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Capitalism after coronavirus

In the latest in our new series on the consequences of the crisis, a distinguished economist makes the case for a new political settlement.

The coronavirus-triggered crisis, combining a health emergency with an economic collapse, is the biggest shock to Britain since the Second World War. Moreover, it coincides with a rare moment in British politics when both parties have a structural opportunity to reset themselves.

We should remind ourselves that only a year ago we faced the daily nightmare of Jeremy Corbyn versus Theresa May: the two worst party leaders since 1940. The transformation for the better in British politics is extraordinary. In the Labour Party, the hard left could not avoid responsibility for Labour’s crushing electoral defeat, and its ringmasters have been swept away. Not only is the party expecting change, but with his decisive leadership victory, Keir Starmer has the power to deliver it. Similarly, the Conservatives first ejected Theresa May, followed by Boris Johnson’s high-risk strategy of ousting the established order of Philip Hammond and Jeremy Hunt, which was rewarded with a decisive election victory. Both parties had been bitterly divided, and in both, the internal opposition has won an election.

The Conservatives are a few months ahead. In his victory speech, Johnson announced that his party “had to change”. By this he meant not just its policies, but its composition. The Tory party had shrunk to a small and highly unrepresentative group of people – southern, elderly, affluent – whereas the votes that delivered Johnson a large majority in the December general election came from the northern working class. Johnson and his advisers understood that new policy ideas could only be sustained if they were grounded in a party membership that was more representative of those voters.

And despite its much larger membership, the same is true of Labour; indeed, perhaps more so. Labour has largely lost connection with its former working-class heartlands: it has become a city-centric party of middle-class, public-sector workers and their teenagers. Many of its most ardent supporters are addicted to the pleasures of outrage. For a party born to represent the working class, this is disastrous. Starmer is a Londoner, representing a London constituency, and his knighthood came from working in the public sector to prosecute private evil. If he wants to, he could simply double down on what Labour has become. But bearing the name Keir, he must be drawn back to Labour’s origins, and he is pragmatic. There is only one formula that has recently enabled the leader of a European social democratic party to become the head of government: that of Mette Frederiksen in Denmark. Her message to the working class was: “You didn’t leave us, we left you. But now we’re back.”

The crisis reinforces this rare opportunity for change. Should they want to do so, either of the new party leaders could use it to announce that “this changes everything” and nobody would blanche. So far, Starmer has hit just the right note, avoiding strident aggression, and offering constructive criticism on key issues where greater energy and focus look to be needed. So where might he take the Labour Party?

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There’s a crisis, but facts don’t speak for themselves. Not because of fake news, but because of how our minds work: what we observe is turned into meaning and action through the intermediation of the prior narratives we have accepted. Communities are groups of people who communicate with each other, circulating narratives that cumulate into a collective brain that guides us in most of our decisions. Sometimes they form because people are already like-minded; in others, people become like-minded through being exposed to a common world-view. The coronavirus crisis is no exception: those who believe in the centralised state as the source of mass well-being see in the sudden need for fiscal largesse the potential for basic income. In parallel, those at the opposite end of the spectrum see it as a reason to ditch concern about “nice-to-haves”, by which they mean such inconvenient truths as climate change.

To guard against the strong tendency to interpret the crisis through a lens of understanding that inevitably reinforces existing beliefs, a good discipline is to start by asking: “In what ways have events not been consistent with what I would have predicted given my prior beliefs?” Applying this discipline, I think one awkward fact really does bear political attention and, as it happens, it is deeply rooted in both left and right. While it can doubtless be spun away into the deep grass, it is sufficiently surprising to mainstream thought that it should shift ideas: Britain is heavily over-invested in its belief in the efficacy of centralised state direction. Underpinning this belief are two fallacies. One is that the top knows what to do. It knows best, because it is staffed by those of the highest calibre and they draw on the finest expertise. The other is that central control is necessary for coordination. These sound – at least to the people to whom they are congenial – obvious. Indeed, anyone hearing them would judge them to be common sense. How could either possibly be wrong?

Repeatedly, for decades, the top of British government has done enough to disprove the first fallacy (the top knows best), and yet it persists. It does so because we are mired in the arrogant myth of British exceptionalism. It even extends to the apolitical think tanks. For example, the Education Policy Institute is an excellent team modelling itself on the world-revered Institute for Fiscal Studies. But when I asked what work it had done comparing Britain’s school system with those in Europe I hit a blank: they had never thought about it. When we do look elsewhere to confirm the myth, we turn to the US – we have the best health service in the world because it is better than in the US, we tell ourselves. But compared with a society that is so dysfunctional, it is easy to look good.

When Britain’s health outcomes are properly measured beyond the privileged zone of London and its region, its health system is not even ranked within the Western European pack – according to medical journal the Lancet, British outcomes look more like those of eastern Europe. The rest of western Europe has “the best health systems in the world”. Why don’t we learn from them? And no, it isn’t just a matter of money. Coronavirus fitted this pattern: we could have learnt from the responses in east Asia, but instead, public policy – though set by scientists – was based on a British model with assumptions about critical unknowns.

We knew enough by late January that the message from the models should have been that we would need much better data on key parameters before they could predict anything. Pending that we should have been prudent – social distancing and screening at airports – but vitally, we should have gathered the data. For that we didn’t even need to wait for mass testing. We could have gathered it very quickly by drawing a random sample of the population, which the pollsters could have done in days, and then repeatedly conducting tests. But we didn’t: key people were over-convinced that “they knew the model”, and that the model knew what was happening. We belatedly started that sample in late April. Indeed, the single most critical failure has been the lack of mass testing. The minor part of the explanation is this overconfidence in a model. But the major part takes us to that second myth, that central control is needed for coordination. How could that one be wrong?

The failure to scale up testing for coronavirus has one primary cause: we have one national testing centre, controlled by Public Health England, and its instincts are to preserve that monopoly. This is supposedly justified by “the science”, but actually it is an instance of motivated reasoning: people persuade themselves of what is convenient for them. Its scientists wanted to develop the perfect test and, to do that, wanted to block all other organisations from either developing tests or even conducting them.

Yet Britain has a superb network of universities with departments fully capable of both – they wanted to do it and were repeatedly denied permission. They still are. The embarrassing contrast is with Germany: the reason why it was able to scale up so fast was that it doesn’t have a centralised testing authority and so there was no entity trying to hang on to its monopoly. We hear a lot about the Dunkirk spirit, by which we seem to mean “we’re all in this together”. But the real lesson of Dunkirk was that monopoly centralised state provision didn’t even work when it came to the vital task of rescuing our army from French beaches. Only when, in desperation, Churchill devolved the task to volunteers was the army saved.

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Whitehall’s appetite for centralised control is enduring and considerable. And in one category of activity it isn’t wrong. Network activities, such as transport planning, need to be joined up. Even then, most of that joining-up is local or regional, rather than national: planning Manchester’s bus system from London is not only unnecessary, it would be awful. Other times national-level planning can make sense: the electricity grid is intrinsically a national network. Unfortunately, necessary as national planning might be, over the decades Whitehall has revealed itself to be spectacularly bad at it. In the case of electricity, the centre ought to have known best, but overconfident as ever, it blundered. It then did what Whitehall repeatedly does most effectively when it messes up – it covers up. If Whitehall tried to control a lot less, it might make a better fist of what it really must get right.

But most activities are not networks. And for this majority, whether they are in the public sector or the private, the power of decision needs to be devolved to the people who have the tacit knowledge that comes from being practitioners, rather than centralised in Whitehall. Expertise matters too, but it is much easier to filter expert knowledge down, than practitioner knowledge up. Expert knowledge, by its nature, is codifiable, and so readily shareable. Practitioner knowledge is tacit: it is intrinsically difficult to share because it can only be learned by doing.

I’ll illustrate with a couple of salient examples: as the economy starts to crash around our ears, we are learning the hard way how useful it would have been had there been some central planning for supply resilience. New research is enabling us to understand much better the vulnerabilities of a modern economy in which there is a vast web of interdependence among firms. Since each firm has an incentive to build resilience against idiosyncratic shocks to its own suppliers, in normal times the economy is resilient enough. But competition between firms drives them to go no further than this; further sacrifice for resilience would be indulgence. Hence, firms cannot afford to guard against the rare shocks that hit all of them: that is the market failure that public policy needs to address, but what would it look like? It would certainly not be Labour’s postwar commitment to “nationalisation of the commanding heights of the economy”.

The natural experiments of artificially cutting a country in two and operating one half under central planning and the other as a decentralised market economy are unambiguous: East Germany versus West Germany; North Korea versus South Korea. Failure on that scale is not even romantic. Nor does it call for a Ministry of Economic Resilience, housing all the information from firms around the country on what they are making, who their suppliers are, whom they supply, and what inputs and outputs they have used in the past week. We need to do something, but not either of those.

We could, however, learn from the Swiss, who, as a small society long surrounded by perils, have a culture of resilience and appear to have hit on something that works. Their planning for economic resilience is devolved across the entire business community, being lodged with 250 supply-line managers in firms judged to be strategically important for any aspect of national security, such as food. Compliance draws upon patriotism and the sense of pride that comes from being given a role of public responsibility: those 250 people are the national planning process for resilience. They are required to stock three months’ worth of any input, the lack of which they judge might jeopardise their ability to maintain the supply of what they produce.

What is the incentive for doing it right? Probably the fear of humiliation in front of the peer group if yours is the firm that lets others down. So, there is no national stockpile, and no minister or civil servant in control of it. Each supply manager has all the information as part of his normal job, and so the whole system is cheap: it costs around £10 per head of population per year. In other words, it relies upon trusting ordinary citizens, who by virtue of their job happen to have the pertinent tacit knowledge, to internalise a common purpose and work out what to do. If only…

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Centralised control doesn’t work, and it isn’t necessary. The other great wrongfooting of conventional thinking has been the gross underestimation of volunteering. We lack masks? My own inestimable personal assistant is busy making stacks of them and sending them to a local hospital. She and thousands of others are displaying common purpose with the people who are being paid. But just because the professionals are being paid, it shouldn’t be assumed that they are inherently unwilling to work well unless subject to control and scrutiny from the all-knowing top. Doctors, nurses, midwives and social workers do not need to be monitored, bullied and incentivised to hit numerical targets set from afar: it is both demeaning and impeding. Most of us are naturally prosocial, whether our contribution to society is through the public sector or the private.

Most, but not all. What professions are we cheering? Our family has been in prolonged lockdown because my wife has been bedridden with Covid-19: we have become deeply grateful to the nonchalant little heroisms of the ill-paid delivery workers who bring food to our door, to the self-employed lady who walks our dog, and to the teachers who are ingeniously struggling to teach our kids. Yet nobody is cheering the two professions that Britain rewards most generously: the City bankers and lawyers, to which our clever youth have gravitated. And nor should we: they are the two professions liable to do the most damage to our economy during crisis. By reining in credit, and by enforcing the letter of contractual liabilities on companies, between them they may push firms over the edge into collapse.

At present, the vital priority is to preserve organisational capital: the web of relationships that are the real productive asset of our business sector and the basis of our economy. If many of our firms collapse we will be impoverished. The left has to face that grim reality – only the deluded want the collapse of the market economy. But a considerable part of the defence should be that the banks extend credit, and the parties to contracts behave reasonably, sacrificing the opportunity to extract the rightful pound of flesh for the preservation of the long-term relationship.

We need compromise, mutuality, long-term perspectives and mediators: exactly the properties that bonus-hungry bankers and aggression-fuelled lawyers are trained not to possess. Returning to the unrepresentative nature of our political parties: depressingly the Tories are overloaded with bankers, and Labour with lawyers. We need to devolve the power of decision from Whitehall, but to where and what? To communities. The right political community, at which many decisions should be exercised, is the region. Whitehall, staffed by people whose daily life is the weirdly atypical experience of professional London, is both too remote and too exceptional to be the locus of many decisions. London is less “the capital” than “the outlier”. But the term “region” begs the question of appropriate boundaries, especially after what coronavirus will do to our economy.

Regions need to make economic sense: fortunately, the ten new Combined City-Region Authorities, of which Greater Manchester and the West Midlands are the flagships, look to be the seeds of an important, devolved political future. They are close enough to real communities and public services for meaningful dialogue with the people in them, yet large enough to achieve the collaboration-at-scale that is transformative for many activities. With ten such regions, each trying its own initiatives, they will learn from each other; as Louis Brandeis said, empowered regions are “the laboratories of democracy”. Indeed, learning from the experiments of others is “the secret of our success” as a species. To date, Whitehall has been gleefully devolving responsibilities to the Combined Authorities, but not the money needed to deliver them. Responsibility without power: the prerogative of the fall-guy through the ages. That now has to change. Proper devolution is the formula that has the potential to save post-coronavirus, post-Brexit Britain. If it is again all left to Whitehall, God help us.

Just as Keir Starmer and Boris Johnson have the makings of pragmatic national leaders, so Andy Burnham and Andy Street are their counterparts at the regional level. Starmer-Burnham and Johnson-Street are the political double-acts to watch. I hope that they both work. And so, reader, should you: “My party right or wrong”, has replaced dulce et decorum est pro patria mori – “It is sweet and fitting to die for the homeland” – as the great lie of our age. 

This article draws on ideas from Paul Collier’s forthcoming book with John Kay, “Greed is Dead: Politics After Individualism” (Penguin), and his book “The Future of Capitalism”.

Read the first essay in this series, “A Turning Point in History” by John Gray, here.

Paul Collier is professor of economics and public policy at the Blavatnik School of Government

This article appears in the 08 May 2020 issue of the New Statesman, Remaking Britain