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The New Depression

The business and political elite are flying blind. This is the mother of all economic crises. It has

We are living through a crisis which, from the collapse of Northern Rock and the first intimations of the credit crunch, nobody has been able to understand, let alone grasp its potential ramifications. Each attempt to deal with the crisis has rapidly been consumed by an irresistible and ever-worsening reality. So it was with Northern Rock. So it was with the attempt to recapitalise the banks. And so it will be with the latest gamut of measures. The British government – like every other government – is perpetually on the back foot, constantly running to catch up. There are two reasons. First, the underlying scale of the crisis is so great and so unfamiliar – and, furthermore, often concealed within the balance sheets of the banks and other financial institutions. Second, the crisis has undermined all the ideological assumptions that have underpinned government policy and political discourse over the past 30 years. As a result, the political and business elite are flying blind. This is the mother of all postwar crises, which has barely started and remains out of control. Its end – the timing and the complexion – is unknown.

Crises that change the course of history and transform political assumptions are rare events. The last came in the second half of the 1970s, triggered by the Opec oil price spike and a dramatic rise in inflation, which marked the end of the long postwar boom. Its political consequences were far-reaching: the closure of the social democratic era, the rise of neoliberalism, the discrediting of the state, the embrace of the market, the undermining of the public ethos and the espousal of rampant individualism. For the next 30 years, neoliberalism - the belief in the market rather then the state, the individual rather than the social - exercised a hegemonic influence over British politics, with the creation of New Labour signalling an abject surrender to the new orthodoxy.

The modalities of this present crisis are entirely different. Extreme as they may have appeared to be at the time, the economic travails of the 1970s were progressive rather than cataclysmic. The old system did not hit the wall, but became increasingly mired and ineffectual. What swept the social democratic era away was not the force de frappe of an irresistible crisis but that it was accompanied by the steady rise of a new ideology and political force in Thatcherism - and Reaganism in the United States - and its victory in the 1979 general election.

In contrast, the financial meltdown of 2007-2008 demolished the neoliberal era and its assumptions with a suddenness and irresistibility that was breathtaking. The political class, from New Labour to the Conservatives, is standing naked. They are still clinging to the wreckage of their old ideas while acknowledging in the next breath that these no longer work. The financial crisis is a matter of force majeure; political ideas and discourse change much more slowly, even when it is obvious that the old ways of thinking have become obsolete. Meanwhile, there is no political alternative waiting in the wings, refining its radical ideas in think tanks ready to storm the citadels of power as there was in the 1970s, notwithstanding the fact that think tanks are now far thicker on the ground. Instead, it has been the mainstream which senses that neoliberalism no longer works, fatally undermined by events and, ultimately, the author of its own downfall. This crisis will have the most profound and far-reaching political consequences and will in due course transform the political landscape, but it remains entirely unclear in what ways and when that might be.

In all these senses the financial meltdown has far more in common with the Great Depression than the Great Inflation. When the financial crisis consumed Wall Street in 1929 and proceeded to undermine the real economy, engulfing Europe in the process, it was not accompanied by a radical shift towards Keynesianism, but rather a reassertion of sound finance orthodoxy, followed in due course by the adoption of protectionism. The political mainstream as represented by Labour's Ramsay MacDonald and Philip Snowden and the Conservative Stanley Baldwin all sang from the same hymn sheet. Only Keynes and a faction of the Liberal Party enunciated a plausible alternative. Eventually a programme of fiscal deficits and public works was pursued by Franklin D Roosevelt in the United States, but in Britain Keynesianism was not properly embraced until rearmament and the approach of war. Indeed, it was not until 1945 that the combined legacy of war and the Depression belatedly resulted in a fundamental political realignment and the birth of the social democratic era.

The Grim Reaper has finally spoken:

a boom pumped up by credit steroids and a bust that takes us back to the 1930s

Since the financial meltdown dramatically intensified in September 2008, Gordon Brown has managed to ride the economic storm rather more successfully than the Conservatives, or, for that matter, than Tony Blair would have done. It is Vincent Cable, the Liberal Democrats' econo­mics spokesman, however, who has indubitably emerged as the political sage, unafraid of confronting neoliberalism's shibboleths, demonstrating a clarity of mind and the political courage to tell things as they are, in a way that has escaped all other prominent politicians. Although Brown was the economic architect of the past decade and was responsible, more than anyone else, for its excesses and was shaping up to be a rather disastrous Prime Minister, he displayed last autumn, at least initially, an agility of mind and nimbleness of foot that defied the expectations of those who believed he was capable of neither. He revelled in the sense of purpose and vision offered by the crisis, seemingly prepared to jettison the thinking that had imbued his previous decade as chancellor.

But Package Part I, widely hailed at the time and imitated elsewhere, proved woefully inadequate, and the financial system remains frozen. Meanwhile the waters are rising up the Good Ship UK, threatening to transform the banking crisis into a fiscal and currency crisis. It seems unlikely that, if that should happen, Brown will survive the next election.

Even if it does not happen, Brown faces a serious problem about his own past role, because Britain’s crisis has been greatly exacerbated by the soft-touch regulation, easy credit, runaway house inflation and overexpansion of financial services over which he presided and for which he is accountable. So far he has refused to admit or accept responsibility for his actions – he initially had the temerity (or foolhardiness) to argue that the UK was better placed than other countries to deal with the credit crunch, even though it has become abundantly clear since that the very opposite was the case. So while Brown remains in denial, the plausibility of his new turn, and his understanding of what is entailed, must be seriously doubted.

Indeed, after its initial boldness, the government now seems trapped by its past actions and its former ways of thinking. Brown's failure to accept the need to nationalise the banks suggests the limits of his new-found political courage, and his inability to embrace the logic and imperatives of the new situation. He is still a prisoner of his old timidity and his conversion to the neoliberal cause. It is his good fortune that the Cameron Conservatives have been hugely wanting in their response to the financial meltdown. Having spent his first years as leader of the opposition seeking to reassure the country of his centrist credentials, David Cameron, at the first whiff of gunfire, has turned on his heels, rejected Keynesianism and, at the very moment when events have shown Thatcherism to be deeply flawed and historically out of time, headed back to the Thatcherite womb of sound finance, arguing that a government must balance its books and that deficit financing, Keynesian-style, is reckless and irresponsible.

But all this, it must be said, is the small change of politics. The crisis threatens in time to sweep away the political world as we know it and those who fail to grasp its magnitude and meaning. Far more is at stake than the fortunes of a few leaders, be their name Brown or Cameron. Who knows where things will be this time next month, let alone next year or, indeed, in 2012? The financial meltdown now rapidly plunging the western world into what increasingly looks like a depression is the first great crisis of globalisation. There was plenty of warning. The Asian financial crisis of 1997-98 proved a salutary lesson about the dangers posed by huge capital movements that were subject to precious little regulatory control. Three economies capsized (South Korea, Thailand and Indonesia) and others stood on the brink.

There were other earlier warning signs, notably Mexico in 1995, when GDP fell by 9 per cent and industrial production by 15 per cent, following a run on the peso. These crises were blamed on the immaturity and fecklessness of national governments - in the case of east Asia on so-called crony capitalism (which, incidentally, prompts the question of how we should describe Anglo-American capitalism) - which the International Monetary Fund obliged to engage in swingeing cuts in public expenditure as a condition of their bailouts.

Yet what if such a crisis were to be no longer confined to the peripheries of global capitalism but instead struck at its heartlands? Now we know the answer. The crisis has enveloped the whole world like an uncontrollable virus, spreading from the US and within a handful of months assuming global proportions, at the same time mutating with frightening speed from a financial crisis into a fully fledged economic crisis. In so doing, it has undermined the foundations on which the present era of globalisation has been built, namely scant regulation, the free movement of capital, a bloated financial sector and immense reward for greed, thereby bringing into question the survival of globalisation as we now know it.

Enormous international flows of unregulated capital have capsized the international financial system - with disastrous consequences for the real economy - in a manner akin to the effect of a roll-on, roll-off ferry shipping too much water. We can now see the cost of free-market capitalism and light-touch regulation. Iceland may provide an extreme example of the consequences of the credit crunch but it also illustrates the dangers facing the more vulnerable economies, the UK included, in a deregulated world where the market rules: a small, open economy; a large, internationally exposed banking sector; an independent currency that is not a serious global reserve currency (of which there are only three); and limited fiscal strength. These propositions have constituted the core economic beliefs - from Thatcher and Lawson to Blair and Brown - that have informed policymaking over the past three decades and without which, it was claimed ad nauseam, an economy could not succeed. Heavy-handed regulation and an overbearing state would serve only to frighten off capital and condemn a country to slow growth, stagnation and global marginality. Now we know the fallaciousness of these claims and the consequences of "letting the market decide".

Like Iceland, albeit not as extremely, Britain has been living in a fool's paradise. A failure to regulate the banks and other financial institutions in any meaningful fashion allowed bankers to behave in a grossly irresponsible and avaricious fashion; a boom that was made possible only by a government-enabled credit binge in which people borrowed recklessly; a bloated financial sector that grew to represent over 8 per cent of the total economy and which was found to have been built on foundations of sand; an overvalued currency that made manufacturing exports uncompetitive and thereby resulted in an unnecessary and counterproductive contraction in the manufacturing sector which must now be reversed; an absurd belief that boom and bust had been banished for ever, allowing the banks to turn a blind eye to the inflating of various asset bubbles and display a profound ignorance of the history of capitalism; a persistently chronic current account deficit that can no longer be compensated for by inward capital flows; monstrous salaries for those at the top of the financial and corporate tree, which were justified in terms of a trickle-down effect that remained a chimera, and as the reward for risk which was, in fact, a reward for greed and failure; growing inequality, which was justified in the name of a more competitive economy accompanied by declining social mobility in the cause of an open and flexible labour market; and, finally, the mushrooming of what can only be described as systemic corruption on a mega-scale as the state ignored the gargantuan abuses of those who ran the banks and other financial institutions, while regulatory authorities willingly colluded in their excesses.

This is the sad story of the New Labour era.

The ultimate cost of this debacle as yet remains unknown. What began as a financial crisis is threatening, as the government seeks to bail out a bankrupt financial sector, to become a currency crisis, with foreign investors concerned about the effects this might have on the value of sterling, and perhaps even worse, ultimately a sovereign debt crisis, with growing doubts about the UK’s financial viability. Until there is some end in sight to the financial crisis, and a line can be drawn under the banks’ indebtedness, we will not know the answer to these questions. One thing is clear, however: whatever the limitations of the social democratic era, it was never responsible for such an all-enveloping and cataclysmic crisis as the one that the neoliberal era – and the Thatcherites and New Labour – have managed to produce. After all the boasting about the virtues of the Anglo-American model of capitalism, the Grim Reaper has finally spoken: a boom pumped up by credit steroids and a bust that takes us back to the 1930s.

There are two key aspects to this crisis: national and global, with the latter promising to be rather solutions are concerned, we are in uncharted territory, with close to zero interest rates, a Keynesian-style fiscal boost that may prove inadequate to the task and could well fail, a hugely indebted financial sector that threatens to leave us with an enormous future tax burden and a greatly expanded national debt. All of this, furthermore, must be addressed in the context of an open-market regime which is very different from those of previous eras, and which could render Keynesian-style national solutions ineffectual. What would greatly assist any national recovery is a co-ordinated global response to the crisis; in other words, global co-operation at the highest level. This cannot be ruled out, but it would be a brave person that would bet on it. It was exactly the lack of international co-operation that bedevilled recovery in the 1930s and eventually led to the Balkanisation of the world into regional currency and trading blocs.

The most important single question in this context is the relationship between the US and China. Will the Obama administration be able to resist the slippery slope of creeping protectionism? Will arguments over the revaluation of the Chinese renminbi be resolved amicably? If the answer is in the negative, then the global outlook will be very bleak indeed and so, also, as a result, will be the prognosis for national recoveries. Indeed, the prospects would look disturbingly like those of the 1930s, with growing international antagonism and friction and a continuingly intractable crisis at a national level, with only the very slowest of recoveries.

Around the world there is growing evidence by the week of a resort to national solutions at the expense of others: measures to subsidise industries that are in severe difficulties; the Buy American clause that was inserted by the House of Representatives into Barack Obama's latest package (though since weakened); the industrial action in Britain against foreign workers; the withdrawal of banks to their national homes; the attack by Timothy Geithner, the US treasury secretary, on China as a currency manipulator. No Rubicon has been crossed but the warning signs are clear. A retreat into protectionism and beggar-thy-neighbour policies will deliver the world into a second Great Depression.

So what will be the political effects of the financial meltdown? Some are already evident. Just as the Great Inflation of the 1970s played to the tunes and concerns of the right, with its invocation of the market, the New Depression suggests the opposite, the inherent limitations of the market and the indispensability of the state. Indeed, the speed with which the neoliberal refrains and invocations have unravelled has been breathtaking. The single most discredited aspect of the social democratic legacy was nationalisation, and yet the government, with the most extreme reluctance, has been obliged to nationalise Northern Rock and partially nationalise the Royal Bank of Scotland and the merged Lloyds TSB and HBOS. Who would have ever imagined, at any point during the past 30 years, that no less than the financial commanding heights of neoliberalism would have ended up in the hands of the state, with precious little opposition from anyone except a few disgruntled shareholders? Even now, however, the Labour government, still trapped in the ideological straitjacket of New Labour and displaying extreme timidity in the face of powerful vested interests, which has always been a New Labour characteristic, is running scared of the inevitable logic of the situation, namely that all the high-street banks should be taken into public hands until the mess is sorted out. Anything else leaves the public responsible for all the debts and risks, while the banks continue to be answerable to the very different interests of their shareholders. But such is the fury and depth of the crisis that this scenario is highly likely.

The state is experiencing an extraordinary revival. The credit crunch is the most catastrophic example of market failure since 1945. It became almost immediately obvious to wide sections of society that there was only one institution that could potentially sort out the mess: the state. Far from being a rational distributor of resources, the market had proved the opposite. Far from bankers and financial traders embodying the public interest, they have been exposed as irresponsible and dangerous risk-takers whose primary motivation was voracious greed. If trade unionists and the nationalised industries were the demons of the 1970s, bankers and the financial sector have assumed the mantle of public enemy number one in the late Noughties. In fact, the irresponsibility of bankers, and the damage they have inflicted on the economy, hugely exceeds anything that the unions could possibly be held responsible for in an earlier era. Meanwhile, the fallen heroes of the pre-Thatcher era, most notably Keynes, are duly being exhumed, restored to their rightful position, and pored over for their ability to throw light on the present impasse and what might be done; if the recession turns into a depression, Marx will once again become required reading.

This political shift is not just a British phenomenon, but a more general western one. The most striking feature of President Obama's inaugural speech was the way in which it embraced and legitimised African Americans for the first time in American history. But it also had another powerful theme, namely its invocation of the public interest and public service. After decades during which American political discourse has been dominated by the language of individualism and the market, it came as a shock to hear a US president articulate a very different kind of philosophy, renouncing private greed in favour of the public good. Obama's election can in part be seen as a response to the failure of the neoliberal era, as well as of Bush's neoconservative agenda; certainly his election represents a remarkable shift to the left in US politics, in contrast not just to Bush, but every recent US president, including Reagan, Bush Sr and Clinton. That Obama is the first African-American president also represents a remarkable redrawing of the political landscape. There is no more powerful - nor difficult - way of redefining society or to embrace a new form of representivity than to include a racial minority that has been excluded.

This brings us finally to what might be the longer-term global consequences of the crisis. Again, we are inevitably stumbling around in the dark because so much depends on whether the recession metamorphoses into a fully fledged depression and in what way and shape the world eventually emerges from the debacle. That said, two key points can be made. First, the credit crunch signals the demise of the Anglo-American, neoliberal model of capitalism, which has exercised a hegemonic influence over western capitalism and been the blueprint for globalisation since 1980. Because of its catastrophic failure there seems very little chance of its resurrection. The process of recovery - whenever that might be - will be accompanied by an overriding concern to ensure that the events of 2007-2009 are not repeated in the future, just as happened in the US in the 1930s with the strict regulatory framework that was introduced for the banks after their comprehensive failure in 1929. This will include the search for a new global regulatory framework that controls and constrains international movements of capital, as well as strict controls over the financial sector at a national level. A new set of political priorities - and with it a new political language - will be born.

Meanwhile, the influence and prestige that the US, and to a far lesser extent Britain, have enjoyed will vaporise in the same manner as their neoliberal model. Their 30-year project has failed and they will be obliged to pay the price in their reputation and the esteem in which they are held. The countries of the former Soviet Union and the casualties of the Asian financial crisis that were forced to swallow the neoliberal medicine will have good reason to feel aggrieved and resentful. The west has been forthright in accusing the non-western world of corruption. The financial meltdown suggests that the west has been guilty of huge hypocrisy. Systemic corruption has lain at the heart of the western financial system. An entirely disproportionate and extortionate level of bonuses has ensured the enormous enrichment of top executives in the financial sector, all in the name of reward for success, when in fact it was the reward for failure. In addition, we have had the collusion of the credit-ratings agencies; a regulatory system characterised by its failure to act as any kind of constraint; and governments that ensured the continuation of this web of relationships and applauded its achievements. The corruption was on a breathtaking scale as evidenced by the size of the bailouts required to rescue the banks. It will be difficult for western governments to make these kinds of accusations of others in the future. That Obama represents such a voice of hope will help to mitigate the inevitable ill-will towards the US, but this should not be exaggerated amid the euphoria surrounding developments in Washington.

The second point is more far-reaching. It is doubtful whether we can still describe ourselves as living in the American era or, indeed, the Age of the West. If not yet quite over, both are certainly drawing to a close, and it seems likely that the effect of the financial meltdown will be to accelerate the rise of China as a global power. The contrast between the situation in China and that in the US could hardly be greater, even though it has been partially obscured by the depressive effect of the western recession on Chinese exports and on China’s growth rate. While the US economy is contracting, China’s grew at roughly 9 per cent in 2008 and is projected to grow at about 6 per cent in 2009. Its banks, far from bankrupt like their US counterparts, are cash-rich. China enjoys a large current account surplus, the government’s finances are in good order and the national debt is small. This is a crisis that emanates from the US and whose impact on China has been essentially indirect, through the contraction of western markets. It is the American model that has failed, not the Chinese.

One of the factors that intensified the Great Depression, and indeed was part cause of it, was Britain's growing inability to continue in its role as the world's leading financial power, which culminated in the collapse of the gold standard in 1931. It was not until after the war, however, that the US became sufficiently dominant to replace Britain and act as the mainstay of a new financial system at the heart of which was the dollar. The same kind of problem is evident now: the US is no longer strong enough to act as the world's financial centre, but its obvious successor, namely China, is not yet ready to assume that mantle. This will undoubtedly make the search for a global solution to the present crisis more difficult and more protracted.

Martin Jacques's new column will be published fortnightly in the New Statesman. His book "When China Rules the World: the Rise of the Middle Kingdom and the End of the Western World" will be published in June (Allen Lane, £25)

the global downturn in numbers


    IMF prediction for global growth in 2009 - worst since WWII

    Up to 40 million

    Number of people who will lose their jobs this year, according to the International Labour Organisation


    Total pledged by the US alone towards solving the crisis


    Proportion of GDP pledged by the G7 and BRICs countries towards fixing the crisis (1.5% this year)


    Number of US properties that received a default notice or were repossessed in 2008. In the UK, 45,000 homes were repossessed - another 75,000 are expected to be taken in 2009


    Number of major global banks which collapsed, were sold or were nationalised during 2008


    Number of European companies expected to fail this year; an additional 62,000 are expected to fail in the United States. These figures represent record levels of insolvency


    Increase in UK company failures between late 2007 and late 2008


    Drop in level of Chinese exports during January


    Current UK interest rates (down from 5% in October 2008). In the US, rates have fallen to between 0 and 0.25%

How the crisis unfolded

13 September 2007 Run on Northern Rock begins when it is revealed that the bank has requested emergency support from the Bank of England

21 January 2008 FTSE suffers worst falls since 11 September 2001

February 2008 Northern Rock nationalised

17 March 2008 JP Morgan Chase takes over the US investment bank Bear Stearns

12 July Mortgage lender IndyMac collapses - second biggest US bank in history to fail

9 August 2007 European Central Bank pumps ?95bn into banking market

7 September Financial authorities step in to rescue Fannie Mae and Freddie Mac

9 September Bradford & Bingley becomes second British bank to be nationalised

15 September Lehman Brothers files for bankruptcy

16 September AIG, biggest insurance firm in the US, receives $85bn rescue package

3 October 2008 US government announces $700bn Troubled Assets Relief Programme

8 October UK launches its first bank bailout plan, making £50bn available

October 2008 Iceland's banks collapse. IMF extends £1.4bn ($2.1bn) loan a month later

24 November Alistair Darling announces a temporary cut in VAT from 17.5 to 15 per cent

23 January 2009 UK enters recession

28 January US Congress passes Barack Obama's $819bn stimulus package

5 February UK Monetary Policy Committee votes to cut interest rates to 1 per cent - the lowest in over three centuries

Michael Harvey

Martin Jacques is a journalist and academic. He is currently a visiting fellow at the London School of Economics Asia Research Centre and at the National University of Singapore. Jacques previously edited Marxism Today and co-founded the think-tank Demos in 1993. He writes the World Citizen column for the New Statesman. His new book on the rise of China, When China Rules the World, will be published in June.

This article first appeared in the 16 February 2009 issue of the New Statesman, The New Depression

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Apprenticeships remain a university alternative in name only for too many young people

New research shows that those who do the best apprenticeships will earn higher salaries than graduates, but government targets undermine the quality of such schemes.

Rare is the week that passes by without George Osborne donning a hi-vis jacket and lauding the worth of apprenticeships. The Conservatives have made creating 3m apprenticeships a governing mission. Labour, both under Ed Miliband and Jeremy Corbyn, are scarcely less enthusiastic about their value.

The best apprenticeships live up to the hype. Those with a level five apprenticeship (there are eight levels) will earn £50,000 more in their lifetime than someone with a degree from a non-Russell Group university, as new research by the Sutton Trust reveals.

But too many apprenticeships are lousy. In 2014/15, just 3 per cent of apprenticeships were level four or above. Over the last two years, there have only been an estimated 30,000 apprenticeships of at least level four standard. So while David Cameron comes up with ever grander targets for the amount of apprenticeships he wants to create, he neglects what really matters: the quality of the apprenticeships. And that's why most people who can are still better off going to university: over a lifetime the average graduate premium is £200,000.

Proudly flaunting lofty targets for apprenticeships might be good politics, but it isn’t good policy. “The growth in apprenticeships has been a numbers game with successive governments, with an emphasis on increasing quantity, not quality,” says Sir Peter Lampl, Chairman of the Sutton Trust.

60 per cent of apprenticeships today are at level two – considered to be no better than GCSE standard. These might help people get a job in the short-term, but it will do nothing to help them progress in the long-term. Too often an apprenticeship is seen as an end in itself, when it should be made easier to progress from lower to higher apprenticeships. The Sutton Trust is right to advocate that every apprentice can progress to an A-Level standard apprenticeship without having to start a new course.

Apprenticeships are trumpeted as an alternative to going to university. Yet the rush to expand apprenticeships has come to resemble the push to send half the population to university, focused more on giving ever-greater numbers a qualification then in ensuring its worth. For too many young people, apprenticeships remain an alternative to university in name only.

Tim Wigmore is a contributing writer to the New Statesman and the author of Second XI: Cricket In Its Outposts.

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The opponents of Jeremy Corbyn are running out of road

The Corbyn insurgency has opened up a chasm on the left. His opponents may have to accept that Labour is now an anti-capitalist party – or leave altogether.

The skirmishes since Jeremy Corbyn’s remarkable victory have avoided the main issue. The Labour Party has been sucked into debates about the rights and wrongs of serving in the shadow cabinet, the wearing of red poppies, the style of Prime Ministers’ Questions and the singing of the national anthem. Recollections of the battles of the 1980s (which I analysed at the time as political editor of the New Statesman) have prompted arguments about whether the best way to secure a progressive government in 2020 is for Labour now to split or to stay together.

There is, however, a more fundamental question that needs to be confronted head-on. It concerns the very purpose of Labour’s existence. Corbyn’s election has opened up a doctrinal chasm on the left. Can it now be bridged or not?

If it can, then Labour might fray at the edges but not shatter. But if the divide is simply too wide, and if Corbyn is still in place in two or three years’ time, then his opponents will face a stark choice: accept that Labour has reverted to an older, firmly anti-capitalist version of its purpose – or leave this party and start a new one.

Here lies the true significance of the Corbyn insurgency. It clarifies and polarises the debate that should be held about what Labour really stands for. Of course, doctrinal arguments have been held throughout the party’s history. Labour has debated the character of socialism for well over a hundred years. But, until now, the outcome has repeatedly been a fix, a fudge, disdain by the party leader or the application of machine politics to keep out the far left. In every one of its four periods of majority government since 1945, Labour has in practice come to terms with capitalism. Now, for the first time, the far left has taken over. Corbyn has already demanded nationalised railways, energy companies and banks.

Perhaps that is all; perhaps he privately embraces the market system in the rest of Britain’s economy. However, his latest plans for corporate taxes suggest no such enthusiasm. Indeed, all the evidence points in the opposite direction. In his 32 years as an MP (and in the years before that when I listened to him backing Tony Benn, Militant and other assorted Trotskyists when we were both members of Labour’s general committee in Hornsey and Wood Green, in north London), I have never come across anything he has said or written that displays any p­assion for the process of wealth creation that flows from competition among privately owned businesses.

Indeed, the opposite is the case. In November 2013, Corbyn published a column in the Morning Star headlined “Challenging capitalism”. He wrote: “It’s high time to move public ownership firmly to the centre of the political agenda.” More broadly, he has been reported as telling his Islington North Labour Party that: “Our job is not to reform capitalism; it’s to overthrow it.” No wonder he has appointed a shadow chancellor whose Who’s Who entry declares his ambition as “fermenting the overthrow of capitalism”.

In the short term, Corbyn will doubtless compromise on his policy agenda, in order to prevent an immediate revolt by more moderate Labour MPs. We should not be fooled. He is a principled socialist. His long-term aims remain. He is a leopard whose spots have never changed, and never will. In a way, that is to Corbyn’s credit. Throughout his political life he has held to a particular view of how to achieve prosperity. He thinks the best way to build a good society is for workers and elected politicians, not company shareholders, to take the big decisions in the business world.

However, that is not remotely what most of Labour’s other leading MPs want. They believe in capitalism. They do not regard it as an evil to be fought at every turn, or even as a regrettable necessity to be endured for the time being. They like its dynamism. They regard it as the best way to invent, develop and supply most goods and services. They have no wish to replace it, even as a long-term objective. They think that one of the basic ambitions of progressive government is to find the best way to encourage private-sector success and, through the judicious use of support, regulation and taxation, to harness that success to the wider task of building a fairer, better society.

Not that many of them would put it as bluntly as that. Look at the words written and spoken by Corbyn’s three opponents and, with the partial exception of Liz Kendall, you will find no celebration of the success and virtues of capitalism and the market system, merely a guarded acknowledgement of its existence. They talk about capitalism not in the manner of a sister to be embraced, but as an awkward cousin to be tolerated.

The outcome has been an ideologically lopsided debate in the leadership contest. For those who view the New Labour years as a model to be admired not reviled, it has come across as a choice between Corbyn who has been wrong but clear, and his rivals who have been right but mealy-mouthed.

This brings us to the heart of the matter. For the character of the century-long tussle between traditional socialism and working-with-capitalism social democracy has always been thus, as left-wing clarity vies with centrist mush. The process has been consistently messy, and frequently frustrating; but it has also been seldom catastrophic and occasionally triumphant. Understanding the evasive culture of Labour’s internal discourse through the 20th century helps us to see why Corbyn’s election could mark such a profound moment in the party’s history.



Morgan Phillips, Labour’s general secretary in the 1950s and one of the old school of machine politicians, made the important observation: “The Labour Party owes more to Methodism than to Marxism.” This is far more than a neat contrast between two words beginning with “M”. It reflects a profound truth about the way Labour has evolved. When Keir Hardie arrived in the House of Commons in 1892 and railed against poverty and exploitation, he couched his argument in moral terms. In his maiden speech in 1893 he spoke not of Karl Marx or class war, but “the horrors of sweating, of low wages, of long hours, and of deaths from starvation”. His proposals – in that particular case, to curb cheap imports that cost British workers their jobs – were rooted in ethical concern rather than ideological conviction.

That set the course for the decades that followed. Even the famous, or notorious, Clause Four, agreed in 1918, fits the pattern. It was crafted with care by Sidney Webb, the most prominent of the early Fabians. In its final form (it went through various drafts over a period of months), it stated that Labour’s objective was:

To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service.

This is generally regarded as a call for ­full-scale nationalisation. But “common ownership” is a far looser term, and the phrase “as may be possible” suggests an incremental rather than revolutionary process. This was deliberate. Overshadowing the Clause Four debate was the Russian Revolution. It inspired some in the west but terrified many more. Webb and his colleagues were determined to distance Labour from the Soviet model. In October 1917, days before Lenin finally seized control, Webb wrote in the Observer:

It [Clause Four] is a socialism which is no more specific than a definite repudiation of the individualism that characterised all the political parties of the past generations . . . This declaration of the Labour Party leaves it open to choose from time to time whatever forms of common ownership, from the co-operative store to the nationalised railway, and whatever forms of popular administration and control of industry, from national guild to ministries of employment, and municipal management may, in particular cases, commend themselves.

In the context of its time, with Britain engaged in the Great War and with much of the economy under state control, as well as Russia turning communist, Webb’s ambition was modest, even insipid.

That said, Labour’s election manifestos in the 1920s and 1930s preached a more muscular socialism. (In 1931 the party proclaimed that “the decay of capitalist civilisation brooks no delay”.) But the party’s two short spells of minority government, in 1924 and 1929-31, gave it little chance to turn words into action. Its first proper test came in 1945, with Clement Attlee’s landslide victory.

Attlee wanted to fight the election with no specific commitments to nationalisation. But in December 1944 the party conference defied his wishes and voted overwhelmingly for “the transfer to public ownership of the land, large-scale building, heavy industry and all forms of banking, transport and fuel and power”. Attlee blithely ignored most of this list. True, his government nationalised the mines and the railways; but given how badly these had been run before the war, one could make a perfectly pragmatic, non-ideological case for taking them over. By 1949, Harold Wilson, president of the Board of Trade, was proclaiming that he had made “a bonfire of controls” to release the energies of the private sector.

As the postwar years ushered in the consumer society, Clause Four looked increasing out of place. What was the relevance of “common ownership” to a world of privately owned homes, cars, television sets and washing machines? In 1959, a few weeks after Labour’s third successive election defeat, the party’s leader, Hugh Gaitskell, sought to change it.

Once again, the party leader argued for pragmatism rather than explicitly for the virtues of capitalism: nationalisation, he said, was one of a number of means for pursuing freedom, social justice and the public interest. Once again, the leader was opposed by left-wing calls for state socialism. Frank Cousins, general secretary of the Transport and General Workers’ Union, the biggest trade union in Britain, addressed the party conference in terms that could have come straight from the Corbyn playbook:

“Let us give over pretending we have to get half a million Tory people to change their allegiance at voting time. There are five million or six million people who are socialists in embryo waiting for us to go out and harness them to the power machine we want to drive.”

Once again, as in 1944, the party leader was defeated. But once again, when Labour was next in power (under Wilson, elected party leader after Gaitskell’s death), it disregarded the conference decision. Clause Four lived on, yet as a symbol rather than a strategy. Only in the catastrophic election of 1983 did Labour take it seriously.

Finally, in 1995, Tony Blair did persuade the National Executive Committee and a Labour conference to agree a new Clause Four:

The Labour Party is a democratic socialist party. It believes that by the strength of our common endeavour, we achieve more than we achieve alone, so as to create for each of us the means to realise our true potential and for all of us a community in which power, wealth and opportunity are in the hands of the many not the few; where the rights we enjoy reflect the duties we owe, and where we live together freely, in a spirit of solidarity, tolerance and respect.

Out went the vague ambition of “common ownership”. In came a perfectly sensible statement of the ethic of co-operation, but nothing that made the case for any kind of economic freedom, let alone full-blown market capitalism. Blair can claim the credit for refusing to take the Attlee/Gaitskell/Wilson route of ignoring Clause Four and disregarding party conference decisions. But he did not win the argument for a pro-capitalist version of social democracy, because he never spelled it out. He implemented policies that the left now attacks as “market liberalism” not by persuading his party of its virtues but by winning elections and asserting his authority.


Thinking with the wisdom of hindsight, we should not be surprised that the anti-capitalist left has revived. The hard truth is that it was never defeated because it was never properly engaged. It was simply thrust to the margins, where it bided its time. After two general election defeats, the left appeals to party activists in a way it could never do during the era of Blair’s election victories. And the character of the recent leadership contest matches the character of every significant doctrinal contest through the Labour Party’s history, with Corbyn arguing his case with clarity and his opponents ducking and weaving.

The difference is that Labour now has a leader, for the first time since at least the Second World War, who actually believes in the policies that the left has consistently advocated and previous leaders equally consistently ignored.

Could things have worked out differently? Could Labour done more than hold the left at bay: could it have won a head-on doctrinal battle?

Perhaps. Such a battle was waged, and won, more than 50 years ago in Germany. In 1959 the German Social Democratic Party (SPD) – Labour’s sister party – met at Bad Godesberg and agreed a new doctrine. In the extract here, the final sentence is the one most frequently quoted, but the whole paragraph is striking, if only because no British Labour conference has ever agreed anything remotely like it:

Free choice of consumer goods and services, free choice of working place, freedom for employers to exercise their initiative as well as free competition are essential conditions of a Social Democratic economic policy. The autonomy of trade unions and employers’ associations in collective bargaining is an important feature of a free society. Totalitarian control of the economy destroys freedom. The Social Democratic Party therefore favours a free market wherever free competition really exists. Where a market is dominated by individuals or groups, however, all manner of steps must be taken to protect freedom in the economic sphere. As much competition as possible – as much planning as necessary.

How come the SPD so long ago confronted left-wing socialism in a way that even Blair at the height of his popularity never attempted? The immediate context plainly played a part. The SPD had lost every postwar election and knew it had to change. Across the border, East Germany, and the Soviet bloc generally, were giving Marxist notions a bad name. Nothing that sniffed of communism, in however dilute a form, was likely to be popular in West Germany.

But there was something else. There was a fundamental difference between Labour’s history and that of the SPD. As we have seen, Labour, with its Methodist-not-Marxist roots, has always been a party of ethics rather than ideology. In contrast, the SPD was created in 1863 as an explicitly Marxist party. That is not to say Marx was a fan. In 1875 the SPD adopted a programme that he strongly criticised as too concerned with formal economic structures and too little with the dynamic of class struggle. However, for the following eight decades, the SPD viewed the world through the prism of ideology.

The essence of what happened in the years leading to Bad Godesberg was that the realisation grew within the SPD that its ideological theory was wrong. State control of the economy was a bad idea. A competitive market economy was intrinsically superior. Governments should intervene only when markets failed.

In a way, the SPD in the 1950s applied the tenets of the Enlightenment to itself. It approached its problems empirically. It pondered the evidence and concluded that Marxist socialism did not work, while properly regulated market capitalism did.

Labour has never engaged in any such Enlightenment-style debate. This is because the advocates of left-wing socialism inside Labour (leaving side the Trotskyists, communists and fellow-travellers who have occupied its fringes from time to time) have argued from a moral rather than a theoretical standpoint. And the ethic of co-operation and fairness does not lend itself easily to empirical investigation.

Thus Labour finds itself with a new leader who rejects the accommodation with market capitalism that every Labour leader since the Second World War, except for Michael Foot, has in practice upheld but none has properly persuaded his party to embrace.

What now? By 2020, one of three things will have happened.

1. Jeremy Corbyn will have maintained control over his party, which may have frayed but not split;

2. Corbyn will have been replaced by a more electable, less left-wing leader;

3. Labour will have split, leaving Corbyn as the leader of a significantly diminished group of MPs.

I don’t know which of these will happen, but I suspect that the outcome will depend on how many MPs decide to fight his left-wing doctrine directly. Most Labour MPs think Corbyn’s politics are bonkers. Left to their conscience, most would strive to remove him at the earliest opportunity or, if that fails, break away and start a new party. But will enough of them combine to do either of these things? Or will they recall the unsettling dictum that the plural of conscience is conspiracy, do nothing to risk being deselected as party candidates in 2020, and quietly hope that Corbyn’s leadership will crumble of its own accord?

I fear that the quiet life will win the day, that Corbyn will become entrenched, and that a head-on doctrinal dispute will, as always, be avoided. For a century, fudging the issue has occasionally allowed Labour to build an election-winning, big-tent coalition of progressive voters. Today, that approach guarantees disaster. It will leave Corbyn free to promote his electorally toxic and economically destructive brand of left-wing politics. If that is what happens, Labour’s tent will become a lot smaller and the party will cease to be fit for purpose.

Peter Kellner is the president of YouGov. Read his analysis of the new polling data that shows the challenge for Jeremy Corbyn here

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