public investment and the development bank are essential for the green transition, and then catalyzing private investment in this sector is key. Kast doesn’t understand this. He caricatures the state as a dark and negative force, but those are the ideas of the past.

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Both Boris Johnson and Keir Starmer chose to address the Confederation of British Industry conference this week. But far more interesting than the party leaders’ paeans to profit or to Peppa Pig were the comments made the same day by the CBI’s new Director General, Tony Danker. Greeted with pearl-clutching in the Daily Mail, rentagob Tory backbenchers providing the copy, Danker has taken careful aim at forty years’ worth of neoliberal economic policy in Britain, specifically calling out the loss of manufacturing jobs under successive governments. And although reported as an attack on Thatcher, Danker picked his words more carefully: “Since the 1980s, we let old industries die… We have spent the past decades living with these consequences.”

It’s not something Labour like to talk about, but if deindustiralisation under Thatcher is notorious today – informing, still, how much of the North of England is perceived – its second round, under New Labour, was also far-reaching.

Source: ONS

Between 1979, when Thatcher entered office, and 1990, when she left, employment in manufacturing fell by 1.8m. But then between 1997, when Labour’s Tony Blair became Prime Minister and Gordon Brown’s exit from No.10 in May 2010, manufacturing employment fell by 1.7m.

The only periods of sustained increase in manufacturing employment occurred under Conservative Prime Ministers: rather weakly, rising around 200,000 in the nine years from 2010 to 2019; and then more dramatically under John Major, rising 190,000 in just four years from 1993 to 1997.

Deindustrialisation

The big picture here is well-known: deindustrialisation from the late 1960s onwards was common to the developed world, with major industries, from coal mining to car manufacture, shaking out jobs on a huge scale. Thatcher’s destruction of industrial employment was more dramatic than elsewhere, but not completely out of line with the general experience. The second wave of deindustrialisation in the West, apparent from the mid-1990s onwards but accelerating from the 2000s, then helps account for the loss of jobs under New Labour.

An overvalued pound – itself the symptom of government monetary policy – is common to both experiences, with recovery in employment being particularly tied, in the 1990s, to the crash in the value of the pound following Britain’s exit from the Exchange Rate Mechanism.

Of course, under New Labour these lost manufacturing jobs were (in effect) replaced with service sector employment, in both the public and private sectors. Overall employment remained high until the Great Financial Crisis, in striking contrast to the searing rises in unemployment under Thatcher. But the swap of typically better-paid, more secure manufacturing work for typically lower-paid, less secure (private) service sector work was keenly felt and, despite some efforts at geographic redistribution under Labour – whether directly via the old Regional Development Authorities or indirectly via public sector employment – the relative weakening of economies outside of London and the South East became all too apparent once the boom of the 2000s ended.

For the entire period, however, until the last few years, the general direction from government has been consistent: that government itself should, as far as possible, “just get out of the way”. At most, it could compensate for “market failures” in the provision of some essentials – basic infrastructure, say, or education. Labour was more expansive in its spending; the Conservatives, and the Conservative-led Coalition from 2010-15, rather less. When Gordon Brown, as Chancellor the Exchequer, told the CBI conference in 2005 he wanted business regulation to be “not just a light touch but a limited touch”, he was simply repeating the neoliberal commonsense of the time – and no doubt his audience would have nodded along with it.

The contrast with Danker’s argument could not be clearer. Noting the “shot of redemption” new industries give to deindustrialised regions, here he is on making “levelling up” work:

This might be a new line from the head of the CBI, but simply saying the market will fix this is simply not good enough. There are free marketeers in the debate who say government should never play an active role like this. But I don’t know a country in the world – including, and especially, the United States – where governments aren’t active in economic geography.

If we go back far enough we can find heads of the CBI disagreeing with Margaret Thatcher during the early years of neoliberalism. In spring 1981, its then-Director General promised a “bare-knuckle fight” with government over their economic policy. The larger companies the CBI represented were in some “panic” from the 1980 onwards about the impact of mass unemployment and industrial recession on their own profits. Thatcher, for her part, tended to view the CBI at the time as corporatist dinosaurs – bureaucratic managers as responsible for Britain’s presumed decline as the over-mighty trade unions. But for much of the last three decades the CBI has been a reliable defender of the free market doctrine.

It’s a sign of the turn against the neoliberal rules of the game – apparent since the financial crisis, accelerating as the pandemic erupted – that the CBI’s director today will make such a pointed criticism of them, and of how they have failed the last four decades. Would that either main party leader had the same confidence.

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This week the UK Chancellor Rishi Sunak delivered the 2021 Autumn Budget in the House of Commons. The Budget confirms that this government has accepted a permanently larger role for the state in the economy. Spending will grow in real terms by 3.8% across government, amounting to a £111bn annual increase by 2024–25. Analysis by the Office of Budget Responsibility (OBR) shows total public spending levelling out around 42% of GDP once the huge rises associated with the pandemic wear off. This is not high by European standards. However given the figure averaged around 37% in the 30 years preceding the Great Financial Crisis it marks a step change, in particular for the Conservative party.

But Rishi Sunak and the Treasury remain fiscal conservatives. The Chancellor has created a new ‘fiscal rule’ (the fifteenth since 1997) which requires balancing day-to-day spending, excluding investment, within three years and keeping public sector investment from averaging more than 3% of GDP. Instead of achieving this through spending cuts, the Chancellor is embarking on major tax rises. Post-budget analysis by the Resolution Foundation finds that by 2026–27, tax revenue as a share of the economy will be at its highest level since 1950 (36.2%), amounting to an increase per household since Boris Johnson became Prime Minister of around £3,000.

The fiscal rule itself is arbitrary and appears to be more driven by politics than economics. With interest rates on long-dated government debt remaining at record lows, there is no obvious reason to balance the budget over the short-term when the economy faces longer-term ‘scarring’ effects from the pandemic, which the OBR estimates will be around 2% of GDP.

More generally, the Budget lacks any real vision for how to achieve the ‘high skill, high productivity, high wage’ economy that Boris Johnson spoke about in his party conference speech.

On the spending front, the biggest increases will go towards the NHS, social care and pensioners. With an ageing population and technological advances in healthcare, such increases are inevitable. They should arguably be higher, in particular for social care, which ultimately could help reduce costs on the NHS in the long run.

Disappointment

The biggest disappointment, ahead of the UK’s hosting of the COP26 summit next week in Glasgow, is the lack of any new plans to support a green transition. Keeping public sector investment to below 3% suggests the Chancellor is not yet taking seriously the massive transformation of our energy, housing and transport infrastructure required to meet the UK’s net Zero 2050 targets. The Treasury appears unable to see the potential of policies such as a national home insulation program to reduce carbon emissions, create good quality jobs and reduce the cost of living for those many poorer households in leaky homes. The announcement of a tax break on short haul flights — which are already significantly cheaper for equivalent journeys than trains in this country — confirms the Treasury’s myopic views on the net zero transition.

Sunak made much of the announcement of reduction of the rate at which universal credit is taxed for those who are in work. How the remaining four million or so households on universal credit who haven’t found work are supposed to survive the £1,050 per year reduction in their incomes from the reversal of the £20 uplift remains to be seen.

But the broader point here is that if the Treasury was genuinely interested in ‘making work pay’ as Sunak emphasised in his speech, they would be taxing wealth and not wages. A recent analysis found that the Treasury could raise £16bn a year if shares and property were taxed at the same rate as salaries. Currently, the richest 1% of the population take 13% of their income in the form of capital gains.

Given that the bulk of new spending announced in the budget will mainly support older, wealthier people, the case for a gradual shift towards taxing some of the assets they have built up over their lifetimes rather than the income of the wider population seems strong. This should also encourage more private investment into productive activities rather than property. But, just as with climate change, this kind of broader strategic vision seems missing from the Chancellor and the Treasury’s thinking.

Originally published on the UCL Institute for Innovation and Public Policy blog.

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