A consensus is developing about why the Labour party lost – and lost big time -in the UK election. But the consensus is wrong. To those relying on the polls for prediction, the result came as a surprise. But for those who have followed Labour in the last years, indeed tried to influence their policies, and have been frustrated by the lack of a seriously different story –on what caused the crisis, what to do during it, and how to get out of it—it was less surprising.
In many ways, what Labour offered was ‘Tory Light’. “We too will cut the deficit, but less”. “We too think immigration is a problem, and will aim to let fewer immigrants enter, but more than the Tories.” In other words, there was no serious effort to develop a story on why running a deficit now could hold the key to future growth (look at the US, that ran a 10% deficit in 2009, and is today growing more than any European country that has been running a surplus). And no serious story on why immigration has actually been one of the key strengths of the UK economy—both in terms of the human capital it has attracted and the way this has resulted in a less provincial island mentality.
But perhaps the most tragic part of the story is what has happened AFTER the election. Labour is rightly asking itself why it lost. But the answers it is finding, from both within the party, and outside, is indeed the most ‘Tory Light’ story of them all. Both Tony Blair and Chuka Umunna wrote articles in the Guardian immediately after the election claiming that Labour lost because it was not ‘business friendly’ enough, with both calling business the ‘wealth creators’, a term later repeated by Liz Kendall. And yesterday Umunna again claimed in the Independent that Labour lost because “not enough was given over to the “producers” creating wealth in our economy”.
Business: wealth creators? This from a ‘Labour’ party? Which businesses? In 2011, Miliband tried to differentiate businesses, according to those that were actually creating value in the economy, from those that were simply extracting it. He called this productive capitalism versus predatory capitalism. But he was immediately told to shut up by his own party, because that sounded ‘anti business’. This is a pity, as he was onto something, that had he continued, might have led Labour to a different place today. Indeed, in 2014 I was labelled, by the Guardian/Observer, one of the Labour party’s gurus, and I can arrogantly say that had I really been one of their gurus (which I wasn’t!), they would not have made this mistake. In my own work I don’t talk about business, private sector or public sector but a particular type of private sector, a particular type of public sector, and a particular type of relationship between them. Talking simply about business as wealth creators misses this point entirely. Indeed, it goes against it.
Why is that distinction important? Because productive capitalism is one in which business, the state, and the working population work together to create wealth. They are all potential wealth creators. Indeed, as I show in my book, revolutions in all the key sectors that have created decades of growth in recent times (from the internet, to biotech, nanotech and today’s emerging green-tech industry), have all relied on an active and strategic network of different public sector organisations willing to take on the biggest risks and uncertainty before the private sector was willing to enter. This required spending on key areas both upstream and downstream of the innovation chain, with some of the most innovative companies receiving early stage high-risk finance (and loans) from public agencies (including Tesla today).
Such investments were not limited to ‘counter-cyclical’ spending in recessions, they were also ‘steering’ economic change during the boom. This means that the call by both Osborne, and the Labour leadership to run surpluses (during periods of growth—what Umunna this weekend claimed was the ‘right thing to do’), makes little sense. It of course also makes little sense for theoretical reasons that I and 76 other economists, addressed in this weekend’s letter to the Guardian. Modest deficits are not a problem. Rather than obsessing about their size, we must debate what kind of spending and investments they are composed of, their relationships to surpluses in other parts of the economy, and how to make sure they lead to a rise in GDP (which means that debt/gdp ratios will also stay in check as a consequence).
The public sector of course does not do this alone. When successful, it has historically engaged with active private sector organisations, both start-ups investing in niche new areas, and larger companies investing through human capital formation and R&D laboratories—all playing their part. Yet today this collective process of wealth creation is under threat, precisely due to a consensus around the wrong narrative. We have a fearful public sector, caving into useless calls for still more austerity debating the size of the deficit rather than its composition. And we have an ultra-financialized private sector, (often spending more on areas like share buybacks to boost stock options and executive pay) than on R&D and human capital formation. And, as I argued in a piece for the Economist, start-ups in such a ‘dysfunctional’ eco-system, have little hope for growth.
The point here is that we are all potential wealth creators, and risk-takers. The failure to appreciate this is what lies behind the current dysfunctional relationship between business and the state. Business, by presenting itself as the (only) wealth creators, have convinced the Tories and Labour alike to introduce policies like the Patent Box (being introduced across Europe), which have no effect on innovation, just on inequality. And under Blair—proposing today that Labour must go back to the centre ground—the Treasury reduced the time that private equity has to be invested, to receive a massive tax reduction, from 10 to 2 years. How much more “business friendly” can Labour’s policies be?
Indeed, often the introduction of these dysfunctional policies have been driven by a desire for the economy to become more ‘business friendly’, more innovative and competitive. Yet what innovation, and innovative firms, need is patient long-term committed capital, historically provided by the public sector in places like Silicon Valley, Germany and of course China today. Was there a serious debate in the election about the need for patient finance, through a well-structured business bank? No.
Until Labour find a new way to discuss innovation and wealth creation, they will lose, and lose again. This should create a real opportunity for the new Labour leader (whoever he or she may be) to develop a more confident story about wealth creation, rather than a timid version of the Tory story. A new narrative is needed which sets out a positive vision for a dynamic innovation economy – one based on a serious relationship between the public and private sector, in which both sides, along with the working population, are seen as part of the collective process of ‘wealth creation’.
This stronger narrative about a nation’s wealth that is created by all – not only by business – is essential. Not only for creating public-private ‘innovation systems’, but also for building a stronger foundation for the welfare state – something that has historically increased the pool of possible innovators precisely because it increases education and training opportunities for all. These vital roles of the state should be funded not only by the willing tax payer but also by a more equal division of the shared profits that result from the labours of all the wealth creators. Until then, we face an increasingly unequal and stagnant economic future. And future losses by Tory-light politicians.
Tags: Financing Innovation, Industrial Policy, Innovation Policy, Market Creating, Mission-Oriented, UK, Wealth Creation