At Christmas, the Labour staff party has at least one difference from the typical office knees-up. Someone, at some point, will ask the DJ to play ‘Things Can Only Get Better’.

This year we are told that the sound of D:Ream’s anthem from the 1997 election brought plenty of nostalgic staffers to the dance floor but caused discomfort among Jeremy Corbyn’s aides, less prone as they are to going misty-eyed at memories of Tony Blair’s biggest victory.

While I would normally join in the enthusiastic if uncoordinated dance moves, as if celebrating that new dawn breaking all over again, the tendency to look back to New Labour’s glory days is one we must resist as the party rebuilds for 2020, not least as director of Progress Richard Angell also argued this autumn.

This is particularly true for economic policy because Blair and Gordon Brown won, and retained, office in a world very different from our own.

The decade from the 1997 landslide was one of steady growth for most western economies, with Britain growing at the fastest rate in the G7, driven partly by a booming financial sector which provided a welcome boost to tax receipts.

This meant that there was extra money for public services and tax credits without having to take more from business or the rich. And when wage growth for ordinary workers slowed, the availability of cheap credit allowed the illusion of wealth to remain for a little longer.

Each of these pillars has now gone. Economists talk of ‘secular stagnation’ across the developed world. Regulators limit the risk-taking of banks because they know ordinary people would end up paying the price later. Tax receipts are lower so there is less money to go round. And the credit crunch stopped easy borrowing by households on modest incomes.

All this means that when it comes to economic policy there is no New Labour playbook to which we can turn. There is no point asking what Tony would have done.

Instead there is a gaping intellectual vacuum; and this month’s edition of Progress magazine highlights some of the more thoughtful ideas of how to fill it.

Tristram Hunt emphasises the need for a ‘big and hopeful vision for change’. He suggests that a starting point could be to revisit the concept of ‘predistribution’: the idea that instead of topping up the incomes of the poor through tax credits, the state should reform the overall structure of the economy so that inequality is lower to begin with.

Claudia Chwalisz and Patrick Diamond argue that this could be achieved through a set of reforms to the financial system, corporate governance and the labour market so as to promote inclusive growth.

Liam Byrne points out that reformers in business can be Labour’s ally in these efforts. He gives examples of companies putting purpose before profit and investing in sustainable long term growth. We should ‘work with them on an agenda for change’.

The authors are rightly regarded as among the best thinkers in Labour today. Diamond was a former colleague of mine in Downing Street and Byrne was one of our most thoughtful ministers in government. The ideas they put forward have a coherence – and a radicalism – which makes them worthy of shaping Labour’s forward agenda.

The next step is to translate the overarching visions into practical toolkits that Labour’s Treasury team can follow. In order to do that, we must begin by challenging an assumption that sometimes underpins our policy debates.

Unlike the Conservatives, we on the centre-left take an optimistic view of government’s ability to effect positive social change. That can lead us to think of ourselves almost like those second world war commanders you see in old films, with a map of the world on the table in front of us, and little models of ships, each signifying their current location. We give the order for what should happen, and a young subaltern shifts the position on the map accordingly.

In practice, those making policy can feel more like the captain of one of the ships – buffeted by the sea and harried by the enemy – than the grand commander back in the control room.

The shadow chancellor does not spend five years developing policy, go on to win a general election and then spend five years as chancellor implementing it.

On a day-to-day basis economic policymakers spend a lot of time reacting. In opposition, this is often reacting to government announcements, some of which are deliberately intended to cause you problems, like the welfare bill or the fiscal charter did Labour this summer.

In government, you get to announce a budget in March and an autumn statement in November but in between you do a lot of reacting to events. These might include the collapse of a bank, a rise in inflation, the onset of a recession, a fall in the external trade balance, a rise in borrowing, a drop in the oil price, a call to bail out an ailing firm or a controversy over a foreign takeover.

What is the ‘Labour’ response to each of these situations? How do you know whether intervening in a given case would correct a market failure or simply waste money that is better spent elsewhere?

The economic policymakers’ toolkit must include not only a forward agenda but also a guide to help navigate the unexpected.

Here are three principles which should guide Labour’s approach.

The first is the instinct, articulated by Tony Crosland, ‘to side automatically with the less fortunate and those in need.’ Faced with any decision in government, we should look first at the impact on the poor and vulnerable.

It is this ethical impulse which unites John McDonnell and Rachel Reeves and which separates both from George Osborne. And it should lead us to advocate, as Crosland wrote, ‘change [which] will appreciably increase personal freedom, social contentment, and justice.’

The second principle relates to the design of formal fiscal and monetary rules. My old boss Gordon Brown set out a framework in which decisions on monetary policy would be made independently by the Bank of England to keep inflation low; and decisions on fiscal policy would be made by the chancellor in a way that kept debt sustainable over the economic cycle.

The same approach guided Ed Balls’ commitment before the 2015 election to bring the current budget into balance during the life of the parliament. This would have ensured fiscal sustainability in the long run while enabling sensible borrowing for investment when interest rates remain low.

Osborne, on the other hand, has chosen to put himself in a fiscal straitjacket that would target an overall budget surplus and give himself no room for manoeuvre. The rule is intended to shrink the state, not promote sustainable growth, and, as Simon Wren-Lewis writes in the new edition of Prospect, ‘I do not know of any economist who has backed [it].’

The third principle that should guide our economic policymaking is a clear understanding of what markets can – and cannot – do.

Markets can be very good at providing two things: information and incentives. If something is in short supply relative to demand, its price should rise, indicating to producers there are profits to be made if they produce more of it.

This price mechanism also encourages innovation, as producers look for new ways to satisfy consumers’ demand and increase their profits.

As John Kay writes, ‘The sustained achievement of market economies comes from their pace of innovation – in products, technology and organisation – derived from the ability of market systems to undertake small-scale experiment, to watch the results, to mimic what works and discard what doesn’t.’

I think Kay is right. But what markets are not very good at is generating distributional equity. If the price of energy rises, it will hit people who use more of it, irrespective of whether they are rich or poor.

If that happens, it is bad news but it is not necessarily a ‘market failure’. And if policymakers rig the market to generate distributional equity, we will likely undermine its ability to provide information and incentives to invest. It is the reason Labour’s energy price freeze in 2013 was such a flawed policy.

The lesson is to know the limits of predistribution. If a market fails to provide information or incentives, we should correct it. But if it militates against distributional equity, post-hoc redistribution is probably a better response.

Predistribution cannot just be an excuse for new kinds of intervention after the limits of what the electorate will bear in taxation have been reached.

Byrne reminds us in his essay that ‘Labour at its best has always connected an ambition for wealth creation with a passion for social justice.’ It will be harder to balance those objectives now than it was in 1997.

We must give Labour’s policymakers the tools and maps they need to do it.

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Stuart Hudson is a former adviser to Gordon Brown and a partner at the corporate advisory firm Brunswick. He tweets @StuartJHudson

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Photo: Christiane Wilke