Stewart Wood in this week’s
Guardian is right to argue that the paradoxical popular support for George Osborne’s manifestly failing policies for
recovery should not mean that Labour must abandon its social democratic approach to solving the nation’s problems.
The drive for “responsible capitalism” is of course an important
aspect of such an approach, and is an area in which Labour should expect to carry greater credibility than its right-wing
opponents. But focusing on that issue concedes far too much to an orthodoxy which has served us so poorly.
Why does Labour, in addition to looking for greater responsibility from
our business leaders, not espouse as well “productive capitalism” or “efficient capitalism” –
in other words, a market economy that actually works? We are now into a fourth decade of Labour failure
to mount any effective critique of monetarist orthodoxy, with the result that the whole area of macro-economic policy has
been effectively conceded to our opponents. Yet, if ever there was an open goal, this is it.
The monetarist approach to economic policy asserts
that the only goal of policy should be the control of inflation – something that can safely be left to bankers armed
with the single instrument of interest rates – and that otherwise the market, if left to its own devices, will deliver
optimum results. Government should just let business get on with it.
How well has this doctrine prepared us to face the challenges of a new world economic order
in which China and India, Korea and Brazil, are making the running? The answer
is that it has served us appallingly. We have continued our inexorable decline in the world pecking order
– whether it be in our share of world trade, in the output of our manufacturing industry, or in comparative living standards.
We do not recognise this only because we have become enured to long-term failure.
And that failure has culminated, of course, in the global financial
crisis and a threatened double-dip recession which have left this country flat on its back and apparently facing up to a decade
of austerity, no growth and further decline.
What response
has Labour made to these startling failures? Nothing – other than deservedly attracting a share of
the blame. Far from pointing out the nakedness of “free-market” monetarism, Labour has joined
in the acclamation for the emperor’s finery, pinning its hopes when in government on the exploits of the City of London,
and only narrowly avoiding the euro trap in which the ECB applies a ruthless monetarism even more extreme than the domestic
variety.
It beggars belief that – now in opposition
– Labour still finds itself unable to develop its own economic policy. Far from developing a coherent
critique of more than three decades of right-wing economic failure, Labour is still urged by many, even
in its own ranks, to ape the Tories - to be ‘realistic’, to put forward its own alternative austerity programme,
and to accept that there is nothing for it but to accept the monetarist framework.
But for Labour to do so is to accept defeat. If the political argument is only about the degree
of austerity, it is an argument Labour cannot win. The Tories will always be seen as more credible exponents
of such policies.
Nor can Labour expect to be taken
seriously if – while not challenging the imperatives of monetarist policy - it simply proclaims its readiness to take
on more debt so as to spend our way out of recession.
Yet
the intellectual straitjacket embraced by Labour is easily discarded. One of the prime weaknesses of the
monetarist approach has been that, by identifying inflation as the over-riding – indeed, only – focus of policy,
and by adopting monetary measures to combat it, we have made inevitable a literally counter-productive upward pressure on
our exchange rate – and this at a time when our competitiveness in world markets was already under extreme pressure
from the rise of new economic (and particularly manufacturing) super-powers.
We tried to escape the consequences of this loss of competitiveness by pinning our hopes on the international asset
and credit bubble created by the City – and when that bubble burst, we discovered that we had a much-weakened real economy
to fall back on.
It is competitiveness, not inflation,
that is our central economic problem. Until we deal with it, any attempt to expand our economy will run
up against a balance of trade brick wall. There will then be no alternative but austerity which, through
a lower tax take from a lower level of economic activity, will simply make our debt problems worse.
We have suffered for decades from a blind spot about the exchange rate.
Yet it is the key to improving competitiveness. We have reluctantly agreed in the past to devalue
only as the remedy for a loss of competitiveness that can no longer be ignored – yet the exchange rate is the most effective,
quick-acting, and comprehensive means of establishing an improved competitiveness for the future that would make short-term
sacrifices fair to all, while establishing a base from which we can quickly build a strong British manufacturing economy that
enables us to break free from recessionary shackles and to find a route out of the austerity cul-de-sac.
Isn’t that preferable to the stark lack of choice we now face?
Why can Labour not find the courage for some new thinking?
Bryan Gould
10 January 2012
