On Tuesday night, Rachel Reeves gave an important speech in the City of London, in which she offered an insight into Labour’s economic thinking. In her Mais lecture, the shadow chancellor cast Britain in a “moment of flux”, comparable to the end of the 1970s when one economic paradigm replaced another. It was, in many respects, an admirably fluent analysis that highlighted the economic damage wreaked by austerity and the price paid by political instability.
A radical agenda is needed to deal with the compounding crises of economic stagnation, political polarisation and the climate emergency. However, Ms Reeves’ response shrank from the scale of the challenge. This raised the question of whether Labour had learned anything from the last decade and a half. The extreme urgency of global heating means Britain can’t risk throttling green investment because of the demands of financial stability. Yet that is where Labour finds itself. Ms Reeves cited approvingly the US treasury secretary Janet Yellen’s “modern supply side economics”. But she refused to back Ms Yellen’s intellectual argument that there are social benefits in running the economy “hot” by maximising the use of all available resources.
Ms Reeves’ speech was about expectation management. In industrial policy, she argued for an activist, bigger state, but one not so large or intrusive as to do anything more than work in “partnership with business to identify the barriers and opportunities they face”. Underlying her approach was the assessment that government can only push business down the same track that it’s on. It can only ask for what business chooses to give. That might be useful in blunting Conservative attacks, but it is profoundly misjudged. To quote the economist Joan Robinson, apparently another influence on Ms Reeves, “private self-interest rarely on its own directs new investment into the lines that best provide for the needs and desires of society as a whole”.
It was Nigel Lawson who argued that growth would be obtained by doing away with government regulations, and inflation brought down by cutting the budget deficit and aggressive rate hikes. Ms Reeves said Mr Lawson, one of the most consequential chancellors of the last half century, was “wrong not only in application but in theory”. However, her radical statement was undermined by her apparent enthusiasm for reinforcing the institutions that maintain Mr Lawson’s judgment.
Ms Reeves’ oration was politically artful, and in that owed something to Tony Blair and Gordon Brown. New Labour loudly rejected Keynesian economics, but achieved growth via budget deficits that pumped demand into the economy. Redistribution to achieve greater social equality was a policy that dared not speak its name under Mr Blair’s premiership, but it was widely implemented. Mr Brown wrote in his autobiography that New Labour talked about fiscal realism and borrowing to invest but “rejected the myth that national finances were the same as household budgets, albeit on a larger scale, and with it the inflexible neoliberal insistence on a ‘balanced budget’”.
With months of phoney election campaigning to go, it may be too much to ask for Ms Reeves to be so open. We can but live in hope. The 1970s are a political device that can be used to frighten voters into accepting the neoliberal logic of “there is no alternative”. But a better balance between capitalism and democracy will need alternatives – and Ms Reeves ought to offer them.
