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Loosening Labour’s golden straitjacket

Economic crisis presents opportunities as well as stark threats for social democracy, writes the Oxf

Like the early Christians, the founding fathers of the Labour Party were sustained by their faith. They believed that a society based on individual self-interest could be transformed into one based on human fellowship.

Bruce Glasier, a contemporary of Keir Hardie, declared that socialism was not about getting but giving. Such utopianism could not survive the harsh realities of government. The Attlee administration, Lab­our’s first majority government in 1945, came to appreciate that, for the foreseeable future, it would have to administer a private-enterprise economy. Labour became, in practice, a social-democratic rather than a socialist party. Yet, because it was unwilling to face up to reality, it remained, from the time of the demise of the Attlee government until the 1990s, directionless, despite being or perhaps because it was able to form governments in the 1960s and 1970s.

Yet social democracy has been the most successful ideology of the 20th century. What, after all, accounts for the great stability of Europe since 1945 and its high rates of economic growth, compared with the turbulence and crises of the interwar years? The basis of the postwar settlement in western Europe, whether administered by Christian Democrats such as Konrad Adenauer in Germany, the Gaullists in France, or Conservatives such as Winston Churchill and Harold Macmillan in Britain, was social democracy, a philosophy which sought to reconcile the competing needs of the people and the market. Yet the success of social democracy was hardly noticed, because its main tenets – a high level of state-provided welfare with taxation to match in an otherwise private-enterprise economy – seemed, for many years, to have been absorbed by all of the mainstream political parties in Europe.

The true hero of postwar politics in Europe is not John Maynard Keynes, and certainly not Friedrich von Hayek, but the forgotten German revisionist Eduard Bernstein. It was Bernstein who formulated modern social democracy, a type of socialism which accepted the market, but insisted that the state had an important role to play in ensuring social justice. Markets where possible, the state where necessary: this has been the slogan of modern social democrats. It was the view that social and economic processes were not spontaneous – but could be controlled by the state – which served to differentiate social democrats from their ideological opponents. In the words of the American political scientist Samuel Huntington, social democracy sought to recreate “through political means the social unity which modernisation has destroyed”.

Over the past 30 years, however, this philo­sophy has been in eclipse. It was replaced by another philosophy, that of neoliberalism. Not only Keynes, but also Bernstein, found himself eclipsed by Hayek and Milton Friedman. In the neoliberal view, any attempt by governments to influence the natural processes of the market would be counterproductive and doomed to failure. Within a basic framework of law and morality, the economy should be left to run itself. People should be allowed to make the most of their capacities and resources, as well as their luck, and should no longer be subject to the overall direction of the state. The social-democratic philosophy of the primacy of the state came to be replaced by the neoliberal philosophy of the primacy of the market.

In Britain, it is possible to pinpoint with some accuracy the moment at which social democracy came to be eclipsed. It happened after the wave of public-sector strikes – the so-called Winter of Discontent – of 1978-79. For these strikes, which kept the dead unburied in Liverpool, sent cancer patients home in Birmingham and left rubbish in the streets in London, could hardly be reconciled with the social and communal solidarity on which the postwar settlement was based.

In 1979, James Callaghan’s Labour government, which had presided helplessly over the Winter of Discontent, seemed to be facing electoral defeat. At one point, however, the polls improved for Labour and it looked as if the party might be in with a chance after all. No, said Callaghan: “There are times, perhaps once every 30 years, when there is a sea change in politics. It then does not matter what you say or do. There is a shift in what the public wants and what it approves of. I suspect there is now such a sea change – and it is for Mrs Thatcher.” And so it proved. Margaret Thatcher was to remain prime minister for more than 11 years; the Conservatives were in power for 18 – the longest period of continuous one-party rule in Britain since the Napoleonic Wars; and Labour was unable to return to power until it had transformed itself into New Labour.

All over the world, social democracy was on the defensive. It was not that social democrats were not in government, but they could only retain power, as in Australia, France and New Zealand, by adapting themselves to the philosophy of the market. Right-wing parties sometimes lost elections, but everywhere they seemed to be winning the argument. “The era of big government is over,” Bill Clinton told Congress in 1996. In 1999 the French president, Jacques Chirac, referred to Tony Blair as “a modern socialist. That means he is five miles to the right of me.” “And I’m proud of it,” responded Blair.

Blair accommodated his party to the market philosophy and to globalisation, which the American commentator Thomas Friedman called a “golden straitjacket” for the left. The success of postwar social democracy seemed to have depended on an equilibrium between production and redistribution, regulated by the state. With globalisation, that equilibrium appeared to have been broken, because capital and production had moved beyond national borders, and so beyond the remit of state redistribution. Pure socialism in one country seemed impossible, as François Mitterrand discovered after 1981.

Critics argued that New Labour accepted too much of Thatcherism. Yet Tony Blair and Gordon Brown succeeded in rejuvenating social democracy while, in a sense, appearing not to do so. From 2001, there was a huge increase in public expenditure, especially on the National Health Service. This led to the first increase in the public-sector share of gross domestic product since the 1970s, the last period of Labour rule. It had been made possible by Brown’s prudential economic policies from 1997 to 2001, which had gained the confidence of the markets, and therefore allowed expansion of the public services to occur safely.

The increase in public expenditure constituted a sharp break with the Thatcher and Major governments, and for a time it even transformed the attitude of the Conservative Party to public services. Until the recession, David Cameron, the Conservative leader, insisted that his party would follow a “prudent” policy in government. By this, he meant it would ensure that the public services were fully protected before embarking on any programme of tax cuts. He now seems to have abandoned this position, accusing Labour of failing to repair the roof while the sun was shining. But he has yet to make clear what public expenditure cuts would be on the agenda for a Conservative government; as recently as last spring, George Osborne, the shadow chancellor, was calling for more financial deregulation and a smaller role for the state.

The recession is forcing the parties to confront stark choices, and it may be that we are facing another sea change in politics: the recession and the credit crunch could well give birth to a new social-democratic moment comparable to that of the early postwar years. For while, in the neoliberal era, governments had to come to terms with markets, they now have to come to terms with the failure of markets. Our economic problems are the product of a long reign of insufficiently regulated markets, of a regime that produced the housing boom and excess lending by banks and other financial institutions. Governments, therefore, can no longer withdraw from markets, but will have to engage with them more closely. Barack Obama, the nearest America has produced to a social democrat, struck a chord with precisely this message. His chief economic adviser, Larry Summers, now declares that the pendulum “should swing towards an enhanced role for government in saving the market system from its excesses and inadequacies”. Bankers today are more dependent on the state than trade unionists ever were.

Yet governments will also have to engage with society more intensely than they did during the years when the market reigned supreme. In times of economic insecurity, people will insist on a firm safety net of social welfare. They will not be prepared to risk all when markets move. The doctrine that we should all help ourselves and rely on the bankers to make us rich has less resonance now than it did during the neoliberal era. We shall return instead to the philosophy of the immediate postwar years: that the doctrine of self-interest needs to be controlled in the interests of society as a whole, and that a country does better when all work together than when it relies on doctrines of competitive individualism.

The fundamental theme of social democracy is that the processes of economic and social change can be controlled by government. The relevance of this philosophy is becoming newly apparent as the recession bites. Combating the recession, therefore, will depend to no small degree on whether the social-democratic leaders of western Europe can breathe life into the dry bones of what seemed, until recently, a dead doctrine.

In Britain, social democrats are hindered because they have been divided since the end of the First World War, when Labour replaced the Liberals as the main party of the left. Social democrats are divided in many European countries as well: but that is a luxury they can afford, under proportional representation. With first past the post the consequences are ruinous.

In Britain, the divisions on the left have helped encourage Conservative hegemony. From 1914 to 1964, there was just one government of the left with a comfortable overall majority, and this even though there probably was a progressive majority in Britain for much of that period, a majority that would have adopted more imaginative policies to deal with unemployment and the threat from dictators. The divisions among social democrats deepened with the breakaway of the Social Democratic Party in 1981, which served to strengthen the political centre at the expense of the Labour Party.

The leading figures who have done most for the Labour Party – Ernest Bevin, Hugh Gaitskell, Tony Blair and Gordon Brown – have done so by forcing it to confront its shibboleths, by telling the party that it cannot afford to retreat to its comfort zone. The same courage is needed today if the recession in Britain is not to inaugurate another long period of Conservative hegemony.

Vernon Bogdanor is professor of government at Oxford University. His book “The New British Constitution” will be published later this year by Allen Lane

This article first appeared in the 23 March 2009 issue of the New Statesman, Campbell guest edit

Jeremy Corbyn. Photo: Getty
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Lexit: the EU is a neoliberal project, so let's do something different when we leave it

Brexit affords the British left a historic opportunity for a decisive break with EU market liberalism.

The Brexit vote to leave the European Union has many parents, but "Lexit" – the argument for exiting the EU from the left – remains an orphan. A third of Labour voters backed Leave, but they did so without any significant leadership from the Labour Party. Left-of-centre votes proved decisive in determining the outcome of a referendum that was otherwise framed, shaped, and presented almost exclusively by the right. A proper left discussion of the issues has been, if not entirely absent, then decidedly marginal – part of a more general malaise when it comes to developing left alternatives that has begun to be corrected only recently, under Jeremy Corbyn and John McDonnell.

Ceding Brexit to the right was very nearly the most serious strategic mistake by the British left since the ‘70s. Under successive leaders Labour became so incorporated into the ideology of Europeanism as to preclude any clear-eyed critical analysis of the actually existing EU as a regulatory and trade regime pursuing deep economic integration. The same political journey that carried Labour into its technocratic embrace of the EU also resulted in the abandonment of any form of distinctive economics separate from the orthodoxies of market liberalism.

It’s been astounding to witness so many left-wingers, in meltdown over Brexit, resort to parroting liberal economics. Thus we hear that factor mobility isn’t about labour arbitrage, that public services aren’t under pressure, that we must prioritise foreign direct investment and trade. It’s little wonder Labour became so detached from its base. Such claims do not match the lived experience of ordinary people in regions of the country devastated by deindustrialisation and disinvestment.

Nor should concerns about wage stagnation and bargaining power be met with finger-wagging accusations of racism, as if the manner in which capitalism pits workers against each other hasn’t long been understood. Instead, we should be offering real solutions – including a willingness to rethink capital mobility and trade. This places us in direct conflict with the constitutionalised neoliberalism of the EU.

Only the political savvy of the leadership has enabled Labour to recover from its disastrous positioning post-referendum. Incredibly, what seemed an unbeatable electoral bloc around Theresa May has been deftly prized apart in the course of an extraordinary General Election campaign. To consolidate the political project they have initiated, Corbyn and McDonnell must now follow through with a truly radical economic programme. The place to look for inspiration is precisely the range of instruments and policy options discouraged or outright forbidden by the EU.

A neoliberal project

The fact that right-wing arguments for Leave predominated during the referendum says far more about today’s left than it does about the European Union. There has been a great deal of myth-making concerning the latter –much of it funded, directly or indirectly, by the EU itself.

From its inception, the EU has been a top-down project driven by political and administrative elites, "a protected sphere", in the judgment of the late Peter Mair, "in which policy-making can evade the constraints imposed by representative democracy". To complain about the EU’s "democratic deficit" is to have misunderstood its purpose. The main thrust of European economic policy has been to extend and deepen the market through liberalisation, privatisation, and flexiblisation, subordinating employment and social protection to goals of low inflation, debt reduction, and increased competitiveness.

Prospects for Keynesian reflationary policies, or even for pan-European economic planning – never great – soon gave way to more Hayekian conceptions. Hayek’s original insight, in The Economic Conditions of Interstate Federalism, was that free movement of capital, goods, and labour – a "single market" – among a federation of nations would severely and necessarily restrict the economic policy space available to individual members. Pro-European socialists, whose aim had been to acquire new supranational options for the regulation of capital, found themselves surrendering the tools they already possessed at home. The national road to socialism, or even to social democracy, was closed.

The direction of travel has been singular and unrelenting. To take one example, workers’ rights – a supposed EU strength – are steadily being eroded, as can be seen in landmark judgments by the European Court of Justice (ECJ) in the Viking and Laval cases, among others. In both instances, workers attempting to strike in protest at plans to replace workers from one EU country with lower-wage workers from another, were told their right to strike could not infringe upon the "four freedoms" – free movement of capital, labour, goods, and services – established by the treaties.

More broadly, on trade, financial regulation, state aid, government purchasing, public service delivery, and more, any attempt to create a different kind of economy from inside the EU has largely been forestalled by competition policy or single market regulation.

A new political economy

Given that the UK will soon be escaping the EU, what opportunities might this afford? Three policy directions immediately stand out: public ownership, industrial strategy, and procurement. In each case, EU regulation previously stood in the way of promising left strategies. In each case, the political and economic returns from bold departures from neoliberal orthodoxy after Brexit could be substantial.

While not banned outright by EU law, public ownership is severely discouraged and disadvantaged by it. ECJ interpretation of Article 106 of the Treaty on the Functioning of the European Union (TFEU) has steadily eroded public ownership options. "The ECJ", argues law professor Danny Nicol, "appears to have constructed a one-way street in favour of private-sector provision: nationalised services are prima facie suspect and must be analysed for their necessity". Sure enough, the EU has been a significant driver of privatisation, functioning like a ratchet. It’s much easier for a member state to pursue the liberalisation of sectors than to secure their (re)nationalisation. Article 59 (TFEU) specifically allows the European Council and Parliament to liberalise services. Since the ‘80s, there have been single market programmes in energy, transport, postal services, telecommunications, education, and health.

Britain has long been an extreme outlier on privatisation, responsible for 40 per cent of the total assets privatised across the OECD between 1980 and 1996. Today, however, increasing inequality, poverty, environmental degradation and the general sense of an impoverished public sphere are leading to growing calls for renewed public ownership (albeit in new, more democratic forms). Soon to be free of EU constraints, it’s time to explore an expanded and fundamentally reimagined UK public sector.

Next, Britain’s industrial production has been virtually flat since the late 1990s, with a yawning trade deficit in industrial goods. Any serious industrial strategy to address the structural weaknesses of UK manufacturing will rely on "state aid" – the nurturing of a next generation of companies through grants, interest and tax relief, guarantees, government holdings, and the provision of goods and services on a preferential basis.

Article 107 TFEU allows for state aid only if it is compatible with the internal market and does not distort competition, laying out the specific circumstances in which it could be lawful. Whether or not state aid meets these criteria is at the sole discretion of the Commission – and courts in member states are obligated to enforce the commission’s decisions. The Commission has adopted an approach that considers, among other things, the existence of market failure, the effectiveness of other options, and the impact on the market and competition, thereby allowing state aid only in exceptional circumstances.

For many parts of the UK, the challenges of industrial decline remain starkly present – entire communities are thrown on the scrap heap, with all the associated capital and carbon costs and wasted lives. It’s high time the left returned to the possibilities inherent in a proactive industrial strategy. A true community-sustaining industrial strategy would consist of the deliberate direction of capital to sectors, localities, and regions, so as to balance out market trends and prevent communities from falling into decay, while also ensuring the investment in research and development necessary to maintain a highly productive economy. Policy, in this vision, would function to re-deploy infrastructure, production facilities, and workers left unemployed because of a shutdown or increased automation.

In some cases, this might mean assistance to workers or localities to buy up facilities and keep them running under worker or community ownership. In other cases it might involve re-training workers for new skills and re-fitting facilities. A regional approach might help launch new enterprises that would eventually be spun off as worker or local community-owned firms, supporting the development of strong and vibrant network economies, perhaps on the basis of a Green New Deal. All of this will be possible post-Brexit, under a Corbyn government.

Lastly, there is procurement. Under EU law, explicitly linking public procurement to local entities or social needs is difficult. The ECJ has ruled that, even if there is no specific legislation, procurement activity must "comply with the fundamental rules of the Treaty, in particular the principle of non-discrimination on grounds of nationality". This means that all procurement contracts must be open to all bidders across the EU, and public authorities must advertise contracts widely in other EU countries. In 2004, the European Parliament and Council issued two directives establishing the criteria governing such contracts: "lowest price only" and "most economically advantageous tender".

Unleashed from EU constraints, there are major opportunities for targeting large-scale public procurement to rebuild and transform communities, cities, and regions. The vision behind the celebrated Preston Model of community wealth building – inspired by the work of our own organisation, The Democracy Collaborative, in Cleveland, Ohio – leverages public procurement and the stabilising power of place-based anchor institutions (governments, hospitals, universities) to support rooted, participatory, democratic local economies built around multipliers. In this way, public funds can be made to do "double duty"; anchoring jobs and building community wealth, reversing long-term economic decline. This suggests the viability of a very different economic approach and potential for a winning political coalition, building support for a new socialist economics from the ground up.

With the prospect of a Corbyn government now tantalisingly close, it’s imperative that Labour reconciles its policy objectives in the Brexit negotiations with its plans for a radical economic transformation and redistribution of power and wealth. Only by pursuing strategies capable of re-establishing broad control over the national economy can Labour hope to manage the coming period of pain and dislocation following Brexit. Based on new institutions and approaches and the centrality of ownership and control, democracy, and participation, we should be busy assembling the tools and strategies that will allow departure from the EU to open up new political-economic horizons in Britain and bring about the profound transformation the country so desperately wants and needs.

Joe Guinan is executive director of the Next System Project at The Democracy Collaborative. Thomas M. Hanna is research director at The Democracy Collaborative.

This is an extract from a longer essay which appears in the inaugural edition of the IPPR Progressive Review.

 

 

This article first appeared in the 23 March 2009 issue of the New Statesman, Campbell guest edit