Forget Corbynomics. We need a new industrial revolution

The economic policies of Labour leadership frontrunner Jeremy Corbyn – the man portrayed as Britain’s latest radical hope – have been variously criticised as idealist, extremist, dangerous and illiterate. The policies he has put forward – including giving the Bank of England powers to invest in housing, energy, transport and digital projects, reopening coal mines and nationalising gas and electricity – are none of these. A more appropriate critical assessment came from the 41 ‘economists’ who wrote a letter to the Observer newspaper – though, ironically, it was intended as a message of support, rather than a brickbat. They argued that Corbyn’s plans expressed ‘mainstream economics’.

‘Mainstream’ is fair comment. Notwithstanding the ‘Keynesian’ roots of his economic ideas, they do not represent a serious alternative to what’s been happening in the UK over the past 30 years. This is because, despite the connotations of Keynesianism as being passé and out-of-fashion these days, its economic content remains consistent with contemporary government practice in Britain and around the Western world.

Corbyn’s economic policies are mainstream because the assumptions on which they are based are mainstream. His policies embody the conventional Keynesian notion that modern capitalism needs high levels of state economic intervention in order to survive. Keynes’ most important insight was that capitalism needed more state intervention in order to keep going during the 1930s and 1940s.

This doesn’t mean Keynes’ policy prescriptions for extra state spending and borrowing could ever work to bring capitalism out of a depression, but his valid judgement has endured as the way capitalism copes with its tendency to decay. Increasingly over the past century – and longer, for some earlier-developing countries like Britain, the US, France and Germany – developed capitalism has become dependent on the operations of the state to maintain itself.

As Western economies have matured, the market has become even less capable of reproducing itself spontaneously, so the state has stepped in to extend its scope of activity. The state and the economy have become so thoroughly integrated it is impossible to separate the two. This reality of modern economic life was even recognised by one of the twentieth century’s most vocal advocates of free-market capitalism, the late Milton Friedman, when he famously declared in the mid-1960s that ‘We are all Keynesians now’. Hence, today, there is a dependence not just on high levels of state spending and regulation, but, since the financial crash, on the extreme levels of monetary support expressed in the ‘unconventional’ – but definitely mainstream – monetary policies of quantitative easing and rock-bottom central-bank interest rates. Corbyn’s economic policies do not challenge the underpinnings of this state-dependent mould.

It is certainly true that Keynesianism as an explicit set of counter-crisis ideas was discredited in the intellectual ‘economic wars’ of the late 1970s and 1980s. After the self-evident failure of state-stimulus policies to restore economic vigour following the 1973 return to depression, the ‘free market’ came back into favour by default. But for all the change in rhetoric associated with the Thatcher and Reagan years, the practice of heavy and increasing levels of state economic intervention has never been reversed.

The reality of close state-market interdependence, that Keynes’ theories had confirmed half a century earlier, never went away. Despite the superficially polarised discussion over the years about the role of the state and the effects of government spending, this interdependence remains the context for all policy implementation. As William White, a former chief economist at the ‘central bankers’ bank’, the Bank for International Settlements, said a few years ago, ‘In practice, Keynesian thinking has almost completely dominated the policy agenda for most of the postwar period’.

Whatever the stated views have been on government economic policies over the past three decades, the state has always stepped in to stabilise economic relations and bolster capatalism’s resilience. Even when governments haven’t initiated this themselves, they have all gone along with it. Corbyn’s proposed policies today reiterate this position and do nothing to challenge its essence. In fact, he is proposing more of the same today, pushing at the door for state support, which is already wide open.

What Corbyn has been proposing is no qualitative change in state activity from what has been implemented from the start of this long depression, and throughout the administrations of Thatcher, Major, Blair, Brown and Cameron. The difference in presentation is that Corbyn can claim to be more honest than most in calling his policies what they are – more state intervention. But no one can legitimately claim they deviate from the past.

In fact, his honesty about promoting the economic role of the state derives from the misguided ideas of state socialism, going back well over a hundred years. This saw state intervention as progressive in itself, rather than an indication that moribund market economies were unable to cope without it. Hence Corbyn’s continued openness to the socialist shibboleth of nationalisation, even though the state ownership of production during the postwar years showed itself to be an inefficient means of raising productivity. Anyone who puts ‘greater prosperity’ at the top of his economic plan, as Corbyn does, could do with reflecting on those lessons.

Corbyn’s attachment to state intervention as inherently progressive betrays his failure to offer an alternative not just to mainstream economic policies, but also to traditional Labourite politics. That’s one good reason why we never heard anything about a ‘left alternative economic strategy’ from Corbyn and his supporting colleagues during the recent General Election campaign. At the time, they endorsed the official Labour Party manifesto, because they went along with its substance. Now they can claim the manifesto ‘didn’t go far enough’, but proposing even greater, and more explicit, state support for the economy does not make for a radical alternative to it.

Nor does Corbyn offer anything much new to the so-called big, but actually hollow, debate in British politics between ‘austerity’ and ‘state spending’. In practice, both sides endorse the maintenance of levels of public spending in the range of 35 to 40 per cent of GDP, and the goal of eliminating the budget deficit. The main difference seems to be over committing to a timeframe for closing the deficit. That applied to the manifesto commitments of all the major parties in this year’s General Election. Corbynomics doesn’t break from that consensus, either.

On the substance of the fiscal deficit, Corbyn offers continuity. As John McDonnell, Corbyn’s campaign manager, spelt out, ‘let me make it absolutely clear that Labour under Jeremy Corbyn is committed to eliminating the deficit and creating an economy in which we live within our means’. So Corbyn is also pledged to balancing the nation’s books, though, unlike the Tories, he doesn’t want to set an ‘artificial’ timetable for when this can be achieved. He also wants more of the deficit reduction to come from a more prosperous economy that generates higher tax revenues – ‘we will ask those who have been fortunate to contribute a little more’.

This approach to book-balancing might sound more appealing than the Tory plans for spending cuts, but it rests on returning the economy to significant and durable growth in productivity and output. On the question of how to bring that renewal about, Corbyn’s policies remain vague to say the least – and, in some areas, they are potentially counterproductive. He shies away from even recognising the urgency of economic restructuring. Corbyn’s vision for a ‘rebalanced economy based on growth and high-quality jobs’ is motherhood and apple pie. Who would disagree? Unfortunately, his existing policy pledges seem more likely to impair than deliver such a vision.

The people-friendly language becomes even more explicit in the area of monetary policy. Corbyn is not just suggesting more quantitative easing – the most mainstream policy initiative of the past decade – but the option of quantitative easing ‘for the people’, as if that’s something completely different.

Quantitative easing, which has been used, or is still being used, by all the mature-economy central banks, is a simple state programme of buying financial assets. In Britain’s case, the bulk of these were government bonds. The original justification for it was that it would reduce long-term interest rates and thereby facilitate more borrowing and investment in business.

In practice, business-investment levels have barely recovered to the low levels of the pre-crash years. Instead, the main effect of lower interest rates has been to perpetuate zombie capitalism by allowing more of the less productive, even loss-making, businesses to keep going. This programme has therefore served to exacerbate the poor productivity record of recent decades. It has stunted rather than stimulated economic growth.

Even more conspicuously, the extra liquidity from central-bank asset purchases, and the money created as a result, has brought about the latest wave of incipient asset bubbles. This happens when central banks buy bonds from big financial institutions, for which they get money credited to their bank accounts. Much of this new money has been used to buy other financial assets, such as shares and corporate bonds. This results in an over-pricing of assets, which is evident in the elevated markets for Western equities and property in the years since the crash. This is paving the way for the next financial crisis, and has reinforced cross-border capital flows into higher-yielding emerging-market debt, aggravating developing countries’ economic challenges.

The proponents of ‘people’s quantitative easing’ seem unfazed by all these adverse economic and financial consequences. Instead, they want even more of it, beyond the £375 billion of asset purchases made between 2009 and 2012. The details of Corbyn’s suggested extension to existing mainstream monetary policy also remains a bit vague, but the idea seems to be that the Bank of England will resume government-bond purchases of debt, issued by a new national infrastructure bank.

In the end, quantitative easing ‘for the people’ is just another way of saying the government should borrow more to finance infrastructure and housing projects. Rather than selling this debt to the private sector, the bonds remain within the state. The Bank of England, as one wing of the state, would be effectively funding another state wing, in the form of the national infrastructure bank. The other magical twist is the suggestion that the government would subsequently declare the bonds to be cancelled, which would mean the debt would never have to be repaid. Hence, the Bank would be creating money to lend it to another part of the government to spend. Then, in effect, it would tear up the debt certificates so they never have to be repaid.

Despite this sleight of hand, this remains, in content, a traditional Keynesian position: extra public borrowing to stimulate the economy. It is characteristic of today’s timid state of politics that Corbyn doesn’t come out and say this openly, even when some other Keynesians seem to be less reticent on the subject. Commentators such as Paul Krugman and Martin Wolf have argued that conditions have never been better to put forward the Keynesian argument: there is a self-evident deficiency in the level and quality of infrastructure and housing, while interest rates for government borrowing have never been lower. Instead, Corbyn appears to be reluctant to engage with the public to justify extra state borrowing. This does not bode well for him in the public discussion about the necessary, and often tough and painful, steps needed to restructure and renew British economic dynamism.

Public debate must be the starting point for a genuine economic alternative; nothing can change without an extensive, country-wide discussion on the necessity to restructure, rather than save, the economy. Democratic public engagement and support is essential, not least because meaningful economic change can’t happen without people making it happen themselves. This is reinforced by the dominant form state economic intervention has taken since the late 1980s and especially since the 1990s.

State institutions in Britain, as well as other mature Western economies, have increasingly promoted policies favouring the stabilisation of capitalism. This reflects a deepening cultural discomfort with change, and especially with disruptive change. This has led the state in many countries to consolidate itself as a ‘conservator state’. The state has been working primarily to preserve and protect the status-quo economy, while committing much less effort and funding to the positive promotion of long-term growth.

Therefore, a genuinely radical and potentially effective economic programme needs to start by recognising that the main barriers to economic revival are more political than economic. Since the current socio-cultural climate is unfavourable to doing what is required to address the objective constraints on progress, overcoming this is a political task. This can’t be resolved within the establishment; it needs the public to be actively involved. People need once again to be convinced that progressive change is possible, as well as necessary.

In this spirit, if Corbyn were to have an intellectual conversion and decide to break from the mainstream, here are five public arguments that he should pursue.

1) Bring economic matters back into political accountability

For too long, economic policy has not been a subject of substantive, mainstream discussion. Disenchantment with politicians has unfortunately led many critics from the old left and the old right to argue that economics should be even more insulated from the politicians. Hence the acquiescence to decisions being taken by ‘independent’ bodies of experts. This is a negation of accountability and the essence of democratic public debate.

We need to question and overturn the assumption that monetary policy is best undertaken by ‘independent’ central banks. Central banks have become the core economic institution of the state. They should be returned to political control and accountability. Corbyn’s apparent dismissal of the merit of central-bank independence is therefore refreshing.

However, this sentiment needs to be extended much further. We must oppose the outsourcing of other areas of economic policy to unaccountable teams of experts, regulators and charities. Opposition to this practice should not be argued off the back of financial calculations – what seems cheaper – or the role of private business in providing public services, which usually only reflects anti-business prejudices. Instead, it should be opposed on the cardinal grounds of democratic accountability.

2) Adopt an agenda for economic progress that challenges scepticism and anxieties about economic growth

This involves winning the argument for the social as well as the material benefits of economic development. It means re-establishing the merits of risk-taking and reversing the spread of state regulation that enforces and institutionalises the anxieties holding back innovation. For too long, the mantra of ‘sustainability’ has had the ascendancy, imposing restraints on innovation and development – including, for example, on genetically modified foods across Europe.

Specifically, the sustainable-development consensus puts the ‘natural’ environment above economic growth. When, in fact, economic development is the best ‘environmental’ thing that ever happened, because it gives humanity the means to control damage done by natural events and to the environment. The revered ‘state of nature’ is a reactionary destination; it takes us back to struggling for survival, dying from premature death, preventable disease, storms, famines and floods.

3) Free up investment in housing and public infrastructure

Corbyn’s promotion of ‘people’s quantitative easing’ is an evasive way of disguising the extra public borrowing needed for housing and infrastructure. Instead, we should recognise that such a construction programme would face much bigger constraints than financing. Funding in fact could be relatively easy, given that the world is awash with cash – partly because of weak capital investment by business, and partly because ‘wealth funds’ in the emerging world are looking for good areas to invest in. The real barrier holding back infrastructural renewal in transportation, communications, energy, other utilities and in housing is the cultural antagonism to development, which becomes further institutionalised in onerous planning regulations. In practice, this also puts off potential investors, and creates an unnecessary financing constraint.

Proponents of a progressive economic plan need to argue for the benefits of this sort of construction activity, and liberate it from the planning regulations that are holding up projects from being agreed and implemented. The procrastination seen over airport, road, railway and energy-plant expansion validates the words of the historian C Northcote Parkinson, who famously said that ‘delay is the deadliest form of denial’. Corbyn’s public opposition to the expansion of Heathrow shows that on airport capacity he straightforwardly takes the side of denial. His record of endorsing environmental anxieties suggests that, on the issue of planning regulations, he is unlikely to offer a solution to Britain’s housing shortage and decaying infrastructure.

4) Stop the state propping up the zombie economy

We need to put a stop to the state’s muddle-through economic policy. Today, this goes far beyond the 1970s-style support for ‘lame ducks’, when the state bailed out and subsidised some uncompetitive firms and industries. State support has now spread through a wider range of corporate subsidies – from public-procurement initiatives to outsourcing strategies to permanently lower interest rates and the general encouragement of debt-driven consumption by businesses and people.

The result of this reorientation in state economic intervention is a zombie economy, dead in productive dynamism but propped up with a semblance of life. Zombification creates a black hole that sucks in and dampens all economic activity, and frustrates creative impulses. Pulling away the state props of zombie capitalism is a necessary part of economic restructuring. We need to clear away the old and the less productive.

Corporate dependency on the state has become every bit as invidious as personal welfare dependency. Kevin Farnsworth, a senior social policy lecturer at the University of York, recently estimated that annual government support for business – through various subsidies, grants and tax relief – at £93 billion a year. And that was a conservative estimate.

Corbyn’s pledge to ‘strip out’ some of this support could set us in a more progressive direction. Unfortunately, his anti-business and anti-development animosity leads him to mix up potentially helpful state support – for productive investment and corporate research and development – with the operational subsidies and other assistance that help keep less-productive firms going. Moreover, Corbyn, with his apparent support for quantitative easing and low interest rates, would only continue to prop up the zombie economy. So far, then, Corbyn’s plans to ‘strip out’ state subsidies are a curate’s egg: something which seems partly good but is ruined by its bad parts.

The progressiveness of state economic intervention is not simply a question of having too much or too little of it. What matters is what the state is being directed to do: either saving a stagnant capitalism or helping to restructure it. Is it perpetuating a state-reliant, debt-dependent zombie economy, or is it helping to…

5) Lead a fourth industrial revolution

In contrast to what’s been happening over the past four decades, the state needs to restructure, rather than prop up, the economy in order to promote and build new, productive sectors. The goal should be to initiate a fourth industrial revolution, no less extensive than the previous three that had focused respectively on steam power, electrification and computerisation.

A next-generation government with ambitious plans to renew the economy would need to:

• Encourage business research and development, including massively expanding direct public funding for science and basic research;
• Foster technological innovation and productive investment;
• Find meaningful ways, including tax incentives and catalyst funding, to support existing and start-up businesses pioneering new technologies.

While trying to pick specific ‘champion’ companies is a lottery, it is more effective to provide consistent support for particular sectors that are likely to define the future, such as biotechnology, nanotechnology and robotics.

As part of this restructuring plan, the state will need to provide transitional help to people as they move from old, low-value jobs into new, higher-productivity jobs, through income supplements as well as retraining in next-generation capabilities and skills.

To finance points 3, 4 and 5, we must establish a special industrial and infrastructure fund in the order of £1 trillion to be spent over the next 10 to 15 years (on top of the existing public-spending plans in these areas). The fund should be distributed as follows:

• Split £400 billion of this between developing three industrial sectors based on advanced technologies: biotechnology, nanotechnology and robotics;
• £200 billion for additional science and basic research in other emerging areas, and support for subsequent commercialisation;
• £300 billion for extra public infrastructure and housing projects;
• £100 billion for transitional income support and training as people move into new jobs.

In today’s money, that would represent about an extra four per cent of GDP each year invested for a stronger and durable economic future. Even if, after the first decade, productivity and GDP growth was only boosted by a conservative two per cent per annum, this £1 trillion of spending would be covered by the creation of additional economic wealth in the future, with sizeable follow-on effects further along.

Conclusion

Together, these five themes encompass the sorts of arguments and initiatives that could help establish a genuinely radical programme for the sort of transformative economic change that is needed to resolve the long-running dearth of productive investment and meagre productivity growth. Corbyn is welcome to adopt them – even though it would mean renouncing the Labour Party’s state-socialist tradition. Otherwise, the people who have started to look in his direction out of dissatisfaction with the dire state of British politics today risk having their aspirations dashed again.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000. (Buy this book from Amazon (UK) or Amazon (USA).).

Phil will be speaking at the sessions ‘Can we manufacture a new economy?’ and ‘Can the UK economy survive Brexit?’ at the Battle of Ideas festival in London on 17-18 October. Get your tickets here.