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 The pre-merger Liberal Party was a social liberal party; classical liberalism was largely superseded by social liberalism towards the end of the nineteenth century.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
remember that there was effectively an embargo on any sort of ideological debate within the Liberal Democrats after the party was created by the merger of the Liberal Party and SDP in 1988. The first three years of the new party’s life were difficult, to say the least. The merger had left a lot of bitterness on both sides; the party’s poll ratings were dire (reaching a low point of 3% in 1989); the results in the local elections of 1988-90 and the Euro elections of 1989 were abysmal; and membership and finances were in free-fall. There seemed a real risk that the merger would unravel and the leadership was terrified that any sort of serious debate might trigger the unravelling. To make matters worse, leading figures from the SDP were still mentally scarred by their battles with the far left in the Labour Party, and carried over their paranoia about grassroots members into the new party. As a result of all these fears, for more than a decade after 1988, debate was strictly managed and party conference proceedings were dominated by anodyne debates about a series of take-it-or-leave-it ‘green papers’.

Something else was stifling debate, which was more the fault of the party’s grassroots members than its leadership. By the time of the merger, the once-radical concept of community politics was degenerating into a mechanical campaigning-by-numbers approach to politics, accompanied by a fierce anti-intellectual culture (“We’ve no time to think, we’re too busy delivering leaflets!”). In this quasi Maoist climate, no one dared risk accusations of dilettantism so the sort of people who ought to have been mounting an ideological challenge were up to their necks in parochial casework. However, the impressive incremental gains in local elections during the 1990s placed this hallowed but hollowed-out form of politics beyond criticism.

These factors combined to create an intellectual vacuum, with little serious thought or debate taking place in the party. By the end of the 1990s, one could be forgiven for thinking that the Liberal Democrats were a blank slate on which it was possible to write almost anything. And that is more or less what happened.

What broke the embargo on ideological debate? The short answer is Charles Kennedy’s election as party leader in 1999, or more precisely his subsequent inactivity.

Kennedy’s election had an unintended catalytic effect. In 2001, he killed off the last vestige of ‘The Project’ (the plan by Paddy Ashdown and Tony Blair to link or even merge the Liberal Democrats with the Labour Party) by disbanding the Joint Consultative Committee. The Project had in any case lost its point after Labour’s landslide victory in the 1997 election. Its end meant that the chancers in the Liberal Democrats seeking a short cut to power needed an alternative strategy. More generally, it was never clear what the purpose of Kennedy’s leadership was. His laid-back approach – or ‘masterly inactivity’ as it was once described – created growing frustration among his fellow Liberal Democrat MPs, who felt that the party was simply drifting and relying on outdated policies. These MPs were also well aware of Kennedy’s alcohol problem long before it became public knowledge.

Nature abhors a vacuum, and the intellectual and strategic vacuum under Kennedy invited a power grab. A few right-wing MPs decided to fill the vacuum by moving the party in a more market-oriented direction and began organising to that end. The initial plotting was confined to the Westminster Village, however. The first inkling most party members had that something was afoot was in 2001, when Charles Kennedy appointed Chris Huhne (then an MEP) to chair a policy commission on public services. Right wingers ran a well-organised campaign to push the commission’s conclusions in the direction of marketisation (similar shenanigans also attended the drafting in 2002-3 of the party’s policy paper ‘Setting Business Free’ and a subsequent policy paper on trades unions, followed by the launch in 2004 of two cash-for-policy-influence groups, the Liberty Network and Liberal Democrat Business Forum). MPs from the party’s centre and left belatedly responded by setting up the Beveridge Group to counter this trend.

It was also in 2001 that Mark Oaten made his leadership ambitions clear. He had previously held no serious political convictions; interviewed by John Harris in the spring of 2004, he admitted, “I only really got a philosophical belief about three years ago”. That philosophical belief turned out to be market fundamentalism. Oaten set up two factional groups to further his aims: Liberal Future (a ‘market liberal think tank’ that was never really a think tank but became the launch pad for a small group of right-wing libertarians) and the Peel Group (whose aim was to make the Liberal Democrats more attractive to potential Tory defectors by moving the party to the right). Although they would be embarrassed to admit it now, most of the party’s leading right-wingers supported Oaten’s leadership ambitions until a fratricidal bust-up in 2005, only a few months before Charles Kennedy’s resignation.

The event that finally left no one in any doubt was the publication of the Orange Book in 2004. It rapidly became the bible of the party’s right, although its value was largely totemic and few people actually bothered to read it. The book’s publication also marked the emergence of hedge-fund millionaire Paul Marshall, who co-edited the book (with David Laws) and bankrolled both the book and the think-tank CentreForum.

These manoeuvres were accompanied by some thoroughly dishonest historical revisionism. In reality, the pre-merger Liberal Party had moved on from classical liberalism in the late-nineteenth century with the emergence of the New Liberals, the policies of the 1906 Liberal government and later the ideas of Keynes and Beveridge. But a version of history was fabricated in which the Liberal Party was ‘economic liberal’ until it was polluted by social democracy in the 1980s. This falsehood enabled self-styled ‘Orange Bookers’ to assert that they were ‘reclaiming liberalism’, as if their spurious ideological purity gave them some sort of prior claim on the party. It was doubly dishonest since most of those peddling this myth were either former members of the SDP or the sort of Liberals who had previously been derisive of ideological purity.

Besides historical revisionism, the economic liberals had another rhetorical trick up their sleeves. This was to insist that the only choice was between economic liberalism and social democracy; the existence of social liberalism was denied, and social liberals found themselves repeatedly castigated as statist social democrats. This was clearly an attempt to deprive opponents of any space from which to argue. It was also ironic considering that, during the 1980s, most social liberals were sceptical of the SDP while most of those who subsequently converted to economic liberalism were then social democrats (as members of either the SDP or the gung-ho-for-merger wing of the Liberal Party).

The economic liberals had a simpler message for the media: tendentious Blairite clichés about being ‘new’ and ‘modern’. They styled themselves as ‘modernisers’ and dismissed their opponents as old-fashioned, without ever explaining precisely what was new or modern about their beliefs. They didn't need to. They could simply exploit the fact that, ever since the 1980s, the media have lazily reported the internal politics of any party in terms of the battles within the Labour Party between Neil Kinnock and the hard left.

As the evidence of right-wing manoeuvers mounted in the years 2001-2005, economic liberals themselves repeatedly denied any allegations of plotting, while the party’s centre-left mainstream was out of the habit of giving much thought to fundamental questions of ideology. The mainstream consequently underestimated the extent of the threat and its response was slow. Mainstream members gradually adopted the term ‘social liberal’ (not previously employed although it had long existed) to distinguish themselves from economic liberals, then published the book Reinventing the State in 2007 as a counterweight to the Orange Book, before launching the Social Liberal Forum ginger group in February 2009 following the shock of the ‘Make it Happen’ debate at the September 2008 party conference, when the defeat of an amendment on taxation exposed the social liberals’ weak organisation.

The financial crisis of 2007/8 and the ensuing recession ought to have boosted the social liberals. The crisis had thoroughly discredited the economic orthodoxy of the past thirty years (in Adair Turner’s famous phrase, it was “a fairly complete train wreck of a predominant theory of economics and finance”). But instead of killing off the plot to realign the Liberal Democrats with the old orthodoxy, the crisis reinforced it. Two events made that paradox possible.

The first of these events was the election of Nick Clegg as party leader in December 2007. Clegg has been accused of being a closet economic liberal who maintained an ecumenical façade during the leadership campaign to avoid alienating anyone. That is an understandable view but the truth is subtly different. Clegg sincerely believes he is above ideology and ‘pragmatic’, refusing to acknowledge his tacit ideological assumptions and insisting there are no other possibilities (an approach discussed in more detail here). His is therefore not an explicit ideological preference for economic liberalism but an unimaginative assumption that there is only one way, which is beyond argument.

The second of these events was the formation of the coalition government in May 2010, which tied the party to the Conservatives’ austerity policies (to the scarcely disguised glee of right-wingers such as David Laws, who saw the coalition as a device to ratchet the Liberal Democrats rightwards).

Despite all these developments, the party’s economic policy (at least on paper) is no more right wing than it was before 2001. Most Liberal Democrat members are no more enamoured of right-wing economic orthodoxy than they were before the coalition. They have never been formally asked whether they wanted a radical shift to the right; the party conference has not debated fundamental economic policy for many years, let alone changed it. Instead, the party’s right wing has achieved what it wanted mostly through sleight of hand.

The slapping down of Vince Cable in recent days is a reminder that the coalition government remains firmly wedded to the failed economic orthodoxy, come what may. But the coalition will not last forever and the Liberal Democrats need to develop some new thinking in this area; the party has no future flogging the dead horse of neoliberalism (or Fabian social democracy for that matter).

We need some creative work to develop 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.

We also need some destructive work to clear away the dead wood of orthodox old economic thinking. The adherents of that orthodoxy in the Liberal Democrats have a strength and a weakness. Although few in number, their strength is that they occupy key positions and can leverage the coalition to realign the party with orthodox thinking. Their weakness is different motives for wanting the same thing, and that will be their undoing. One can discern three quite distinct categories:

1. Market fundamentalists – “The answer is the market; what is the question?” True believers who often claim the inheritance of nineteenth-century classical liberalism but lack their nineteenth-century forebears’ Christian morality. They know the price of everything and the value of nothing. They believe in economism, the reductionist idea that all social facts can be reduced to economic dimensions, that the market is a value rather than merely a system of exchange, and moreover that this value trumps or replaces all other values. This group includes David Laws, Jeremy Browne, most of the people in Liberal Reform and the right-wing libertarians. They are joined by a few very wealthy people whose support for this ideology is more self-interested.


2. Positionists – “What are the people in power saying? We’ll have the same.” For these chancers, politics is all about positioning. It is about aligning yourself with whatever the people in power believe, as the best means of obtaining power yourself. This cynical manoeuvering explains why the positionists adopted social democracy in the 1980s then Blairism in the 1990s, before becoming economic liberals in the 2000s. They are governed by the concept of the Overton Window; if you step outside that window, you are not “serious about power” but a “purist” or a “hopeless idealist”. Consequently they see sincerely-held political values not as a prerequisite for using power but as an obstacle to acquiring it. Their belief in positioning is reinforced by the view that politics is analogous to consumer marketing, hardly surprising considering many of them work in PR or advertising. This group includes the sort of people who like to pull strings behind the scenes, such as Ian Wright, Neil Sherlock and Gavin Grant.


3. Friends of TINA – “There Is No Alternative.” They are convinced that the fall of the Berlin Wall ended all ideological argument definitively, for ever. Political argument is now about who can best manage a system that is itself beyond dispute. Most of them are too young to remember when the current orthodoxy was not orthodox and therefore simply cannot imagine any other possibility. Since no alternative is imaginable, they feel no need to employ any arguments but merely assert that only one course of action is possible. They brook no opposition, claiming that any critic is “not living in the real world”. Despite their denials, they have as much ideology as anyone else but dress it up as a non-ideological, faux-neutral ‘pragmatism’. This group includes Nick Clegg and Danny Alexander. For an authentic voice of TINA, read Nick Thornsby’s presumptuous sermons on Liberal Democrat Voice.

Circumstances have united the three groups in common cause but, sooner or later, these circumstances will change. The prevailing orthodoxy (which has been living on borrowed time since the financial crisis erupted) will be replaced. The three groups will then part company because the only thing they will have left in common is a sense of entitlement to power.

Group 1 (the market fundamentalists) will stick with the true faith, but will increasingly be viewed as an isolated bunch of fanatics.

Group 2 (the positionists) will carefully observe which way the establishment moves before eventually realigning with whatever the new orthodoxy happens to be.

Group 3 (the friends of TINA) will be devastated. They be utterly lost, since their very premise will have been kicked away – once there is an alternative, its existence can no longer be denied. They will be forced to compete in a marketplace of ideas, and how ironic is that?


Postscript: Thinking about it, there were two other reasons why 2001 was the year the ‘economic liberal’ movement suddenly emerged. In June of that year, David Laws was first elected to parliament. In September of that year, the Conservative Party elected Iain Duncan Smith as its leader, which led some wealthy free-marketeers to conclude that the Tories had taken leave of their senses and were consequently unelectable and no longer worth bothering with.