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The god that failed

The three-decade neoliberal experiment ended in global financial crisis. But there is another, bolder agenda.

In the 1990s Bill Clinton warned the centre left to beware of false choices. Two decades later, with a lively debate now fully under way within the Labour movement about the way forward, we face our own false choice: between those who see our central task as one of restoring credibility and those who advocate a return to radicalism.

Look back at any era of success for Labour in Britain, and you will see credibility and radicalism sitting side by side. What makes successful coexistence between the two possible is when Labour understands, and is seen to understand, the central truths about the kind of Britain we live in - what is right with it, what is wrong with it and what voters want and need from their government. A credible platform for government is one that adds up financially, but it is also one that passes the test of understanding the state of the nation. Get that right and Labour's ambition in the radical cause of change and improvement can have both moral purpose and electoral appeal.

We are still in the early stages of rethinking. But if we want to understand the historical moment, there is one dominant conclusion that must inform Labour's future strategic approach: that Britain in 2011 is witnessing the death throes of the neoliberal ideology that has dominated Britain for more than 30 years. Facing up to this realisation should be both liberating and challenging in equal measure. But it is inescapable, and if we do not face up to it, we cannot hope to be the party for our times.

Neoliberalism began in the late 1970s with Margaret Thatcher and Ronald Reagan. It was based on a belief that deregulated markets, less government and reducing taxes on the well-off (to reward effort and to enable the fruits of entrepreneurialism to trickle down to the rest of the country) would restore economic good times after the trials of the 1970s. Its political success - both for parties of the right and shaping perceptions of political space on the left - has been extraordinary. As a governing project, it held out the promises of an end to social division, national renewal and prosperity for all.

Fast-forward to 2011 and neoliberalism has been derailed by the financial crisis and the ensuing recession. Its promises have been shown to be illusory - not simply for the poorest but for the vast majority of working people. Through its excessive dependence on financial services - and its inadequate regulation of those who provided (and vastly profited from) them - it left Britain with an industrial base that was too narrow, a large skills gap in the middle of our working population and tax revenues that became too dependent on the fortunes of one sector. Neoliberalism told us that the efficiency of markets and the notional freedom of individuals to operate within them were the pre-eminent virtues of a successful country. The price of this was that neoliberalism ignored what makes for strong and cohesive communities, marginalised the vulnerable, and rode roughshod over the value of strengthening democracy.

When it came to social solidarity, neoliberalism did not just encourage us to embrace inequality as a necessary evil - it positively fostered and welcomed inequality as essential to market efficiency and urged us not to be squeamish about it. Ultimately, this resulted in a prolonged period during which those in the middle of the income distribution saw themselves squeezed out of their share in growing prosperity, while the income of the very wealthiest took off stratospherically. In 1979, the top 1 per cent received under 6 per cent of Britain's personal income; in 2005 they received over 14 per cent. For the past 30 years, 22 per cent of every extra pound earned has gone into the pockets of the top 1 per cent.

Rewriting the rules

The truth is that Britain tried neoliberalism and the price has been heavy indeed. We should be proud that in some ways New Labour acted as a corrective to many of the excesses of neoliberalism - through the minimum wage, tax credits and helping to rebuild the long-neglected fabric of our public services. But too many of the tenets of neoliberalism - the powerlessness of national governments in the face of globalisation, the dependence on under-regulated markets and growing inequality - were accepted, willingly or otherwise. Now that we can see the ideology of neoliberalism for what it is, we should see the challenge for our party in radical and ambitious terms - to rewrite the rules that govern how Britain works.

The Conservatives, even aided and abetted by the Liberal Democrats, cannot do this. Their answer to the problems created by neoliberalism is more neoliberalism, as if it didn't work before because there wasn't enough of it. Rather, neoliberalism cannot work where people want to be a society and not simply a collection of individuals who grow steadily more detached from each other's lives.

This is a bold agenda, but we must take care that it is understood properly and not caricatured. To assert the failure of neoliberalism is not to set our faces against well-functioning markets, any more than the collapse of Soviet communism meant we should become hostile to the well-functioning state. Markets are fundamental to our lives, so healthy markets are fundamental to flourishing lives. They should ensure growing prosperity for all - but only if they work properly. For a market to be legitimate and to operate in the interests of society, everybody has to have a chance to swim with the rising tide.

It will take courage, because saying you want to take on neoliberalism is considered by many to be naive and impossible. For too long we thought the neoliberal analysis had to be accepted, either because it was right or because the political costs of challenging it were too high. As we struggle through the prolonged and painful fallout of the global financial crisis, the whole country now knows that neither is true.

Building an alternative to the neoliberal settlement should be the frame for the debate within our movement in the coming months. Its content needs to emerge from this debate but the ambition should be clear upfront (and we should not apologise for its ambitiousness).

First, jobs and growth must be at the heart of our approach, but we must have the courage to say that we need to build a different kind of economy - a better capitalism. It may be one where there are sensible limits on the scope and functioning of financial markets (to protect individual savings and the nation's finances alike); where companies, individuals and government are partners in transforming our workforce's skills and strengthening the high-value-added sectors that rely on them; where banks service companies' needs from funding start-ups to supporting long-term research and development; where a living wage for high-quality work becomes the norm rather than the exception; and where the world of work allows for the world outside work, so that families can lead balanced lives.

Second, we need to prioritise tackling inequality, not basing our efforts on abstract theory or utopianism but to protect individuals' dignity, support social cohesion and ensure that the majority rather than the wealthy minority benefit from the return to steady growth (when it comes). And we must think of new ways of addressing the sources of inequality, as well as making the cash transfers that blunt inequality work more effectively.

Third, we need to revisit the rules of our welfare state. We have to face up to the fact that the legitimacy of the liberal welfare state - with a tax-paying majority funding a relatively poor and workless minority - has come under severe strain. Restoring this legitimacy requires not simply achieving the time-honoured balance between helping those outside work to get into work and meeting the genuine needs of the most vulnerable; it also demands that we consider how to engineer a stronger link between contribution and benefits. We must do this both to provide better insurance against different kinds of risk and to rebuild the stake of taxpayers in a well-functioning welfare system.

Fight for optimism

Fourth, we need to understand what makes communities work well, rather than hoping that prosperity will be enough to bring social cohesion. In the wake of the August riots, this task has become more pressing than ever. We need to consider how to build the civic leadership - inside and outside the state - that makes strong communities possible and where to redraw the line between markets and local democracy to enable people to have greater control over the places in which they live.

Last, we need to fight for something that is a prior condition of everything else: an optimism about what politics can achieve. Neoliberalism both relies on scepticism about what politics can do and reinforces that scepticism with its denigration of politics, of active government and of those who work in it. We have to challenge this scepticism head-on. Look at the United States, where an anti-politics Tea Party movement is trying to turn an economic crisis into a crisis of politics itself. We must not let Britain follow this path. If we want to create a better capitalism and a country that moves beyond the neoliberal era, the first and most urgent fight must be for the public's faith that politics, at its best, can be a force for improvement in their lives.

Stewart Wood, a Labour peer, is shadow minister without portfolio and a fellow of Magdalen College, Oxford

A version of this article appears in the current conference edition of the "Fabian Review"

This article first appeared in the 26 September 2011 issue of the New Statesman, The fifty people who matter