Responsible Capitalism

Stewart Wood writes:

In Europe, economic crisis has thrown up a political paradox: in the wake of the most spectacular failure of global markets since the 1930s, electorates have turned to the right rather than the left. They have done so in part because of a concern that in straitened times the policies of social democracy come with a price tag that is unaffordable.

The many faces of the Labour movement in Britain – from Black to Blue Labour, from Progress to Compass – are in their different ways all grappling with the same question: what does it mean to be on the left in tough economic times?

The blind alleys beckon: match them cut for cut; outflank them on the right. This would be wrong on ideological and economic grounds. We must defend, not abandon, those who are bearing the brunt of the Tory-led government's damaging economic strategy. Equally, in the wake of the global economic crisis it is quite wrong to suppose that we can hold our breath and wait until growth returns, and then go back to the status quo of capitalism before the collapse of Lehmans. We can't, and even if we could, we shouldn't.

This is why Ed Miliband's agenda of responsible capitalism – rewriting the rules of our economy to reward responsibility, produce a more sustainable prosperity and ensure that it works for the many rather than just the wealthy few – must become the platform for social democratic politics after the crisis. It is the right choice for Labour in an age of fiscal constraint, and the right choice for Britain's economic interests. But it also holds out the hope of a more effective way to pursue social justice, by addressing the sources and not just the symptoms of huge inequalities in market power.

Britain's deficit is now 8.4% of GDP. When Labour was elected in 1997 it was 3.4%. In that same year debt was 43% of GDP. It is now 68%, and will peak in 2014-15 at 78% of GDP. Combine that with flatlining growth under this government's failing policies, and continuing weak demand across the west and the implication is clear: we will be living in straitened times for years to come.

For the past 50 years, Labour's approach to governing has rested on using the proceeds of growth to fund redistribution, social protection and public services. In 2012, we know that these proceeds will be in scarcer supply than in the past, and the claims of deficit and debt reduction on them when growth does return will be greater than before.

Of course we will still tax and we will still spend, and in straitened times the politics of tax and spend – making sure tax policy is fair, making sure spending is well targeted and efficient – will become more, not less, important. But these choices will be tougher, and we know we will not be able to rely on ever-increasing public spending to improve fairness and raise the quality of our public services.

Responsible capitalism is also necessary for a wider reason – because Britain needs a new approach to paying our way in the world. There cannot be anyone left who really believes that minimal regulation and tax reductions for the rich will create wealth which, guided by an invisible hand, will trickle down to those in the middle and below. It doesn't work. It has created an unbalanced economy, excessively reliant on financial services and far too vulnerable to external shocks. And it has produced a country scarred by increasing inequality – soaring prosperity for a tiny minority at the top and a persisting decline in real wages for the vast majority.

The 1980s supply-side revolution from the right has run its course: what Britain needs is a supply-side revolution from the left, to build a stronger and fairer economy. We will need different kinds of banks and stronger competition in the banking industry; corporate governance reforms to incentivise good ownership models and longer-term business strategies; ensuring that companies see the continuing upskilling of their workers as an obligation and not simply a luxury; and the courage to challenge vested interests in the economy that charge excessive prices for energy or train fares and squeeze families' living standards.

This economic era calls for a different kind of emphasis for the left than in the second half of the 20th century, but it is one that can serve the enduring values of social democracy more, rather than less, effectively. The frustration of simply relying simply on a tax-and-transfer approach is that we find ourselves using "redistribution" to fight against "pre-distribution" – Jacob Hacker's term for the way the market distributes rewards in the first place. In the face of rising inequality, declining social mobility and stagnating real wages for middle-income earners, there are limits to what redistribution can achieve on its own.

To be really effective we need to intervene earlier – to reform markets so that economic power and rewards are more evenly distributed, even before taxes and transfers kick in. That is why it is right to take steps to curb excessive pay and bonus deals in Britain's boardrooms, rather than resign ourselves to leaving markets alone and look to redistribution to bear too heavy a load.

This is an opportunity for Labour. We have the chance to reshape the politics of the left for the next generation; to overhaul our politics and create a socially democratic capitalism for the 21st century. Having attacked Miliband for being anti-business in his conference speech, David Cameron is now desperately trying to prove he is the friend of responsible capitalism. But it won't work. He is doing it because the public don't believe he is interested in a better kind of capitalism, not because he does believe in one. This agenda is Labour's, and only we have the values to get it right. It is the way in which we can combine credibility and radicalism in the run-up to the next general election.