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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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The NS Podcast #118: Cultural Appropriation

The New Statesman podcast.

This week we talk Conservative Party Conference, David Cameron's speech, and discuss the problem with "cultural appropriation". (Helen Lewis, Anoosh Chakelian, George Eaton, Stephen Bush, Yo Zushi).

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In the valley of death

Labour and the disintegration of social democracy.

When Fenner Brockway, the Labour MP, lifelong anti-imperialist and peace activist, recalled his early involvement in the Independent Labour Party, he wrote, “On Sunday nights a meeting was conducted rather on the lines of the Labour Church Movement – we had a small voluntary orchestra, sang Labour songs and the speeches were mostly Socialist evangelism, emotion in denunciation of injustice, visionary in their anticipation of a new society.”

Fast-forward a century or so, and Brockway could be describing a Jeremy Corbyn leadership rally: the same joyfulness, fervour of conviction and ecstasy of expression, only this time clothed in the self-belief of the Labourist left, rather than Nonconformist millenarianism, and playing to a larger crowd. Corbyn’s campaign reinvented the party political rally, a form of British politicking long since presumed dead. He created a space in which the lost tribes of the British left could reunite, and new followers join the throng. Suddenly a “surge” was under way, a democratic explosion within the mainstream body politic, not safely contained outside it.

Corbyn’s election as leader of the Labour Party is undoubtedly a seismic event. But it does not herald a wider political transformation. For although the left of the Labour Party is not a sect, it is sectarian. It inhabits a world-view, culture and practice of politics that is largely self-referential and enclosed. Save for brief moments of popular experimentalism – such as the two occasions when Ken Livingstone governed London – its reach has been minimal. Corbyn’s policy platform is an unreconstructed Bennite one, defined by nationalisation and reinstatement of the postwar settlement, given a fresh lease of life by revulsion at foreign wars and the social consequences of austerity. While his campaign tapped into discontent with the decrepit state of mainstream Labour politics, it did not give birth to a new social movement, rooted in popular struggle, like those that have sprung up in southern Europe. His improbable leadership of the Labour Party is another symptom of the crisis of social democracy, not the incubator of its future.

That social democracy is in crisis across Europe is indisputable. Few parties of the democratic left now register more than 30 per cent in national elections. In its northern European heartlands, social democracy is either besieged by populist anti-immigrant parties or marginalised by a dominant centre right. Even in Germany, where a recognisably social-democratic culture still exists, the SPD is reduced to junior-party status, topping out at 25 per cent of the electorate. Elsewhere, austerity has either destroyed the mainstream left, as in Greece, or cut it back to its core, as in Spain and France. Only in Italy, where the right has been discredited by years of corruption and abject economic performance, does the centre left have any energy.

Britain’s first-past-the-post system has protected the Labour Party from the full force of these currents, but the pull of their logic is at work here, too: political loyalties have fractured, immigration has split the core working-class vote, and the financial crisis has ushered in a politics of economic security, not reform.

The last time the death notices of social democracy were written in the early 1990s, a wave of Third Way revisionism brought it back to life. Then, social-democratic parties expanded out of their working-class electoral heartlands and public-sector redoubts, forging new coalitions of support. The freshly modernised centre left won power across Europe and in the United States. But the breadth of its appeal was not matched by depth. Over time, centrist voters proved fickle and the core vote started to abstain or desert to the anti-immigrant right. Centre-left parties began to shed votes and lose power. The financial crisis provided the coup de grâce, punishing incumbents and passing the baton of energetic opposition to new parties of the left such as Syriza and Podemos.

Today, it is clear that Third Way modernisation relied on historical circumstances that cannot be repeated now: principally a long wave of growth, in which a build-up of household debt and government transfers maintained living standards, despite rising asset inequality and the sundering of the link between productivity increases and wages. “Globalisation plus good schools” is no longer a plausible formula for winning back working-class voters, and the fiscal headroom for binding the middle classes into an electoral coalition built on investment in public services has shrunk. Nor can the rise of identity politics, whether of the civic nationalist or the anti-immigrant kind, be properly understood, let alone contested, within a political strategy that gives pride of place to individual social mobility. Even the crowning achievement of the New Labour era – the rescue and revitalisation of public services – would now require a very different set of tools from the centralism of the turn-of-the-century delivery state.


In the early 1990s, New Labour thinkers looked across the Atlantic for inspiration and renewal. Bill Clinton’s insatiable curiosity for policy ideas rubbed off on Blair and his advisers, but the most important lessons were strategic: how to win back voters in the mainstream of politics and push the right off the centre ground. Today, the transatlantic cable is broken. Latino migration to the US has replenished the Democrats’ vote base and refreshed its politics, while immigration has done the reverse to European social democrats. The White House cannot be won with older white voters, but, in Europe, ageing societies have become more conservative, making it harder for the reformist left to win. At the last general election, Labour won every age group up to those aged 55 and over, but haemorrhaged support among pensioners. The party’s Russell Brand moment never arrived. Inequalities of turnout between young and old, prosperous and poor, are such that it likely never will.

The conservatism of ageing societies, the cultural and political fracturing of the working class, and the structural dysfunctions of debt-laden western economies all pose grave challenges to social-democratic parties. The task is magnified for Labour by the break-up of the political unity of the British state, and the collapse of its support in its Scottish heartlands. Unlike in the 1980s, it cannot fall back on the ballast of a centrist trade union movement and cross-national solidarities of class.

More serious still, its intellectual resources are depleted, left and right. Those who have sought to renew Labour at critical moments in its history have always had to battle against a deep strain of anti-intellectualism in the party. Because it famously owes more to Methodism than Marx, it has never possessed a theoretical tradition. In the 20th century, it borrowed heavily from Liberal giants such as Keynes and Beveridge, and turned to the Fabians and the London School of Economics for technocratic expertise when economic planning and the construction of the welfare state demanded it. But it only ever produced a few big thinkers of its own, such as Tawney, G D H Cole and Crosland, and even their influence on the course of Labour politics was limited. When it last faced the prospect of terminal decline, in the 1980s, it had almost no intellectual resources to fall back on. Instead, it was the Gramscian thinkers grouped around Marxism Today who furnished it with an analysis of Thatcherism and a route map towards re-election.

New Labour’s openness to wider currents of ideas – at least in its early, formative phase – allowed it to draw on fresh thinking from academia, think tanks and elsewhere. But the Labour Party’s intellectual revival in the late 1980s and 1990s owed much to a cadre of soft-left MPs, epitomised by Robin Cook and Gordon Brown, who could act as receptors into the labour movement of the thinking that was taking place outside it. No such cadre exists today. The soft-left tradition was weakened by defection, desertion and (tragically, in Cook’s case) death, and what remained of it in the parliamentary party at the turn of this century had become a Brownite patronage network. Ed Miliband failed to revive it, despite being suited to the task. The reductio ad absurdum of this decline was reached in the desperate political gymnastics of Andy Burnham’s leadership campaign.

Labour’s anti-intellectualism would be less of a problem if the party were well attuned to public sentiment and capable of intuiting the sources of change in British society. But it is not. Like other mainstream political parties, it has become hollowed out, professionalised and state-centred in recent decades. As the class structures that gave birth to Labour politics declined in the second half of the 20th century so, too, did the party’s roots in civil society begin to shrink. Its forms of popular culture, its institutions and its membership base all withered, leaving it with leaders drawn from a professional caste, possessed with all the skills and networks necessary to navigate Westminster and Whitehall, but with not much underneath or around them in the wider society.

This decline has been apparent since the late 1970s – certainly since Eric Hobsbawm wrote his celebrated essay “The Forward March of Labour Halted?” (1978). And yet, despite significantly broadening its electoral appeal in the New Labour era, Labour has not created social and economic bases to replace those lost with the passing of industrial society. It has become caught in what the political scientist Peter Mair diagnosed as the trap facing all centrist parties: the one between responsibility and responsiveness. Parties aiming for elected office seek the patina of responsibility, fiscal and political. They set out credible, carefully crafted programmes for government, mindful of its constraints and compromises. Instead of representing the people to the state, they increasingly represent the state to the people. This leaves the field open for populists, who eschew responsibility in favour of responsiveness, unmediated authenticity and the articulation of an anti-politics. In recent years, only the SNP has sprung this trap, combining broad appeal with seriousness of governing purpose.


Corbyn’s surge did not reverse this decline. The number of trade unionists voting in the 2015 leadership election was lower than that in 2010, and even the addition of registered supporters did not push the selectorate back up to where it was in the mid-1990s (he is also now learning that leadership itself can’t be dissolved into networks, and that the task of leading demands considerable skills). Yet Corbyn’s campaign held up a mirror to the Labour Party, showing it how shrunken, uninspiring and detached from society it had become. Over the course of a few months, he mobilised 16,000 volunteers, pulled in thousands of new activists, and showed the Labour high command how to do digital politics. Some of his supporters are day trippers who won’t stick around. But many more are for real, with decent intentions; and they have changed the party irrevocably. Corbyn used Labour’s new internal democracy to open the party up, and in so doing placed the cadaver in full view. There is no going back.

Is social democracy finished, a relic of 20th-century class society, as John Gray and others predicted three decades or so ago? Its twin historic tasks – to tame and humanise capitalism, while harnessing its dynamism – remain as valid and pressing as ever. But in this post-crash era, it needs to equip itself with new economic reform agendas. Croslandite and Third Way revisionism were both creatures of eras of economic moderation, and shared a conviction that capitalism had overcome its contradictions. The great financial crisis of 2007-2008 destroyed those assumptions, and threw into sharp relief the challenge of stabilising highly financialised economies while reducing the inequalities and imbalances to which they are subject. Despite his political failure, Ed Miliband was undoubtedly right to see this as the most important challenge facing contemporary social democrats. Without being able to offer more widely shared prosperity, generated from within market economies, and not just by redistribution, social democracy is purposeless.

The intellectual resources for this renewal are readily to hand, in both new Keynesian and heterodox economic thinking, as well as a welter of empirical analyses of central policy challenges, such as productivity and wage growth, household indebtedness, and so on. Indeed, far more original new economic thinking has come from the centre left since the financial crisis than from the right of politics, where think tanks and commentators rehash comfortable Thatcherite nostrums. Politically, however, the story is reversed. Labour’s economic credibility has been shot to pieces since the recession and the party shows no signs of knowing how to restore it. Simply opposing austerity will not do the trick, and arguments about the deficit – let alone quantitative easing – will be otiose by 2020, unless the global economy tips back into recession (and relying on that eventuality would be unwise, if not reckless).

More fundamental still, Labour and its sister parties in Europe have yet to work out how to build broad coalitions for economic reform, in the absence of the strong trade unions and organised workers’ movements that they had at their back in the postwar period. The growth of self-employment, the spread of automation, and the decline of public-sector jobs are all making labour itself more disorganised and therefore harder to mobilise politically. Meanwhile, older voters turn a deaf ear to labour-market concerns. If they are on zero-hours contracts, they are likely to be content with them. If not, they are concerned about savings, asset prices and stable inflation. Even in countries with strong trade unions and large manufacturing sectors, there has been a substantial growth in flexible service-sector employment, and a concomitant decline in the political muscle generated in the workplace.

If nothing else, Corbyn’s victory is a dramatic forcing mechanism for the mainstream of the Labour Party to confront these challenges. A generation of Labour MPs and activists grew up in the shadow of Blair and Brown, and now must shoulder the burden of rebuilding the party without the intellectual and political leadership they once took for granted. They are now freed from the narcissistic feuds and rivalries of that era, but this liberty comes with the heavy responsibility of toiling hard to haul the party back. The scale of their defeat is such that cosmetic change will be wholly inadequate. Corbyn’s campaign showed up the profound individual organisational and intellectual weaknesses of the old-right, New Labour and soft-left wings of the party. The soft left vacillated hopelessly and the old right, deprived of the unions and the power of its MPs, had little, if anything to offer. Blairite standard-bearers were blunt and unforgiving in their analysis of Labour’s 2015 election defeat, but they had no answer to the mobilisation taking place in front of their eyes, nor did they have the magic ingredient that had once made them so successful, of what Hobsbawm in 1988 called “having the future in your bones”. They cannot now retread their old path to power.


The character of the Labour Party that emerges from this tumult will tell us whether it has a future as a serious political party. Corbyn’s paradox is that he harnessed democratic energy to a familiar statist and dirigiste project. Labour can only hope to renew if it embraces the democracy and ditches the dirigisme: if any part of 20th-century social democracy needs consigning to history, it is the preference for centralist standardisation and bureaucratic public administration. There are strong currents of both liberalism and conservatism in contemporary Britain, but each shares a hostility to remote, dominant power, whether in the state or in the market. Many of the most liberating contemporary social and economic trends, not least the diffusion of digital technologies, point in the direction of individual empowerment and political decentralisation. Labour has been too slow to grasp this.

Importantly, political and economic dynamism in capitalist economies today is increasingly concentrated in our cities, and this is where progressive politics is strongest. Although national elections cannot be won with cosmopolitan voters alone, city leadership is a vital source of energy, and many of Labour’s best politicians are now found in the town halls and civic offices of Britain. These leaders will be a critical building block in Labour’s renewal, whenever it comes. But that will require the party to understand and embrace the devolution of power, rather than tolerate or, worse still, reject it.

Class reductionism on the Corbynite left gives it a tin ear to the claims of territory and patriotic identity, as well as the demands for power currently swelling across the UK, not just in Scotland, but in England, too. Unchallenged, this will place Labour on the wrong side of one of the most important vectors of British politics: the reconfiguration of the UK as a federal (or quasi-federal) entity. The rise of the SNP cannot be accounted for as an expression of anti-austerity
politics, any more than the demands for greater recognition of English identity can be reduced to anti-immigrant sentiment. Both are expressions of deeper underlying historical changes in the Union, as well as the importance of culture and identity in politics. Without sensitivity to these claims, and an awareness of their democratic potential, Labour will become marginal or irrelevant, when it should be transformative.

There are grounds for optimism on the centre left. Economic reform, meeting the challenges of climate change and ageing, and the promise of digital technologies – all of these hold progressive potential. Social democracy could be just as well placed as any other tradition to capitalise on what the 2020s will bring; it doesn’t need to remain trapped between hollowed-out centrist technocracy and revanchist state socialism. But the depth of the crisis it faces demands deep and sustained rethinking, as well as political reorganisation. The rupture that Corbyn’s election has forced must be a catalyst for that change, or it will never come.

Nick Pearce is the newly appointed Professor of Public Policy at the University of Bath and the outgoing director of the Institute for Public Policy Research. He writes here in a personal capacity.

Nick Pearce is the director of the Institute for Public Policy Research.

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