Interview: Alistair Darling

Alistair Darling was once the safest pair of hands in the government. A year after

Who'd be Alistair Darling? Once viewed as the safest pair of hands in the government, he has presided over a period of crisis in the Treasury not witnessed since the time of Norman Lamont (and a young adviser called David Cameron) more than a decade and a half ago. Most cabinet ministers consider themselves unfortunate in having to deal with a single serious crisis in their time, two at the most. Darling has faced an avalanche: Northern Rock, the loss of computer discs containing details of 25 million people, criticism of his handling of a new tax on "non-doms", and changes to capital gains tax and corporation tax. He has had to weather the storm over the decision to abolish the 10p rate of income tax inherited from his predecessor, deal with a potentially disastrous downturn in the housing market and the effects of continued hikes in the price of oil.

When we meet on a glorious June day at the Treasury, the Chancellor is in a remarkably sunny frame of mind, all things considered. I wonder if, just sometimes, he felt he was the most unlucky politician alive. "If you're ever tempted to feel sorry for yourself, then that's the day you go away," he replies. "You just have to deal with events." He raises the example of the child benefit discs, lost in November 2007. "When I was phoned up on a Saturday morning and told by the head of Revenue & Customs that they'd lost these tax discs . . . it was obvious to me within 30 seconds that this was a massive political problem and you just have to deal with it. No one would want to go to the House of Commons and explain it the way I had to, but there's no way to get away from it."

Darling is keen to note that he had also foreseen the potential political consequences of the abolition of the 10p tax rate shortly after he took up the Treasury job a year ago. "As you would expect when I became Chancellor, I looked right across the piste to see where we were on a whole lot of things." He interrupts and even completes my question when I begin to ask whether action should have been taken earlier: "Of course," he says. But the key question is whether, when he looked at the 2007 Budget, which contained the 10p proposals, he thought it would prove to be a political problem or something that could be dealt with as a piece of financial tinkering? "Well," he says,"what I noticed was that a lot of people would be paying more tax."

At no point does Darling show the least sign of disloyalty to Gordon Brown, but he is keen to emphasise that he was well aware of the potentially toxic nature of the 10p tax rate abolition as soon as he took over from his old friend at the Treasury. He made a similar claim to the Observer journalist Andrew Rawnsley during an interview for his recent Channel 4 documentary on Brown; so it would appear that Darling is not prepared to act as the fall guy for the government's woes over the 10p tax-band fiasco.

It's the economy, stupid

In the spirit of fair play I ask him to take me through the past year and give me his perspective on the predicament in which the government presently finds itself. "If you ask fundamentally what's changed . . . self-evidently it's the credit crunch . . . The IMF has said that it is the biggest shock to the world's economic systems since the 1930s . . . If you look at the overarching event of the past 12 months, it is a slowdown in the economy, and everything that comes with it, and that hasn't just affected the economic matters - it's had a huge bearing on politics, too. It's the old adage 'it's the economy, stupid', and the economy drives politics."

Alistair Darling has the disarming habit, for a politician, of admitting when he and the government have got things wrong. For instance, although he believes it was right to simplify capital gains tax and create a single rate of 18 per cent in his pre-Budget report last October, he acknowledges that this hit small businesses too hard, forcing him to back-track three months later.

His ready admission of mistakes makes his defence more credible than it would otherwise be, when he talks about criticism he sees as unfair. On Northern Rock he is unrepentant. "I'm not apologising for one moment for what we did. We set out to prevent Northern Rock's problems from spreading to the rest of the banking system and we succeeded." He firmly believes the government did everything it could to find a private-sector buyer for the bank and that nationalisation was the only option.

On legislation to bring in a £30,000 a year tax on wealthy foreigners who have made their home in Britain, Darling points out that he stuck to his guns on the tax, despite talk of a possible climbdown in February during the consultation period. "What I announced last October is what is in force. I'm not saying anyone is happy to pay tax, but I think most people would think it's not unreasonable. It's a question of fairness."

Radical suggestion

Which brings us back to the 10p issue. "It was a costly mistake for us, because after ten years of systematically going through the tax system to help the middle- and lower-income people in this country . . . this appeared to send a different message."

Darling believes that Labour needs a significant shift in emphasis if it is to woo back the voters necessary to win the next election. "We have in the past ten years helped a lot of people on middle and low incomes," he says. But he adds: "The political challenge to us now is that there are a lot of people, for example, without children, or whose children have grown up who say, 'I'm in favour of helping families and in favour of ending child poverty, but I'm also in favour of helping people like me.' "

Darling, for all his natural caution, makes a radical suggestion for Labour's strategy for the next election. "We have to go into the next election almost with the mentality of an opposition party and say what it is we want to do at the next stage, what it is we think is wrong that still needs to be put right."

It is notoriously difficult to get the Chancellor to talk about his personal life. But I was curious to know what stirred his passions. Why, for instance, did this privately educated son of Conservative-voting parents end up as a Labour politician? What attracted him to the cause? "In a nutshell, it was fairness," he says. "I think it's unfair that some people, through no fault of their own, are held back and can never do the best they're capable of."

I ask if he can remember a particular moment, but he says it was just something that grew on him. He joined in 1977, during one of the previous dark times for the party - two years before a Tory landslide.

Picture: Archives Charmet / Bridgeman Images
Show Hide image

What Marx got right

...and what he got wrong.

1. You’re probably a capitalist – among other things

Are you a capitalist? The first question to ask is: do you own shares? Even if you don’t own any directly (about half of Americans do but the proportion is far lower in most other countries) you may have a pension that is at least partly invested in the stock market; or you’ll have savings in a bank.

So you have some financial wealth: that is, you own capital. Equally, you are probably also a worker, or are dependent directly or indirectly on a worker’s salary; and you’re a consumer. Unless you live in an autonomous, self-sufficient commune – very unusual – you are likely to be a full participant in the capitalist system.

We interact with capitalism in multiple ways, by no means all economic. And this accounts for the conflicted relationship that most of us (including me) have with capitalism. Typically, we neither love it nor hate it, but we definitely live it.

2. Property rights are fundamental to capitalism . . . but they are not absolute

If owning something means having the right to do what you want with it, property rights are rarely unconstrained. I am free to buy any car I want – so long as it meets European pollution standards and is legally insured; and I can drive it anywhere I want, at least on public roads, as long as I have a driver’s licence and keep to the speed limit. If I no longer want the car, I can’t just dump it: I have to dispose of it in an approved manner. It’s mine, not yours or the state’s, and the state will protect my rights over it. But – generally for good reason – how I can use it is quite tightly constrained.

This web of rules and constraints, which both defines and restricts property rights, is characteristic of a complex economy and society. Most capitalist societies attempt to resolve these tensions in part by imposing restrictions, constitutional or political, on arbitrary or confiscatory actions by governments that “interfere” with property rights. But the idea that property rights are absolute is not philosophically or practically coherent in a modern society.

3. What Marx got right about capitalism

Marx had two fundamental insights. The first was the importance of economic forces in shaping human society. For Marx, it was the “mode of production” – how labour and capital were combined, and under what rules – that explained more or less everything about society, from politics to culture. So, as modes of production change, so too does society. And he correctly concluded that industrialisation and capitalism would lead to profound changes in the nature of society, affecting everything from the political system to morality.

The second insight was the dynamic nature of capitalism in its own right. Marx understood that capitalism could not be static: given the pursuit of profit in a competitive economy, there would be constant pressure to increase the capital stock and improve productivity. This in turn would lead to labour-saving, or capital-intensive, technological change.

Putting these two insights together gives a picture of capitalism as a radical force. Such are its own internal dynamics that the economy is constantly evolving, and this in turn results in changes in the wider society.

4. And what he got wrong . . .

Though Marx was correct that competition would lead the owners of capital to invest in productivity-enhancing and labour-saving machinery, he was wrong that this would lead to wages being driven down to subsistence level, as had largely been the case under feudalism. Classical economics, which argued that new, higher-productivity jobs would emerge, and that workers would see their wages rise more or less in line with productivity, got this one right. And so, in turn, Marx’s most important prediction – that an inevitable conflict between workers and capitalists would lead ultimately to the victory of the former and the end of capitalism – was wrong.

Marx was right that as the number of industrial workers rose, they would demand their share of the wealth; and that, in contrast to the situation under feudalism, their number and geographical concentration in factories and cities would make it impossible to deny these demands indefinitely. But thanks to increased productivity, workers’ demands in most advanced capitalist economies could be satisfied without the system collapsing. So far, it seems that increased productivity, increased wages and increased consumption go hand in hand, not only in individual countries but worldwide.

5. All societies are unequal. But some are more unequal than others

In the late 19th and early 20th centuries, an increasing proportion of an economy’s output was captured by a small class of capitalists who owned and controlled the means of production. Not only did this trend stop in the 20th century, it was sharply reversed. Inherited fortunes, often dating back to the pre-industrial era, were eroded by taxes and inflation, and some were destroyed by the Great Depression. Most of all, after the Second World War the welfare state redistributed income and wealth within the framework of a capitalist economy.

Inequality rose again after the mid-1970s. Under Margaret Thatcher and Ronald Reagan, the welfare state was cut back. Tax and social security systems became less progressive. Deregulation, the decline of heavy industry and reduction of trade union power increased the wage differential between workers. Globally the chief story of the past quarter-century has been the rise of the “middle class”: people in emerging economies who have incomes of up to $5,000 a year. But at the same time lower-income groups in richer countries have done badly.

Should we now worry about inequality within countries, or within the world as a whole? And how much does an increasing concentration of income and wealth among a small number of people – and the consequent distortions of the political system – matter when set against the rapid ­income growth for large numbers of people in the emerging economies?

Growing inequality is not an inevitable consequence of capitalism. But, unchecked, it could do severe economic damage. The question is whether our political systems, national and global, are up to the challenge.

6. China’s road to capitalism is unique

The day after Margaret Thatcher died, I said on Radio 4’s Today programme: “In 1979, a quarter of a century ago, a politician came to power with a radical agenda of market-oriented reform; a plan to reduce state control and release the country’s pent-up economic dynamism. That changed the world, and we’re still feeling the impact. His name, of course, was Deng Xiaoping.”

The transition from state to market in China kick-started the move towards truly globalised capitalism. But the Chinese road to capitalism has been unique. First agriculture was liberalised, then entrepreneurs were allowed to set up small businesses, while at the same time state-owned enterprises reduced their workforces; yet there has been no free-for-all, either for labour or for capital. The movement of workers from rural to urban areas, and from large, unproductive, state-owned enterprises to more productive private businesses, though vast, has been controlled. Access to capital still remains largely under state control. Moreover, though its programme is not exactly “Keynesian”, China has used all the tools of macroeconomic management to keep growth high and relatively stable.

That means China is still far from a “normal” capitalist economy. The two main engines of growth have been investment and the movement of labour from the countryside to the cities. This in itself was enough, because China had so much catching-up to do. However, if the Chinese are to close the huge gap between themselves and the advanced economies, more growth will need to come from innovation and technological progress. No one doubts that China has the human resources to deliver this, but its system will have to change.

7. How much is enough?

The human instinct to improve our material position is deeply rooted: control over resources, especially food and shelter, made early human beings more able to reproduce. That is intrinsic to capitalism; the desire to acquire income and wealth motivates individuals to work, save, invent and invest. As Adam Smith showed, this benefits us all. But if we can produce more than enough for everybody, what will motivate people? Growth would stop. Not that this would necessarily be a bad thing: yet our economy and society would be very different.

Although we are at least twice as rich as we were half a century ago, the urge to consume more seems no less strong. Relative incomes matter. We compare ourselves not to our impoverished ancestors but to other people in similar situations: we strive to “keep up with the Joneses”. The Daily Telegraph once described a London couple earning £190,000 per year (in the top 0.1 per cent of world income) as follows: “The pair are worried about becoming financially broken as the sheer cost of middle-class life in London means they are stretched to the brink.” Talk about First World problems.

Is there any limit? Those who don’t like the excesses of consumerism might hope that as our material needs are satisfied, we will worry less about keeping up with the Joneses and more about our satisfaction and enjoyment of non-material things. It is equally possible, of course, that we’ll just spend more time keeping up with the Kardashians instead . . .

8. No more boom and bust

Are financial crises and their economic consequences part of the natural (capitalist) order of things? Politicians and economists prefer to think otherwise. No longer does anyone believe that “light-touch” regulation of the banking sector is enough. New rules have been introduced, designed to restrict leverage and ensure that failure in one or two financial institutions does not lead to systemic failure. Many would prefer a more wholesale approach to reining in the financial system; this would have gained the approval of Keynes, who thought that while finance was necessary, its role in capitalism should be strictly limited.

But maybe there is a more fundamental problem: that recurrent crises are baked into the system. The “financial instability” hypothesis says that the more governments and regulators stabilise the system, the more this will breed overconfidence, leading to more debt and higher leverage. And sooner or later the music stops. If that is the case, then financial capitalism plus human nature equals inevitable financial crises; and we should make sure that we have better contingency plans next time round.

9. Will robots take our jobs?

With increasing mechanisation (from factories to supermarket checkouts) and computerisation (from call centres to tax returns), is it becoming difficult for human beings to make or produce anything at less cost than a machine can?

Not yet – more Britons have jobs than at any other point in history. That we can produce more food and manufactured products with fewer people means that we are richer overall, leaving us to do other things, from economic research to performance art to professional football.

However, the big worry is that automation could shift the balance of power between capital and labour in favour of the former. Workers would still work; but many or most would be in relatively low-value, peripheral jobs, not central to the functioning of the economy and not particularly well paid. Either the distribution of income and wealth would widen further, or society would rely more on welfare payments and charity to reduce unacceptable disparities between the top and the bottom.

That is a dismal prospect. Yet these broader economic forces pushing against the interests of workers will not, on their own, determine the course of history. The Luddites were doomed to fail; but their successors – trade unionists who sought to improve working conditions and Chartists who demanded the vote so that they could restructure the economy and the state – mostly succeeded. The test will be whether our political and social institutions are up to the challenge.

10. What’s the alternative?

There is no viable economic alternative to capitalism at the moment but that does not mean one won’t emerge. It is economics that determines the nature of our society, and we are at the beginning of a profound set of economic changes, based on three critical developments.

Physical human input into production will become increasingly rare as robots take over. Thanks to advances in computing power and artificial intelligence, much of the analytic work that we now do in the workplace will be carried out by machines. And an increasing ability to manipulate our own genes will extend our lifespan and allow us to determine our offspring’s characteristics.

Control over “software” – information, data, and how it is stored, processed and manipulated – will be more important than control over physical capital, buildings and machines. The defining characteristic of the economy and society will be how that software is produced, owned and commanded: by the state, by individuals, by corporations, or in some way as yet undefined.

These developments will allow us, if we choose, to end poverty and expand our horizons, both materially and intellectually. But they could also lead to growing inequality, with the levers of the new economy controlled by a corporate and moneyed elite. As an optimist, I hope for the former. Yet just as it wasn’t the “free market” or individual capitalists who freed the slaves, gave votes to women and created the welfare state, it will be the collective efforts of us all that will enable humanity to turn economic advances into social progress. 

Jonathan Portes's most recent book is “50 Ideas You Really Need to Know: Capitalism” (Quercus)

Jonathan Portes is senior fellow The UK in a Changing Europe and Professor of Economics and Public Policy, King’s College London.

This article first appeared in the 22 June 2017 issue of the New Statesman, The zombie PM

0800 7318496