An Economic Policy For A Post Neo-Liberal World (Part 3 of 3)

An Agreed Industrial Strategy

As we have seen, an effective economic policy is dependent for its effectiveness on a further element – the development of an agreed industrial strategy. This does not raise problems for a centrally directed economy such as China, nor is it a difficult issue in wartime when the needs are pretty obvious; and, while a country like democratic Japan, with its more structured society, might find that the common good might be more readily accepted as the basis for action than it would be in the West, it should not mean it is any more difficult in principle to achieve for a country like the UK.

An effective industrial strategy for Britain would require agreement and support from each of government, industry and the banking sector. The task is not an impossible one; the urgency of what is required should surely concentrate minds. The strategy need not “pick winners” in detail or operate in too prescriptive a manner but would establish criteria and measures of performance that would provide a context within which the normal processes for identifying worthwhile investment opportunities could operate so that a great deal of the decision-making could be left to the usual agencies.

Proponents of the current orthodoxy will of course argue that to attempt such an exercise would be to usurp what is the proper role of the market. But that is to ignore two obvious factors – the current failure of the market to produce satisfactory outcomes and the successful experience at other times, and of other economies, when just such a strategy has been implemented.

A successful industrial strategy would, of course, focus on manufacturing. It is a competitive manufacturing sector that has underpinned the growth of other economies by providing access to mass markets and the benefits of economies of scale. It is manufacturing that uniquely provides the stimulus to innovation, the quick return on investment, the development of new skills and the creation of new jobs – all elements in a successful economy that have sadly eluded us for a very long time. It is manufacturing that makes possible the strategy of investment credit creation by offering a sufficient return on that investment in terms of increased output so as to provide the virtuous circle of increased investment leading to increased output and back again to yet greater investment that has served other economies so well.

Credit creation by a central bank, directed to productive purposes, would be hugely more effective than undirected quantitative easing in rebuilding our industrial strength. British firms with access to investment capital on terms that impose less of a burden on cash flow and that give them the chance to build output, sales and profits so as to repay their borrowings would stand a much better chance of not only surviving but prospering; there would then be a sound base on which other well-tried elements of an industrial strategy, such as tax breaks for research and development, would have a better chance of making a difference, and that in turn would improve employment, investment and productivity levels.

Restoring Macro-economic Policy to Democratic Control

The commitment of government, industry leaders and the banks to the development of such a strategy – encouraging its development, in other words, as the outcome of a wide-ranging consultation so that it thereby gains considerable popular support and understanding – would point the way to a further essential reform which constitutes a further element in a successful economic policy – the restoration of macroeconomic policy to its proper place as the responsibility of government.

The elevation of a supposedly “independent” central bank to the role of unchallengeable arbiter of macro-economic policy was widely applauded when Gordon Brown introduced it and is still virtually never questioned. It can hardly be argued, however, that it has produced successful results; and there is now at least a greater disposition to ask whether bankers are as objective and free from self-interest as was thought.

The evidence is that handing monetary policy over to the tender care of a central bank is simply a reinforcement of the current and increasingly discredited orthodoxy that inflation is the only concern and proper focus of monetary policy and that its treatment is simply a technical matter that is properly the preserve of unaccountable bankers, and is not to be trusted to unreliable politicians. Quite apart from the undemocratic nature of this approach, whereby the most important decisions in economic policy-making are removed from the democratic arena, we have paid a heavy economic price for allowing the bankers’ interest to prevail over the interests of the economy as a whole.

It is easy to see why the bankers – and the economists who increasingly work for them – should support this. It is less easy to see why the politicians should so readily have accepted it. Yet the answer is fairly clear. It has suited the politicians well to be able to argue that the travails of the economy arise, not by virtue of their mistakes or deficiencies, but as a consequence of inexorable economic forces which must kept in check and marshalled by expert technicians. In this way, our governments have been able to disclaim any responsibility for policies (and their consequences) for which they are ultimately responsible. It should be noted in passing that the ability to disclaim responsibility for monetary policy by handing it over to a European central bank was always one of the (usually unstated) supposed advantages in some quarters of joining the Euro.

What is clear is that an economic policy that breaks the shackles of current orthodoxy would necessarily have to be removed from the exclusive and self-interested control of bankers. It would need to be driven by politicians who saw the need to ensure that the wider interest is carried into policy and is an essential element in setting its direction and gaining for it the necessary support.

The aim should be to re-establish the full range and purpose of macro-economic policy. It would no longer be a simple matter of tasking the central bank with restraining inflation and then allowing market forces to get on with it. Other important outcomes – full employment, a reasonable and sustainable rate of growth, properly funded public services, and so on – would come back into the reckoning as the legitimate goals of policy. Governments would expect then to be judged on their success or otherwise in achieving those goals of a more broadly based economic policy. The outcome of reviving the public debate about macro-economic policy – a debate that has been in limbo for decades – would be not only a better performing economy and a more integrated society, but also a more vibrant democracy, as voters realised that their views might count after all.

For the time being, however, even those – like Adair Turner and Michael Woodhouse – who are prepared to consider significant departures from standard monetary policy are still in thrall to an almost religious faith in central bank independence. This leads them (and of course most others) to shy at ghosts; they find it necessary to grapple with the totally unnecessary and invented problem of whether a sensible combination of monetary and fiscal policy might threaten the supposedly necessary separation of function between the Treasury (with responsibility for fiscal policy) and the Bank of England (responsible for monetary policy). The danger is that this misplaced concern will inhibit us from doing what is necessary.

As Kurihara made clear, no such problem bothered the Japanese, and it is hard to see why it should bother us. If we have to choose between the supposed need to maintain central bank independence and the advantages of a more accommodating monetary policy, it is surely a no-brainer; the fact that we even have to consider it is merely a further illustration of the price we have paid for allowing bankers to run our economy.

Full Employment

As we have seen, an important benefit from a renewed debate about economic policy would be the possibility of replacing ideologically driven preoccupations, such as preserving the value of assets, reducing the size of government, and relying on austerity to escape recession, with goals that more accurately reflect the wider interest and represent a more comprehensive measure of economic success. Prime amongst such goals would be full employment – a further element in a more effective economic policy.

Full employment as the central goal of policy would not only be the most important step that could be taken to relieve poverty and to reverse the destructive growth in inequality; it would also be a huge step towards a more inclusive and therefore more successful economy. There is, after all, nothing economically efficient about keeping large numbers out of work and unwillingly dependent on benefits. Full employment is the hallmark of a properly functioning economy. An economy that is competitive in the sense that it could find profitable markets for what it produces, and for which investment capital is available to finance increased production, would be able to use the productive capacity of its total workforce. Conversely, a high or persistent rate of unemployment shows that those conditions do not apply.

To restore full employment as the central goal of policy and as the measure of that policy’s success would revolutionise the way in which management of the economy is regarded. Once it was accepted that full employment is achievable, the success or otherwise of economic policy would be judged according to a criterion that was easily understood by the public. The value, in both economic and social terms, of the contribution that labour makes to society’s well-being would be newly acknowledged. Full employment would be seen as determining the direction of economic policy but requiring that other aspects of policy should also help towards this desirable outcome. It would be seen as important that the workforce was properly supported, through measures like comprehensive rights at work and appropriate skills training, and that the underlying services that guarantee the health and educational levels of the workforce were raised to a high level. The well-being and effectiveness of that workforce is, after all, our greatest asset.

This would represent, of course, a significant move away from the current orthodoxy which regards labour as just another production cost, to be kept as low as possible. That approach may, or more likely may not, make sense from the viewpoint of the individual business, but it is certainly and literally counter-productive from the viewpoint of the economy as a whole. A change in approach would also run counter to the current, but usually unstated, belief that wage costs are too high and that the key to improving competitiveness is to drive them down – not least by allowing unemployment to remain high.

Conclusion

These elements of an economic strategy to replace neo-liberalism would certainly represent a clear break from the orthodoxy that has dominated the world economy for so long. It has the merit of offering a real choice to the voters and enthusing those who are keen for change, without departing in any way from mainstream economics. The overall strategy is recognisably Keynesian and would be supported by that growing group of economists that is now confident that neo-liberalism as an economic doctrine has had its day.

It allows a coherent critique to be made of an orthodoxy that is manifestly failing, not only in the UK but in Europe and elsewhere – an orthodoxy that uses austerity to drive us deeper into recession and is increasingly defended not on its own merits but by the schoolboy tactic of demanding sight of an alternative. Each of the elements in my proposed strategy supports the others and helps to create a coherent whole; objections to the relevance or practicality of one element can be met by pointing to the supporting role of the others.

Most importantly, it means that those who increasingly understand the failures of neo-liberalism are not discouraged by a reluctance to tackle the doctrine on the centrally important territory where its deficiencies are most apparent and damaging. An economic strategy built on these elements would not only produce better economic performance but would – properly understood -commend itself to the electorate as well.

And for those who suffer withdrawal symptoms when denied their usual diet of an emphasis on deficit reduction, it would be the best way of dealing with that too!

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This post was written by Bryan Gould