Sunday review on Wednesday: the Great Rebalancing, by the Fabian Society

by Jonathan Todd

Heavy words are lightly thrown in the Great Rebalancing, the Fabian Society’s new collection of essays on the economy. Three telling examples are “change the rules of the game”, “a mainstream north European economy” and “market failure”. The different interpretations that might be made of these largely undefined terms go to the heart of Labour’s dilemmas.

Twice in Stewart Wood’s relatively short introduction he refers to “changing the rules of the game”. This may tell us that he is putting these words into Ed Miliband’s mouth but I remain unclear as to what exactly is meant.

Does it mean legal and/or regulatory rules, some market intervention to change the dynamics of competition and thus the rules of the market, or the rules formed by cultural and social norms?

Should, for example, the living wage be a legal right for employees, something that is incentivised for employers by tax or other mechanisms, or something that it is considered culturally unacceptable not to respect?

Wood cites Jacob Hacker’s definition of predistribution: “a more equal distribution of economic power and rewards even before government collects taxes or pays out benefits”. Given that this would not seem to extend to incentivising the living wage through tax breaks for employers, predistribution routes to a living wage would seem to encompass enforcing it as a legal right or seeking to make it a cultural norm. The former comes with more risk of pricing workers out of employment and the later is less likely to effectively secure the living wage.

Thinking about predistribution, in short, does not readily answer the difficult questions surrounding the living wage. This does not mean that predistribution is an unhelpful concept. Indeed, it’s vital for egalitarian parties confronted by heavily constrained public budgets. But it does mean that predistribution does not shortcut hard questions for Labour.

These questions are less around whether Labour favours predistribution and more around what kind of predistribution we favour. The party’s opposition to the Welfare Uprating Bill, moreover, with its emphasis upon redistribution via the benefits system, does not immediately suggest answers to these questions.

The collection of essays also leaves largely unanswered the vexed questions around the UK’s relationship with the EU. Ernest Stetter may be “more convinced than ever that these times necessitate pan-European progressive answers” but other than a well-argued piece by Stephany Griffith-Jones in favour of a financial transactions tax, the collection says little about what these answers entail.

Furthermore, the repeated references to a “mainstream northern European economy” leave unaddressed the obvious question raised by this term: Would this extend, as is the case for most other northern European economies, to UK membership of the Euro?

We are left to presume not in current circumstances but this raises another question: how does the UK, outside the eurozone but inside the EU, now advance pan-European progressive answers?

Part of the answer should be UK support for a financial transactions tax. In addition to the many powerful points made by Griffith-Jones, it would buy some British political capital with European partners who have become deeply frustrated with the UK. It would also complement the moves towards a more diverse banking sector that Duncan Weldon proposes in his compelling chapter.

While Weldon forensically identifies a problem and its drivers and tailors solutions accordingly, I am less clear about Mariana Mazzucato’s discussion of “the ‘market failure’ approach”, which she says “assumes that the state is limited to correcting and fixing problems in the market rather than actively shaping and creating the market”.

This confuses me as it seems to ignore the classic non-excludability and non-rivalry arguments for state provision of public goods, which even the most ardent of mainstream economists would accept. Moving beyond this school of economists – for example, to behavioural economists who relax the rationality assumption that is central to mainstream economists – uncovers further market failures that are thought to require the active shaping and creation of markets by the state.

This may seem a churlish objection to a largely insightful chapter but imprecision around market failure, which should be fundamental to our policy thinking, is unhelpful. As well as precision, our thinking should, as Mazzucato is right to argue, “not be based on myths about the different actors but evidence”. In this context, her observation that SMEs receive more funding each year than the police is particularly striking and suggests that patience finance arguments for a British Investment Bank may be better made than those focused on a claimed funding gap for SMEs.

Such a bank would not undermine the potency of Weldon’s arguments for greater diversity in the sector, which should remain a priority, and this bank would form an important part of the institutional architecture of a reconfigured British economy. Maurice Glasman’s arguments on corporate governance, Vicky Pryce’s on equality-enhancing education and Jonathan Portes on immigration should also form part of this architecture.

Taking up these contributions, in addition to those by frontbenchers Chris Leslie and Chi Onwurah, would enable Labour to go some way towards improving upon the “ambitious yet vague” characterisation of Labour’s objectives for economic reform offered by Andrew Harrop, the general secretary of the Fabians.

The reality is that the backdrop against which the party is seeking this improvement is unprecedented in its challenges. Overall the contribution leaves a sense that we have further to go in meeting these challenges. Roll on the Fabian new year conference on 12 January.

Jonathan Todd is Labour Uncut’s economic columnist

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3 Responses to “Sunday review on Wednesday: the Great Rebalancing, by the Fabian Society”

  1. Nick says:

    Increase capital requirements on banks – less to lend.

    Disallow bailed out banks to offset profits against losses – less to lend

    Tax capital – less to lend.

    Use all of QE to buy Gilts – less to lend.

    Pretty clear who has curtailed lending by banks, its Vince Cable and the numpties.

  2. Ex-Labour says:

    ” Part of the answer should be UK support for a financial transactions tax. In addition to the many powerful points made by Griffith-Jones, it would buy some British political capital with European partners who have become deeply frustrated with the UK”

    Blair negotiated (i.e. gave away) a significant amount of power to the EU in return for EU reform of the CAP and other silly policies – reform never happened because the EU cabal did not want it to. How naiive are you ? Do you really think the EU would give us any more influence as a result of agreeing to a Robin Hood tax ? These people have a “project” where nothing is allowed to derail their socialist utopia, however poorly defined and reactionary it may be.

  3. McCurry says:

    Why has QE put banks out of pocket? QE has pushed up the price of gilts, giving a subsidy to institutions who have them to sell, including banks. As a result, money that was in gilts has been reallocated into the stock market, lifting stock prices, benefiting banks again.

    The other contradictions are correct. I’d further add that the low share price of banks is a major issue to their lack of lending. This low share price is partly caused by the fog of government intentions.

    I somehow imagine that the Fabian society hasn’t provided a chapter on that.

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