Why America’s economy is recovering and Europe’s isn’t

The reason Europe’s economy isn’t recovering is a dogged insistence on austerity. That is the conclusion of John Cassidy, writing in the New Yorker:

The big mystery isn’t why austerity has failed to work as advertised: anybody familiar with the concept of “aggregate demand” could explain that one. It is why an area with a population of more than three hundred million has stuck with a policy prescription that was discredited in the nineteen-twenties and thirties. The stock answer, which is that austerity is necessary to preserve the euro, doesn’t hold up. At this stage, austerity is the biggest threat to the euro. If the recession lasts for very much longer, political unrest is sure to mount, and the currency zone could well break up.

So why is this woebegone approach proving so sticky? Some of the answers can be found in a timely and suitably irreverent new book by Mark Blyth, a professor of political economy at Brown: “Austerity: The History of a Dangerous Idea.” Adopting a tone that is by turns bemused and outraged, Blyth traces the intellectual and political roots of austerity back to the Enlightenment, and the works of John Locke, David Hume, and Adam Smith. But he also provides a sharp analysis of Europe’s current predicament, explaining how an unholy alliance of financiers, central bankers, and German politicians foisted a draconian and unworkable policy on an unsuspecting populace.

The central fact about Europe’s “debt crisis” is that it largely originated in the private sector rather than the public sector. In 2007, Blyth reminds us, the ratio of net public debt to G.D.P. was just twelve per cent in Ireland and twenty-six per cent in Spain. In some places, such as Greece and Italy, the ratios were considerably higher. Over all, though, the euro zone was modestly indebted. Then came the financial crisis and the fateful decision to rescue many of the continent’s creaking banks, which had lent heavily into property bubbles and other speculative schemes. In Ireland, Spain, and other countries, bad bank debts were shifted onto the public sector’s balance sheet, which suddenly looked a lot less robust. But rather than recognizing the looming sovereign-debt crisis for what it was—an artifact of the speculative boom and bust in the financial sector—policymakers and commentators put the blame on public-sector profligacy.

“The result of all this opportunistic rebranding was the greatest bait-and-switch operation in modern history,” Blyth writes. “What were essentially private-sector debt problems were rechristened as ‘the Debt’ generated by ‘out-of-control’ public spending.”

In other words, austerians are playing a game of ‘blame the victims’ and the consequences for real people’s lives are disastrous.

How the case for austerity has crumbled

Make a pot of tea because you are about to read a long essay. It is a very good essay by Paul Krugman, explaining why the orthodoxy of austerity, adopted throughout Europe and North America in 2010, is profoundly wrong:

Three years after the turn to austerity, then, both the hopes and the fears of the austerians appear to have been misplaced. Austerity did not lead to a surge in confidence; deficits did not lead to crisis. But wasn’t the austerity movement grounded in serious economic research? Actually, it turned out that it wasn’t—the research the austerians cited was deeply flawed.

Krugman also takes apart the motivation of austerians and finds emotions rather than rationality; a flawed impulse to treat macroeconomics as if it were a morality play instead of a technical malfunction.

It is not as if we did not have the knowledge to prevent such misjudgements. But as Krugman concludes:

To the extent that policymakers and elite opinion in general have made use of economic analysis at all, they have, as the saying goes, done so the way a drunkard uses a lamppost: for support, not illumination.

Why re-privatise East Coast?

Just what is the point of re-privatising the East Coast railway operator?

East Coast is the state-owned inter-city train operator on the main line from London King’s Cross to Yorkshire, the North East and Scotland. It is due to be re-privatised this month.

Along with the rest of British Rail, the service was originally privatised in 1996 but it had an unhappy history in private hands. The first private operator was Sea Containers trading as GNER, but it was stripped of the franchise in 2007 due to financial difficulties. The franchise was then awarded to National Express, which lost the franchise two years later when it refused further financial support to its National Express East Coast subsidiary.

The franchise was re-nationalised in 2009 under the East Coast banner. This was always intended as a temporary measure, so a return to the private sector comes as no surprise. That is not the issue.

As Rachel Graham points out at OurKingdom, the issue is that East Coast is outperforming other operators and providing far better value for money:

The coalition government re-iterated their intentions to re-privatise the East Coast mainline rail network this month. This despite a new report by the Office of Rail Regulation (ORR) showing the line as the most cost efficient. The Financial Times stated that the report proves the East Coast line is “the most efficiently run rail franchise in terms of its reliance on taxpayer funding”.

The ORR report shows the East Coast line required the lowest level of government funding as a percentage of total income, at just 1.2%, a mere 0.2% of the overall share.

The irony of Britain’s privatised railways is that they receive far more in government subsidy – both in real terms and as a percentage of overall income – than British Rail did before privatisation. And this higher subsidy is being provided despite growing passenger numbers.

It is unclear what concrete benefits privatisation of East Coast would bring. The burden on the taxpayer is unlikely to go down. There can be only two possible motives. One is a dogmatic belief in privatisation regardless of the consequences. The other is a scorched earth policy, a desperation to privatise East Coast before the Tories lose the next general election (similar to John Major’s original privatisation of the railways ahead of the 1997 election). These two motives are not mutually exclusive.

Private good, public bad?

For more than thirty years, we have been taught to believe that the private sector is automatically superior to the public sector. Another mythbuster by nef (the new economics foundation) demonstrates the falsehood of this dogma.

For Liberals, the point is the distribution of power and the human element. The private and public sectors can both be well or badly run. They are equally capable of remoteness, alienation, bad service, waste and incompetence.

As Britain’s experience with the railways demonstrates, privatisation is no guarantee that things will improve. Furthermore, when politicians repeatedly tell public sector workers such as teachers or nurses that they are rubbish, it hardly works wonders for the quality of public service.

Few push the dogma of nationalisation anymore. No one should push the dogma of privatisation either. The guiding principle should be to put people first, which is why social liberals prefer voluntary, mutual, cooperative and social enterprise models to private or state monoliths. As David Boyle points out on his blog today, we should be exploring ways to enable local communities to develop and run their local economies and local services, instead of pushing them into dependence on large organisations.

Transferring bus services from the National Bus Company to Stagecoach, or care homes from the council to a big private operator, fails to address that need. So there is no reason to believe that a private monopoly is somehow morally superior to a public one.

George Osborne believes in fairies

The coalition government’s harsh austerity policy isn’t working, for the reasons the Liberal Democrats predicted in their 2010 manifesto. Even the IMF has advised the government to rethink its strategy and spend more. So why is the government refusing to change course?

As Paul Krugman explains, it is because George Osborne still believes in the confidence fairy. And the arguments for the existence of this fairy are utterly implausible.

What is the reason for Osborne’s stubborn persistence with this nonsense? Superstition, muddle or callousness? You decide.

Stop worrying about UKIP and learn to love Liberalism

So Nigel Farage thinks last Thursday’s local elections are a “game changer”? As any Liberal Democrat with a rueful memory of ‘liberal revivals’ could remind him, one swallow doesn’t make a summer.

To capture around 25% of the vote from a standing start is very good going. But to put that in perspective, the turnout, as usual in local elections, was only about 25 to 30%. 25% of that is only about 7% of the whole electorate. The fact that 7% hate foreigners, gays, wind farms and everything else that’s happened since 1963 is neither remarkable nor a threat – the only surprise is that this percentage isn’t higher.

What UKIP did well was to give that 7% a reason to vote. In marketing parlance, UKIP has a clear USP (described by Stephen Tall on Liberal Democrat Voice as “stop-the-world-I-want-to-get-off-pull-up-the-drawbridge-nothing-against-them-personally-but-we’re-full-and-another-thing-health-and-safety-some-of-my-best-friends-are–all-the-parties-are-the-same-I’d-emigrate-if-I-could”). This USP may be just a mishmash of bar-room prejudices but it chimes with the gut feelings of a substantial minority of voters. Furthermore, such voters were not deterred by the Tory-inspired media hatchet job on UKIP candidates – if anything, the disapproval of the political establishment would have spurred them on.

But UKIP has done more than simply provide an outlet for Daily Express readers’ prejudices. Nigel Farage is surely onto something when he says:

“People have had enough of the three main parties, who increasingly resemble each other. The differences between them are very narrow and they don’t even speak the same language that ordinary folk out there, who are struggling with housing and jobs, speak.”

Voters have been offered little real choice since the fall of the Berlin Wall and the ‘end of history’, which cemented a neoliberal consensus (TINA). The replacement of ideological conflict by managerialism paved the way for the rise of the identikit professional politician and the adoption by such politicians of triangulation. And these politicians speak in an abnormal language of party mantras and robotic slogans.

In contrast, UKIP is not afraid to use plain language, challenge the consensus or stand up for what it believes in. The question for Liberal Democrats is why they don’t display a similar level of assertiveness and pride in their values, which would enthuse and mobilise their own base. The answer is that their leader Nick Clegg firmly believes in the old consensus, as his latest appeal to the ‘centre ground’ demonstrates. This is all of a piece with his increasingly technocratic and managerialist approach, his insistence that he is above ideology and ‘pragmatic’, and the repeated implication that his views are somehow obvious or inevitable and therefore beyond argument.

This is a far cry from the 2010 general election campaign, when Clegg openly criticised the fundamental failings of the political system and promised not just change but that the Liberal Democrats would be that change. In a complete reversal, he now rejects that approach as nothing more than being a ‘party of protest’ and therefore part of a history that must be jettisoned. Instead, he presents the act of assimilation with the old establishment consensus as a sign of political maturity.

Clegg’s ‘centre ground’ strategy could not be more wrong. As Tory MP Bernard Jenkin recently pointed out:

Politicians often talk about “the centre ground” of British politics, as though there is some big bell curve of voters in the middle where we have to be in order to get elected. The three main parties are crowded there in the facile belief that being anti-immigration, anti-EU, pro-business, tax cuts and tough on crime is “right wing”; while more spending, concern about the poor, pro-EU, pro-human rights and CND is “left wing”, and therefore sensible moderate people weigh up these “extremes” and finish up somewhere in between. And, of course, most people are sensible.

The Clinton/Blair people called it “triangulation”. The architects of Conservative modernisation copied it and made David Cameron in this respect the “heir to Blair”, but the result is that all the parties are now losing to “extremes”. Eastleigh showed there is no such thing as the centre ground – a great pile of voters in the middle waiting to be harvested by politicians’ cynical positioning. Nor is there a magic bullet labelled “immigration” or “Europe” either.

Public opinion is both diverse and changeable – it is neither clustered round a settled consensus nor immutable. Hence converging on an illusory ‘centre ground’ does not increase the Liberal Democrats’ appeal but makes them seem indistinguishable from the other mainstream parties. Clegg’s claim to be more centrist than the other centrists is not a USP but merely competing in the blandness stakes. Worse than that, the dominant consensus of the past thirty years has been fatally damaged by the financial crisis and is due for replacement. By clinging to that sinking ship, Clegg risks taking his party down to the bottom with all hands.

The alternative is not to realign with UKIP. As Mark Pack’s bar chart demonstrates, of the three mainstream parties in the local elections, the Liberal Democrats suffered least at the hands of UKIP. The Liberal Democrats have no tactical need to trim on issues like Europe or immigration (even if to do so were morally acceptable, which it isn’t).

There is only one way forward for the Liberal Democrats, and that is to stop banging on about the ‘centre ground’, stop apologising for being liberal, stop trimming and, instead, come out, loud and proud, for enlightened, cosmopolitan and tolerant values. Only then can the party build its base and provide supporters with a compelling reason to get off their arses and vote with the same enthusiasm that UKIP supporters did last Thursday.


Postscript (1): Max Dunbar’s blog post about UKIP is well worth reading (with thanks to Jonathan Calder).

Postscript (2): See Anthony Wells’s analysis of UKIP at UK Polling Report.

Postscript (3): See Chris Dillow’s blog post, which explains why UKIP is not the anti-establishment force it purports to be.

Postscript (4): See A Very Public Sociologist (writing just after the Eastleigh by-election), in particular the quotation from Lord Ashcroft’s analysis of UKIP voters. They are driven by outlook rather than policies.

The end of democracy?

Why is the public gradually disengaging from democratic politics?

Henry Farrell thinks he knows the answer. In an essay inspired by Colin Crouch’s influential book Post-Democracy, he writes a depressing epitaph for democracy. Globalisation and neoliberal economics have combined to shift power elsewhere, while the voters are left with less and less choice. In a postscript on the Crooked Timber blog, Farrell laments the current political chaos in Italy.

The problem with Farrell’s thesis is that he conflates the malaise of democracy in general with that of social democracy or moderate socialism. It is true that democracy is in trouble, and that neoliberalism has had a major role to play in the undermining of democratic politics. But just because the traditional left has no answer to the current economic crisis does not necessarily mean democratic politics as a whole is impotent.

The collapse of neoliberal orthodoxy in the recent financial crisis was a gift to its opponents but the traditional left has been completely unable to provide a coherent or compelling response. That is not because democracy is failing. It is because the social and economic conditions of the post-war era (which made the social democratic settlement possible) no longer apply. Like UKIP, social democrats yearn for a return to the 1950s, but for different reasons.

There is a coherent and compelling response for the Liberal Democrats to adopt (once they get over their current fixation on blending into the establishment). First, they should adopt the recommendations of the Rowntree-funded Power Inquiry (full report here and executive summary here), which examined popular disengagement from formal democratic politics in Britain (and which was previously discussed on this blog here). Second, they should develop some radical new economic thinking, and this work has already begun, in particular with the ALDC’s 2008 pamphlet by David Boyle and Bernard Greaves, The Theory and Practice of Community Economics, and the just-published Green Book.

One can at least agree with Farrell that things cannot continue as they are. One cannot accept his fatalism simply because the parties of the old left resemble exhausted volcanoes.

The price of everything and the value of nothing

It’s official. The Secretary of State for Culture is a philistine.

Maria Miller will deliver a speech at the British Museum today:

British culture should be presented as a “commodity” and “compelling product” to sell at home and abroad, the culture secretary, Maria Miller, will argue in her first speech on the arts since taking up the job in September.

It has taken Miller seven months since becoming culture secretary to deliver a speech setting out her philosophy, and it turns out that she knows the price of everything and the value of nothing.

It is this economistic outlook that is the true heritage of Margaret Thatcher. Instead of attacking the corpse of a dead prime minister, critics should focus on the zombie of her ideas.

Thatcherism is not a Thousand Year Reich

In today’s Guardian, John Harris wonders what happened to that extinct species, the One Nation Tory. He finds a revealing statement by Margaret Thatcher (quoted in a book by Ian Gilmour, one of her cabinet ‘wets’):

“Do not say it is time for something else! Thatcherism is not for a decade. It is for centuries!”

Thatcher said this in 1990, towards the end of her premiership when she was already going round the bend. Nevertheless, the idea that Thatcherism is permanent or inevitable is widely held, even among her opponents.

The apologias by juvenile right-wingers among the comments on Liberal Democrat Voice are only to be expected, but others who ought to know better have been equally fatalistic. Here for example is Paddy Ashdown, speaking in last week’s debate in the House of Lords:

At the time when she did those things, they needed to be done.

Historical inevitability? I never knew Paddy was a Marxist.

More often, inevitability is cloaked in a false notion of pragmatism, where the Thatcher settlement is viewed as so permanent as to be beyond ideology. This has led to the current fad for managerialism, which suggests that most mainstream politicians have given up on offering real political choice.

There is a difference between agreeing with Thatcher and being mesmerised by her. It is time for people to snap out of it.

In politics, nothing is inevitable or permanent. If that were the case, there would be no need for politics. We always have a choice and, the sooner that is recognised, the healthier our politics will be.

Britain isn’t ‘broke’

“Britain has maxed out its credit card. The level of debt is too high, and the cost of servicing that debt risks bankrupting the UK. We’re in real danger of heading the same way as Greece.”

Really?

The ‘maxed-out credit card’ metaphor is actually complete bollocks, and nef (the new economics foundation) has just published a handy mythbuster to expose this metaphor as both false and damaging.

The Rise and Fall of Economic Liberalism

The recent debate about secret courts has had an extraordinarily unifying effect on the Liberal Democrats, uniting previously opposing factions. Admittedly, they have been united against their own leadership, which is another matter.

But it does make you wonder why the party split into factions in the first place. The answer is that this is perfectly normal. Major political parties are broad churches and must remain so if they are not to become narrow sects. There are basic beliefs that all members share, otherwise there would be no point being in the same party. But in a broad church, it is inevitable there will also be competing values and interests, and like-minded members will collaborate and coalesce into factions to advance those values and interests.

So the real question is not why there are factions within the Liberal Democrats but why the party was under-factionalised for much of its history. The party was founded in 1988 with two ready-made factions, the Liberals and the SDP, but that division has long ceased to be a fault line.

The main ideological division now is about economics. It began with the sudden emergence of the self-styled ‘economic liberals’ in 2001. This development was one of the most profound in the history of the party. It was also one of the most bizarre.

It was bizarre because the economic liberals seemed to come out of nowhere, having scarcely been evident in the Liberal Democrats beforehand. Nor were they much in evidence in the two predecessor parties. The pre-merger Liberal Party was a social liberal party; classical liberalism was largely superseded by social liberalism towards the end of the nineteenth century. The pre-merger SDP was social democratic, as you would expect. A few of the economic liberals who emerged in 2001 were new recruits to the party (notably the small group of right-wing libertarians around Mark Littlewood) but most of them had been members of the Liberal Democrats for some time. They must have either suddenly changed their views in 2001 or previously kept quiet about their predilection for market forces.

The emergence of the economic liberals was also bizarre because of its timing. Why leap aboard the Thatcherite ideological bandwagon so late in the day? By 2001, Thatcherism had been the dominant orthodoxy for over twenty years. The fall of the Berlin Wall, which encouraged the idea of ‘TINA’ (There Is No Alternative), had occurred in 1989. The same year, Francis Fukuyama published his seminal essay The End of History?, while Tony Blair ascended to the leadership of the Labour Party (and made his peace with Thatcherism) in 1994.

[At this point, some readers may already object to the distinction between ‘economic’ and ‘social’ liberals, claiming to be both or that both are the same. I would merely point out that, if that were the case, why did ‘economic liberals’ label themselves as such and start their factional activities in 2001, which created the current division?

Oh, and this is a long-ish historical analysis. Before you read any further, make yourself a pot of tea and put your feet up.]

For an explanation of why the economic liberals emerged when they did, one should first

Austerity = drop in GDP = rubbish policy

The policy of fiscal austerity has failed throughout Europe. Which radical, left-wing publication has reached this conclusion? The Financial Times (£) [to get round the FT’s paywall, go to Google News and enter the phrase “The sad record of fiscal austerity” in the search box].

The FT’s Martin Wolf is scathing about the European Central Bank’s policies before turning on the UK government:

...the panic that justified the UK coalition government’s turn to a long-term programme of austerity was a mistake. Had its members never heard of the paradox of thrift? If the domestic private and external sectors are retrenching, the public sector cannot expect to succeed in doing so, however hard it tries, unless it is willing to drive the economy into a far bigger slump. While short-term factors have played a real part, it is not surprising that the UK’s recovery has stalled and the deficit is so persistent. It is consequently also not surprising that downgrades are on the way, not that these tell one anything very useful in the case of an issuer with access to its own money-printing machine.

Wolf concludes:

In the long run, the fiscal deficit must close. In the short run, the UK has the chance to push growth. It should take it. So should the US.

Market fundamentalism? It’s dead meat

Why is the horsemeat saga continuing to dominate the news?

It was the question posed by Peter Oborne in his introduction to yesterday’s edition of BBC Radio 4’s Week in Westminster:

There’s nothing like a story about dumb animals to bring out the most atavistic and juvenile instincts of your average British newspaper reporter. Few stories in living memory have been less significant than the Great Horseflesh Scandal. Nobody has been killed and and there’s no evidence anyone’s health has been put at risk. Not since rival teams of crack reporters from the Sun, Star and Daily Mirror raced around southern Spain on the trail of Blackie the donkey in the early 1980s has a story counted for much less. Yet very rarely since Blackie the donkey has a story been awarded more airtime. Such are the mysteries of modern media and political discourse.

In a sense, Oborne is right. There are no dead or wounded. Nevertheless, the story has touched a raw nerve and the media are not entirely to blame for the continuing public interest.

The reason for enduring public concern is that the horsemeat scandal symbolises a much deeper problem, which is explored in two articles in today’s Observer. Will Hutton sees the horsemeat scandal as a final denouement for Thatcherite values:

The collapse of a belief system paralyses and terrifies in equal measure. Certainties are exploded. A reliable compass for action suddenly becomes inoperable. Everything you once thought solid vaporises.

Owen Paterson, secretary of state for the environment, food and rural affairs, is living through such a nightmare and is utterly lost. All his once confident beliefs are being shredded. As the horsemeat saga unfolds, it becomes more obvious by the day that those Thatcherite verities – that the market is unalloyed magic, that business must always be unshackled from “wealth-destroying” regulation, that the state must be shrunk, that the EU is a needless collectivist project from which Britain must urgently declare independence – are wrong.

Indeed, to save his career and his party’s sinking reputation, he has to reverse his position on every one. The only question is whether he is sufficiently adroit to make the change.

Paterson is one of the Tories who joyfully shared the scorched earth months of the summer of 2010 when war was declared on quangos and the bloated, as they saw it, “Brownian” state. The Food Standards Agency was a natural candidate for dismemberment. Of course an integrated agency inspecting, advising and enforcing food safety and hygiene should be broken up. As an effective regulator, it was disliked by “wealth-generating” supermarkets and food companies. Its 1,700 inspectors were agents of the state terrifying honest-to-God entrepreneurs with unannounced spot checks and enforced “gold-plated” food labelling. Regulation should be “light touch”.

No Tory would say that now, not even Paterson, one of the less sharp knives in the political drawer. He runs the ministry that took over the FSA’s inspecting function at the same time as it was reeling from massive budget cuts, which he also joyfully cheered on. He finds himself with no answer to the charge that his hollowed-out department, a gutted FSA with 800 fewer inspectors and eviscerated local government were and are incapable of ensuring public health.

Hutton points out that a strong FSA, far from being a regulatory burden, would have given British enterprise a competitive advantage:

What the Paterson worldview has never understood is that effective regulation is a source of competitive advantage. If Britain had a tough Food Standards Agency, it would become a gold standard for food quality, labelling and hygiene. British supermarkets and food companies could become known for their quality at home and abroad, rather as “over-regulated” German car companies are, rather than first suspects when something dodgy is going on.

In a companion piece, Jay Rayner points to the “thuggish” behaviour of the big supermarkets:

The horsemeat scandal is not some isolated incident. It is a symptom of a much bigger disease affecting mass food retailing in Britain. (Last year’s row over falling payments to dairy farmers was another.) It is about the way British supermarkets have singularly failed to react to the vast changes to the global food market that they assumed was theirs to plunder by right.

Ever since the banking crisis of 2007/8, it has been obvious that the dominant economic orthodoxy of the past thirty years is a busted flush. And now we have yet more proof of its moral and practical failure.

There is no future in the fundamentalist ideology that elevated markets from a mechanism to a value and, moreover, a value that trumped all other values. The small minority in the Liberal Democrats who continue to seek to push the party further in that direction must be barking mad.

Economics – The Movie

Could Robert Reich’s new movie Inequality For All do for economics what Al Gore’s An Inconvenient Truth did for climate change?

That is the question posed by Carole Cadwalladr in an article in today’s Observer. She reports that, far from being dry and boring as you might expect of a documentary about economics, the film is witty and well-made, and picked up the special jury prize at the recent Sundance film festival.

Robert Reich’s books have always been worth reading – and so is his blog. You may recall that, in the 1990s, he took a break from academia to serve in President Clinton’s cabinet.

Reich’s message is that capitalism took a wrong turn at the end of the 1970s. Although the economy kept growing, wages didn’t. Median incomes declined while the top 1% took an increasing share. For a while, the middle classes compensated with various coping mechanisms. More women entered the workforce, creating dual-income families. Working hours rose. And increasing house prices enabled people to borrow. Then in 2007, people ran out of options and the economy crashed. The people who buy stuff could no longer afford to buy stuff.

It ought to be obvious by now that the economic orthodoxy of the past thirty years is like Monty Python’s dead parrot. It has expired and gone to meet its maker. It’s a stiff, bereft of life. It’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir invisible.

True believers in ‘TINA’ (There Is No Alternative) are like the pet shop owner, stubbornly insisting that their economic dogma is not dead but merely resting. It’s tired and shagged out after a long squawk. It’s pining for the fjords. And even when you provide them with incontrovertible evidence that their orthodoxy is dead, they reply that it has “beautiful plumage”.

Let’s hope that Reich’s film will convince more people to give this dead economic orthodoxy a decent burial instead of trying to nail it to the perch.

A new capitalism for a new year

Nick Clegg has been going on lately about the need to occupy the ‘centre ground’, as if there were a big space between the Conservatives and Labour. But that hasn’t been the case since Margaret Thatcher and Micheal Foot battled it out thirty years ago.

Actually, the most striking thing about the three main parties, certainly since Tony Blair took over the Labour Party, is how close they are on matters of economics. None of the party leaders seriously questions the orthodoxy that took hold in the 1980s; indeed, they do not even recognise it as an ideology, preferring to see themselves as post-ideological pragmatists. Their argument is basically managerialist, about who can best manage the old orthodoxy rather than who has the best ideas for replacing it.

Whether the party leaders like it or not, the banking crisis of 2007/8 signalled that the dominance of the old orthodoxy is coming to an end. On The Browser, Anatole Kaletsky discusses the new capitalism that will replace it:

This crisis is going to be viewed as the fourth historic transition that capitalism has gone through since the modern market economy was created in the late 18th century. The argument that I make in my book on the crisis – perhaps one of the few predictions in it that has been fully realised – is that this was not just another financial boom and bust, nor a crisis in one particular country or one part of economy. This was, and still is, a crisis of the entire global economy of a kind that has only happened three times before.

I compare this crisis with the great inflation of the late 1960s and 1970s, which created a completely new form of capitalism – Thatcherism and Reaganomics were totally different from the Keynesian social democracy they replaced. The previous systemic transformation started with the Russian Revolution and culminated with the Great Depression. This also created a new form of capitalism, almost unrecognisable from the classical capitalism of the 19th century. And the systemic crisis before that was the one that created liberal capitalism in the first place – the American and French revolutions that broke down agrarian aristocratic economies and established the market-oriented capitalist globalisation that Marx so vividly described.

So in my view this is the fourth systemic crisis of capitalism, and it’s going to give rise to a new kind of capitalist system. One still based on private property, competition and profits, but fundamentally distinct from the classic capitalism of the 19th century – from the government-led Keynesian economics of the postwar period, and from the Reagan and Thatcher market fundamentalism of the last 30 years.

You can quibble with the details of Kaletsky’s analysis (and do read the complete article, not just this extract, before you quibble), but it is clear that the version of capitalism established by Reagan and Thatcher is now a busted flush – in Adair Turner’s phrase, it is “a fairly complete train wreck of a predominant theory of economics and finance”.

The global economy is at an historical turning point; its future is the really big issue of the decade, not the trivial gossip and the public relations games that normally preoccupy the Westminster Village.

The Liberal Democrats cannot put off recognising this situation any longer. The party’s new year resolution should be to start a serious debate about the sort of economy it wants to see emerge from the wreckage. One can argue about the precise form that economy might take, but one thing is clear: the past is not an option. Any party, not just the Liberal Democrats, that believes its role is nothing more than to tweak a dying economic orthodoxy will become increasingly irrelevant. The advantage will lie with the party that is first to have the courage to admit that the old orthodoxy is a dead loss and articulate a replacement.

And it is no good dismissing this debate as ‘academic’ and nothing to do with ‘real life’ or ‘ordinary people’. For most people, the effects of a failed economic dogma are only too real.

Monty Python on the problem of economism

Peter Cook was the father of British satire but he also knew its limits.

In the early 1960s, he described his satirical nightclub ‘The Establishment’ as “loosely based on the Berlin cabaret of the 1930s, which did so much to prevent the rise of Adolf Hitler”.

In the early 1970s, Monty Python first broadcast this sketch, which in retrospect was extraordinarily prescient. As Cook might have said, it did so much to prevent the rise of amoral and economistic values in the subsequent three decades.

How buying a round shows the limits of economics

Economics has limits. Its narrow focus cannot explain social phenomena. To understand this, John Kay in the Financial Times asks us to consider Christmas gift-giving or buying a round of drinks at the pub by comparing how anthropologists and economists interpret these social rituals:

For the anthropologists, the custom of standing a round represented ritual gift exchange. They drew an analogy with Native American potlatch festivals, where tribes would gather to eat, sing, dance and confer lavish presents – sometimes treasured or essential possessions – on each other. The economists preferred a more hard-nosed explanation. Buying drinks in rounds rather than individually was a means of reducing transaction costs. The number of dealings between the customers and the bar was reduced, and the need for small change diminished.

I proposed an empirical test between the competing hypotheses. Did you feel successful or unsuccessful if you had bought more drinks than had been bought for you? Unfortunately, the result was inconclusive. The anthropologists believed their generosity enhanced their status. The economists sought to maximise the difference between the number of drinks they had consumed and the number they had bought. They computed appropriate strategies for finite games and even for extended evenings of indeterminate length. The lesson is that if you want a good time at a bar, go with an anthropologist rather than an economist.

We can also see the limits of economics when we consider the act of starting a family:

The economists who argue that the rationale of the family is found in cost savings have a point. Two together can live more cheaply than two separately, if not as cheaply as one. But anyone who thinks the quest for scale economies is the primary explanation of the human desire for family life is strangely deficient in observational capacity, as well as common sense.

The ‘economics of the family’ is a prime example of an economic imperialism that seeks to account for all behaviour through a distorted concept of rationality, an extreme example of economists’ notorious physics envy. Some models developed in physics demonstrate a combination of simplicity and wide explanatory power so remarkable that it makes no sense to think about the world in any other way.

But such powerful explanations are rarely available in other natural sciences, and almost never in social sciences. Even the visit to the bar is governed by a complex and tacit collection of social conventions. How do you know that you have bought the beer but only rented the glass?

The point is not that economics has no value but that, by itself, it can neither fully explain nor provide a rounded understanding of human needs and human behaviour. The specific problem here is economism, the reductionist idea that all social phenomena can be reduced to economic dimensions. This reductionism enables believers in neoclassical economics to argue that the market outstrips or permits ignoring ethical, social, political or cultural values. It is why the orthodox economic ideology of the past three decades has, amongst other things, led to so much social corrosion.

Following the banking crisis of 2007/8, this orthodoxy is, in Adair Turner’s famous phrase, “a fairly complete train wreck of a predominant theory of economics and finance”. It is now only a matter of time before that predominance ends. But it would be a mistake, and ironically an economistic one, to view the old orthodoxy purely as a practical failure. It is also a moral failure, precisely because it is economistic.

The Liberal Democrats need to move on and develop radical alternatives (The Theory and Practice of Community Economics by David Boyle and Bernard Greaves is a good place to start). This is a vital element in any recovery strategy for the Liberal Democrats because the party will be doomed if it fights the other parties for the right to cling to the wreckage of TINA (‘There Is No Alternative’). Moving on, however, requires not just a Plan B, C or D but also an ethical and human dimension. This means a decisive rejection of economism, and an insistence that human welfare and human values come before ideological constructs.

Hayek, Friedman and lessons for today’s neoliberals

The intellectual gurus of today’s neoliberals are Friedrich von Hayek and Milton Friedman. But Hayek would probably be crossed off your average Tea Party supporter’s Christmas card list if they ever took the trouble to read him.

That is the conclusion of Robert M. Solow in a fascinating review of Angus Burgin’s book The Great Persuasion: Reinventing Free Markets since the Depression.

Hayek was right to point out that central planning was doomed, since the centralisation of decisions is bound to generate errors and then fail to correct them. But today’s neoliberals are reluctant to acknowledge that Hayek also rejected unrestricted laissez-faire as unworkable, and was keen to identify ethical constraints on market forces.

The interesting angle for Liberal Democrats is that the basic problems with the market fundamentalists on the right-wing fringe of their party are prefigured in the early years of the neoliberal intellectual movement.

Then as now, neoliberals insist that economic theory and policy are a Manichean struggle between free markets and collectivism. In the early years of neoliberalism, we were told we must make a stark choice between unrestrained markets and Soviet communism. Today, the neoliberal fringe in the Liberal Democrats insists the only choice is between unrestrained markets and Fabian-style social democracy. They deny the existence of radical/social liberalism, and dismiss pragmatic policies in favour of ideological dogmatism.

As Solow points out:

...for those of us trying to live on this planet, the issue is not between free markets and socialism/collectivism; it is between an extreme version of free markets and effective regulation of the shadow banking system, or between an extreme version of free markets and the level and progressivity of the personal income tax. The metaphor of the slippery slope is largely an invention to scare off pragmatic exploration of the policy landscape.

and:

...the temptation to frame the intellectual issue as Free Markets v. Communism more or less guarantees that all the important practical questions about economic policy and social policy will disappear from view.

Neoliberals junked Hayek’s moral concerns long ago. Thanks to Friedman, the dogmatic insistance on laissez-faire, regardless of the human consequences, suggests that neoliberals today are unburdened by any ethical concerns.

And that is the fundamental problem with neoliberalism. Like all other rigid political dogmas, it insists that ideological constructs come before human welfare or human values.

It is no accident that most of the neoliberals in the Liberal Democrats today are single young men who spend most of their lives in front of a computer screen, often lost in a virtual world of violent computer games. They should try moving to this planet, meeting real people and engaging with some real world policy concerns. Then they might realise that politics is not primarily an individual quest to refine your ideological purity regardless of the human cost.

Spending and Growth

In the 2010 general election, the Liberal Democrats recognised that the government deficit had to be brought under control, but also that cutting too fast or too soon would be self-defeating. The party’s manifesto said:

We must ensure the timing is right. If spending is cut too soon, it would undermine the much-needed recovery and cost jobs. We will base the timing of cuts on an objective assessment of economic conditions, not political dogma.

Once the coalition was formed, that wisdom went out of the window. Liberal Democrat ministers began arguing for the Tory policy of early cuts, on the dubious grounds that the UK economy was comparable to Greece.

It seems that Nick Clegg and David Laws, contrary to the manifesto, were more concerned with political dogma than “an objective assessment of economic conditions”. They saw the coalition as an opportunity to reorient the Liberal Democrats around a ‘small state’ ideology. Laws makes that clear in an essay he wrote for the IEA in June.

David Howarth has demolished Laws’s arguments in an essay written for the think tank Liberal Insight. He asks, “Is Laws right to imply that reducing the overall share of public spending in GDP will lead to greater prosperity?” and concludes he is not.