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Guided by an invisible hand

The bank meltdown marks a turning point in our thinking about how the world works writes the Nobel L

Make no mistake: we are witnessing the biggest crisis since the Great Depression. In some ways it is worse than the Great Depression, because the latter did not involve these very complicated instruments - the derivatives that Warren Buffett has referred to as financial weapons of mass destruction; and we did not have anything close to the magnitude of today's cross-border finance.

The events of these weeks will be to market fundamentalism what the fall of the Berlin Wall was to communism. Last month in the United States almost 160,000 jobs were shed - making more than three-quarters of a million this year. My guess is that things will get considerably worse. I have been predicting this for some time, and so far, unfortunately, I have been right.

There are several reasons for my pessimism. The extreme credit crunch is a result of the banks having lost a lot of capital. And there is still uncertainty about the value of the toxic mortgages and other complex products on their balance sheets. The US economy has been fuelled by a consumption binge. With average savings at zero, many people borrowed to live beyond their means. When you cut off that credit you reduce consumption. This, in turn, will dampen the US economy, which helps keep the global economy growing. The American consumer has not only sustained the US economy, he has sustained the global economy. The richest country in the world has been living beyond its means and telling the rest of the world it should be thankful because America fuelled global economic growth.

There are further reasons for my pessimism about short-term economic prospects, in America and Europe. In the second quarter of this year, growth in the US would have been negative were it not for the growth in exports. But with the slowdown in Europe and problems in Asia it is difficult to see how we can maintain net export growth. The strengthening of the dollar - due not to greater confidence in the US but to reduced confidence in Europe - will make matters worse. The fall of energy prices will help a little, but not enough.

Treasury Secretary Hank Paulson has now come up with a new bailout scheme. The original plan - buying up the thousands of "troubled assets" (read: bad loans and complex products based on them that Wall Street created) - was badly designed and rife with problems. How would they have been priced? Call in the same Wall Street experts who got us into the mess and mispriced risk before? It is a heads I win, tails you lose situation.

The worry is that the taxpayer will be left holding the short end of the stick.

The British approach, which Paulson seems to be following, is far better, involving capital injections into banks, with preferred shares to protect against losses and warrants to share in some of the upside potential. This is the approach that I - along with most US economists and people with good street sense, like George Soros - had been saying America should adopt.

Ironically, though Paulson wouldn't listen to us, he seems to have listened to Gordon Brown.

Many of the problems our economy faces today are the result of the use of misguided models. Unfortunately, too many took the overly simplistic models of courses in the principles of economics (which typically assume perfect information) and assumed they could use them as a basis for economic policy. Many central banks use the notion of inflation targeting - that they should focus exclusively on inflation, raising interest rates when inflation increases. But I would argue that central banks have a broader responsibility; they are supposed to ensure the stability of a country's economy. While monetary authorities in the US and elsewhere focused on price stability, they allowed the financial system to undertake risks that put the whole economy in jeopardy.

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith's conclusions do not hold when there is imperfect information - and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership - the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

Professor Joseph E Stiglitz is chair of the Brooks World Poverty Institute at the University of Manchester and a 2001 Nobel prizewinner

This article first appeared in the 20 October 2008 issue of the New Statesman, My year with Obama

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The day the earth stopped

Ed Miliband’s confidant and former speechwriter recalls the terrible shock of election night and tries to make sense of what has happened since.

Conference season 2015 wasn’t meant to be like this, for any of us. The Conservatives were meant to be plunged into turmoil, having lost office. The Liberal Democrats were meant to be reimagining themselves as partners in a progressive alliance. The leading lights of a young Labour generation – Chuka Umunna, Tristram Hunt, Rachel Reeves and Liz Kendall – were meant to be getting used to their ministerial boxes. And I was meant to be writing a victory speech for a newly elected Labour prime minister.

Painful though it is to recall, it wasn’t that long ago that this alternative future disappeared. It was the night when the hope of 7 May turned to the despair of 8 May. Good news had trickled in to Labour’s HQ at One Brewer’s Green, London, throughout the ­afternoon. Rumours spread. Turnout was up, it was said. Young people seemed enthused, we heard. There were more people voting Labour making the journey to the polling station than people voting Tory. And how did we know? Well, the party had had over five million conversations with voters. Or was it six million? Even that number continued to rise as the day went on. As party staff came in for the evening shift at Brewer’s Green, the challenge was to control expectations.

But then the exit poll came. And then ­Nuneaton. And then Douglas Alexander. And then Ed Balls. And lose we did. This was supposed to be a country, as I had written in speech after speech, “yearning for change”. But it turned out it wasn’t, or at least not in the way we thought. It was happily settling for more of the same. Just without the Liberal Democrats.

Yet, somehow, here we are, at the end of the summer, with Jeremy Corbyn – a serial backbench rebel who had spent 32 years on the furthest reaches of the back benches and the margins of Labour politics – about to give the leader’s speech at conference in Ed Miliband’s place.

Surreal though this story sounds in the abstract, the rough outline of what has happened and why is bizarrely familiar. In May, the British public rejected Labour for seeming to offer too much of an economic risk in exchange for too little of an economic promise. And then, four months later, Labour members and supporters empowered by reforms most people had long forgotten about seized their chance. They flocked to an unlikely candidate who celebrated his own unbending authenticity. Someone who not only put principle before pragmatism in theory, but who was prepared to say things that party members believed but that their leaders had resisted saying for decades. And then to do so again and again. So it turned out that the consequence of an election in which the British public opted for continuity was a landslide Labour leadership election victory for a candidate who promised to bring even bigger change.

Put this way, it is no wonder that there are many who genuinely care about Labour’s election prospects who are in despair. Within four months, we have had the public heading one way, followed by the party heading almost exactly in the opposite direction. It is not what any of my political scientist colleagues would describe as “orthodox vote-seeking behaviour”.

For those seeking a more optimistic reading, however, there is at least one place where the party’s voters and the broader voting public may find common ground. Jeremy Corbyn’s triumph, along with the utter failure of the other leadership candidates, is not only a shift to the ideological left. It is a rejection of a whole way of doing politics. It marks the end of the spadocracy, the strangulated prose of political slogans derived solely from focus groups, the ever-declining levels of trust, the apparent refusal to take the braver course of action, the collapse of respect for grass-roots party activism, the widespread sense that the elite “never listens to us”. When Owen Jones and Yanis Varoufakis are the go-to advisers for Her Majesty’s Opposition, we know we are a long way from Peter Mandelson and David Axelrod.

Now, pundits talk too often about a “new politics” but in this, at least, the election of Jeremy Corbyn is a new political reality. As the political scientist Peter Mair so presciently put it a few years ago, we have witnessed “the hollowing out of western democracy” in recent years, as elites have drifted ever further away from the people, and now almost everyone has had enough. The widespread revulsion at a “political class” separated off from the rest of society has shaken the old order.

People far beyond the membership of the Labour Party have grown tired of politicians of all parties who live in continual dread that someone will discover precisely how little they know or care for what most people call their everyday. People know that underneath those gotcha questions about the price of a pint of milk or a loaf of bread there lurks a terrible truth: most top-level politicians of all parties can’t really know what it feels like to have no formal power, no significant influence, to be worried about how things will pan out in their daily lives.


To those already persuaded, the rawness of Corbyn’s political style seems perfectly suited to a time when people have become turned off by the slick, the polished and the professional. There is a freshness to a party leader who seems not to care what he wears, who takes the night bus and who just doesn’t know when the newspapers go to press. A leader whose acceptance speech contained not one soundbite, not even a memorable phrase, but that laid out a philosophy nonetheless, indicates that we are indeed in a new era. Ironically, it all follows from one of Axelrod’s most compelling pieces of advice to Ed Miliband. Conventional politics where the candidate seems to care more about power than anything else, he always told Miliband, just can’t win for the left in an age like ours.

So, in this respect at least, the public and the party may seem to be at one. Surely that is a reason to be optimistic about what Jeremy Corbyn has to offer?

Sadly, this apparent confluence between the public and the party’s disdain for politics as usual is not quite as simple as it seems to the converted. And that is not because, as the gnarly old sceptics claim, the only way to do politics properly is the Campbell, Mandelson or Crosby way. Of course, Corbyn’s team needs to avoid near-terminal presentational errors, but it faces a bigger challenge than just getting its act together. Instead, there is something important about the public’s turn against professionalised politics that risks being lost in all the frenzy and the excitement of Labour’s political takeover. And that is the precise nature of what the public thinks about politics and politicians. Because it is not just that the public is bored by soundbites and focus groups and strangulated slogans. Millions of members of the public think that our politicians have a deep disdain for the everyday life of millions of people in this country. They believe that politicians lead entirely separate lives, shaped by their own, entirely idiosyncratic ideas, and that they spend a good deal of their time looking down on the rest of us. And no amount of soundbite-free politics is going to change that on its own.


I realised the depth of this problem almost exactly a year ago. At that time, I was working with Ed Miliband on his eventually disappointingly received annual conference speech. Miliband’s goal, with just months to go to the general election, was to share his vision of the future of our country. More ambitiously still, he wanted to describe what Britain could look like after not just one term of a Labour government, but two. Yet he also knew that for this vision to resonate with people it had to start not from him, but from them. It had to begin, that is, with the dreams and the nightmares of the people of this country, not from the abstractions and the ambitions of the professional politician.

The question for me as a speechwriter was how to reach those dreams and nightmares. The answer seemed simple. Listen and talk to people. And that is how Ed and I ended up spending day after day in conversation with people we bumped into in the park. It’s how we ended up, as a close friend joked at the time, “cruising for anecdotes on Hampstead Heath”.

It all seems like a different world now. But at heart, it was an honest attempt to describe the spirit of the country. The stories didn’t just come from the rich or the powerful. They didn’t just come from people who lived in north London. They came from all over. And they were written in and rehearsed, and they provided a texture to his understanding.

But as Ed began to deliver this part of his speech, the reaction was stark. People began to tweet with incredulity and, believe me, that is not what you want as a speechwriter. The first accusation was that the people were invented. They weren’t. The second was that they couldn’t really have said the words that Ed attributed to them. They had. The third was that they hadn’t really been persuaded by Ed’s arguments. They were. The fourth was that it was inappropriate to talk about real people and their petty ­goings-on in a speech of this scale. That it was silly or sentimental, mawkish or mad. And that just reinforced the whole problem with which we began.

Despite the frustration, and now that the dust has settled, I understand the scepticism. It goes far beyond the standard critique of leadership ratings or rhetorical power. Why should anyone who didn’t know Ed Miliband personally believe that he was sincerely trying to do things differently, trying to demonstrate that the words of political leadership should be dictated by the people? Why shouldn’t they just think it was a cheap trick in an otherwise standard party conference speech? Why should anyone think that a Labour government led by Ed would think differently from governments that had gone before?

These are the same questions that remain for Labour’s new leader. The ideology and policy orientation may have changed. The style may have changed even more. But it is going to take much more than either of those things to convince the British public that Labour has an approach to politics that respects them, that takes their lives seriously, that is sincerely concerned with changing the relationship between the governed and those who aspire to govern.

Working out precisely what is required to convince the British public that this is now a party rooted in their concerns and not in its own interests will be the central task of the next few years. It will take us right to the heart of all the hardest debates about policy and ideology. But I believe the essence of what is required is already evident.

Most of all it needs a culture of humility at the top. The new leader, deputy leader and shadow cabinet need to display an inner belief that people matter more than politicians, that government doesn’t possess all the answers. They need to show they know that the trust that is crucial to our politics has snapped and needs to be restored. This means speaking boldly and directly to people’s concerns. It means forgetting the tendency to speak in the arcane abstractions of socialist politics; dropping the references to the International Labour Organisation and the long march of the working class. It also means an end to behaving as if all the conventions of public life apply only to others. It was the haughtiness behind the decision not to sing the national anthem at the Battle of Britain commemoration that was most off-putting of all. Even more importantly, it means turning decisively against the statism and the centralism of Labour’s past, both in terms of the party’s structures and its plans for government. Corbyn must be clear: the future is democracy, not dirigisme, experimental innovation, not narrow ideology. Ours is an age in which people rightly long to direct as much of their own lives as possible, not have their lives directed for them. Labour is a party that has shown such success recently in engaged, local government, from Hackney to Manchester, and now is the time that the party can make that change with confidence. But doing so will require a break with many of the habits of mind and spirit that many around Corbyn have acquired over the decades.

Similarly, renewal also requires putting in the hours. Everyone who knows the inner workings of the Labour Party knows about “Labour doorstep” – the time put in by activists all across Britain going door to door, talking to voters, doing voter ID. It is vital. But if that is 90 per cent of the way you meet people, you will never expand the party. The Chicago community organiser Arnie Graf, whose career began with the civil rights movement and who advised Labour during the Miliband years, once put it this way: door-to-door contact is at best a one-minute advertisement, and although that is better than a leaflet, it is not building a relationship. To build a relationship with people, you must know who they are, find out what they care about and begin to show that you can respond. The only way to show you trust someone and care for them, after all, is to show them that you want to spend time with them and that you enjoy it when you do. Labour’s community organising experiment should be at its beginning, not its end. No energy should be wasted on factional fighting in constituencies or in Westminster. All energy should be directed towards turning the increase in membership Corbyn has overseen into a strong connection with Britain’s communities. Put simply, Labour needs to return to the politics of relationship-building, not the politics of reselection.


Yet Labour’s renewal demands more than just humility and hours. It demands honesty, too. That starts with an honesty of campaigning. We need an end to the almost complete domination of politics by negative dividing lines, by minutely tailored messages designed to deceive rather than enlighten. That was the straight talking Corbyn promised during the summer. But it also requires honesty about the scale of the challenges that confront us all in the 21st century and can’t be wished away by grand statements of motivation or intent, as Tristram Hunt’s speech at Policy Network during the leadership campaign acknowledged.

That is why we can’t just have knee-jerk rhetoric about the merits of “investment over cuts” and the evils of austerity, however much the Corbyn victory has reminded us of the need to challenge stale economic orthodoxies. Instead, we have to develop an account of the way we can build an inclusive, egalitarian economy that gives people a sense of security and possibility for the future but also understands that the times we live in are hard and are unlikely to get easier any time soon. The only antidote to destructive populism in such an age is a politics of bracing truth-telling. Labour should lead the way in a conversation where we aim to get beneath the surface of problems, make sense of where we are in order to develop deep and sustainable solutions to them, and do so together. That is why we still can’t duck the challenges of reforming the social security system or of the future funding of the NHS. And it is why we have to remind people relentlessly of the economic, social and cultural imperative of securing our place in the European Union: a task that could define this political generation. Labour’s best hope – no, its only hope – is that the public will respond to clarity and honesty about all of these challenges. It will certainly punish any effort to look the other way, whether motivated by expediency or by passionately held conviction.

As I think about what that future looks like, I am drawn back to 8 May. I probably always will be: the pain of the failure is that intense. But this time I remember something from outside Labour HQ. Just before the exit poll was announced, James Graham’s new play, The Vote, was broadcast on More4 live from the Donmar Warehouse in London. The play was set on polling day at a single polling station in Lewisham, south London. People came in and they talked. There was a middle-aged man who had got drunk over the road and wanted to take his ballot paper to the pub; an elderly man who may, or may not, have voted twice by mistake; a young man, just 18, who had read too much pre-Ed Miliband Russell Brand and ripped up his ballot paper in revolutionary protest; and an elderly woman and her daughter who shared a first name, weren’t sure which one had been registered at their address and thus didn’t know precisely who had the right to cast her vote.

The play was funny and poignant, but most of all it was real. Here were the wonderful people of our country. They disagreed about some things – what should happen to children when parents divorce, whether the one-way system was good for traffic flow, whom to vote for – but shared many others: pride in the place they lived, their lives full of family and work and hope and fear. And a sense that democracy still matters.

It ended with the characters gathering together as the TV election programme began. The last sound the audience heard was the disembodied voice of David Dimbleby announcing the exit poll. It was a moment of pride, because everyone each knew, as so rarely in politics, that their voice had been heard. Then the play stopped. And we all returned sharply to reality. Because what Dimbleby went on to say was that they hadn’t said Labour. That is what Jeremy Corbyn has got to remember. They won’t say Labour again, unless the party sounds and feels like it knows the people we love.

Marc Stears is Professor of Political Theory at University College, Oxford. He was chief speechwriter to Ed Miliband

Marc Stears is fellow in politics, University College, Oxford and visiting fellow at IPPR.

This article first appeared in the 24 September 2015 issue of the New Statesman, Revenge of the Left