Why the left is losing the crisis

The financial crash has not turned out to be a social-democratic moment as some expected. In Britain

The coalition government has been in power for six months. It has attracted endless speculation but, as Churchill said of Russia, it remains "a riddle wrapped in a mystery inside an enigma". The last election was a watershed of some kind, but no one knows where the path ahead now leads. By the narrowest of margins, the Labour Party has elected an accomplished and steely new leader, on a ticket of change, but it remains to be seen if he can wean his party away from the tribalism and statism that have cursed it for 90 years. For the moment, the Liberal Democrats are locked in to the coalition, but the social-liberal tradition represented by Simon Hughes and Charles Kennedy may yet prove strong enough to break the lock. We know what the coalition's ferocious Spending Review contained, but we don't know if the projected cuts will actually be made. Despite his macho rhetoric, George Osborne has left himself much more wriggle room for downward revisions than many assume. My hunch is that there will be many such revisions before the end of this parliament. Above all, we do not know what project the coalition hopes to pursue, or even if it has a project beyond staying in power.

Yet three things are reasonably clear. The first is that ministers have so far shirked the hard task of bringing David Cameron's enticing ­vision of a "big society" down to earth. If the term means anything, it means diversity, pluralism, a freer rein for the "little platoons" once hymned by Edmund Burke and a correspondingly more modest state. At first, the coalition seemed to be moving in that direction. It hoped - or said that it hoped - for a more consensual, open-ended and grown-up way of doing politics than what we have been used to. It has delivered something, but not enough. The coalition partners seek consensus between themselves, but they treat the opposition in the old, adversarial way. The taunting and shouting in the Commons chamber is as tiresome as it used to be. True, the chief fault lies with Labour. To take just one example, its charge that the coalition is bent on destroying the welfare state is risible. Osborne hopes to bring the ratio of public spending to GDP back to what it was before the crash - not exactly Armageddon. Meanwhile, the government parties have made no attempt to meet the opposition halfway on the central issue of deficit reduction or to involve civil society and the House of Commons in the search for solutions.

Imagine a government that really wanted a new kind of politics, fit for the big society of Cameron's dreams. How would it have approached the biggest hole in the public finances since the end of the Second World War? Surely it would have encouraged searching select committee inquiries, preferably in public, into its macroeconomic thinking and the options that implied before completing the Spending Review. Leading supporters and opponents of the government's approach would have been cross-examined; non-governmental organisations, local authorities, industrialists and trade union leaders would have given evidence; parliament and the public would have had a chance to appraise their arguments.

Nothing of the sort took place. The Spending Review was preceded not by open discussion in a non-partisan setting, but by the secretive arm-twisting and shady horse-trading that are the hallmarks of the old politics; the deliberate opacity of its small print is reminiscent of Gordon Brown at his worst. And that is only one example of the hole at the heart of Cameron's dream.

For the Liberal Democrats, the projected referendum on the Alternative Vote (AV) is the harbinger of and a vehicle for a new politics. As a hardened supporter of proportional representation, I hope that the referendum goes through and that AV is carried. Yet the notion that AV would create a vibrant and pluralistic democracy is poppycock. It would be a great improvement on the present system: at least, no more MPs would be returned on minority votes. Besides, a change to the electoral system would probably make further changes easier to achieve. But it is not proportional representation and it may produce less proportional outcomes than the present system. The Liberal Democrats would probably (but not certainly) do better than they do now.

That leads on to the second point of clarity. Despite the rhetoric beloved of Cam­eron and echoed less and less plausibly by Nick Clegg, this is a government spawned by fear: indeed, by a wave of fear that has washed across Europe and lapped the shores of the United States. As everyone knows, the Liberal Democrats campaigned against the Conservative line on deficit reduction during the election. After the election, they changed their minds. Had they remained true to their election promises, the coalition would not exist. So why the volte-face? There are two possible justifications for it - first, that a swollen, wasteful and oppressive public sector is crowding out a lean and hungry private sector, eager to expand employment and increase investment; second, that it was essential to promise drastic spending cuts to fend off a Greek-style sovereign debt crisis.

The first is low-grade, saloon-bar economics: a throwback to the "Treasury view" of the 1920s that Keynes demolished. As he showed, crowding out cannot take place when private demand is flagging. So, far from crowding out the private sector, public spending kept it alive in the immediate aftermath of the crash and deserves the credit for its growth in the first three quarters of this year. The Conservative Party is not exactly famed for economic literacy and it may well be that its spokesmen believed what they said during the election. But it is inconceivable that Chris Huhne and Vince Cable, two of the most economically literate members of the Commons, believed - or still believe - anything of the sort.

Unlike the crowding-out theory, fear of a sovereign debt crisis was not self-evidently absurd. Markets are notoriously fickle and foolish beasts and it is conceivable that adverse market sentiment might have plunged Britain into a Greek-style crisis had the British government seemed unwilling to make economies. Unfortunately for the fear-mongers, however, the choice was not between Osborne's cuts and no cuts. It was between Osborne's cuts and Alistair Darling's cuts. To make the confidence argument stick, the coalition has to show that Darling's cuts would have precipitated the confidence crisis from which Osborne's bold, brave cuts have saved us. It has shown no such thing. On the contrary, it has insisted ad nauseam that Labour was planning cuts, too (which, of course, it was), and that the difference between its plans and Osborne's is not all that great (which is also true). But that means Darling's cuts sufficed.

Quite apart from that, the coalition has sedulously ignored the huge differences between the volume and nature of Greek and British indebtedness before the Greek crisis broke. Britain's public debt is long-term, not short-term; and the creditors are mostly British. The kindest interpretation of the Liberal Democrats' volte-face is that they succumbed to panic along with their coalition partners.

If they were alone, that would be the end of the story. Sadly, they are not. The British experience is part of a wider European, indeed North Atlantic, experience. In the immediate aftermath of the crash of 2008-2009, it looked as if the neoliberal hegemony of the preceding 30 years was over. Keynes had come in from the cold; government walked tall; space had opened up for collective action, liberal social democracy and a revitalised public domain. That, it seemed, was the meaning of Barack Obama's victory in the US in 2008 and of Gordon Brown's glory months as global economic saviour.

We know better now. All over Europe, "fiscal consolidation" - code for spending cuts - is the order of the day. The neoliberal hegemony of the recent past was not destroyed, only dented. This is not quite true in America - at least, not yet. But only the very brave or foolish would bet much on continued economic literacy in Washington in the years ahead. In truth, most of the developed world seems determined to march back to the deflation of the 1930s.

The procession is not confined, as left-wing commentators tell themselves, to private sector elites and their hangers-on in the media, the prosperous middle class and right-of-­centre think tanks. Everywhere, and not just in Britain, liberal social democracy is in retreat. In Sweden, the Social Democratic Party vote share is back to where it was in 1914. In Italy, ­Silvio Berlusconi still commands the political stage, despite repeated scandals and gro­tesque vulgarity. In 2009, the German Social Democrats achieved their worst result since the foundation of the Federal Republic. In France, the Socialists are in demoralised disarray. In Spain, the odds are that José Luis Rodríguez Zapatero will lose the next election. In the United States, the only question is how much damage the Republican resurgence will do to the Obama administration.

As the social costs of the crash make themselves felt, the voters of the developed world are turning right, not left. True, fiscal consolidation - or, rather, the social consequences of fiscal consolidation - has provoked angry and sometimes violent protests all over Europe. But the protests testify to the weakness, not the strength, of liberal social democracy. They are safety valves for the bitterness and despair of the defeated, kicking against the untamed ­capitalism of our time, not harbingers of a left-of-centre renaissance. Clear, too, are the stark implications for what used to be called the left.

The untamed capitalism that swept the world in the 1980s and 1990s was not forced upon reluctant societies by sinister vested interests and hidden persuaders. It was the work of freely elected governments, backed, for most of the time, by those who had elected them. It was resisted by society's losers, but these were a minority. Faced with a choice between liberal social democracy and an increasingly confident and aggressive right, the winning majority opted for the latter, not because anyone forced them to, but because the right had a better story to tell. For a while, Tony Blair bucked the trend, but he did so by stealing the right's clothes. He was right-wing in economics and left-wing in culture. In a society suspicious of established authority and yearning for personal authenticity and self-fulfilment, and at a time when the Conservatives seemed sunk in homophobia, xenophobia and Europhobia, it was a winning formula. But once the Conservatives had successfully repackaged Blairism for their own purposes, under a leader who was patently more comfortable with the culture of authenticity and self-fulfilment than Blair's buttoned-up successor, the New Labour game was up.

The great question for the future is whether the liberal social democrats of today can learn the lessons not just of their recent setbacks, but of the wider story I have tried to tell. It will not be easy.

The ancient Marxist myth of false consciousness dies hard on the left. It says that, if hitherto left voters swing to the right, it is because they have been led astray by racists or demagogues, or because they have been seduced by false promises, or both: in short, because they don't understand what their true interests are. Unfortunately for its purveyors, the myth does not stand up. There was plenty of false consciousness around, but its chief repositories were the leaders of the social-democratic left, not the voters who deserted them. The deserting voters sensed that the statist paradigm in which their erstwhile leaders were trapped was a busted flush: that, as the American political economist Charles Lindblom once put it, the central state consists of "strong thumbs and no fingers" and those strong thumbs were no longer enough to induce lasting change.

New Labour's sad fate is a classic illustration. It began well. The Human Rights Act, the Belfast Agreement, devolution in Scotland and Wales and, to a lesser extent, the creation of the London mayoralty, all took power away from the central state, implying a politics of power-­sharing in place of the power-hogging that had been part of the British social-democratic tradition for as long as anyone could remember. But power-sharing did not last.

In its second and third terms, New Labour turned back on its tracks. Ministers and officials succumbed to a culture of mistrust and the fetish for targets and audits that reflected it. ­Initiative after initiative was designed to force centrally determined "reforms" on the harassed professionals who knew more about the issues involved than did the reformers.

The strong thumbs of the state remodelled intermediate institutions from hospitals, to police forces, to schools, to local authorities, to universities; and curbed civil liberties in the name of the so-called war on terror. The results were bizarre. New sites for civic engagement emerged in the non-English periphery of the kingdom, embedded in diverse new poli­tical cultures. England suffered relentless centra­lisation at the hands of an increasingly hubristic state. And - irony of ironies - the ­results were nugatory.

At this point, the big society comes back into the story. At the moment, it is little more than an attractive slogan. Most Labour politicians and Labour-friendly commentators have either ignored it or rubbished it as camouflage for a return to the bad old days of the dreaded Margaret Thatcher. Less partisan commentators have generally dismissed it as rhetorical flim-flam, with no practical meaning. The truth is both far more complicated and far more interesting. Despite its Conservative provenance, the social vision it implies is not uniquely Conservative - with either a big or a small "C". It certainly chimes with a well-worn conservative tradition, going back to Macmillan, Churchill and Disraeli. But it also chimes with the social liberalism of the later John Stuart Mill - and with the non- or anti-statist socialist tradition of G D H Cole, the syndicalists, William Morris and Robert Owen.

To have any hope of recapturing the initiative, liberal social democracy must drink again from that spring. Ed Miliband, over to you.

David Marquand's most recent book, “Britain Since 1918", is published by Phoenix (£14.99).