By articulating a vision that spoke about the future and connected with people’s aspirations, the Labour party was able to win three successive general elections. In simplistic terms, the model for the political economy was that government intervention was limited to address market failure and the proceeds of taxation were applied to invest in social infrastructure. The distinction between the private and public sectors was sharp as business and government were assumed to know best when it came to administering their respective spheres. This approach worked well during a period of economic growth when capital investment was needed to rectify Tory underinvestment. But the context has now changed.

It has been eight years since the first signs of the financial crisis emerged and we are on the brink of another recession. The years since the crash have been characterised by low-rates of growth, a lack of innovation and increasing inequality. The living standards of the majority have been squeezed while a small elite has captured the proceeds of growth. This is the zero-sum economy: where the contrast between winners and losers is sharp and increasing. Trust in business and politicians has hit an all-time low due to the perception that the system is rigged against the interests of ordinary people. The opportunity for Labour in the 21^st century is to define the role of a proactive government that shapes an economy that works in lockstep with people’s aspirations.

Fixing the system

Here are some of the features of the economy (generally interrelated) that are holding us back as a nation and preventing us from realising our potential:

• Lack of investment: for an economy to enjoy sustained long-term growth our businesses need to invest. Indeed, investment is one of the components of GDP but we are far too reliant on consumption to drive growth. This is often attributed to the short-term time horizons of investors and managers. Many companies have to report on a quarterly basis and chief executives, whose remuneration is driven by the share price, are incentivised to maximise short-term gains ahead of long-term investment. Ending quarterly capitalism has been one of the themes of Hillary Clinton’s campaign.
• Financial tinkering: we celebrate big mergers and acquisitions but economic studies show that these rarely end up being economically successful. We have also seen an increase in buybacks since the financial crisis – can we really argue that these deliver economic value? Note also the rise of the tax inversion in the United States, where big companies engineer a takeover in a foreign jurisdiction to take advantage of lower rates of corporation tax.
• Lack of competition: there are oligopolies in several major markets that enjoy the concentration of power to squeeze suppliers, price out consumers and squash new entrants.
• Lack of innovation: for the reasons set out above we have low rates of innovation. But this is a deeper cultural issue that we need to address. We need to prepare our children for life as an entrepreneur or for jobs that will cut across an increasing number of skills.
• A perverse tax system: during the height of the boom, a private equity manager was lambasted for paying less tax than his cleaner. While the quote was taken out of context, it is shameful that nothing has been done to reform rules that allow the super-rich to pay the lesser rate of capital gains tax on money they earn.

 
Talking about aspiration and the future is still fundamental. But the conditions have changed such that the role of the state can no longer be to sit back and allow markets to regulate themselves. Our mission should be to define the role of a proactive state in fixing the zero-sum aspects of the economy and reshaping it so that it is fit for the new world of work and technology that is already upon us.

Widespread reforms are needed to address the issues set out above and embarking on these will not be for the faint-hearted. Vested interests that stand to lose will recycle familiar arguments that the free market should be left alone. We will need to get better at explaining that the free market is often used by vested interests to argue against intervention. In fact, the argument is that by intervening to address the above issues, we will be making the economy more competitive, sustainable and pro-growth.

There is something in this project for all wings of the Labour party. We need to reform capitalism to ensure it works for the people and not elites. But we need to work with the grain of human nature, incentives and markets. For example, transparency is generally understood to be a good thing. But reporting quarterly earnings has distorted incentives and led to the wrong behaviours. We need to be pragmatic about what works.

Talking about the future

But it is not just enough to fix the problems. We also need to recast capitalism in a mould that will fit the 21^st century. Change is occurring at breakneck speed. Our children will have several different types of jobs, each one drawing on a range of skills that will be unknown to us today. Technological innovation, including artificial intelligence, will make certain types of jobs obsolete but also create new types of jobs (monitoring the social media account of a company is a job that did not exist when a lot of people entered the workforce).

We will need to design an entirely new institutional framework of incentives, policies, regulation and contracts that reflect new ways of working and doing business. The pace of change of technological innovation has been immense over the past few years but our institutional setting has not kept up with this pace of change.

Only a proactive progressive government can fix and reshape the economy to meet people’s aspirations for the 21^st century.

———————————

Dan Faundez is a qualified solicitor and a member of the Labour party. He tweets @DanFaundez1

———————————

Photo: jarkko-t