Ed Miliband is right to seek the redistribution of economic power
Responsible capitalism is far from a safe bet, but our economy needs it.
"First they ignore you, then they laugh at you, then they fight you, then you win." Gandhi’s famous aphorism has so far proved an apt description of Ed Miliband’s trajectory as Labour leader. Few predicted his victory in Labour’s leadership contest two years ago. In autumn 2011, his annual conference speech was derided by the business and media establishments. But Miliband has since shown on issue after issue – phone hacking, banking, pensions – he has been ahead of, not off, the curve.
This has taken place against the backdrop of crumbling hopes for economic recovery. Scandal has eclipsed scandal in our financial system, reminding a straitened public that we are not all in it together. Popular demand for a robust political response to what looks like systemic abuse and injustice in our economic system is unmet. The coalition, divided and crisis-prone, looks increasingly unequal to the task.
In the last year, Miliband has made a number of speeches sketching what he describes as an agenda for a more “responsible capitalism”. The concept has been dismissed as, at best, a well-meaning but insubstantial drift into abstraction and, at worst, a discreet return to old Left hostility to profitable commerce. But as the coalition founders and the obstacles to a Conservative parliamentary majority in 2015 mount, Miliband is winning a more attentive audience. The question is posed with more urgency by his allies and opponents: can this project become the centrepiece of a campaign to return Labour to government? What, in practical terms, does it involve?
The answer begins with an account of what went wrong. Three lessons stand out from Britain’s experience in the global financial crisis. First, the shakiness of an economic growth model so dependent on the financial services sector, which grew twice as fast as overall GDP in the decade preceding the crisis. But what lay beneath these impressive statistics was unsustainable: a small group of people trading ever-more complex financial products, taking huge risks with other people’s money, with few personal downsides if their bets failed to pay off.
Second, recession has focused minds on what Miliband has termed the "new inequality": the widening gap between the very top and the squeezed middle, whose wages have been stagnant since 2003. Promises of "trickledown" turned out to be just that – a trickle – as 22p of every pound of GDP growth went to the top one per cent between 1979 and 2005, and top executive pay ballooned from 69 times average pay in 1999 to 145 times just ten years later.
Third, as the independent Kay review has highlighted, equity markets were corrupted by a culture of chronic short-termism that rippled through the whole economy. The UK equities market was once dominated by institutional investors that typically held stocks in a group of companies for the long-term. Company and owner interests were aligned: maximising the long-term value of the company’s stock, rather than annual profits.
This model is gone. The market has fragmented, with shares traded by the minute rather than the decade. There has been an explosion of asset managers acting on pension funds’ behalf, whose rewards are based not on generation of long-term value, but annual outperformance of the market average. This has created a culture that neglects investment and creates illusory value through financial engineering and frenzied mergers and acquisitions. Great British institutions like Cadbury have been taken over by international conglomerates, and the price has been paid in jobs and communities.
The level of consensus on these issues is remarkable given none were high on the political agenda five years ago. But it is Miliband’s diagnosis of these as symptoms of a wider deficit of accountability that sets him apart. The new inequality is a result of power shifts that came with globalisation, technological progress that increased returns to high skills at the expense of mid-skill jobs, and the decline of trade unions. Short-termism in equity markets is caused by lack of accountability of asset managers and boards to the pension funds ultimately owned by the public. Too much power is vested in executives and financiers in global corporations; too little sits with those who work for them, own them and buy from them.
These power shifts date back to Thatcher-era economic reforms, which did not just increase the scope of markets, but shifted the balance of power within which they operated. Reforms that increased incentives to innovate, take risks and create wealth at the same time made it easier for those at the top to extract rather than add value.
The “Third Way” of Tony Blair and Bill Clinton aimed to reconcile the Washington Consensus’s unpalatable impact on inequality with its benefits for growth. Some of Blair’s reforms significantly shifted the balance of economic power, most powerfully the National Minimum Wage. But the Third Way was chiefly about mediating the unfair effects of markets, not tackling power imbalances at source: to do so would be to mess with the engines of growth. So increased tax revenue from the City paid for tax credits and investment in public services.
Yet while the tax-benefit system worked harder than ever, inequality increased. The financial crisis was a spectacular illustration that Thatcherism had swung the power balance too far in the other direction. Reforms that once powered Britain to growth ultimately led to implosion, as it became all too clear that debt-fuelled consumption had been compensating for a lack of investment.
Miliband has recognised that in the wake of the financial crisis, a "Blair-Clinton plus" approach to creating a fair economy – redistribute and regulate more – will not suffice. Far from letting up, the global trends that propel increased inequality are going to intensify: the High Pay Commission has predicted that by 2035, the top 0.1 per cent will take home 14 per cent of national income, a mirror of Victorian England. There is no evidence the public will support the increased levels of taxation needed to ameliorate the impact of growing inequality, let alone reduce the deficit over the medium-term and sustain current levels of service provision in the face of an ageing population. Redistribution had limits in a time of plenty; they will now be even more pronounced.
Besides, a "Blair-Clinton plus" approach is unappealing in other ways. Even if those who unfairly make huge gains from the system stump up their taxes to pay for tax credits, they feel they are handing over what’s theirs by rights, while others make do with handouts. Who wants to live in a society increasingly atomised, but in which the top buy off the bottom? What happens when there is another global economic crisis caused by the abuse of unaccountable power, requiring another vast bail-out?
Responsible capitalism is about a fairer "predistribution": inclusive growth generated by fair markets, where those who contribute get to share in the gains. Rather than pay to subsidise low wages by taxing company profits, why not fight for a living wage? Rather than using benefits to make pensioners’ rising fuel bills affordable, why not make the market itself work more fairly?
It shares a common starting point with Blairism and Thatcherism: markets are the best way to structure our economy. But just as Blairism embodied the idea that markets need tempering through redistribution and regulation, responsible capitalism advocates addressing power imbalances at source.
This is why Miliband’s interventions have been controversial. Whether slamming corporates who manipulate uncompetitive markets to rip off consumers, criticising big companies that wrangle free credit by paying small suppliers late, or indeed berating trade unions for their failure to represent private sector employees, his is an agenda about unchecked and unbalanced power. When power is challenged, the powerful speak out loudest. But having worked for Miliband, it is impossible not to appreciate that he has an appetite and courage to make that challenge that few others do.
Responsible capitalism implies a new role for the state in relation to the economy: not picking winners but making markets work better. So government needs to better regulate uncompetitive markets like banking and energy, and catalyse investment via a state investment bank. It should use its procurement power to boost innovation. And it can lead the way as an employer of low-paid labour through living wage policies, adopted by some Labour councils.
But responsible capitalism recognises the limits of government intervention: it cannot substitute for more evenly distributed economic power.
How to create more accountability within the system if not through government intervention? The answer lies in mobilising three types of power: labour, saver and consumer.
In the historic fight to redistribute economic power, no institutions were more important than the once-mighty trade unions. But increased militancy in the 1970s damaged their popular legitimacy and Conservative reforms curtailed their reach.
Germany offers an instructive lesson on what is achievable with meaningful employee representation on company boards, and a mature dialogue between employees and management: more sustainable, inclusive economic growth.
The role of the trade unions in Miliband's plan remains ambiguous. Photograph: Getty Images
The jury is out on whether British trade unions could carve a similar role. They mimic this culture in a few industries, such as the car industry. But much will depend on whether unions can prove their wider relevance, particularly to low-paid private-sector workers. There are other important institutions of workplace democracy that can be nurtured, however, such as employee associations and employee-owned companies.
Employee voice should be ingrained into the economic system, for example by incorporating employee representation on company boards. This is better for business and better for the economy: since 1992, firms with a significant amount of employee share ownership outperformed the FTSE100 by 10 per cent each year on average.
Our shareholder-value capitalism might at least be expected to deliver for the British public via their pension funds, which still own a significant proportion of British plcs.
But short-termism is hard-wired into our pensions. An industry flourishing from opaque charges has little incentive to reform in the public interest: fragmentation means it is in no fund’s interests to go it alone with a different approach – returns would be distributed right across the industry. Tinkering with corporate governance will not by itself break this impasse: the problem is not rules but collective action.
Rather than trying to persuade powerful private sector funds to invest a paltry £2bn in UK infrastructure, Cameron and Osborne should be figuring out how to put to use the collective assets of public sector workers in funded public sector schemes. Their combined might could give the economy a kickstart while achieving better returns for schemes underwritten by taxpayers.
The new National Employment Savings Trust also offers the opportunity to create a large, private sector scheme that could act as a market force to reduce charges, and act as a different type of investor. But the coalition government has limited its potential to scale in the face of industry lobbying.
Untapped saver power also lies in the cash sitting in our bank accounts. Banking once existed to recycle deposits into loans and mortgages, generating a modest cut for the bank manager. Elsewhere this model thrives. In Germany, for example, a network of 430 local banks have 40 per cent of market share and an SME lending role is written into their statute.
Account switching to Nationwide and the Coop increased substantially in the wake of the crisis. But the market is too uncompetitive to allow people to vote with their feet on any scale. Enforced separation of retail and casino banking is needed to open the market to new challengers. British credit unions also offer great potential if they can consolidate technological and risk-pooling infrastructure like their German cousins.
Consumer power did not feature alongside workers and capital in Marxian theory, and little has changed in centre-left economic thinking over the centuries. The tendency of the left is to be snobby about consumerism, let alone work it into theories about a fairer economic distribution.
Since the 1970s, the mobilisation of consumer power has taken place mainly around ethical issues like Fair Trade. It has remained a fringe force rather than mainstream conduit for economic reform.
But this is changing. Which, the UK’s largest consumer association, recently ran ‘the Big Switch’: a collective switching campaign bringing consumers together to demand a better deal from energy companies, matching the monopoly power of big corporations with organised consumer power. It perhaps is no coincidence that Which was founded by one of Britain’s most famous progressives, Michael Young, to empower consumers in the face of corporate power.
Consumer organisations could play a wider role in helping consumers collectivise their power to get better value in uncompetitive markets. Beyond that, it is not inconceivable that consumers could be mobilised to turn away from those companies that take an unscrupulous approach to generating profit.
However, the big society highlights the pitfalls for any political party trying to empower people as a route to reform. Cameron’s pet project never made the transition from a belief in the limits of government to a winning electoral offer. One of its many flaws was the assumption that a political party could by itself create mass social change.
The Labour Party itself was born from a grassroots movement to shift the balance of economic power. But modern political parties are no longer social change movements. To the public, they are machines that sell leaders and policies every five years. Work is underway to try to reconnect the Labour Party with the community organising history of its past. It remains to be seen, though, whether 21st century parties can overcome entrenched cynicism about modern politics.
Equally important is whether the public appetite exists for this type of agenda – and how it might be created. It makes little sense for a lone employee, saver or consumer to stick their neck out, sometimes at great cost.
This points to the need for a new and refreshed set of economic institutions to harness employee, saver and consumer power and overcome collective action problems. A future Labour government should focus on how it can help build these institutions. This may require rebuilding old institutions in a new mould. Or it may be a case of building new institutions altogether.
In a Groupon age, social media also offers unprecedented opportunities to match the increase in global corporate power with new, global forms of accountability. Online social movements have flourished as membership of traditional institutions has declined. Movements like 38 Degrees and SumofUs have mobilised people power on a scale that would have been unthinkable years ago, chalking up significant successes in corporate accountability. In business financing, technology is enabling crowdfunding, cutting out the middle man and generating better deals for lenders and borrowers alike.
Turning responsible capitalism’s intellectual framework into a campaign message will be a challenge for modern politics. It would make for a very different manifesto than the traditional list of policies, and creates new challenges for communications teams more familiar with pledge cards than social movements. Again big society sounds a warning: the Conservative 2010 manifesto, cringingly entitled "An Invitation to Join the Government".
The Conservative manifesto in 2010. Photograph: Getty Images
Some will see responsible capitalism as a dangerous distraction from the core business of restoring economic credibility to get Labour re-elected in 2015. But that is hardly sufficient: convincing the public that Labour can be trusted with their money is a vital ingredient, not a recipe, for electoral success. Fiscal realism means that for the foreseeable future, no centre-left party can build an electoral coalition with spending giveaways. But it is hard to see how it can be done relying just on switching spending, whilst also cutting. Labour needs something more if it is going to win with a positive agenda for change.
Responsible capitalism is far from a safe bet: a treacherous path not trodden since Thatcher, nothing less than remoulding and reshaping the way British capitalism works.
Yet our economy needs it. A return to business as usual leads to nowhere but an unresilient society characterised by growing atomisation, and an unresilient economy capable of the kind of spectacular implosion of the sort just seen.
This time it is Labour best placed to forge this path. The Labour Party was built on a grassroots fight to redistribute economic power, not just economic resource. Miliband’s agenda is the right one: to make that fight central to the Labour Party again.
Sonia Sodha was formerly senior policy advisor to Ed Miliband. She writes here in a personal capacity.
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