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Crisis and regime change in Britain.

The slump of 2008-9 was deeper than any since the 1930s, and the subsequent recovery slower. Does this mean there is a prospect for regime change in Britain?

The responses to the crisis have not so far produced much in the way of new ideas: policies have been drawn from the standard neoliberal repertoire. The modest upturn that followed Labour's rescue measures was cut short by a fiscal conservative backlash, though international comparisons and the historical record do not suggest that the rise in UK public debt as a result of these measures was exceptional, and bond traders seemed unfazed by it. The best (or least bad response) to the crisis would have been to delay raising taxes or cutting public spending until recovery was assured (although there is reason to believe that part of the budget deficit was structural, in the sense that even a full recovery would not suffice to remove it). But the scale of Labour public borrowing was a gift to the enemies of 'big government'. Having successfully pinned the blame for the crisis on Labour's 'profligacy', the incoming coalition launched a fiscal austerity drive of unprecedented severity and duration, with predictable results: from late 2010 until early 2013, the economy flat-lined. Not until 2014 did GDP regain its pre-recession peak and then only on the back of a pumped-up, pre-election boom.

The recovery that we have thus far seen has not been led by investment or exports, but by consumer spending--a continuation of previous failed policies. Against a backdrop of ultra-low interest rates and a buoyant--not to say bubbly --housing market, households have started to save less or borrow more. A fiveyear squeeze on household finances will be further eased as the rate of inflation drops below the growth of average earnings (though real wages are not expected to regain their pre-recession peak until 2018). Meanwhile, the Bank of England is endeavouring to support the growth of output and employment by keeping money cheap--at least until after the election--while somehow reining in the national sport of property speculation.

Little has been done to tackle Britain's deeper economic and social problems: the dominance of finance, under-investment, a chronic balance of payments deficit and levels of social inequality not seen since the Edwardian era. Westminster politics remains mired in a festering crisis of legitimacy, while UK foreign policy combines growing detachment from the European Union with continued subservience to Washington.

In spite of all this the state we are in is one in which the shape of the crisis remains 'economic':
   There are so far no major political fractures, no unsettlings of
   ideological hegemony, no ruptures in popular discourse. The
   disastrous effects of the crisis are clearly evident; but there is
   little understanding of how everyday troubles connect to wider
   structures. There is no serious crisis of ideas. Indeed, the crisis
   has been exploited as a further opportunity to reinforce the
   neo-liberal narrative ... and to push its project even further. (1)


We owe the term organic crisis to Gramsci, who distinguished it from dramatic conjunctural events--a military defeat, the fall of a government, the exposure of a scandal. An organic crisis comes about through the build-up of over time of persistent, pervasive and intractable stresses indicative of deep flaws in the way society is organised and governed. A crisis of this kind may last for years and cannot be resolved by a mere change of policy, leader or government. What is required is a change of regime. For this to happen, three conditions must come together: intellectual innovation, political realignment and institutional reform. The first essential is a new policy paradigm, a body of ethical values and philosophical principles offering a sense of political purpose and a source of ideas on which to draw in response to the flux of events. But new ideas cannot shift the balance of power without political champions and popular support. And if they are to make a lasting impact on the character of the state and the contours of society, they need to be embodied in new institutions or in reforms of existing institutions.

In the first parts of this article I seek to elucidate this general claim by revisiting two earlier periods of organic crisis: the Great Depression of the 1930s and the Great Inflation of the 1970s. Both crises were eventually resolved, but not until the preconditions for regime change had been met. In both cases, challenges to the old policy paradigm preceded shifts in the balance of political forces, leading to a wave of institutional reform. In the last part of the article I outline of the rudiments of a post-neoliberal paradigm, paying particular attention to the way we think about 'the economy' and the moral limits of the market.

Escaping from the Great Depression

After the upheavals of the First World War, the Treasury and the Bank of England set out to restore the three pillars of 'sound finance': balanced budgets, the gold standard and free trade. Budgets should be balanced out of revenue, at the lowest level of spending compatible with the defence of the realm and the maintenance of order; the parity of the pound sterling should be maintained so that it was 'as good as gold'; and there should be no barriers to the flow of goods, money and capital across Britain's borders, regardless of what other countries did, or of the consequences for specific domestic interests or industries.

During the war, these principles had been in abeyance: the costs of the war were met by borrowing; the gold standard was suspended; and duties were imposed on a range of imported luxuries. But after the war, faced with surging inflation and labour unrest, the authorities sought to restore 'business as usual'. Having cut public expenditure in order to remit taxation and reduce public debt, the Treasury steadfastly resisted all proposals for loan-financed public works as a remedy for mass unemployment. In 1925, the pound was returned to the gold standard at the pre-war parity of $4.86. However the issue of free trade was more complex; tariff reform remained unpopular with voters, and the Conservatives, rebuffed at the 1923 election after campaigning for protection, decided to bide their time before pressing the issue again.

The rate of unemployment, chronically high throughout the 1920s at twice the pre-war average, doubled again with the onset of the Great Depression, eventually peaking in 1932 at 22 per cent of the insured workforce. Contributory unemployment insurance, extended after the war to almost all employees, was overwhelmed by joblessness on this scale, and the minority Labour government elected in 1929 faced a mounting budget deficit which, in the summer of 1931, triggered a run on the pound. To restore financial confidence, bankers and opposition parties demanded swingeing cuts in public spending. Having no coherent alternative policy, Labour was bundled out of office and replaced by a 'National Government'--nominally a coalition, but dominated by the Conservatives. The coalition government promptly abandoned the gold standard, allowing the pound to depreciate to two thirds of its former gold value--though it remained orthodox in its imposition of across-the-board cuts. After a general election in which the coalition parties sought a 'doctor's mandate' and won a landslide victory, free trade too was ditched in favour of protective tariffs.

The third pillar of financial orthodoxy--balanced budgets--proved more resilient. The Wall Street Crash of 1929 may have marked the end of laissez-faire, but it took ten more years of mass unemployment and six years of total war for Britain to complete the transition to state-managed capitalism. Unemployment plagued the entire capitalist world in the 1930s. But two governments did institute successful recovery programmes: a worker-farmer coalition led by the Social Democrats in Sweden and the Nazi dictatorship in Germany Both pursued 'Keynesian' policies avant la lettre.

Britain's National Government, however, had no programme for tackling the slump. The recovery that began in 1933 owed more to market forces than to public policy The government's main contribution was cheap money and tariff protection. Low interest rates helped to revive house building, while protection channelled domestic demand away from imports, facilitating the growth of new mass production industries such as cars and electrical goods. Keynes's pleas for deficit-financed public works and active demand management were still considered dangerously unsound by the authorities.

The success of Keynesian deficit financing is of course by no means guaranteed. In particular, the issue of business confidence is critical. If it has been shattered by a deep and prolonged slump, a one-shot fiscal stimulus may fail to galvanise private investment and, after a short-lived upturn, output and sales will then fall back to their starting point. And if the stimulus is repeated, bondholders may take fright, thereby driving up the rate of interest on gilts and with it the cost of private sector borrowing. There are number of other possible adverse reactions to a recovery programme based on 'pump-priming', and these need to be countered by government taking the necessary steps to reassure business, refute critics and rally the public.

In Britain, however, the issue never arose: the crisis of 1931 put paid to any prospect of using fiscal tools to combat the depression. But during the 1930s, most economists agreed with Keynes on policy, whatever they thought about his critique of orthodox economic theory Support for his ideas cut across party lines, encompassing John Strachey on the Marxist left, Ernest Bevin and Lloyd George on the centre-left, Harold Macmillan on the centre-right and Oswald Mosley who was later to become the founder of the British Union of Fascists. But there was no political vehicle for a Keynesian programme. Even if the opposition parties joined forces, they stood little chance of winning power. At the general election of 1935, although Labour gained a hundred seats, the Liberal decline continued; and the coalition parties, with 53 per cent of the votes, amassed 70 per cent of the seats.

Thus, the last redoubt of sound finance did not fall until May 1940, when, in conditions of dire national peril, dissension on the Tory backbenches forced Neville Chamberlain to resign. In place of his discredited administration, a 'people's government' was formed. While prime minister Churchill presided over grand strategy, Labour ministers and Liberal mandarins took charge of the home front, opening up the road to 1945. Keynes returned to the Treasury and the first 'Keynesian' budget was introduced in 1941. By then, of course, Britain's pressing economic problem was no longer how to conquer unemployment but how to pay for the war without causing inflation and endangering class peace.

By and large, wartime economic management was a success, not least because the Keynesian policy revolution stimulated the development of a new system of national economic accounts, together with the collection of statistics for the purpose of measuring economic aggregates such as GDP, assessing the performance of the economy and making short-term forecasts. After the war, this powerful intellectual apparatus formed the basis for what became known as macroeconomic policy: the routine deployment of fiscal and monetary tools so as to prevent or mitigate recessions and maintain full employment whilst countering inflation. Alongside the welfare state and the mixed economy, the commitment to full employment formed a central pillar of the post-war settlement.

The rise and fall of full employment

During the 'golden age' of the post-war settlement, from 1945 to 1970, Britain, along with other capitalist democracies, enjoyed full employment, stable growth and rising living standards. And right up until the crash of 2008 British governments were not called upon to rescue the economy from a slump that no one wanted and few foresaw. There were, of course, recessions: notably, in the early 1980s and early 1990s. But these were recessions of choice, deliberately induced or tolerated by governments seeking to quell inflation without resort to some form of pay restraint

The Achilles heel of full-employment capitalism, however, was inflation. Keynes judged that 5 per cent was the lowest level of unemployment that could be achieved without having to introduce wage and price controls, a policy he opposed on liberal grounds: the most he was prepared to countenance was voluntary pay restraint. But between 1946 and 1970 UK unemployment averaged 2 per cent, substantially below the level that Keynes thought the lowest feasible. We might describe the 5 per cent figure as 'low full employment'. Historical experience suggested that as unemployment fell below this threshold, employers would encounter increasing difficulty in containing wage pressure and maintaining work discipline.

Once people had experienced high full employment, however, it became 'unthinkable' for governments to allow any appreciable or prolonged departure from it. This greatly complicated the problems of economic management. From the 1960s, successive governments battled to control inflation, while profits were squeezed between rising labour costs and intensified international competition. By the 1970s, conflict over the distribution of income and the allocation of resources had become endemic.

Was there a way of reconciling high full employment with moderate inflation and adequate profitability? In retrospect, it seems doubtful, but in the 1970s the issue was still in contention. The old left, with little regard for consistency, sought to defend free collective bargaining while pressing for more state planning; the new right aspired to abrogate the post-war settlement so as to set capitalism free; and the embattled Labour government conducted a prolonged holding operation, desperately seeking to contain wage settlements within the framework of the social contract.

There were voices outside the mainstream urging a more strategic response, based on a 'regime-changing' programme of reform that would sustain popular support for the social contract by linking the acceptance of pay restraint to advances in economic democracy (2) The case for a more democratic system of corporate governance was threefold: sectional conflict would be easier to resolve; a culture of social partnership would emerge, eliciting stronger efforts to tackle Britain's besetting economic weaknesses--low investment, lagging productivity, flagging competitiveness; and the old tripartite system of industrial politics could be transformed into a more inclusive process of social dialogue, enabling hitherto excluded groups to bring on to the policy agenda previously 'invisible' issues, such as the sexual division of labour. (3)

This prospect held little appeal for the big battalions. When, in January 1977, the Bullock Committee of Inquiry published its main report, recommending a number of proposals for greater industrial democracy, the unions' response was at best lukewarm and mostly hostile. And employers' organisations attacked the report with one of the most vitriolic campaigns they had ever mounted.

By then, in any case, it was too late to save the post-war settlement. In the early 1970s inflation had accelerated into double figures. In its wake, unemployment had climbed steadily and, though the rise was halted in 1977, there would be no return to the 'golden age'. The end came with the spectacular collapse of pay policy in the winter of 1978-9. This self-inflicted disaster opened the way to the neoliberal revolution of the 1980s.

The first Thatcher government made the conquest of inflation, not the pursuit of full employment, the objective of macroeconomic policy, insisting that lasting growth and prosperity could only be achieved by 'supply-side' reforms aimed at removing restrictions on capital, enterprise and markets. This set the agenda for the rest of the decade: breaking the power of organised labour, deregulating the economy--including the financial sector--and privatising stateowned corporations and other public assets. At that time, however, converting health care and education into commodities, produced and sold by privately owned, profit-seeking firms, would have been wildly impracticable and deeply unpopular. Instead, the government experimented with quasi-markets, a hybrid arrangement whereby tax-financed public services continued to be available to users free of charge, but provision was outsourced to private contractors, chosen via competitive tendering. At the same time, market libertarians waged a war of attrition on tax-financed income transfers, damning compulsory redistribution as legalised theft and demonising benefit claimants as scroungers.

Towards a new policy paradigm

The regime change of the 1980s laid the basis for the neoliberal era in which we now live. And it inaugurated a fresh wave of economic growth. Sir Mervyn King, recently retired governor of the Bank of England, described the years from 1993 to 2007 as the NICE age, a period of 'non-inflationary, continuous expansion'. Real GDP per head rose by 1.5 per cent a year, and most people had more to spend, though some gained more than others.

But were people better off in the NICE age? It was, after all, marked by the runaway growth of financial services, whose 'products' included a spectacular rise in household debt, a speculative property bubble and a variety of toxic financial instruments that multiplied risks rather than managing them. Perhaps neoliberal growth was ultimately more mirage than miracle. Indeed, taking boom and bust together, the financial sector's contribution to GDP over this period may well have been negative.

More fundamentally, the steady advance of markets and money into every sphere of social life, from education and childcare to politics and sport, now obliges us to distinguish between a market economy and a market society. A market economy is a tool for co-ordinating the production of commodities: goods and services produced for sale on the market. A market society is a way of life in which market values seep into every human activity, transforming social relations and depleting or degrading non-market values, whether personal virtues such as honesty, integrity, compassion and kindness or social ideals such as democracy, solidarity, freedom and fairness. We have become used to the idea that economic growth may harm the natural environment. Exactly the same applies to forms of social life. If the invasive spread of commodity production corrupts practices and institutions whose value lies beyond price--i.e. cannot be measured in terms of money--then it is, at best, a mixed blessing and, at worst, a form of vandalism. (4)

Furthermore, GDP measures output, not welfare or well-being. And even as a measure of output it is flawed. What is to count as output? Which activities are 'productive'? GDP measures what people pay for, directly via market transactions or indirectly via taxation, willingness to pay being taken as an indicator of value. Thus, commercial products and government services are included--the former valued at market prices, the latter at cost (what the government spends on paying the wages of public sector workers and procuring supplies from the business sector). But unpaid household activities such as childcare and housework are excluded. The imaginary line separating 'productive' from 'unproductive' activities is called the 'production boundary'. In reality, however, there is no sharp division: it is up to us where to draw the line. In the eighteenth and nineteenth centuries, before the concept of GDP was invented, economists were happy to leave both government and banking out of their definitions of national income. Once fixed, however, the boundary becomes self-fulfilling: activities that contribute to GDP are declared 'productive'; the rest don't count.

Is the answer, then, to seek to create a more compendious measure of GDP that includes household production? This could be done: for example, by calculating what it would cost to provide market substitutes for unpaid childcare and housework. But if we want to know how much time is spent on unpaid work and how it is allocated between men and women, household time-use surveys suffice: there is no need to calculate the hypothetical market value of household services. Indeed, the desire for a single measure of aggregate output should be resisted, for it obliges us to squeeze the various activities required to keep society going into a uniform accounting framework. This blots out the different social relations and logics of action at work in the business, public and household sectors of the economy, and blurs the distinction between a market economy and a market society.

In short, GDP is no longer fit for purpose. It was an abstract idea originally devised to help policy-makers respond to the Great Depression and the Second World War. Its growth should cease to be the chief goal of economic policy and yardstick of economic performance.

What should replace it? One popular candidate is happiness, as measured in surveys in which people are asked to rate, on a scale of 1-3 or 1-10, their own happiness or life-satisfaction. The resulting data are used in cross-national comparisons, studies of historical trends and detailed statistical investigations. One much disputed issue is whether economic growth makes us happier. In all countries, the rich are happier than the poor. Yet raising the incomes of all does not increase the happiness of all. The standard explanation for this paradox is that we desire not to be rich, but to be richer than others--hence the idea that growth is a treadmill. (5) Defenders of growth reply that richer countries tend to be happier than poorer, though the correlation is far from perfect. Moreover, as Diane Coyle points out, GDP is a figure that can rise without limit, whereas the scales used to measure happiness have an upper limit. It may be that the relationship between the two is like that between income and life expectancy. They are linked--just not proportionately over time. (6)

In my view the time is long overdue for us to rethink our obsession with growth and restate the case for the good life, conceived as a life worthy of desire, not just one that is widely desired. As the Skidelskys note, the deeper objection to endless growth is that it makes no sense. (7) Capitalism has brought vast improvements in material living standards, but it has also exalted some of the most reviled human characteristics: greed, envy and avarice. It is time to reorientate our politics towards securing the 'basic goods' that constitute living well.

The Skidelskys identify seven such goods: health, security, respect, personal autonomy (the ability to frame and execute a plan of life reflective of one's conception of the good), harmony with nature, friendship and leisure (understood not just as time off work, but as a special kind of activity in its own right).

Growth might be pursued as a means to one or more of these basic goods (health requires decent food and medicine; leisure requires time away from toil). Or it might be pursued for short-term pragmatic reasons (during a recession, with high unemployment and public debt, growth has to be a priority). But perpetual growth is not only unnecessary to achieving the basic goods: it may actually damage them. This is because the basic goods are essentially non-marketable: they cannot be bought and sold. An economy geared to unlimited commodity production will tend to crowd them out, replacing them with inferior marketed surrogates.

Critics of capitalism, particularly on the left, tend to make two standard charges: that the system is inherently unstable and crisis-prone; and that it generates unacceptable inequalities in the distribution of income, wealth and lifechances. But neither charge deals with the incursion of markets and money into areas where they have no business. This calls for an ethical critique. Without in any way discounting either the insecurity caused by boom and bust or the chasm that divides rich and poor, we need to stimulate debate about what it means to live well and why neoliberal capitalism puts the good life out of reach, even for the rich.

Notes

(1.) Stuart Hall, Doreen Massey and Michael Rustin, 'After neoliberalism: analysing the present', Soundings 53, spring 2013.

(2.) See Mike Prior and David Purdy, Out of the Ghetto, Spokesman, Nottingham 1979: www.hegemonics.co.uk; and David Purdy, 'The Social Contract and Socialist Policy' in M. Prior (ed), The Popular and the Political, Routledge 1981.

(3.) See Beatrix Campbell, 'After neoliberalism: the need for a gender revolution', Soundings 56, Spring 2014.

(4.) See Michael Sandel, What Money Can't Buy: The Moral Limits of Markets, Allen Lane 2012.

(5.) Richard Easterlin, 'Does Economic Growth Improve the Human Lot?' in P.A. David and M.W Reder (eds), Nations and Households in Economic Growth, Academic Press Inc, 1974.

(6.) Diane Coyle, GDP: A Brief but Affectionate History, Princeton University Press, 2014.

(7.) Robert Skidelsky and Edward Skidelsky, How Much is Enough? The Love of Money and the Case for the Good Life, Allen Lane 2012.

David Purdy is a social economist and former Head (now retired) of the Department of Applied Social Science at the University of Manchester. Politically active since the early 1960s, he is a member of Democratic Left Scotland. He co-edited and contributed to Feelbad Britain: How to make it better (Lawrence and Wishart, 2009).
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