Time for a New Economic Paradigm

Britain's budget reminds us just how powerless politicians have become

Thanks for reading Progress & Survival and a warm welcome to my new subscribers. This essay was prompted by the UK Government’s budget announcement last week, but its arguments apply equally to every country. So wherever you are in the world, I would urge you to read it.

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Yes, ChatGpt, blah, blah. I’m not talking Utopia here. Just a slightly better world.

So that was it. A budget that taught us nothing we didn’t already know about the state of politics, and the impossibly tight economic corner into which Britain has allowed itself to be backed. I could spend the next 2,500 words arguing with the details of what Rachel Reeves announced last Wednesday. But there is nothing she could have done, given the rigid framework the government imposes on itself, that would have made much difference. The economy is no longer fit for purpose, essentially because politicians have given up the tools they require to manage it.

We need a complete rethink. But nobody is doing that thinking. Introducing a recent issue of the New Statesman, editor Tom McTague lamented the lack of intellectual energy on the left. This, he argued, is one of the reasons the Labour government is struggling. He’s right. Keir Starmer has nothing original to say and is looking like a dead duck despite his huge majority. If you can’t carry the parliamentary party with you, such a majority is worthless anyway.

As Neal Lawson wrote recently, the project to get Starmer into power was conceived specifically in reaction to the unexpectedly strong showing of Labour under Jeremy Corbyn at the 2017 election. Labour today stands against something: a return to the old Labour ways advocated by Corbyn, but appears to stand for nothing. It pays lip service to the idea of a fairer, more inclusive Britain but offers no road map for how we might get there. It has no intellectual hinterland and no new ideas.

When he interviewed Starmer earlier this year, McTague came away with the impression that the Prime Minister believes there is nothing fundamentally wrong with the country and, by implication, the way the economy is configured; it just needs to be better managed. No wonder Starmer is struggling.

There are many reasons for the rise in support for populist politicians of the far right, but high on the list is that voters no longer think conventional politics is able to make a difference to their lives. And they’re right, because politicians are no longer in control of the economy.

To escape the current malaise, and to prevent a slide to authoritarian rule, we need our leaders to come up with new ideas, and find ways to effectively communicate those ideas to the electorate. We need to hear a convincing story about the possibility of a more inclusive economy, and we need politicians with the courage and the confidence to tell it.

That story requires us to be honest about where we are and how we got here. It also demands a serious conversation about the kind of society we want to live in, and how we get there, both in terms of reconfiguring the economy, and persuading enough people to support those changes at the ballot box.

Where we are

Britain, and the world, face a number of threats that could change our societies forever. The consequences of climate change; the not unrelated rise in migration from south to north; growing inequality driven by an economy skewed to bestow immense riches on a tiny minority while excluding millions from effective participation; and war and civil conflict driven by each of these.

People in rich countries wonder why life is tougher than it was for their parents’ generation, while people in poor countries wonder why the promise of development has failed to materialise. Perversely, many countries now face the prospect of authoritarian governments run by people who deny climate change, celebrate current economic arrangements, choose to tackle migration with violence, and don’t give a damn about people in poor countries. We are not going to succeed in tackling any of these problems without a serious change of course.

How we got here

For five decades now we have placed our faith in a low-regulation, finance-dominated, free-market economy which promised much but has delivered little. People are now feeling that lack of delivery, and the explanation for it is a simple one: in advanced post-industrial economies like ours, unless measures are taken to prevent it, a point is reached where wealth stops trickling down to the wider population, and starts to trickle back up again, extracted by the minority who control the economy, and leaving only crumbs for the majority, however hard they work.

The evidence of this is everywhere, but we are still hooked on the idea that there is no alternative to a free-market economy as currently configured. There are plenty of economists working to reform their discipline and imagine a new economic order, but they are unable to penetrate mainstream political thought, where the Overton Window remains stubbornly closed.

Where would we like to be?

The immense technological advances of modernity should have helped us create a society in which nobody goes hungry, everybody has a roof over their head, and all have access to decent healthcare and education. Our failure to achieve this suggests that not enough people care, especially those with power; and that too few people believe in the possibility of a more inclusive society, because that’s what they’ve been taught to believe. It also implies that democracy isn’t working as it should: in a properly functioning democracy majority interests would direct policy.

Growing inequality is both a symptom and a cause of the economic exclusion of millions. The economy needs to be reconfigured to enable the effective participation of more people so they can earn enough to support themselves and their dependants. In an economy that provides viable opportunities for everyone, fewer people would have to rely on the state, or charity, for their basic needs.

And this should be an ambition not only for rich nations; wherever you are in the world, people have similar aspirations for themselves, their families and their communities. It will take longer to address extreme poverty in poorer countries, but it has the same root causes everywhere.

While advances in technology could help, it depends how they’re applied. If they are used to reduce labour costs, make businesses more profitable and line shareholders’ pockets, then things will get worse. When it comes to wealth creation, the more diffuse the ownership of factors like technology, the less unequal society will be.

There is understandable concern that many of the white collar jobs that have formed the bedrock of economic activity in rich countries for decades will be lost to AI. There is no solution to this threat under current arrangements. 95 years ago, John Maynard Keynes suggested that within a century people would only need to work a 15 hour week. It may have taken a little longer than Keynes anticipated, but politics still hasn’t caught up.

There is no reason, given the technologies now available, that people shouldn’t be able to work less and still have a reasonable standard of living. Instead, we are constantly being told to work longer hours, and further into old age, just to keep our heads above water. Something has gone very wrong.

How do we get there?

The progressive left has always shown an astonishing lack of moral ambition. By assuming the redistribution of wealth through taxation is the only way to even things up, it has avoided the serious thinking required to imagine a new kind of economy and society.

Tax can be used to level things up in two ways: by redistributing the wealth created through economic activity after the event. We’ve been doing this for years, but it leaves wealth creators resentful and welfare recipients disenfranchised. Or, it can be used to rebalance the economy so that instead of redistributing wealth, the opportunities to create wealth are more evenly spread.

The tax system could be used to ensure wider ownership of ‘the means of production, distribution and exchange’ not by transferring these factors to the state, but by spreading their ownership among many more people.

Currently it’s the billionaire elite who own and control nearly everything, and that’s why politicians are no longer able to make a difference. Bewitched by the ideology of the free market, not only have they handed control over economic policy to the financial markets, they’ve allowed monopoly ownership across the private sector. Every student of economics knows that whatever social benefits a free-market economy may bestow, they immediately disappear under monopoly conditions.

To his credit, Ed Miliband tried to push this idea of ‘predistribution’ when he led the Labour Party. But that debate barely lasted a single news cycle before it was immediately shut down when the billionaire elite and their media attack dogs realised the implications.

So how are we going to succeed where Miliband failed? There’s already an encouraging debate about the need to tax accumulated wealth instead of the activities - entrepreneurship and labour effort - that create new wealth. Most accumulated wealth is not saved from the proceeds of productive economic activity, but is ‘unearned’. It arises from a natural process of asset inflation which is inevitable unless it is taxed. We already acknowledge this with partial taxes on increases in the value of assets when they are sold: Capital Gains Tax.

The Funeral of Henry George, 31st October 1897. E.M. McKay, Public domain, via Wikimedia Commons

More than a century ago, an American economist called Henry George explained this process to millions of people who bought his book, Progress and Poverty. So popular were his ideas that the book outsold The Bible for a number of years. In 1897, had he not died during the election campaign, he may well have foreshadowed the recent success of Zohran Mamdani and become Mayor of New York City. His thinking inspired David Lloyd George’s People’s Budget of 1909, which included a proposal for a tax on land values, but was blocked by the House of Lords. This led to the Parliament Act of 1911, which removed the Lords’ absolute veto over legislation.

The 1911 act was a victory for parliamentary democracy, but similar forces are at work today, ensuring that democracy remains limited in its capacity to force changes in economic arrangements that would help create a more inclusive society.

Opponents of taxes on incomes and profits are right: they do act as a drag on entrepreneurship and productivity. So why not gradually replace them with a tax on the unearned wealth that drives rising asset prices: not just land, but myriad other assets that siphon off funds from the real economy, and could instead be used for productive investment?

There are two other pillars of the current economic system that conspire with tax arrangements to exclude many people from effective economic participation: the financial system and the monetary system.

The vast majority of the exchanges transacted through the financial system have nothing to do with channelling funds for investment into the real economy. Instead, financial market activity focuses on increasing the value of the wealth held by those who already have spare cash. If your private pension has increased in value by ten per cent over the last year (excluding contributions from your earned income) as many people’s have, then that wealth has been generated somewhere: it derives, at least in part, from the labour effort of other people. Likewise if your house has doubled in value since you bought it.

A tax on rising asset values would help reduce this transfer of wealth from those who create it to those who currently enjoy it. This would, of course, have profound implications: we would no longer be able to think of our homes as investments, nor expect our pensions to increase at a rate far in excess of inflation. But as many people don’t hold any such assets, inequality would reduce and the perception of economic injustice that drives support for far-right populists would diminish.

We also need a rethink of the monetary system. It is absurd that we currently allow privately owned banks to create money at the push of a button whenever they make a loan, while the government, through the Bank of England, is generally prohibited from creating all but a small proportion of what is known as ‘base’ money, unless of course, the commercial banks need bailing out, as they did in the wake of the 2008 financial crisis.

Our over-financialised, free-market economy has not delivered the goods. Socialism as conventionally conceived is unlikely to do any better. And social democracy: a fudge that involves the large scale redistribution of wealth created by some, into the hands of others, and which usually leaves both sides discontented, is not the answer either.

The belief that the only alternatives to current arrangements are rehashed versions of previously tried systems that do nothing to inspire voters, is why politicians are so diminished in their ability to make a difference to people’s lives.

But can it really happen?

To resurrect their fortunes, and to prevent a slide to authoritarian government, Labour needs to start telling the story of how we got here, and how we might get ourselves to a different place. Transformation on this scale would require changes at least as big as those unleashed by Margaret Thatcher and Ronald Reagan in the 1980s. And they will be harder to sell, because they challenge the status quo in a way it hasn’t been tried since Lloyd George more than a century ago.

Given the power of global financial markets, it’s difficult to see how such changes could be introduced in one country alone. But Keir Starmer has more friends abroad than he does at home. When you’ve been backed into a political corner, sometimes the only strategy is to come out fighting. If Starmer wants to leave a mark, let him be the one to give other world leaders a lesson in economic reality. If he won’t, he must be replaced by somewhere who will.

The only people who stand to lose from such reforms are the billionaire elite who currently dictate terms to the rest of us. If enough people can be persuaded that redesigning the economy along more inclusive lines is the only way to prevent the loss of the freedoms embedded in democracy, the freedoms we all cherish, then perhaps they will support a visionary leader with a new story to tell.

It was Einstein who said: 'We cannot solve our problems with the same level of thinking that created them.’ He was talking about the risk of nuclear proliferation after the first atomic weapons were used to end World War II. Soon after, at Bretton Woods, the western world took heed of his words, and redesigned the economy so as to avoid a repeat of the conditions that led to the rise of the Nazis. We need, once again, to invoke the spirit of Bretton Woods. Not to return to the post-war settlement, or anything like it, but to invent a new economy fit for the special circumstances of our own time.

It is perfectly possible to create a dynamic economy in which everyone is able to make a meaningful contribution and be rewarded appropriately. The minority-favouring mechanisms inherent in today’s free-market capitalism are a legacy of a time before the advent of democracy. A democracy that cedes economic power to a billionaire elite is not worth having. And unless we wrest back that power, democracy will die. We desperately need leaders with the vision, courage and story-telling skills to persuade enough people to vote for a better Britain, and a better world.