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Home and Away? The Political Economy of New Labour
David Coates (Wake Forest University, USA) and
Colin Hay (University of Birmingham, UK)
(Draft, please do not quote without permission)
To fully grasp the nature and significance of the economic policies which underpin dominant political projects, those policies have to be studied over time. They have to be grasped as complex totalities which touch all aspects of the political agenda; and they have to be seen as constructed and contested wholes, whose contradictions, internal consistencies and conceptual limits are as vital to their trajectory as are their axioms, theories and content. For a range of reasons both academic and professional the study of policy in this rounded way is more difficult than might be imagined. That this is so rests in large part on the powerful divisions within and between intellectual disciplines within the social sciences. That between politics and economics is well known, and its costs well attested to. 1 Less frequently discussed, though no less potent and equally corrosive is that internal to political science, between international and domestic spheres of inquiry (with their attendant sub-disciplines). 2
All too frequently its effect has been to separate the study of foreign and domestic policy to such a degree that the relationship between the two is inadequately explored, where it is explored at all. This is a particularly characteristic feature of much of the scholarship on the British Labour Party. It should come as no surprise, then, that it has become an emerging tendency in much of the recent writing on New Labour. There are exceptions in previous scholarship, of course Stephen Blanks important work on the adverse effect on UK domestic economic growth of the Attlee Governments foreign commitments is a classic example. 3
But, as yet, we are aware of no systematic attempt to explore the relationship between foreign and domestic policy in the emerging literature on third way politics in the UK. Material is appearing which seeks to chart New Labour policy in both the domestic and international sphere 4; but we know as yet of nothing that focuses specifically on the character and interaction of foreign and domestic policy. Here, as elsewhere, precious little attention has been paid to the "international conditions [of existence] of domestic political and economic dynamics" and to "the domestic conditions [of existence] of global/international political and economic dynamics" . 5 The purpose of this paper is both to identify and to begin to fill that void, by focusing on the character and interaction of foreign and domestic economic policy under New Labour.
Two factors make such an assessment particularly essential in the contemporary British context. Arguably, both reflect different aspects of New Labours attitude towards globalisation. First, both in opposition and now in government, Blairs Labour Party has, to an unprecedented extent, emphasised the degree to which international (indeed, global) processes, pressures and tendencies serve as external constraints circumscribing the parameters of political possibility. 6 Second, and at times in seeming opposition to this (a point to which we return), Labour has sought to project itself, again in a largely unprecedented manner, as a dynamic international economic force in the promotion of globalisation. 7
One sense, then, in which New Labour is both different from Old Labour and at one with its Thatcherite predecessor is in its powerfully held conviction that the UK economic model instantiated in its policies is one that should be canvassed and promoted in the international arena. Though most clearly targeted at a European audience, such third way adventism, has by no means been confined to a European stage. 8 The enthusiasm with which Labour has sought to export its vision of a domestically deregulated capitalism actively promoting trade and financial liberalisation on an international stage should not lead one to overlook the partys recent conversion to such ideals. For the assumed superiority of the Anglo-US model of deregulated capitalism upon which it is publicly predicated reflects a relatively recent revision to New Labours economic thinking. Until 1996 at least (and thereafter in an ever more diluted formulation), Labours political economy (domestically and internationally) was animated by a Huttonesque vision of the comparative (and competitive) advantage of a distinctly Germanic capitalism. This was (crudely) characterised (caricatured, perhaps), by the principle of stakeholding which Labour came enthusiastically to embrace. 9 Yet where once New Labour sought to internalise the Germanic model, it now seeks to export the British model. As Ben Clift has recently noted, whilst "then, Labour contemplated importing elements of the Rhenish model, principally long-termism and co-operative employer/employee relationships today, New Labour advocates exporting elements of the Anglo-Saxon model, principally deregulated labour markets to continental Europe" . 10 Given the current Deutsche Mark-Sterling exchange rate and Schröders seeming enthusiasm for labour-market flexibility, this may be all that Britain is likely to export to Germany for the foreseeable future.
What is clear, however, is that Blairism, like Thatcherism, sees itself both as an ideological project for export, and as one whose domestic success requires the recasting of international (and particularly of Western European) institutions and practices in its image. It is not difficult, then, to identify a coherent (or, at least, coherently articulated) New Labour economic message of a complex and integrated kind which is regularly delivered by leading figures in a string of international venues. Moreover, despite its more recent re-calibration of the relative merits of the Anglo-US and Rhenish models, for the most part this is a message which has been delivered from very early in the New Labour project. In opposition, Tony Blair was prone to use overseas venues for the delivery of major policy statements: in Germany and East Asia in 1996, and again later in South Africa. 11 These speeches exhibit an interesting logic. As widely noted, and as documented in meticulous detail by Mark Wickham-Jones, in opposition New Labour sought increasingly to convince capital of its moderation and competence. 12 At a time when Labour was still animated by a continental European conception of stakeholding and cooperative capitalism, this took the form of a studious courting of domestic industrial capital. Yet, as confidence in the Rhenish model waned, so attention turned increasingly from industrial to financial capital, and from domestic to international investors. 13 It was no simple coincidence that the culmination of a series of speeches proclaiming Labours economic moderation and its rejection of any lingering vestiges of social democracy should come not in London or Brighton in an address to the CBI or to an audience of trade unionists, but in a speech to the Singapore Business Community.
A similar logic was soon exhibited in office. Blair took the first available opportunity to address the European Socialist Movement in Malmo in particularly trenchant mode, and subsequently repeated his call for reform before European and world leaders in a string of gatherings from Edinburgh and Amsterdam to Bangkok and Davos. At home he (and other Ministers) have used public conferences and lectures (from the New policies for the Global Economy conference of 1994 to the Mais lectures of the late 1990s) to put their message across; and leading New Labour figures (from Gordon Brown to Claire Short) have regularly surfaced on the international stage pressing the same New Labour case. Time and again, New Labour Ministers have called in international fora for the deregulation of labour markets, the liberalisation of trade, and the respecification of the role of government calls which in every case have linked New Labour reforms within the UK to a New Labour vision of how best to organise and govern the (European) regional and global economy. There is thus already in existence a distinct body of primary data demonstrating the character and interaction of domestic and foreign economic policy in the New Labour project, and indicating the centrality of that interaction to much New Labour thinking. It is data which now needs systematic organisation and evaluation. Our principal aim in this paper is to begin this long-overdue task.
The internal and external dimensions of New Labour economic policies
The external conditions of endogenous growth
The internal face of the New Labour economic strategy is one concerned primarily with the twin goals of economic competence and competitiveness. Though identified as internal ends, both require external, indeed international, validation. From the outset, then, the relationship between the domestic and the international is integral to New Labours economic strategy, as indeed it must be to any assessment and evaluation of that strategy.
Competence and the credibility it is seen to confer is the touchstone of Labours new political economy a theme tirelessly rehearsed in virtually every statement of economic policy originating in the Cabinet Office, the Treasury or the DTI. Its principles are laid out most systematically by Ed Balls, Economic Advisor to the Chancellor, in his address to the Scottish Economic Society in 1997. 14 The emphasis, a consistent theme of New Labours political economy, is that the principles which guide (open) macroeconomic policy flow directly and necessarily from the changed architecture of an open (and global) macroeconomic environment. As Balls asserts in characteristically authoritative fashion, "changes in both the world economy and our economic understanding of it over the past twenty years mean that policy makers must adjust to new ways of making decisions". 15 Quite simply there is no alternative. In return for perceived credibility, an open global economy demands open macroeconomics; open macroeconomics entails a quasi-independent central bank diligently pursuing a strategy of inflation-targeting through the setting of interest rates (now elevated as the sole instrument of monetary policy); hence globalisation dictates that the government must absolve itself of responsibility for monetary policy, with whatever implications this bears for the domestic economy. The governments room for manoeuvre in the pursuit of any additional goals for the economy it might have (whether with respect to full employment, redistribution, competitiveness or innovation) is, then, circumscribed by the autonomy it has ceded to the Monetary Policy Committee (MPC) of the Bank of England. More than any other policy commitment the governments preference for credibility through operational independence for the Bank of England delimits, as it restricts, the parameters of political and economic choice. Identified consistently by the Chancellor as the sine qua non of economic policy, it may well, at a stroke, render any residual social democratic aspirations to party retains (as we shall see) obsolete.
The connection between the domestic and the international is, if anything, rather more immediately transparent with respect to the governments second core strategic objective the promotion of (international) competitiveness. Rather like credibility, competitiveness is a (desirable) quality of the domestic economy which can only be conferred upon it externally and whose conditions are thereby determined by the broader political economic environment in which the domestic economy must, again, be situated. Despite the academic controversy which the term has spawned and the seeming reluctance of professional economists to deploy the notion 16, competitiveness is presented as entirely unproblematic and as an unambiguously beneficial attribute of an economy. Consequently, rather like credibility, once it is established (or reiterated with sufficient frequency) that a specific measure or policy is competitiveness-enhancing, its desirability can simply be assumed and any additional externalities discounted. Like credibility again, competitiveness is presented as the means by which the economy is externally validated in an era of globalisation. This, in turn, implies that competitiveness-enhancing policies acquire precisely the same logic of necessity as operational independence for the Bank of England. Within such a rigid conceptual schema there can be no principled objection to strategies which promote the competitiveness of the economy, whatever their indirect consequences. Moreover, and perhaps of rather greater immediate significance, existing institutions which find themselves on the competitiveness-corrosive side of the balance sheet (such as an unreformed welfare state) emerge as indulgent luxuries of a bygone era. 17
Whatever one may think of the policy detail, then, one thing is certainly clear. The invocation of external constraints (more specifically, external selection mechanisms driving an evolutionary convergence on the fittest model of capitalist accumulation) have proved crucial to Labours legitimation of economic (and social) reform. The quasi-Darwinian nature of this (natural) selection process is well-illustrated in Blairs recent speech to the World Economic Forum in Davos (where its survival of the fittest allusions acquired a rather sinister edge).
Here, as is so frequently the case, Labours policy package speaks to two related but distinct audiences: (i) the UK labour movement; and (ii) UK and overseas business and financial institutions. To the first, New Labour Ministers have projected a new trinity of concerns with labour market flexibility, welfare reform and welfare to work. To the holders of capital, New Labour Ministers have emphasised their parallel commitment to the restraint of public spending and to a growth strategy built on the openness and transparency of economic decision-making (in short, the institutional guarantees of credibility). What this serves to demonstrate is that Labours strategies to promote credibility and competitiveness are also intimately connected.
The commitment to labour market reform was evident even before New Labour came to power, when the party was seeking to establish a political gap between itself and Conservative administrations for whom greater labour market flexibility had long been a cornerstone of economic policy. New Labour chose, as is now well known, to retain the vast majority of the Thatcherite labour law changes against which Old Labour had set its face, and was in consequence vulnerable to the accusation that, in its newness, it was buying into the entire Thatcherite industrial relations package. New Labour in opposition was adamant that it was not: that it was not committed to labour market deregulation solely or at any price. Tony Blair insisted rather that "the benefits of deregulated labour markets have not been unqualified, and increased flexibility has not been won without costs", and that New Labour would not take "the cheap labour route" to economic success adopted by its Conservative predecessors. 19
Yet even in opposition, when the political need to distance itself from neo-liberal market reforms was far greater than it would be once power was won, this condemnation of the sweat shop growth strategy associated with Thatcherism entered the argument only as a precautionary caveat to a much clearer and more strident call for greater labour market flexibility both within and beyond the firm. 20 The assertion in opposition was one of complementarity: a belief that there was no "conflict at all between sensible minimum standards at work, including on pay, and a successful labour market" so long as unions and employers could generate "a new partnership". 21 Since taking power, however, and with those partnerships far from evident, New Labour concerns with flexibility has taken centre stage. A distinctly cheap labour growth strategy has began inexorably to reappear, no matter how regularly Labour Ministers denied and continue to deny its impending arrival. This was evident in the New Labour Governments lack of enthusiasm for a generous National Minimum Wage and in its subsequent failure to agree any form of earnings- (or even inflation-) indexation. It was evident in the limited content of the Fairness at Work proposals and it was evident in the rhetoric with which those proposals were presented. New Labour offered the modest accretion of individual and collective rights in its 1998 Employment Protection Bill as a once-and-for-all corrective to the Thatcherite industrial relations settlement, and Tony Blair famously defended the new package as still leaving the UK with "the most lightly regulated labour market of any leading economy in the world". 22
Alongside that modest resetting of the labour codes inherited from the Thatcher era has come a much more energetic resetting of the scale and scope of welfare provision. This again was signalled in opposition and triggered quickly when in power: the New Labour belief that welfare reform was vital because tax payers would no tolerate the costs of an unreformed system, and because the Party had now discovered what Gordon Brown called "a modern agenda to tackle poverty". 23 The squaring of the circle of modest labour market reform and major welfare resetting lay as far as New Labour Ministers were concerned in this new agenda, central to which was the pursuit of policies of welfare to work. As Gordon Brown put it late in 1997, "achieving high and stable levels of growth and employment will require new approaches from national governments, modernising social security systems, improving work incentives through the tax system, removing barriers to growth and encouraging the job-creating potential of small business". 24 The great trick for New Labour was so to reset the welfare state that it would promote work, not dependency by making (as Tony Blair put it) "major changes in unemployment benefit, disability, the treatment of single parents, and pensions to preserve flexibility in our labour markets [while reshaping] the Employment Service around an active strategy for work". 25
New Labour set its labour market and welfare reforms alongside new mechanisms for influencing capital flows and investment levels. New Labour has not returned to any Old Labour form of direct controls, but nor has it accepted the Thatcherite dictum that "deregulation of labour, product and financial markets" was "enough to deliver medium term supply side improvements". 26 What New Labour has done instead is to prioritise the achievement of macro-economic stability by the pursuit of what Ed Balls later called policies of constrained discretion 27 (the creation, that is, of stable long-term macro-economic framework within which companies could plan and invest with genuine certainty, by the setting of definite economic targets and pre-fixed limits to government spending). New Labour in consequence (and even in opposition) accepted (as it now adopts) "the golden rule of public finance that public borrowing will be used only to finance investment, not public consumption and even then only prudently undertaken". 28 It accepted the constraint of existing Conservative spending plans for its first two years in office; it set a long-term inflationary target; and it moved quickly to grant the Bank of England independent responsibility for the setting of interest rates to attain that target. The thinking here was clear, as Gordon Brown later explained to the Council for Foreign Relations in New York, namely that:
Labours activism on the domestic economic front has, then, centred on its dual aims of promoting credibility through a new institutional architecture for the conduct of monetary policy and on the promotion of a strategy of competitiveness through an ambitious programme of labour-market and welfare reform. In the two sections which follow it is to the details of policy, to the ideas animating policy and to the antinomies of policy in both of in these areas that we turn in more detail. The first deals with Labours studious courting of credibility; the second with its conception of competitiveness.
Studiously courting credibility
Within a week of Labours electoral triumph the new Chancellor, Gordon Brown, announced, to the amazement of journalists, analysts and commentators alike, that operational responsibility for the setting of interest rates would be ceded to the Bank of England. The radicalism of such a gesture should not be understated, especially when it is considered that the manifesto and supporting documents in which Labour had set out its stall to the electorate in the weeks and months prior to this decision contained no hint of the institutional overhaul to follow. 30 This renders all the more ironic, Ed Balls comment that "the institutional changes which have been introduced since 1 May at the Treasury and the Bank of England, in some cases only a few days after the election day, add up to what is now probably one of the most open and accountable systems of economic policymaking in the world". 31 The ostensible aim may well have been accountability and transparency (accountability and transparency, one must assume, to the international financial markets), yet scarcely could the introduction of a major reform to the governance of economic policy have been delivered in a less accountable and less transparent manner.
Putting this aside for now, "the clear intention was to demonstrate that Labour was indeed to be a radical government radical in its desire to project for itself an image of fiscal and monetary conservatism and, wherever possible, to depoliticise macroeconomic policy-making". 32 No move could better have served to temper any residual anxieties amongst holders of mobile funds as to the orthodoxy of Labours economic conduct in office. As Andrew Roberts, bond analyst at the Swiss Bank, UBS, remarked, "it is unbelievable to gain so much financial market credibility with such a simple move". 33 Browns unexpected announcement met with near universal acclaim.
The origins of Labours institutional overhaul of the governance of monetary policy are not difficult to trace. They derive, in the most unambiguous manner, from the rational expectations revolution of the mid 1970s. Closely following the work of Friedman, who had challenged the (Keynesian) notion of a long-run trade-off between inflation and unemployment, the rational expectations school derived what they identified as the time-inconsistent inflationary preferences of elected governments. Given a (belief in the) short-term trade-off between inflation on the one hand and unemployment and/or growth on the other, governments would seek to engineer a political business cycle, over-inflating the economy in the run-up to an election in order to reap the short-term electoral benefits of growth with little consideration to the longer-term consequences (a suppression of long-term growth potential and an increase in the natural or equilibrium rate of unemployment). 34 What this meant, in essence, is that governments could not be trusted to stick to any inflation target they had set for themselves, given that it was rational for them to renege on any such bargain. Market actors, assumed here to be similarly rational in their expectations, would anticipate this, thereby coming to adapt their investment decisions in the anticipation of inflation arising from the political business cycle. Such rational expectations served to set in place a hysteresis effect for which there is simply no solution whilst monetary policy remains in the hands of elected politicians. Thus as Ed Balls argues, in an admirable summary of the new orthodoxy,
The solution is simple and comes in the form of a paradigm shift from discretionary to rules-bounded and institutionally-guaranteed inflation targeting. By ceding responsibility for monetary policy to an independent authority (an independent central bank) mandated constitutionally to deliver price stability (in the case of the Federal Reserve or European Central Bank) or a specific inflation target (in the case of the Bank of England), credibility could be restored, with consequent (beneficial) effects for the trade-off between interest rates rises and resultant deflationary outcomes. In short, under a regime of central bank independence, interest rates rises required to iron out any given inflationary tendencies could be kept to a minimum.
The pedigree of New Labours new open macroeconomics could scarcely be clearer. Yet despite this, Balls is quick to distance himself from the obvious association with monetarism. The specific monetarist solution, he suggests the targeting of inflation through control of the money supply is overly restrictive and, in the end, counterproductive. 36 Accordingly, what is required is "a modern route to credibility, which preserves discretion": in other words, what he earlier terms (with the help of Mervyn King), constrained discretion. 37 Here an overall inflation target is set (the independent monetary authority is denied goal discretion), yet operational or instrumental discretion is conferred upon it.
If monetarism is understood in the most narrow terms (as the control of the money supply) then Balls is indeed correct: monetarism is dead, and New Labour is post-monetarist. 38 Yet it is interesting to note how Balls enlists the support of his mentor in such matters, Greg Mankiw, in suggesting that New Labours stance is essentially new Keynesian. What he overlooks is Mankiws comment, elsewhere, that "new Keynesian macroeconomics could just as easily be labelled new monetarist
economics". 39 We thinks Balls protests too much! Monetarist or not, it is clear that New Labours open macroeconomics is a radicalised yet nonetheless direct descendent of the monetary policy of successive Conservative administrations from 1979. Moreover, as Jonathan Kirschner perceptively notes,
The implications of this are profound and, arguably, compromise significantly other aspects of Labours strategic economic objectives.
First, within this the dominant international paradigm, monetary policy is restricted to the adjustment of interest rates by an independent monetary authority (here, the MPC of the Bank of England). Yet interest rate hikes are a particularly blunt instrument of monetary policy, imposing as they do, deflationary pressures across the entire economy. In an economy characterised by both regional and sectoral segregation as in Britain today, with a deeply entrenched and widely-observed manufacturing recession coterminous with a housing boom concentrated on the south-east of England this may serve to institutionalise a deflationary bias in the most disadvantaged sectors and regions of the economy. The institutional architecture established by ceding operational responsibility for monetary policy to the Bank of England here backs the Chancellor into a corner. Either he simply ignores the adverse economic consequences (say, for export-oriented sectors of the economy and for Northern England, Wales and Scotland) of a monetary policy inappropriate for the conditions of the entire economy, or he reneges on the spirit of operational independence by intervening directly to counter sector-specific inflationary pressures. With identifiable inflationary tendencies currently associated with the housing market, such interventions might take one of two forms: (i) an increase, such as that currently under consideration, in the Stamp Duty payable on properties over a specific sum; or (ii) a more general increase in the burden of direct taxation, which might serve both to douse demand in the property market whilst providing the exchequer with resources to encourage investment in research and development, physical and human capital formation. The governments equivocation on the former and existing pledges on fiscal policy which effectively eliminate the second (hypothetical) option altogether, indicate that the burden of monetary policy is likely to remain with the MPC and that Britain will continue to pay an interest rates premium for suppressing sector- and region-specific inflationary tendencies (associated, in particular, with comparatively low rates of taxation for high earners).
Whilst the first point is a general dilemma for complex and internally differentiated national economies, the second is rather more specific to the structural weaknesses of the British economy. Throughout the postwar period this has been characterised by relatively low rates of productive investment, reflective of the high cost of capital and the endemic short-termism, risk-aversion and overseas orientation of its financial institutions. 41 Consequently, it suffers from significant capacity constraints. Relatively modest rates of economic growth (currently somewhere between 2.0 and 2.5 per cent per annum) see the economy operating at full capacity. Clearly growth rates in excess of this figure will inject further inflationary pressures (and consequent expectations) into the economy, necessitating pre-emptive hikes in interest rates from the monetary authorities. The consequences are easy to see. If monetary policy is restricted to the setting of interest rates, then Britain will endure an interest rates premium over competitor economies if it to meet a given inflation target. Here, too, path dependent feedback (hysteresis) effects can be identified. 42 For any comparative interest rates rise increases the relative cost of capital, further depressing levels of productive investment with direct effects for physical capacity. Britains new institutional architecture for monetary policy may, then, further serve to exacerbate and institutionalise the long-term structural weakness of the British economy. Moreover, this to say nothing of its implications for the exchange rate upon which the competitiveness of export-sectors of the economy is premised. Whilst an over-valued currency may be good news for the City this is likely to provide precious little comfort for already beleaguered manufacturers producing for export markets.
Though these are perhaps the principle antinomies of Labours open macroeconomics, they are by no means the only ones. Two additional points are perhaps also worthy of brief mention. First, given the peculiar sensitivity of the British economy to the negative externalities of orthodox strategies for promoting price stability, it is surely tempting to ask whether moderate levels of inflation might be a price well worth paying for higher levels of productive investment, an expanded stock of physical capital and consequent stimuli to the rate of (sustainable) growth and the level of manufacturing employment. Specific statements as to the merits of price stability are notoriously elusive even amongst those neoclassical economists most vociferous in insisting upon the necessity of monetary and fiscal conservatism. Even Robert J. Barro, self-described libertarian and hardly a doyen of post-Keynesian economics, is forced to concede that "the inverse relation between growth and inflation is statistically significant for cases of average inflation between 15 and 40 per cent and for those in excess of 40 per cent but is not significant for values up to 15 per cent". 43 This presents a particularly striking paradox. For, as Jonathan Kirschner notes,
As he goes on to suggest, if the economics of inflation are ambiguous, its politics are far less so. If the dogged pursuit of low inflation in the British economy is associated with consistent short- and long-term interest rates premiums, then we should perhaps ask ourselves whose interests are served by such outcomes. We need look no further than the City of London. 45
A final point relates to consistency. If there is a compelling argument to be made that elected politicians should not be trusted to remain true to inflation targets they have set for themselves across the political business cycle, then the same should apply with interest to other spheres of economic activity. As Alan Blinder, former Vice-Chairman of the Board of Governors of the Federal Reserve, rather mischievously observes,
Arguably, the answer to this resides in precisely the same time-inconsistent preferences of government that are held to necessitate an independent monetary authority. As we write, the dust is being blown off the Chancellors sizeable war chest of accumulated fiscal surplus ready for the widely anticipated pre-election spending spree. Years of accumulated fiscal prudence, it seems, will be strategically invested in the outcome of the next election. What further evidence is required of the time-inconsistent fiscal preferences of New Labour? What better rationale could be provided for an independent fiscal authority?
The competitive imperative: rendering welfare conditional
Credibility is not an end in itself. As frequently reiterated by the Chancellor, credibility is seen by New Labour as "a necessary pre-condition to deliver [its] objectives for growth and employment". 47 It is, in short, seen as a necessary but not in itself sufficient condition of competitiveness in an era of globalisation. It is to Labours chosen competitiveness strategy that we now turn. As indicated above this is comprised of essentially three components: (i) a further flexibilisation of the labour market; (ii) a heightened emphasis, seemingly inspired by the new growth theory, on human capital formation; and (iii) a range of attempts to make work pay through reform of the welfare state. Though, as we shall see, sometimes pulling in different directions, this ambitious package of aspirations, proposals and substantive reforms is animated by a common concern. That is to make welfare answerable to (perceived) economic imperatives. As Gordon Brown emphasises,
Implicit in such a view is a rather different conception of the welfare state than that which characterised the postwar period. As Giddens, New Labours intellectual guru in this area (as in so many), notes, the principle is one of
Welfare is no longer an end in itself, but must be recast as a means to the economic imperative of competitiveness and rendered answerable in such terms. Such a notion invites obvious comparisons with Cernys conception of the competition state (which he counterposes to the welfare state of the postwar period) and Jessops somewhat more subtle if cumbersome conception of the Schumpeterian workfare state (similarly counterposed to the Keynesian welfare state). 50 For in both of these theoretical accounts, social policy is increasingly subordinated to perceived economic exigencies in contemporary capitalism, as existing welfare provision is cut back and revised so as to equip workers with the skills required in a qualitatively novel political economic environment (globalisation or post-fordism respectively). However tempting it might be to enlist New Labours conditional welfare advocacy in support of a more general thesis of the transition from welfare to competition, Keynesian welfare to Schumpeterian workfare state (and the descriptive fit is certainly considerable), two qualifications must first be noted. First, the metanarratives offered by both Cerny and Jessop, however well observed, are nonetheless little more than abstracted redescriptions of contemporary tendencies (to which, as Jessop is the first to concede, there are counter-tendencies). Consequently, it would be dangerous (both analytically and politically) to ascribe to them a logic of economic necessity. New Labour may well be animated by a Giddensian vision of a social investment state-welfare society mix which closely parallels Cernys conception of the competition state and, moreover, may well regard such a mix as a necessary condition of competitiveness in an era of globalisation. But this should not be mistaken either for confirmation of the competition state thesis or, perhaps more significantly, as an explanation for New Labours modernisation.
Secondly, implicit in Cernys formulation and, to a lesser extent that of Jessop, is a conception of the welfare state of the postwar period as something of a indulgent luxury of a bygone era in short, of the welfare state as a competitive burden rendered ever more anachronistic in an era of heightened competition amongst nations. This, too, chimes closely with New Labours rationale for welfare reform. Yet it is difficult to square with the empirical evidence. 51 Whether the welfare state is competitive-enhancing or competitive-corrosive depends, ultimately, on the regime of competitiveness of the economy as a whole. As suggested elsewhere,
Yet, what is also clear is that Europes most open economies (Britain excepting) have always sought competitiveness on the basis of quality not cost. They have thus sought to promote internal flexibility within the firm rather than external flexibility in the labour-market, permanent innovation in production as opposed to productivity gains on the basis of hire-and-fire and the elimination of supply-side rigidities, high and stable levels of both human and physical capital formation, and inclusive and encompassing labour-market institutions. Within such a model, far from representing a supply-side rigidity, the welfare state is not only a competitive advantage, it is a competitive necessity.
The core to Labours chosen regime of competitiveness is the elimination of supply-side rigidities which might impede wealth creation. In this respect, there are clear parallels with the trickle-down economics of the Thatcher/Major years. It core tenets were succinctly expressed by Stephen Byers in his speech to the Mansion House in which he sought to lay out what he saw as the role of the DTI in promoting Labours competitiveness strategy.
As a number of commentators have noted, however, though New Labour has certainly prioritised wealth creation, both rhetorically and substantively, it has not entirely abandoned a redistributive agenda. Yet what is particularly interesting is that where Labour has been redistributive, as for instance in the New Deal (funded through the one-off windfall tax on the privatised utilities), that redistribution has been justified not in terms of the alleviation of poverty, but in terms of the contribution to a well-functioning labour market. Once again, welfare expenditure is made answerable in economic terms.
Though clear from the above passage, Labours entrepreneurial zeal is yet more clearly articulated later in the same speech.
Again, the emphasis is placed upon the elimination of supply-side rigidities. Moreover, underpinning such a view seems to be a submerged conception of market outcomes, under conditions secured by a regulative as opposed to interventionist state, as just, fair and equitable in their own right.
Labour market flexibility
The role of the state is, then, limited to ensure labour market flexibility and, as Byers again suggests, to "resist burdensome regulation of the labour market" originating in Europe. 55 Here we see clear continuity with the Thatcher and Major years. Britain, as Tony Blair famously noted in his foreword to the Fairness at Work White Paper has the most deregulated labour market of any leading economy in the world, a competitive advantage which it cannot afford to sacrifice on the altar of fairness at work. What this means, in rather more substantive terms, is that "it is probably easier and less expensive to sack a worker in Britain than any other major European economy". 56 Though the government is understandably loath to admit it, this does present difficulties for an administration which, at least publicly, predicates its policies upon a conception of social justice. Yet without an active and interventionist (corporatist?) industrial strategy, there is little chance of any revision to the regime of the competitiveness of the British economy. Consequently, the problem becomes one of inheritance. As Donald Sassoon notes, "after eighteen years of Conservative government, the distinctive competitive advantages of British industry are low wages, low taxes, weak trade unions, poor working conditions, a flexible labour force and limited job security". 57 Labours attitude to what it sees as the dangers of an overly regulated European-style labour market are not difficult to discern from this. As Anne Gray has argued, "arguing that a stronger Social Chapter might threaten jobs, Blair appears content with the Tory legacy of a national economic strategy which has attempted to secure competitive advantage through low labour costs, low social security charges and legal repression of trade unions". 58
What Labour means by labour market flexibility is, then, both clear and narrow. If flexibility can be achieved either within the workplace, as highly skilled workers adapt themselves to a range of flexible tasks, or externally, within the labour market itself, as employers avail themselves of the opportunity to hire and fire, then it is clear than Labour in power has prioritised the latter. This has clear implication for the second aspect of its articulated strategy to promote competitiveness: human capital formation.
Britain, as all the available empirical evidence makes clear, has comparatively high rates of labour turnover. 59 This, combined with its characteristically high cost of capital, its propensity to downsizing through mergers and acquisitions and a corporate culture which prioritises dividends for share-holders over reinvestment conspires to militate against high levels of physical and human capital formation. Consequently, in comparison to its European partners, Britain is a relatively low-wage, low-skill economy. This is merely exacerbated by successive attempts to further liberalise Britains already flexible labour-market. If labour turnover is high and labour shedding is simple, why invest in the skills of your workers when you can poach those skilled by others and when any investment in human capital you do make will only enhance the mobility in the labour market of those in whom you invest? Conversely, as Crouch et al. note, "if employers are unable to dispose of workers easily, they will have to use voice mechanisms, that is work to improve the quality of those they have available" 60
There is, then, a clear tension in Labours economic strategy: were it serious about raising the level of human capital formation in Britain, with consequent benefits for the internal flexibility of the economy, it would be well-served by tightening its regulation of the labour market. There is a trade-off between internal and external flexibility which New Labour simply fails to acknowledge.
Endogenous growth theory and human capital formation
Whatever the internal contradictions of Labours competitiveness strategy, the influence of endogenous growth theory upon it is unquestionable. It has, nonetheless, been a particularly limited (though certainly the popular) reading of endogenous growth theory which has informed government pronouncements. Endogenous growth theory (post-neoclassical or otherwise) is not merely a synonym for the need for human capital formation, as much of the literature (and Labour speechwriters) seem to assume. As Nick Crafts explains, "the basic idea of endogenous growth is that long-run growth in income per head depends on investment decisions rather than, as in traditional growth theory, resulting from unexplained or exogenous improvements in technology". 61 Thus, in addition to investment in human capital (skills), endogenous growth theory places at least equal emphasis (indeed, arguably rather greater emphasis) upon the positive externalities arising from investment in physical capital (capacity), research and development and new product development. 62 Given Britains widely acknowledged capacity constraints (discussed above), New Labours tendency to relegate physical to human capital formation as an economic imperative in the name of post-neoclassical endogenous growth theory is both perverse and ironic.
It leaves the government singularly ill-placed to address the long-term structural weaknesses of the economy, prioritising investment in human capital at a time when Britain suffers from a distinct lack of investment in the physical capital which a highly trained workforce might deploy. Interestingly, Balls himself gets quite close to acknowledging this, however unwittingly, when he refers to human capital as "the fuel of growth in the modern economy". 63 Fuel is one thing, but the ultimate fact is that Britain currently lacks a motor. No investment in fuel will serve to jump-start Britains manufacturing sector, currently in the midst of protracted recession. To deploy a slightly different metaphor, to build a competitive strategy exclusively on human capital formation is like building a house with mortar.
Moreover, were this not sufficient to demonstrate the internal contradictions and tensions of New Labours endogenous growth strategy, there is now a considerable body of empirical evidence to suggest that the supply of human capital is not the problem. The supposition which seems to inform New Labours thinking here (as in the New Deal) is that the supply of skills generates its own demand. Sadly this empirical evidence suggests otherwise. For, as Keep and Mayhew observe, Britain currently suffers as much as anything else from an under-utilisation of the skills already possessed in the labour market. Consequently,
The welfare-workfare mix
A similar preoccupation with the supply-side characterises, as arguably it compromises, Labours reform of the welfare state to promote welfare to work. Here the government has increasingly sought to resuscitate, rather optimistically perhaps, its historical commitment to full employment, albeit a rather different conception of full employment. Full employment here refers to a condition in which there is rough parity between vacancies and those claiming benefits (i.e.: what, elsewhere, would be seen as the economys natural or equilibrium rate of unemployment). On such a definition the economy is currently close to a condition of full employment, 65 though this is not the case for a number of regional economies where sizeable disparities between the number of benefit claimants and vacancies persist. 66 Given such a conception of full employment, it is not difficult to see what Labour regards (any residual) unemployment as essentially a supply-side phenomenon. The demand for labour is assumed to exist if the benefits structure can be reformed so as to provide incentives to move from welfare to work (such as stringent welfare conditionality, the National Minimum Wage and Working Family Tax Credit) and provided the unemployed can be rendered employable. The strong element of compulsion which characterises New Labours contract with welfare claimants should not, however, be overlooked. Its authoritarian tone is well-captured by Alistair Darling, Secretary of State for Social Security, writing in The Independent,
Yet for current purposes, what is most significant is, as Jamie Peck notes, that "the New Deal has been designed and represented as a resolutely supply-side programme, framed in a policy discourse which downplays or even excludes issues such as job creation and job availability". Yet, as even the most cursory glance at the regional employment statistics reveals, unemployment is regionally concentrated. Consequently, "the welfare-to-work client base is largest in precisely those parts of the country where the labour market is weakest, implying that the New Deal may have least purchase as a policy tool in those places where it is needed most". 68
Labours understanding of unemployment as an exclusively supply-side phenomenon has clear implications for the nature of its welfare-to-work strategy. Essentially, it seeks to promote the employability of welfare claimants such that they can satisfy the (assumed) demand within the labour market. In one sense, then, this too is a strategy of human capital formation or, perhaps more accurately, a strategy of social capital formation. As Keep and Mayhew again perceptively observes, "much of what is being labelled here as skills is appears to be personality traits or attributes that may only partially be amenable to change and enhancement through training and education as traditionally conceived". 69 Welfare-to-work may, then, be more about instilling in those claiming benefit (as a condition of continued receipt of such benefits) a resigned acceptance of the flexi-time, hire-and-fire labour market they must endure, rather than providing a genuine ladder to opportunity. Given the path dependence of labour market trajectories, it may also serve to prevent skilled workers returning to highly skilled employment. The New Deal may, then, have very little to do with building a modern high-wage, high-skill economy. Hence, perhaps, the need for a strong element of compulsion. Finally, the test of the welfare-to-work programme is not how it performs whilst the economy is operating at or in excess of full capacity. As Kleinman and West argue persuasively, "if the level of demand is low, if the economy is in recession, if business confidence is low, then the likelihood [that such] schemes [will have] any appreciable employment or employability is also extremely low". 70 In the absence of a more concerted strategy to boost investment in the productive economy in the absence, in short, of an industrial strategy this is a most depressing conclusion.
Exporting the Anglo-US model
It is vital to grasp that New Labour has not simply pushed this agenda internally, or used its presence at international fora merely to describe and justify its internal reform programme (though of course Ministers have taken every international opportunity to make that defence). New Labour Ministers have also pushed for a resetting of the (European) regional and global economic order in the image of their internal settlement. Indeed, as their tenure in office has grown, their desire to leave a mark not merely on the domestic stage has grown too. In particular, they seem to have set for themselves the goal of exporting a deregulated Anglo-US model of capitalism to the European Union, arguing effectively for an asocial model of European capitalism.
The package of policy measures just described what we might term the internal face of New Labour has, then, increasingly been accompanied by a developed external face as well. The call for greater labour market flexibility has been matched by an enthusiastic endorsement of the globalisation processes that were supposedly making labour market flexibility so vital. The Protestant Work ethic so evident in Labours internal New Deal has been matched by its Adam Smith-like endorsement of the wonders of free trade. Indeed, Blair began his speech to the World Economic Forum in Davos, by publicly acknowledging his puritanical streak. 71 The sensitivity of New Labour Ministers to the adverse effects on investment flows of the taxation burden of the welfare state has been paralleled by an enthusiastic endorsement of foreign direct investment. And the determination of New Labour to trigger internal growth by restraining both state expenditure and the extent of the states interventions within the economic sphere has a definite parallel in the reform packages advocated by New Labour for international organisations such as the IMF, and in the policy role canvassed at East Asian governments by New Labour Ministers during their occupancy of the European Presidency. All might be seen as reflecting something of a paradigm shift from an interventionist to a regulatory role for the state. The internal face of New Labour, keen on flexibility, welfare reform, work-fare and limited public spending, sits within the emerging New Labour canon alongside an external face keen on global change, reduced trade barriers, unregulated capital mobility and state moderation. This is by no means an unnatural or uncomfortable liaison.
In particular, the enthusiastic endorsement of globalisation whether as a process or a project has been a marked feature of the New Labour rhetoric from the very beginning. Time and again, both in opposition and in power, New Labour leaders have emphasised "the growth of increasingly global markets and global culture" 72, and the emergence of "a twenty four hour round the world round the clock capital market in which the daily flows of foreign exchange are already almost as much as twice the monthly flows of trade", a world characterised by "the global sourcing of companies" and "a new wave of technological change." 73 New Labour leaders have consistently drawn a particular policy message from that new global reality: free trade. "The best way to promote efficiency in production is through competition, liberalisation and open markets not through monopoly, state subsidy or preferential procurement". 74 Not surprisingly, therefore, New Labour Ministers have regularly positioned themselves at the forefront of the call for unregulated world trade, as they certainly did at the WTO meeting in Seattle. With protesters camped outside the conference hall, and parts of the City under marshal law, DTI Minister Stephen Byers reasserted the New Labour view that "a shared commitment to open trade and commerce has been a driving force for growth" and that in consequence "the essential answer to the problems of the moment is not less globalisation not new national structures to separate and isolate economies but stronger international structures to make globalisation work in harder times as well as easy ones". 75 What is particularly interesting here is the extent to which globalisation, initially invoked by New Labour (in opposition and subsequently in government) as an inexorable logic of compulsion (driving a quasi-Darwinian process of natural section) has increasingly come to be seen as a project which must be defended in the face of challenges, such as that presented both in Seattle and Davos. Brown, Blair and Byers have, then, increasingly used their speeches in prominent international arenas to talk-up the benefits of globalisation and to draw attention to the fact that globalisation must itself be defended if such benefits are to be realised. What was once an external constraint is now re-presented as a precarious and highly contingent tendency to which powerful counter-tendencies have already been mobilised. 76
One consequence of this enthusiasm for unregulated trade has been a particular New Labour propensity to push stridently for a resetting of European labour market institutions in the New Labour image. That was the New Labour message at Malmo in 1997, and again at Davos in 2000, and at all European stops in between. The Blair call for reform was clear in 1997: that European labour costs needed to be cut, that the achievement of labour market flexibility was central to enhanced European economic competitiveness, and that this flexibility was being denied largely by outmoded notions within the European Left itself. How else are we to interpret his observation at Malmo that "our aim must be to tackle the obstacles to job creation and labour market flexibility cutting unnecessary bureaucracy for the small firms that are likely to be the main job creators, completing the single market, promoting welfare to work initiatives which bring teal jobs within reach of those now excluded from the labour market, making sure the Social Chapter and Employment Chapter help job creation, not hinder it". 77 The Blair message at the Hague in 1998 was even sharper: that "in the sensitive area of labour market reform, Europe had made some limited progress" but that the EU still needed "to make a modern labour market work better. High levels of unemployment are not social protection". 78 And the message hadnt changed, or softened, at Davos two years later. If anything, it was starker still: that at the Lisbon summit the EU would have to choose, either "to continue with the old social model rooted in the 60s and 70s" or make "a definite turning point towards the reform agenda, retaining the values of the European social model but changing their application radically for the modern world". 79
A second consequence of the New Labour enthusiasm for unregulated trade has been inertia verging, at times, on outright resistance on calls for the re-regulation of labour markets and for the public management of capital flows. The New Labour Government was able to avoid full involvement in the row surrounding the proposed Multilateral Agreement on Investment (MAI) at the WTO, but is now pressing for a renewed round of trade negotiations that would include investment, and has been bullish on the benefits (particularly the benefits to the UK economy) of unregulated capital flows and the elimination of remaining restrictions on foreign direct
investment. 80 Tony Blairs opposition to something as modest as the Tobin tax is also on record. Such a move, he suggested in an interview with John Humphreys, "is the wrong thing to do because you actually want people to be able to move money very, very quickly", and because its introduction would open the door first to exchange controls and subsequently to import restrictions. 81 In New Labours conceptual universe, globalisation is starkly counterposed to protectionism. On the issue of labour standards in international trade, the New Labour silence has been deafening. Indeed, remarkably it has even been outflanked on this by the Clinton administration. Similarly, the latters response to the protesters in Seattle was quite different from that of New Labour; and in consequence Clinton went to Davos with one message, Blair with another. Clinton took the Seattle protest as a "wake up call" to the international community, as an opportunity to widen the groups involved in trade negotiations and as a chastening reminder to stop "viewing with contempt those new forces seeking to be heard in the global dialogue". 82 Tony Blair, by contrast, took the protests as a direct challenge, countering by arguing that "the worst thing we could do for developing countries would be to shelve the trade liberalisation agenda and sit back while trade barriers were re-erected round the globe". Conceding nothing, he placed the emphasis on a failure, thus far, to "convince the sincere and well-motivated opponents of the WTO agenda that trade liberalisation is the only sure route to the kind of economic growth needed to bring their prosperity closer to that of the major developed economies". 83
New Labour Ministers have also played a key role in the orchestration of reform at the level of international economic agencies. Partly this enthusiasm for global reform has been understood, within New Labour circles, as the international parallel to New Labours attack on poverty at home. Certainly when Gordon Brown was floating his long-term claim for party leadership early in 1998, he was prepared to make that linkage, presenting as a supplement to his "modern agenda for tackling poverty" in the UK proposals for debt relief for the poorest of the less developed economies (and to his credit, those proposals have remained high on his personal agenda). But the main thrust of New Labours advocacy of reform within the IMF and WTO derived not from its anti-poverty agenda so much as from its general growth theory, where the call for reform acted as the international parallel to New Labours internal exercise of cautionary discretion in monetary and fiscal policy. Abroad, as at home, New Labour believed that economic growth was best guaranteed by "the absolute requirement
for fiscal and monetary policy to be oriented towards discipline, stability and transparency" 84 in order to produce macro-economic conditions of stability and certainty. Abroad, as at home, New Labour believed that this in turn required a "reform of the financial architecture" by the establishment of "a framework of internationally agreed codes and standards, new disciplines", greater levels of international financial regulation, "new frameworks for crisis prevention and resolution" based on private-public sector co-operation, and "new social principles allowing for immediate debt reduction". 85 At home and abroad, that is, the New Labour alternative to either renewed capital controls or total capital market deregulation was the establishment of financial regimes characterised by openness and transparency, ones based on "stability through constrained discretion, credibility through sound long-term policies, credibility through maximum transparency, and credibility trust through pre-commitment" 86
What has come to unite the internal and external faces of the New Labour economic project is a clear sense of the limited but distinct role of the state in the age of third way politics. Indeed, it is New Labours view of state functions which in the end distinguishes it most sharply both from Old Labour and Thatcherism, justifying its claim to constitute a genuine third way. The Old Labour state was an active economic player, prepared both to replace private capital in the provision of investment and to orchestrate capital-labour accords. The Thatcherite state, by contrast, was willing neither to orchestrate those accords nor to substitute for private capital. New Labours third way state occupies a genuinely middle ground between the two: eschewing both capital substitution and accord-orcherstration like a true Thatcherite state, but exhibiting activism in the labour market in ways which have no clear Thatcherite parallel. New Labour shares with Thatcherism a view of the state as regulator, and with Old Labour a view of the state as economically interventionist. It simply restricts its spheres of intervention to a set of labour market issues that Old Labour did not privilege, and which Thatcherism declined to deal with systematically at all. So, both at home and abroad, New Labour insists (as Tony Blair told his Davos audience early in 2000) that "heavy-handed state intervention in anything like the terms my grandfathers generation would have understood it, is dead and buried" 87 arguing instead for a three point economic role for the state in the promotion of "a high wage, high skill, high investment, high employment economy" for all. 88
New Labour argues for state restraint in the sphere of capital. It prefers the regulation of capital flows, and the anchorage of wealth creation in the sphere of the private. It dislikes exchange controls, and certainly has no time for new public ownership. Tony Blair was very clear on this even before taking office: publicly asserting his conviction that "where there is no over-riding reason for preferring the public provision of goods and services particularly where those services operate in a competitive market then the presumption should be that economic activity is best left to the private sector with market forces being fully encouraged to operate". 89 It is a view of the states role which New Labour now regularly advocates internationally as well. Thus, as Blair argued to an audience in the Netherlands, "the best long term policy for new job creation is to get the conditions right in order to enable small and medium enterprise to flourish, not rely on unfocused expansion of the public sector which has led to high taxes and high deficits". 90 Just as, at home, New Labour has set its face against any extension of public ownership, any reconstruction of exchange controls, or the heavy taxation of dividends, so too abroad New Labour opposes governments (like that in Malaysia) which advocate exchange controls, whilst vehemently resisting any attempts within the European Union to increase the tax take from the financial sector. 91 In this vein, at Davos Tony Blair insisted it was "axiomatic that open money and capital markets are the best means of ensuring that investment flows to the most attractive opportunities, and that that is how economic development is best promoted". Here, too, Blair was adamant that, "rather than governments trying to pick winners or back particular industries or businesses, government should have a role that is enabling: supporting small businesses, encouraging technological advance, investing in science, above all, promoting competition and removing the barriers to growth". 92 Such sentiments, of course, might just as easily be associated with senior ministers in either the Major or Thatcher governments.
Where New Labour is breaking different ground from its Conservative predecessors is where it argues for active labour market policies of a particular kind. It does not, of course, advocate any great increase in collective rights for workers or any resetting of industrial decision-making in a more democratic direction. In opposition, it briefly toyed with such a radical interpretation of the stakeholding idea, but quickly discarded it. Instead it now stresses the importance of the reskilling of individual workers, and the general enhancement of the capacities of the labour force as a whole. For New Labour, access to education and skills, as Gordon Brown told an international conference as early as 1994, "is a more critical determinant of success and failure than any other factor", and now constitutes "the commanding heights of the modern economy". 93 For New Labour this, too, is a self-evident fact, a truth it is not shy of disseminating internationally. The role of government, as Blair told his audience in Davos, is "to equip the country and its people for change". 94 Just as at home where the modesty of its resetting of legal codes in the Employment Protection Bill stands in sharp contrast to its enthusiastic pursuit of the New Deal so abroad its silence on labour standards stands in marked contrast to its enthusiastic advocacy of state-sponsored retraining programmes. As Tony Blair told his audience in The Hague, "governments can best improve economic performance by addressing supply side weaknesses here education, skills, technology, better infrastructure and transport systems are the key: not over-regulation and burden on business". 95
New Labour argues, too, for transparency and procedural rectitude in the orchestration of international economic activity. Its answer to the issue of how best to trigger world economic growth is neither capital controls nor untrammelled market competition. It is rather free trade within a set of international financial and governmental structures which parallel those created within the UK by the granting of independence in monetary policy to the Bank of England. According to Gordon Brown, "global financial stability depends on individual national governments pursuing strong domestic policies". By these, he has in mind not simply supply-side initiatives to "promote productivity and employment" but also policies capable of "building a platform of stability based on openness and transparency". 96
Reflections on the two faces of New Labours economic project
New Labours economic project is as coherent as its Thatcherite predecessor, in that it rests on a clear theoretical base. The theoretical underpinnings of Thatcherism were neo-classical. The project was self-consciously anti-Keynesian. The theoretical underpinnings of New Labours project are post neo-classical. The project is self-consciously inspired by the new growth theory, by (as Gordon Brown put it in 1994) post neo-classical endogenous growth theory). 97 This provides the key to each of New Labours central economic concerns. It is the key to New Labours commitment to growth via macro-economic stability. It is the key to New Labours prioritising of investment in human capital. It explains, that is, why education policy can be substituted for industrial policy. It is also the key to New Labours lack of enthusiasm for capital controls and re-regulated labour markets. New growth theory stands only one shade away from classical growth theory in its attitudes to the centrality of market forces as triggers to competitiveness, efficiency and long-term capital investment. New growth theory is now very fashionable in progressive economic circles, and New Labour has succumbed to that fashion.
In fact, New Labours policies seem coloured by a second and related fashion too one that is more hybrid in quality. In British policy-making circles state these days you find arguments of a neo-Schumpeterian and a neo-Weberian kind sitting alongside ideas gleaned directly from the new growth theory. 98 The Schumpeterianism is reflected in New Labour leaders understanding of the dynamics of capital accumulation in imperfect markets their sensitivity to the crucial importance of technological innovation particularly by large companies, and to the associated and vital role of an economys science and engineering base in the creation of long-term economic competitiveness. The post-Weberian voice is there in New Labours enthusiastic endorsement of the new economy as one that is primarily information-based. 99 New Labour sees itself as developing technologies, and investing in skills, to survive in the new knowledge-based economy of computer-based machinery, information technology and genetic engineering. There are even echoes of a (rather dated) post-regulationist flexible specialisation argument in its glorification of small technology companies, research triangles and science parks. Whatever else this New Labour project is, it is more consciously theorised than any before it, and the theories all pull in one direction: towards investment in human capital, and in the science base of otherwise entirely unregulated large global companies.
The issue, then, is whether New Labour has chosen theories that will last, theories which will enable it to square its (often laudable) social ambitions with its economic programmes. We would want to argue that it has not, because of inadequacies in all three (Weberian, Schumpeterian and post neo-classical) theories of growth and economic change which New Labour is deploying. The post-Weberian imagery of a weightless economy just misses entirely the labour processes underpinning it processes characterised not primarily by high-wage high-skill technological innovation, but by low -skill routinised/Taylorised white collar and service work of a highly exploited kind. 100 The Schumpeterian fantasies about cost-free economies of scale emerging from the dynamic research and development initiatives of large corporations just misses the speed with which technological diffusion forces those companies back into competition on the basis of wage cutting and work intensification. And post-neoclassical endogenous growth theory gets nowhere near understanding the complexities and contradictions of processes of capital accumulation in a world system now rapidly proletarianising peasantries across North and East Asia and South America. The cumulative strategy advocated from this melee of theories the strategy of progressive competitiveness set against a backcloth of credibility is indeed distinctive from the strategy of competitive austerity canvassed by the Thatcherites; but though different, it is just as limited. Indeed it is as equally likely as was Thatcherism before it to generate a general ratcheting down of wages and conditions for workers in the UK (and Western Europe); and because its fate is similarly constrained, the likelihood of such a policy both reinvigorating the UK industrial base and guaranteeing a longevity to New Labour in power is very low indeed. 101
There is one final feature of the interaction of the internal and external face of the New Labour economic project that is worthy of comment, and that is its shifting centre of gravity over time (from stakeholding to endogenous growth theory; from indigenous productive investment to foreign direct investment and human capital formation; from globalisation as an external constraint, to globalisation as a contingent necessity). This is more a matter of tone than of substance, a matter of judgement built upon an assessment of the distribution of silences and emphases in the public statements of Ministers, and of a slightly changing vocabulary speech for speech. Our sense is that the New Labour project is hardening, is shifting the focal points of its concerns ever further from those characteristic of Old Labour at its best. As New Labours economic renaissance remains in low gear, the economic and social authoritarianism tucked away in the New Labour propensity to link rights to responsibilities is creeping incrementally into view. The rights of claimants who decline an offer of work or training are already being eroded; and the Blairite language is shifting from the advocacy of empowerment to the cataloguing of blockages. The language of empowerment is still there ("at the heart of the public policy towards the new economy is the idea that helping people is not about protection but empowerment", 102 as Blair argued at Davos). It is just that arguments for empowerment are now accompanied by a tone of irritation with those not in tune with New Labours vision of how empowerment is best guaranteed. It is as though Tony Blair has now come fully to believe the central equation of his rhetoric that his policies are so obviously those of the future that any opposition to them must necessarily be rooted in the attitudes and interests of the past. So, at Davos for example, this was how Tony Blair chose to inflect his perennial enthusiasm for modernisation and reform (in a passage whose Darwinian qualities we have already noted). "The pace of reform" he argued, "has to match the pace of change. Societies that are open, flexible, able easily to distinguish between fundamental values which they must keep and policies which they must adapt, will prosper. Those that move too slowly or are in hock to vested interests will fall behind". And because they will, the task of New Labour in power is clear. "Supporting wealth creation. Tackling vested interests. Using market mechanisms". 103 We have seen that slippage in rhetoric before: from Labour Governments in the past, and from European social democrats too long in power, most recently, perhaps, in Spain.
1. The literature is voluminous but see, in particular Ben Fine, The triumph of economics: Or, rationality can be dangerous to your reasoning, in James G. Carrier and Daniel Miller (eds.) Virtualism: A New Political Economy (London: Berg, 1998); Deirdre N. McCloskey, The Vices of Economists The Virtues of the Bourgeoisie (Amsterdam: Amsterdam University Press, 1996).
2. Amongst a far more restricted literature, see, Craig N. Murphy and Roger Tooze (eds.) The New International Political Economy (New York: Lynne Reinner, 1991); Colin Hay and David Marsh, Introduction: Towards a (New) International Political Economy?, New Political Economy, volume 4, number 1, 1999, pp. 5-22.
3. Stephen Blank, Britain: the politics of foreign economic policy, the domestic economy, and the problem of pluralistic stagnation, International Organization, volume 31, no. 4, Autumn 1977, pp. 674-721.
4. Including work in which we have been involved, including Colin Hay, The Political Economy of New Labour (Manchester University Press, 1999) and David Coates and Peter Lawler (eds.), New Labour Into Power (Manchester University Press, 2000)
5. Hay and Marsh, Introduction, p. 14.
6. Amongst a now extensive literature, see, Michael Moran and Elizabeth Alexander, The Economic Policy of New Labour, in Coates and Lawler, New Labour Into Power; Martin J. Smith, The Complexity of New Labour, in Steve Ludlam and Martin J. Smith (eds.) New Labour in Power (London: Macmillan, 2000); Matthew Watson, Globalisation and British Political Development, in David Marsh et al. Postwar British Politics in Perspective (Cambridge: Polity, 1999); Mark Wickham-Jones, Anticipating Social Democracy, Preempting Anticipations: Economic Policy-Making in the British Labour Party, 1987-92, Politics and Society, volume 23, number 4, 1996, pp. 465-94. For a further development of the argument developed here see also Hay, The Political Economy of New Labour.
7. See also Rorden Wilkinson, New Labour and the Global Economy, in Coates and Lawler, New Labour Into Power.
8. Colin Hay and Matthew Watson, Neither Here Nor There? New Labours Third Way Adventism, in Lothar Funk (ed.) The Economics and Politics of the Third Way (Münster: LIT Verlag, 1999).
9. See Will Hutton, The State Were In (London: Viking, revised edition, 1996); Gavin Kelly, Dominic Kelly and Andrew Gamble (eds.) Stakeholder Capitalism (London: Macmillan, 1997); and, for a review, Colin Hay, A Sorry State? Diagnosing the British Affliction, Socialism and Democracy, number 11, 1996, pp. 87-104.
10. Ben Clift, New Labours Third Way and European Social Democracy, in Ludlam and Smith (eds.) New Labour in Power, p. 78.
11. See, for instance, Tony Blairs speeches to the BDI Annual Conference, Bonn, Germany, 18 June 1996; to the Singapore Business Community, 8 January 1997; cite here the Tokyo speeches, and the South African address on social(?) policy. For a commentary, see Colin Hay and Matthew Watson, Rendering the Contingent Necessary: New Labours Neo-Liberal Conversion and the Discourse of Globalisation, Program for the Study of Germany and Europe, Working Paper #8.4, Harvard University, 1998.
12. Wickham-Jones, Anticipating Social Democracy; The Ties That Bind: Blairs Search for Business Credibility, unpublished manuscript.
13. Hay, Political Economy of New Labour, p. 149.
14. Edward Balls, Open Macroeconomics in an Open Economy, Scottish Journal of Political Economy, volume 45, number 2, 1998, 113-32.
15. Ibid, pps. 113, 114.
16. On which see, Paul Krugman, Competitiveness: A Dangerous Obsession, in idem. Pop Internationalism (Cambridge, MA: MIT Press, 1996); D. P. Rapkin and W. P. Avery (eds.) National Competitiveness in a Global Economy (New York: Lynne Reinner, 1995).
17. For competitive audits of the welfare state which reach a rather different conclusion see A. B. Atkinson, The Economic Consequences of Rolling Back the Welfare State (Cambridge, MA: MIT Press, 1999); Ian Gough, Social Welfare and Competitiveness, New Political Economy, volume 1, number 2, 1996, pp. 209-32; Colin Hay, Globalisation, Economic Change and the Welfare State: The Vexatious Inquisition of Taxation, in R. Sykes et al. (eds.) Globalisation and the European Welfare States: Challenges and Change (London: Macmillan, forthcoming).
18. Tony Blair, speech to the World Economic Forum, Davos, Switzerland, 28 January 2000, p. 1.
19. Tony Blair, New Britain: My Vision of a Young Country (London: Harper Collins, 1996) p. 92.
21. Tony Blair, The Mais Lecture, 22 May 1995, p. 15.
22. Tony Blair, Foreword to DTI White Paper, Fairness at Work (London: The Stationary Office, 1998).
23. Gordon Brown, A Modern Agenda to Tackle Poverty. Labours Case, January 1998, p.1.
24. Gordon Brown, Personal View, The Financial Times, 11 November 1997, p. 16.
25. Tony Blair, Speech at the World Economic Forum, Davos, Switzerland, 28 January 2000, p. 4.
26. Tony Blair, Mais lecture, op.cit., p. 2
27. Balls, Open Macroeconomics in an Open Economy, p. 117. The notion of constrained discretion is, of course, delightfully paradoxical. As a footnote to Ballss public lecture reveals (added, presumably, for publication), the addition of the qualification constrained came at the behest of Mervyn King, Deputy Governor of the Bank of England with responsibility for monetary policy and member of the MPC (who, presumaby, now knows rather more about monetary policy in Britain than Brown or Balls). King, it transpires, suggested (one can only assume in a rather forthright manner) that the term constrained discretion better captured the sense "that the Bank of England exercises discretion only within the constraint of the inflation target" (p. 120, n. 8, emphasis added). The irony is, of course, that it is the distinctly rules-based (as opposed to discretionary) quality of monetary policy under the new regime (in which goal discretion is removed altogether) which is seen as crucial to institutional credibility. Monetary policy is rendered a purely technical matter in a manner demanded by rational expectations macroeconomists (and, they suggest, financial markets). In a world where credibility is (supposedly) slow to accumulate and swift to evaporate, King was presumably anxious to prevent the (mistaken) impression gaining currency that the Bank of England was promoting a discretionary monetary policy. On the conduct of monetary policy under the new institutional architecture, see Mervyn King, The Inflation Target: Five Years On, lecture to the LSE Financial Group, 1997. On the distinction between rules-based and discretionary monetary policy, see Finn. E. Kydland and Edward C. Prescott, Rules rather than Discretion: The Inconsistency of Optimal Plans, Journal of Political Economy, volume 85, number 3, 1977, pp. 473-92; Robert E. Lucas, Econometric Policy Evaluation: A Critique, in K. Brunner and A. Meltzner (eds.) The Phillips Curve and Labour Markets, supplement to the Journal of Monetary Economics, number 1, January 1976, pp. 19-46. On the distinction between goal and instrument discretion, see Stanley Fischer, Modern Central Banking, in F. Capie et al. The Future of Central Banking (Cambridge: Cambridge University Press, 1994).
28. Tony Blair, Mais Lecture, op. cit., p. 12.
29. Gordon Brown, speech to the Council for Foreign Relations, New York, 16 September 1999, p. 6.
30. Such a proposal had, nonetheless, been contemplated publicly by analysts and advisors close to Brown in the long run-up to the election. See, for instance, Richard Layard, What Labour Can Do? (London: Warner, 1997), pp. 126-7.
31. Balls, Open Macroeconomics, p. 114.
32. Hay, Political Economy of New Labour, p. 137.
33. Financial Times, 7 May 1997.
34. See for instance, Kydland and Prescott, Rules Rather than Discretion; Lucas, Econometric Policy Evaluation: A Critique; Thomas Sargent and Neil Wallace, Rational Expectations, the Optimal Monetary Instrument and the Optimal Money Supply Rule, Journal of Political Economy, number 83, 1975, pp. 241-55; on the political business cycle, an addition to the original rational expectations model, see Alberto Alesina, Macroeconomic Policy in a Two-Party System as a Repeated Game, Quarterly Journal of Economics, volume 103, 1987, pp. 651-78; Inflation, Unemployment and Politics in Industrialised Democracies, Economic Policy, volume 8, number 1, pp. 58-98..
35. Balls, Open Macroeconomics, pp. 120-1; see also Gordon Brown, The Mais Lecture, 19 October 1999, pp. 7-14.
36. Again, see also, Brown, Mais Lecture, p. 7-9.
37. Balls, Open Macroeconomics, p. 121.
38. Brown, too, describes New Labours economics as post-monetarist. Mais Lecture, p. 7.
39. Greg Mankiw, cited in Jonathan Kirschner, Inflation: Paper Dragon or Trojan Horse?, Review of International Political Economy, volume 6, number 4, 1999, pp. 609-18, p. 611.
40. Kirschner, Inflation, pp. 612-3.
41. The literature here is vast and well known. For recent reviews see Stephen Bond and Tim Jenkinson, The Assessment: Investment Performance and Policy, Oxford Review of Economic Policy, volume 12, number 2, 1996, 1-29; Michael Kitson and Jonathan Michie, Manufacturing Capacity, Investment and Employment, in J. Michie and J. Grieve Smith (eds.) Employment and Economic Performance: Jobs, Inflation and Growth (Oxford: Oxford University Press, 1997); Matthew Watson and Colin Hay, In the Dedicated Pursuit of Dedicated Capital: Restoring an Indigenous Investment Ethic to British Capitalism, New Political Economy, volume 3, number 3, 1998, pp. 407-26.
42. For a similar argument, see Avinash K. Dixit, Investment and Hysteresis, Journal of Economic Perspectives, volume 6, number 1, 1992, pp. 107-32.
43. Robert J. Barro, Getting it Right: Markets and Choice in a Free Society (Cambridge, MA: MIT Press, 1996), pp. 66-7.
44. Kirschner, Inflation, p. 616.
45. For such an argument see Adam Posen, Why Central Bank Independence Does Not Cause Low Inflation: There is no Institutional Fix for Politics, in R. OBrien (ed.) Finance and the International Economy, volume 7 (Oxford: Oxford University Press, 1993).
46. Alan S. Blinder, Central Banking in Theory and Practice (Cambridge, MA: MIT Press, 1999), p. 59.
47. Gordon Brown, Modernising the British Economy: The New Mission for the Treasury, 30th Annual Lecture to the Institute for Fiscal Studies, 27 May 1999, p. 3.
48. Ibid, p. 9.
49. Anthony Giddens, The Third Way: The Renewal of Social Democracy (Cambridge: Polity, 1998), p. 117.
50. Philip G. Cerny, Paradoxes of the Competition State: The Dynamics of Political Globalisation, Government and Opposition, volume 32, number 2, pp. 251-74; Bob Jessop, The Transition to Post-Fordism and the Schumpeterian Workfare State, in R. Burrows and B. Loader (eds.) Towards a Post-Fordist Welfare State? (London: Routledge, 1994).
51. See, in particular, Atkinson, The Economic Consequences of Rolling Back the Welfare State; Gough Social Welfare and Competitiveness; Geoffrey Garrett, Partisan Politics in the Global Economy (Cambridge, MA: Cambridge University Press, 1998); Robert Geyer et al. (eds.) Globalisation, European Integration and the End of Scandinavian Social Democracy? (London: Macmillan, 2000).
52. Hay, Globalisation, Economic Change and the Welfare State.
53. Stephen Byers, speech to the Mansion House, 2 February 1999, p. 1.
54. Ibid, p. 2.
55. Ibid, p. 6.
56. Bob Anderton and Ken Mayhew, A Comparative Analysis of the UK Labour Market, in R. Barrell (ed.) The UK Labour Market: Comparative Aspects and Institutional Developments (Cambridge: Cambridge University Press/NIESR, 1994), p. 37.
57. Donald Sassoon, European Social Democracy and New Labour: Unity in Diversity?, in A. Gamble and A. Wright (eds.) The New Social Democracy (Oxford: Blackwell/Political Quarterly, 1999), p. 24.
58. Anne Gray, New Labour New Labour Discipline, Capital and Class, number 65, pp. 1-8, p. 3.
59. See, for instance, Ray Barrell (ed.) The UK Labour Market: Comparative Aspects and Institutional Developments (Cambridge: Cambridge University Press/NIESR, 1994); Colin Crouch, David Finegold and Mari Sako, Are Skills the Answer? The Political Economy of Skill Creation in Advanced Industrial Countries (Oxford: Oxford University Press, 1999), p. 37; John Philpott, The Performance of the UK Labour Market: Is Anglo-Saxon Economics the Answer to Structural Unemployment?, in T. Buxton et al. (eds.) Britains Economic Performance (London: Routledge, 1998).
60. Crouch et al., Are Skills the Answer? p. 38.
61. Nick Crafts, Post-Neoclassical Endogenous Growth Theory: What are its Policy Implications?, Oxford Review of Economic Policy, volume 12, number 2, 1996, pp. 30-47.
62. On investment in human capital see Robert E. Lucas, On the Mechanics of Economic Development, Journal of Monetary Economics, volume 22, 1988, pp. 3-42; on investment in physical capital see P. Romer, Increasing Returns and Long-Run Growth, Journal of Political Economy, volume 94, 1986, pp. 1002-37; and on investment in research and development and new product development, see P. Romer, Endogenous Technological Change, Journal of Political Economy, volume 98, 1990, supplement, pp. 72-102. For reviews of the literature see Crafts, Post-Neoclassical Endogenous Growth; Margaret Sharp, Technology Policy: The Last Two Decades, in Buxton et al. (eds.) Britains Economic Performance.
63. Balls, Open Macroeconomics, p. 116.
64. Ewart Keep and Ken Mayhew, Vocational Education and Training and Economic Performance, in Buxton et al. (eds.) Britains Economic Performance, p. 379; Training Policy for Competitiveness, in H. Metcalf (ed.) Future Skill Demand and Supply (London: Policy Studies Institute,1995); Towards the Knowledge-Driven Economy: Some Policy Issues, Renewal, volume 7, number 4, 1999, pp. 50-9.
65. Ed Crooks, Browns Jobless May Be No More, Financial Times, 17 February 2000, p. 3; despite this seemingly rather idyllic depiction of the labour market, the economically inactive (those not in work who are either ineligible or eligible but not claiming benefit) number some three million.
66. Esra Erdem and Andrew Glyn, From Welfare to No Work, Financial Times, 17 February 2000.
67. Alistair Darling, We Make No Apologies for Our Tough Benefit Regime, The Independent, 10 February 1999.
68. Jamie Peck, Getting Real with Welfare-to-Work: Hard Lessons from America, Renewal, volume 7, number 4, 1999, pp. 39-49, p. 45.
69. Keep and Mayhew, Towards the Knowledge-Driven Economy, p. 53.
70. Mark Kleinman and Anne West, Employability and the New Deal, New Economy, number 3, 1998, pp. 174-79, p. 176.
71. Ibid, p. 1.
72. Tony Blair, Fabian pamphlet, op. cit., p. 6.
73. Gordon Brown, speech to the conference on New Policies for the Global Economy, 26 September 1994, p. 3.
74. Tony Blair, Speech at the Annual Friends of Nieuwspoort Dinner, The Ridderrzaal, The Hague, 20 January 1998, p. 2.
75. Stephen Byers, plenary address to the opening session of the WTO ministerial meeting, Seattle, 30 November 1999.
76. See, in particular, Gordon Browns speech to the Council for Foreign Relations, 16 September 1999; Stphen Byerss speeches to the WTO ministerial meeting in Seattle and to the Keidanren, Tokyo, 14 June 1999; and Tony Blairs speech to the World Trade Forum in Davos.
77. Tony Blair, speech to the Congress of European Socialist Parties, Malmo, Sweden, 6 June 1997, p. 5.
78. Tony Blair, Speech at the Annual Friends of Nieuwspoort Dinner, p. 7.
79. Tony Blair, speech to the World Economic Forum, p. 4.
80. DTI press release P/99/1029 Investment into Britain jumps by 90% to reach new height.
81. Tony Blair, in conversation with John Humphreys, reported in Marxism Today, November/December 1998, p.26.
82. Bill Clinton speaking at Davos, as reported in The New York Times, 31 January 2000, p .A6.
83. Blair, speech to the World Economic Forum, p. 6.
84. Ibid, p. 3.
85. Brown, speech to the Council for Foreign Relations, pp. 2-3.
86. Balls, Open Macroeconomics, op. cit., p. 129.
87. Blair, speech to the World Economic Forum, p. 1.
88. Blair, speech to the conference on New Policies for a Global Economy, p. 6.
89. Tony Blair, The Guardian 8 April 1997, p. 1.
90. Blair, Speech at the Annual Friends of Nieuwspoort Dinner, p. 8.
91. See the report on the EU Helsinki Summit, Financial Times, 11/12 December 1999, p. 2.
92. Blair, speech to the World Economic Forum, pp. 7 & 4.
93. Brown, speech to the conference on New Policies for the Global Economy, p. 14.
94. Blair, speech to the World Economic Forum, p. 1.
95. Blair, Speech at the Annual Friends of Nieuwspoort Dinner, p. 1.
96. Brown, speech to the Council for Foreign Affairs, p. 6.
97. For the original citation of this theory as inspiration, see the 1994 Brown speech; and for a fuller discussion the Balls article, already both cited .
98. For evidence on both, see the DTI Competitiveness White Paper, Building the Knowledge Driven Economy (Cm 4176, London: HMSO/DTI, 1998) and its accompanying conference report Our Competitive Future: The economics of the Knowledge-Driven Economy(London: HMSO/DTI, 1999). On the relationship between the two, see Sharp, Technology Policy.
99. Particularly influential here has been Charles Leadbeaters book Living on Thin Air: The New Economy (London: Viking, 1999) which contains a glowing endorsement from none other than the Prime Minister himself.
100. On this, see U. Huws, Material World: the myth of the weightless economy, in L. Panitch and C. Leys (eds.) Global Capitalism versus Democracy: The Socialist Register 1999 (London: Merlin Press, 1999), pp. 29-55.
101. For the arguments underpinning this paragraph, see David Coates, Models of Capitalism (Cambridge: Polity Press, 2000) pp. 251-264; and Watson and Hay, In the Dedicated Pursuit of Dedicated Capital.
102. Blair, speech to the World Economic Forum, p. 4.
103. Ibid, pps. 1 & 8.
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