Ed Miliband's challenge

Shifting economic paradigms won't be easy.

Ed Miliband told us in his speech to the Labour Party conference earlier this week that he wants to see a new type of economy: one with different aims and values from those that prevailed during much of the last 30 years. Bringing about such change will not be easy. In a new IPPR paper, David Nash and I show how resistant to change economic paradigms can be.

As Martin Kettle argues, if Ed Miliband wants a new type of economy in Britain, he will have to argue long and hard for it. He will have to continually highlight the flaws in the existing model and he will need to make a persuasive case for the alternative. This week his framing of this important argument was not strong enough and as a consequence, it has been more easily criticised and caricatured than it might have been.

Distinguishing between "predators" and "producers" was an unnecessary hostage to fortune as the shadow cabinet discovered when defending the speech to the national media. The arguments of thinkers such as Will Hutton, Anatole Kaletsky and William Baumol over different models of capitalism got obscured as Andy Burnham and Sadiq Khan resisted the temptation to list good and bad businesses. And without a stage managed letter to the Financial Times from company CEOs calling for a level playing field on apprenticeships or placing workers on remuneration committees, the new policy nuggets were easily picked off by a hostile media.

Nonetheless, Miliband's analysis of the flaws in the existing economic model was sound as the Telegraph's Peter Oborne has recognised. After all, it allowed the worst financial crisis since the 1930s to develop and this was followed by the deepest recession in the post-war era, both in the UK and globally. There is also a growing recognition that, even in the good times before the financial crisis, the economy was only delivering for the wealthiest in society. In the UK, living standards for those on median incomes stopped improving after 2003 - a full four years before the crisis.

And yet there is nothing to suggest that a paradigm change is imminent. Indeed, apart from some toughening of the regulations covering the banking sector (and then less than might have been expected three years ago), it is largely business as usual. There has been no great change in the way economic policy is designed and implemented, no change in the objectives of economic policy and no change the dominant strands of academic economic thinking.

Perhaps, things have not been bad enough for paradigm change to occur. Unemployment has increased sharply, but at around 8 per cent it is considerably below the 20 per cent plus levels seen in the Great Depression: levels that eventually helped create the conditions for the Keynesian Revolution in economic thinking and policymaking. Nor does the combination of 5 per cent inflation and 8 per cent unemployment feel as bad as the 27 per cent inflation and 6 per cent unemployment that were experienced in 1975.

More importantly, there are not enough new economic ideas waiting in the wings to coalesce into a new economic paradigm. Keynes said that it takes a theory to kill a theory and Kuhn argued that a paradigm cannot be displaced by anomalies, only by another paradigm. But the economics profession continues to resist change because it has invested so much intellectual capital in the wrong models and is reluctant to admit its mistakes.

In the 1970s, Margaret Thatcher, Keith Joseph and others in the Conservative Party were able to work with critics of Keynesian thinking, such as think tanks like the Institute for Economic Affairs and the Centre for Policy Studies, to develop the ideas of the Chicago monetarist school into policies that could be implemented in the UK. The politicians helped give support and credibility to the new way of thinking, and in return benefited from appearing more up-to-date in their ideas than their political rivals in government.

Ed Miliband's primary problem is that there is no new well-developed economic model - comparable to monetarism in the 1970s - sitting on the shelf waiting for him to pick it up and champion it. He therefore faces a tough decision. Does he want to tinker at the edges with the existing model - a bit more banking regulation here, an employee representative on a company board there? In some ways, that would be the easy option. But it will hardly distinguish him from David Cameron and George Osborne.

Or is he prepared to make the case for more radical change and to champion those independent voices in economics that are not heard enough? This might involve rethinking the objectives of macroeconomic policy, for example by giving the Monetary Policy Committee a dual mandate to target inflation and full employment (in line with the US Federal Reserve's mandate), or requiring explicit targeting of asset prices. It might involve developing new objectives for economic policy that take account of the distribution of income; of non-monetary measures of progress such as wellbeing; or of future resource constraints. Or it might involve abandoning altogether the solutions proposed by traditional economics in favour of new ways of economic thinking, which better describe the real word, such as complexity economics.

Such an approach would be riskier. It would be a real call for a new economic paradigm and shifting economic paradigms is not easy. There would be an inevitable backlash from beneficiaries of the status quo - the wealthy and the right-wing press.

But the prospect of a decade of stagnating living standards for the bulk of the population suggests a big change in thinking is required. History suggests a shift in the economic paradigm requires political support and if Ed Miliband is prepared to take up the challenge, he could help to forge a new approach to economic policymaking in the UK. The added bonus for him would be greater differentiation between current Labour Party thinking and both its own past and the government's approach.

Tony Dolphin is Chief Economist at IPPR

Tony Dolphin is chief economist at IPPR

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How will Theresa May meet her commitment to low-earners?

The Prime Minister will soon need to translate generalities into specifics. 

The curtailed Conservative leadership contest (which would not have finished yet) meant that Theresa May had little chance to define her agenda. But of the statements she has made since becoming prime minister, the most notable remains her commitment to lead a government "driven not by the interests of the privileged few, but by yours." 

When parliament returns on 5 September, and the autumn political season begins, May will need to translate this generality into specifics. The defining opportunity to do so will be the Autumn Statement. Originally intended by George Osborne to be a banal update of economic forecasts, this set-piece more often resembled a second Budget. Following the momentous Brexit vote, it certainly will under Philip Hammond. 

The first priority will be to demonstrate how the government will counter the threat of recession. Osborne's target of a budget surplus by 2020 has wisely been abandoned, granting the new Chancellor the freedom to invest more in infrastructure (though insiders make it clear not to expect a Keynesian splurge).

As well as stimulating growth, Hammond will need to reflect May's commitment to those "just managing" rather than the "privileged few". In her speech upon becoming prime minister, she vowed that "when it comes to taxes, we’ll prioritise not the wealthy, but you". A natural means of doing so would be to reduce VAT, which was increased to a record high of 20 per cent in 2010 and hits low-earners hardest. Others will look for the freeze on benefit increases to be lifted (with inflation forecast to rise to 3 per cent next year). May's team are keenly aware of the regressive effect of loose monetary policy (low interest rates and quantitative easing), which benefits wealthy asset-owners, and vow that those who lose out will be "compensated" elsewhere. 

A notable intervention has come from Andrew Tyrie, the Conservative chair of the Treasury select committee. He has called for the government to revive the publication of distributional analyses following Budgets and Autumn Statements, which was ended by George Osborne last year (having been introduced by the coalition in 2010). 

In a letter to Hammond, Tyrie wrote: "I would be grateful for an assurance that you will reinstate the distributional analysis of the effects of the budget and autumn statement measures on household incomes, recently and mistakenly discontinued by your predecessor." He added: "The new prime minister is committing her government to making Britain a country that works 'not for a privileged few, but for every one of us'. A high level of transparency about the effects of tax and welfare policy on households across the income distribution would seem to be a logical, perhaps essential starting point." 

Whether the government meets this demand will be an early test of how explicit it intends to be in reducing disparities. 

George Eaton is political editor of the New Statesman.