From the TUC

States, Markets & Institutions

22 Oct 2013, by Guest in Economics

A couple of articles from very different authors and reaching very different conclusions have caught my eye this morning.

Over at LabourList Unite’s Len McCluskey writes that ‘the market is broken’ and asks a very interesting question – if politicians are prepared to intervene in the energy market (such as through Ed Miliband’s proposed energy price freeze), then where else will they intervene?

Meanwhile over at City AM, editor Allister Heath has an article entitled “Corporatism, rigged markets and a new ideological showdown” which concludes:

We need to ditch corporatism, resist the siren songs of social democracy – and above all rediscover the liberating potential of real capitalism. 

Heath believes that much of the current economy is marked by what he terms corporatism and calls for ‘real capitalism’*.    

The Chancellor declared in his conference speech that he is a believer in ‘freedom and free markets’, but in reality he is happy to intervene when it suits him.

Heath points to yesterday’s nuclear power deal as an example of his corporatist economy. He is certainly right that for all the Chancellor’s invocations of Marxism at the proposed Labour prize freeze (invocations of Marxism that I note were not mentioned as heavily during his visit to China last week), here he was yesterday hailing a deal which saw the State underwriting major project financing, signing a deal with state owned French and Chinese firms and coming to an agreement with a supplier on long term energy prices.

Or take the housing market, where the ‘free market Chancellor’ is prepared to launch an unprecedented (and not wildly popular with economists!) scheme of mortgage guarantees to support housing market activity and specifically house prices?

Or rail – where fares are set by a formula which itself is in the hands of the government.

Of course there are vast areas of the economy where such intervention has been lacking, which bare little relation to Heath’s notion that we live in a corporatist world. Britain has one of the least regulated labour market markets in the developed world and yet the government is to continue liberalising. Not only do we have the longest real wage squeeze since the 1870s but also a serious rise in under-employment, precarious working and, in many cases, poorer terms and conditions.

Or banking – where the government has taken a relatively relaxed approach to regulation and reform (points picked on by the Parliamentary Inquiry into Banking) and where a market dominated by a handful of big firms is still failing to support lending to business.

In reality the British economy is an odd mix – in some sectors there is relatively heavy handed government intervention in others the approach is one of letting market forces rip. What cannot really be doubted is the direction of travel for, despite Heath’s protestations, the overall shift over much of the last three and half decades has been towards deregulation and liberalisation of product, consumer and labour markets.  The starting point has often been ‘how can we make this market freer’ and the assumption, underlying this is that free markets will lead to the best outcomes.

Under the previous Labour government, the essence of this approach was not questioned but alleviations at the market’s worst distributive effects were put in place – the minimum wage, tax credits, higher public spending, etc.

What Heath calls the coming ideological battle, Chris Dillow (rightly I think) sees as the unintended consequence of neo-liberalism.

In this sense, we’re seeing two unintended consequences of neoliberalism.

One, as Polanyi described, is that when market economies undermine human concepts of reciprocity – when the rich seem to get richer at the expense of the poor – they generate a backlash; Miliband’s promise to freeze energy prices is hugely popular with focus groups.

The other is that this backlash is taking the form of statist policies.

Where Heath and Dillow would no doubt agree is that we are starting to see (in some ways it dates back to 2011 and Ed Miliband’s “producers and predators” speech) a live ideological debate about the shape of our economy.

If 2009-2013 was dominated by a “cuts versus Keynes” debate on the macroeconomics of spending cuts then 2013-2015 looks set to be shaped by a more wide ranging debate on the relative role of the market and the state. The concurrent ‘cost of living crisis’ and economic recovery open the space. If the economy looks set to grow a reasonable headline pace, and the public finances begin to improve (as seems likely) but living standards remain squeezed for the majority, then many will rightly ask – what is the point of the recovery? If the economy is indeed growing at a decent clip, why are most people not feeling the benefits?

This takes us back into the broader debate on the structural problems of the British economy – the disconnect between wages and growth which began well before the crisis, the short termist nature of many firms, serial underinvestment, regional inequalities and the general ‘lack of balance’ in the macroeconomy.

I’ve tried to sketch out before some policies that aim to address this – arguing that what we need is not so much recovery to the pre-2008 model but a programme of renewal aimed at slowly changing the shape of our economy.  Much of that agenda moves beyond traditional fiscal and monetary levers.

Such an agenda starts by recognising, as Ed Miliband has argued (channelling Polanyi), that “markets don’t just drop down from outer space, perfectly formed”. Instead they are shaped by social, cultural and governmental factors. The job of government is to help form markets that actually work for the majority, that reward value creation rather than extraction, that generate productivity increases rather than incentivising low wage/low value business models,  that ensure wages rather than just profit margins rise when productivity increase, that reward long-termism and that led to increasing levels of investment.

In many ways I think this again comes down to the missing variable in the traditional state versus market dichotomy – institutions.

In practical terms, Labour’s proposed 20 month energy price freeze will bring some relief to consumers and business, but more a more long term solution is likely to come from the second half of the policy:

It’s time to reset the market. So we will pass legislation in our first year in office to do that, and have a regulator that will genuinely be on the customers’ side but also enable the investment we need.

In banking, one option would be means to pressure the existing banks to step up lending to SMEs and for infrastructure – but a better long term solution is to establish a new British Investment Bank, new regional entities and increase the scale of the Green Investment Bank.  The existing institutions have failed, new ones are required to agrees obvious gaps.

 A similar example can be found in low pay – a one off increase in the minimum wage would bring many benefits but more fundamental reform will come from re-examining the working of the Low Pay Commission.   

In the labour market more widely, we need to look again at how pay is set,  how firms are managed and the role of the workforce and their unions. As Frances O’Grady argued earlier this year in her Attlee lecture, this presents challenges for government and business but also for trade unions:

… industrial democracy poses a challenge to us in the trade union movement. It implies a role that is not just more ambitious, but more demanding, than the one we usually have now. It means accepting responsibility, moving out of a comfort zone of short-termism, to taking the long view and championing the greater good. We already play such a role in the best workplaces, and also in policy areas such as the environment, pensions, skills and health and safety, where mutual advantage is clear for all to see.

Similar debates around reform and institutional renewal are to be found across the spectrum – encompassing planning, housing, skills and a whole variety of other issues.

The costs of living crisis has created the space for lively debate on the really big economic  questions – not just around the size of a proposed stimulus or the extent of cuts but going back to fundamentals about how our economy works.

I think this is a debate to be welcomed.


*As an aside, I find the term ‘real capitalism’ quite revealing – does Mr Heath distinguish between real capitalism and ‘actually existing capitalism’ I wonder?)  

2 Responses to States, Markets & Institutions

  1. Robert Wootton
    Oct 22nd 2013, 11:49 pm

    To end poverty, it is necessary to alter the system drivers that create poverty to system drivers that ensure a fair distribution of wealth by the wealth creating organisations themselves. Otherwise campaigns are merely King Canute exercises of futile power against the tides.
    The difference is that the tides are created by nature or God. The institutions that create poverty are created by man. So man can change the institutions so that poverty, in the sense that physical survival is severely at risk, can be eliminated.
    A differential in wealth/income at present is necessary to create the system drivers but the ratio between the rich and the poor must be lower.
    In an article published on May 23rd 1977 in the Wall Street Journal, titled “Is Executive Pay Excessive” Peter Drucker wrote that there should be after tax income ratio between the highest and lowest paid. The size of ratio was not as important as the fact that there should be a ratio. The suggestion is that the ratio should be 8 to 1.

  2. Robin Wilson
    Oct 24th 2013, 8:29 am

    Excellent article. Speaking of Marxism, the great virtue of Gramsci’s version in this regard is how he recognised that the period after Marx’s death had seen the growth of civil society in western Europe, though not in Russia–hence the authoritarianism of what was to become ‘actually existing socialism’ there. Gramsci’s conception of civil society allowed of a third term to be introduced into the state v market argument, which not only allowed an understanding of how capitalism could enjoy hegemony–because of consent won through the ‘fortifications and earthworks’ of civil society, rather than primarily state coercion–but also what a self-managed socialism could look like. The rich social fabric of Nordic welfare states, matching a strong state to a strong civil society (rather than these being seen as counterposed, as in Cameron’s fad for the ‘big society’ of Burkean little platoons), was to be its best manifestation.