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The British Model and the Brexit Shock: Plus ça Change?

2019; Wiley; Volume: 90; Issue: S2 Linguagem: Inglês

10.1111/1467-923x.12625

1467-923X

Duncan Weldon,

Political and Economic history of UK and US

for more than four decades, membership of the European Union and its predecessors, the European Community and European Economic Community, has been an anchor of Britain's economic model. Increasing the size of the market available to UK firms, exposing firms to greater competitive pressure, and ensuring access to wider supply chains and skilled labour have all been important drivers of productivity growth. More broadly, membership of the EU's customs union, conformity to the rules of the European single market and political engagement with a widening circle of European partners since the mid-1980s have acted as a policy anchor for Britain's economic policy making elite, ruling out both some of the more interventionist policies favoured in the past by the left (impeded by single market procurement rules and restraints on state aid) and also some of the deregulatory agenda favoured by the right (constrained by European social and environmental legislation and trade agreements). The original ‘Brexit referendum’ of 1975 foreshadowed this—with the then No campaign uniting Tony Benn on the left with Enoch Powell on the right. Both saw that membership of the EEC would limit the ability of policy makers to advance their own favoured agendas. Leaving the EU therefore knocks away a core foundation stone of economic policy making. After a rough performance in the 1970s and shock treatment in the 1980s, a broad consensus formed on how the British economy should be run—one which drew in not only the technocrats of Whitehall and Threadneedle Street, but also the leadership of both major political parties, the leading voices of British capital and, in many important ways, much of the leadership of the labour movement. By the mid-1990s, there was considerable agreement on important contours of the debate: the primacy of monetary policy as a way of stabilising the business cycle; the need to remain competitive internationally (although the definition of competitiveness of course varied across the spectrum); and the importance of structural drivers of productivity growth, such as skills, training and economic openness. Whilst there were important disagreements over the exact size of the state, the generosity of the welfare system and the appropriate level of taxation, the central tenets of the British model were widely accepted. Post-Brexit, that consensus is falling away, with many on the right now arguing for a ‘Singapore on Thames’ model of deregulation and further tax cuts to boost a buccaneering, free trading ‘Global Britain’, whilst many on the left have moved towards supporting a far more dirigiste approach to economic policy making, involving state investment banks, renationalisation of key utilities, and greater political control over central banks. The irony, of course, is that whilst leaving the EU may (or may not depending on the eventual final deal) give the British political elite the illusion of ‘taking back control’ and the ability to set policy in a much less constrained manner, in reality, the likely damage to already weak productivity growth will lead to a smaller economy, weaker public finances and, in all likelihood, less freedom of action for domestic authorities.1 Viewed in this way, leaving the EU is an enormous shift in the nation's political economic framework, perhaps every bit as large as the two major shifts of the twentieth century—the Keynesian revolution of the 1930s and 1940s and the monetarist/neoliberal counter-revolution of the 1970s and 1980s. But unlike those two shifts, it is much harder to explain purely in terms of traditional political economy analysis. Indeed, on closer inspection, Brexit may represent not so much an actual change in Britain's political economic paradigm, as a significant worsening of economic performance, but without radical paradigmatic change: a negative shock to the current framework, rather than a transformative shift to a new one. In the political economist Peter Hall's categorisation,2 a shift in the economic paradigm requires a third order of change. A first order change is a simple resetting of economic policy instruments—be that the adoption of tighter monetary policy or a looser fiscal policy. A second order change is the adoption of new policy instruments, such as the active use of fiscal policy for demand management. By contrast, a third order shift requires not just a change in the instruments used or available to policy makers, but a change in the very goals of policy itself. The policy paradigm adopted in the 1940s saw full employment (or at least full male employment) as the central goal of economic policy making. Starting in the mid-1970s, this was replaced by the logic of discipline—a striving for more balanced budgets and lower inflation. Both changes were far more sweeping than the decisions taken in, say, the 1960s, to supplement traditional Keynesian demand management policies with an active programme of supply side measures—in that case, the essential aims of policy remained unchanged: what was new was the addition of novel instruments to the policy makers’ toolkit. Whilst the extent of the ‘Keynesian revolution’ remains disputed—as does the exact dating—there can be little argument that the model of the UK economy underwent a substantial transformation between the early 1930s and the late 1940s. Active demand management (via both fiscal and monetary policy) came to the fore, full employment was adopted as an explicit policy aim, the size of the state grew substantially and it took an increasingly active role in whole swathes of national life previously left to the voluntary and private sectors. The gradual extension of the franchise coupled with the poor economic performance of the 1920s, the patchy economic performance of the 1930s (broadly, a booming south of England and decline of the areas associated with the old staple industries) and the experience of total war in the Second World War, reconfigured Britain's political economy. The counter-revolution arose out of the seeming failure of the previous Keynesian era: an economy that appeared to be stuck in a stop/go cycle, marred by balance of payments problems, suffering a relative (although perhaps inevitable) decline against its European peers, and high inflation. Inflation hit middle class savers particularly hard and undermined their buy into the system as a whole. Beginning in the mid-1970s, control of inflation came to be seen as a more pressing immediate goal than preserving full employment (although in theory of course, low and stable inflation would itself drive better growth and employment). Alongside this, and accelerating in the 1980s, the state began to step back from many of the roles it has assumed in the decades before. Strategic industries and the utilities were privatised, taxes cut and the labour market deregulated. Many of the policy instruments seized by policymakers in the 1930s and 1940s were given up and the whole aim of policy itself shifted. Economic policy paradigm shifts can often appear to be something of a black box. In a development of Hall's work, Oliver and Pemberton argued that a paradigm shift tends to follow a pattern.3 The initially stable paradigm is first challenged by a rising series of ‘anomalies’—for example, the rising inflation and weaker growth of the 1960s. Policy makers respond with a bout of experimentation, which in Hall's analysis would be characterised as first and second order changes—the changing of existing policy setting and the trialling of new ones. Staying with the 1960s as an example, fiscal policy was regularly tightened in response to rising inflation, whilst new supply side quasi-planning experiments sought to boost longer-term productivity growth. Only if these experiments fail to quash the anomalies does a state of paradigm crisis develop, opening the door to a more radical third order shift. Whether or not such a third order shift occurs depends on political contestation, the availability of new ideas and, crucially, the interaction of politics and ideology. During a period of failed experimentation, the marketplace for economic ideas widens—but whether or not they are adopted depends on raw politics. It is never simply the case that ‘good’ ideas succeed. Keynes may have written that ‘it is ideas, not vested interest which are dangerous’ but ideas rarely get put into practice without the support of some vested interest or another. In this context, it is instructive to look at these transformations of the British economy in the twentieth century—and indeed Brexit—through the lens of the so-called ‘Varieties of Capitalism’ literature.4 This distinguishes between national varieties of capitalism, placing the UK in a liberal market economy (LME) grouping, typically alongside a cluster of other Anglo countries such as the USA, Australia and New Zealand. In the ‘ideal type’ LME, we find shareholder rather than stakeholder corporate governance and finance, limited coordination of business and labour interests, competition on price over quality, lightly regulated labour markets, and strong general education rather than vocational training. Throughout the twentieth century, the UK remained, despite the building of some corporatist machinery in the middle decades, an LME rather than a co-ordinated market economy (CME), of the kind found in central and northern Europe. Viewed through this lens, the policy innovations of the 1930s/40s and 1970s/80s were no doubt significant, but they did not fundamentally call into question the liberal nature of Britain's political economic framework. Product and labour markets remained, in the main, relatively decentralised, and so crucially did wage bargaining (and attempts to move towards more centralised wage bargaining were fiercely resisted and ultimately unsuccessful). The skills and education systems showed similar levels of continuity and the welfare state that gradually developed over the twentieth century was complementary to this model of capitalism. Entry to the EEC—and exit from the EU—in this light could be viewed as similar to the shifts in demand management policies in the 1940s or 1980s: important to economic outcomes, but not a fundamental change in what could be called the ‘constitution of the economy’—its wage bargaining set-up, training systems, corporate government arrangements, and so on. The essentials of the LME framework would remain in place. A further argument against Brexit as a fundamental transformation in Britain's political economy is to be found in the lack of a ‘battle of ideas’ before the Brexit referendum. The literature on the previous shifts suggest that a major change requires not just a period of poor economic performance, but for the right alignment of revisionist policy ideas, discontented interest groups and the political economy alignments, to drive through series movement. For there to be a new paradigm there also has to be a coalition of potential economic winners capable of securing major change. Class politics and class interest played a major role in both of the UK's two previous paradigm shifts. The Keynesian revolution was not simply the adoption of the ideas of Keynes and Beveridge, but the triumph of the organised working class. Similarly, the counter-revolution was not about the technocratic adoption of the ideas of Friedman, but about the organised fight back by the interest of capital, coupled with the middle class losers of higher inflation—all of which is what makes Brexit so inexplicable from a traditional political economy perspective. In the decade before Brexit, the UK no doubt suffered what might, politely, be termed a series of ‘economic anomalies’. The banking crisis of 2008 destroyed a major engine of growth, denuded the public finances and left the UK with its worst decade of growth in over a century, and its longest real wage squeeze in two centuries. With productivity essentially stagnant, the policy experiments of the Cameron era ultimately failed to stabilise the old paradigm. But the usual ingredients for a major shift appear still to be missing. It is hard to find many examples of serious analysts arguing that the solution to Britain's economic ills could be found in leaving the European Union. The battleground of ideas in the run-up to 2016 had focussed mainly on fiscal policy rather than the UK's international trading and regulatory arrangements, or its place in the single market. The traditional political economy producer interest groups in 2016 were firmly lined up in favour of a Remain vote. The leadership of the trade union movement alongside most major unions and the majority of the Labour party argued for Remain, as did the vast bulk of British business—across almost all sectors of the economy—alongside the leadership of the Conservative party. Many were indeed arguing for change in 2016, but few for the sort of change the UK is now embarking on. The contrast with the intellectual tumult of the 1930s or the 1970s is stark. In both those cases, a fierce battle was fought over the aims and instruments of economic policy management. Both organised labour and capital—alongside the political parties—took active positions. It is tempting to try to describe the Brexit vote as a revolt by the losers of globalisation—communities that had experienced de-industrialisation and stagnating wages simply voting against what the elite desired. One could argue that the Labour party and the leadership of the trade unions have been disconnected from their traditional support bases and that class politics (despite appearances) actually drove the Leave victory. Innumerable newspaper opinion columns have indeed attempted to make this case. But the evidence suggests otherwise. Despite the popular image of Brexit being something which finds its loudest proponents in a stereotypical northern working men's club, the reality is that the most hardcore Brexiteers are usually to be located in the bar of a southern golf club. Age and education, rather than class or politics, drove the real cleavages of the Brexit vote. Indeed, the young voted overwhelmingly for Remain, despite having suffered the worst excesses of the last decade in terms of unemployment, falling wages and precarious work, whilst older voters—protected from the worst of austerity and most likely to have enjoyed a period of rising asset values—voted Leave. Neither class analysis nor the battle of ideas offers many clues to what drove the vote of June 2016. This is something new—a potentially large shift in the economic policy, driven by neither ideas nor by major interest groups. That may offer clues to how the political economic pieces now in flux may eventually settle. An alternative way of viewing the whole debate is to use a different frame entirely, most clearly argued in the recent work of the historian, David Edgerton,5 which recasts the terms of the battle. For Edgerton, British history should not be seen as continuous. His central thesis is to recast UK history into a struggle between ‘the global’ and ‘the national’. He argues that early twentieth century ‘Britain’ was, both economically and politically, a uniquely global and open polity, that it was only from the 1930s and 1940s that a cohesive political and economic ‘national Britain’ really existed and that from the mid-1980s onwards that national Britain was once more subsumed into a more global existence. For much of the British left, the Attlee government will forever be a high-water mark of British social democracy. But Edgerton argues that the view of that administration as being focussed on ‘welfarism’ is fundamentally incorrect. It was far more concerned with national productionism—with the building of a British-focussed economy, coupled with a renewed warfare state. As he writes: ‘I think, for example, that the actual post-Second World War United Kingdom was in some ways better prefigured in the programme of the Tories and the British Union of Fascists than that of the Liberal or the Labour Party. Although explicit nationalist political economy was a rarity, it was implicit in much economic commentary, concerning everything from the balance of payments to research policy’.6 In this version of the national story, the 1930s and 1940s indeed saw a paradigm shift—but it was more driven by a turn away from the global towards the national, than by a shift from a laissez-faire model to one of active demand management. Similarly, Edgerton argues that the changes of the 1970s and 1980s, and entry to the EEC, make at least as much sense if viewed as a way of re-globalising the UK economy than when seen as a simple turn back towards market mechanisms. Perhaps an argument can be made that Brexit is the third act of Edgerton's drama—an attempt to renationalise the economy? Certainly, that view is popular in ‘Lexit’ (or left-wing fans of Brexit) analysis. The great irony would be if supporters of a free trading, buccaneering ‘Global Britain’, also saw Brexit mark a step back away from a globalised Britain. Indeed, all but the very softest of Brexits would likely mean less immigration, less foreign capital flows and less trade intensity. The pendulum would indeed move back from ‘global’ and towards ‘national’. But it is very difficult to see it swinging by a great deal. As Edgerton himself has argued, Thatcher may have talked of recharging and unleashing British capitalism, but it is hard to describe the capitalism that dominates the British economy today as especially ‘British’. What were once called the ‘commanding heights’ are dominated by either foreign owned firms or parts of complex international supply chains. Finance and the City may be a traditional British strength, but many of the dominant firms are foreign owned and even the ‘British’ banks, insurances companies and asset managers are dependent—in most cases—on overseas earnings and funding. The manufacturing sector is in the main, if anything, even more internationalised. The Mini might be an iconic British brand still made in Oxfordshire, but it is owned by BMW and most sales are to Europe. The engine shanks are manufactured in Warwickshire, but sent to Germany for assembly before being returned to the UK to be added to the vehicle, which is then just as likely to be sold in the Netherlands as in the UK. There are components of the car which will cross the North Sea four or more times before final sale. Non-resident buyers of British homes have become a political flashpoint in recent years, but the very construction force that builds them is disproportionately from EU accession countries, whilst much of the capital funding these developments ultimately comes from East Asia. Even in the non-tradable sector, it is hard to find large swathes of ‘national British capitalism’. The workforce in low wage, non-tradable sectors such as hairdressing or restaurant work is, once again, disproportionally imported. The utilities and railways are mainly foreign owned and often rely on imported capital goods. Fishing, and the return of control over the UK's national waters, was a key calling point for the Leave vote in certain communities, but the majority of fish caught in British waters are consumed overseas. The UK has run a current account deficit, often a large one, every year since 1998 and in reality, for most of the last four decades. Few parts of the British economy have been left untouched by international capital flows. In the years since 2008, the global economy has seen some—depending on how one measures it—’deglobalisation’, or at the very least, a pause in the process. Cross border capital claims are below the level they were a decade ago for the first time since the 1930s—mainly the result of banks pulling back on cross border lending, whilst the share of trade in global GDP (which grew continuously throughout the 1980s, 1990s and 2000s) has been fairly steady over the last ten years. But even if the pace of globalisation has slowed or even, by some measures reversed, this is still a far cry from the 1940s. The deglobalisation/nationalism of the British economy that occurred in the 1930s and 1940s was a product of another time. Manufacturing supply chains—and even finance—were still more obviously national. Britain, as the hyper globalised country of the day, was something of an outlier and the moves in those two decades brought it back into line with its European peers. Attempting to ‘renationalise’ an even more globalised twenty-first century UK economy is a much steeper challenge. The history of Britain's political economy, then, provides few clues to how Brexit will unfold. In many ways, it is just too different to what has come before. It is, of course, hardly surprising that a long period of economic semi-crisis will provoke an attempt at change. It would be more unusual if there wasn't a counter-reaction. What is novel, however, is the UK embarking on a major shift in its core economic relationships without the support of any major economic interest group and without a preceding battle of ideas on what a new paradigm will look like. In an inversion of the usual chain of events, the battle of ideas has now been joined after a major decision has been taken. Presented with a (rather unspecific) call for change from the electorate, politicians are now arguing over exactly what that change should look like. Leaving the EU, in its harder forms (not aligning with the EU's regulatory state) appears to offer more freedom to domestic policy makers. The Labour party has adopted its most radical programme since the 1980s, with talk of a major state investment bank, a large programme of domestic investment and a deliberate attempt to rebuild British domestic supply chains and take back ownership of key economic infrastructure. In many ways, it is a familiar programme—much of it rings true to Edgerton's analysis of the programmes of the 1930s and 1940s. Meanwhile, important voices in the Conservative party are pushing an agenda of global free trade, deregulation and tax cuts—a doubling down on the initial programme of the Thatcher years. And yet, whilst the battle of ideas has widened, the core economic interest groups of organised labour and organised capital are, in the main, arguing for the least disruptive and the softest Brexit possible—something incompatible with the programmes of the left or the right. Creating the nirvana favoured by either the vocal left or the vocal right seems impossible in the short term. Both ignore the damage done by tearing up the existing framework under which capitalism in Britain operates. It is hard to create a productionist, national model for the UK economy when most of its industry relies on foreign sales and foreign components. Equally, for all the talk of embracing free trade on the right, the first act of ‘Global Britain’ would be to leave the deepest and most integrated cross border market the globe has yet seen. In terms of the traditional model, the ‘anomalies’ that drove the challenge to the existing paradigm are likely to continue, and experimentation as envisioned by both the left and the right are highly unlikely to end the period of crisis. Perhaps, then, Brexit cannot be explained in terms of a traditional model of economic policy paradigm shift because it is not a paradigm shift. The flaws in the old model of growth were exposed by the financial crisis of 2008 and led to what might be termed ‘extreme anomalies’—stagnating productivity, weak growth and a squeeze on real incomes of historical proportions. But whilst policy makers did indeed respond with experimentation—a particular combination of tight fiscal policy and ultra-loose monetary policy—the case was never really made for a major regime shift. Neither at the level of ideas, nor interest groups, was a serious case made for Brexit as a solution to Britain's economic woes. The foundations of Britain's liberal market economy survived both the Keynesian revolution and the neoliberal counter-revolution. It doesn't seem unreasonable to expect they will also weather the leaving of the EU. For all the talk of a radical change in the economic policy set-up, it is just as likely that the end result is a very British attempt to ‘muddle through’ with a model which itself is not working and of which one of the key props (EU membership) has just been kicked away. The implication of this is that Brexit will not generate a new model for the UK, but simply an inferior version of the existing one. The past two years of British political economy have been unprecedented and confusing in equal measure. For the first time, a major economic experiment is beginning without the support of any of the traditional political economy interest groups and without a preceding intellectual debate. Policy makers, who themselves mainly supported Remain in the referendum, find themselves arguing for a harder Brexit than their traditional economic supporters in key interest groups. The battle for ideas feels, in terms of potential scope, more open than it has for three decades. But this wide-ranging debate all too often ignores the reality of a slowing economy and damaged public finances. Much of the left and the right is arguing about how to reform a British capitalism without really ever engaging in how ‘British’ it is. The results are likely to be messy.