Home > General Politics, Labour Party News, Socialism > The under-investment challenge for One Nation Labour

The under-investment challenge for One Nation Labour

Larry Elliot is very good in the Guardian today, as he uses the hook of the supposed increasing employment/flat-lining national output conundrum to set out the real problem:

What appears to have happened is that the rising profit share went to the financial sector and has been used to boost City pay and bonuses rather than used for new investment. In the bracing climate, few groups of workers are able to garner the full fruits of their labour: Premier League footballers are one, investment bankers another.

A number of conclusions can be drawn from this analysis. The first is that the task of rebalancing the economy may be even more daunting than first thought. If the financial sector is responsible for the entire increase in the profit share over the past three decades, that shows how dependent the economy has become on the City as a source of growth.

Go read it, and the forthcoming paper at Touchstone on which Larry bases his article.

The only problem with Larry’s article is the suggestion that this is groundbreaking analysis.  It’s not.  Sensible economists have known for about 40 years that under-investment is at the heart of Britain’s economic decline, and that at the heart of this under-investment lies the political hegemony of the City.  Here’s David Coates in 1986, talking about Britain’s post-colonial decline:

[O]nce British domination of word trade and industrial production  had gone, the interests of the two sections of British capital proved increasingly incompatible, and nationally-based industrialists found themselves locked into increasingly outmoded industries and production methods, whilst at the same time being disadvantaged in their access to long-term credit relative to their competitors, and subject to a political class in which financial interest had a disproportionately strong voice… They found it difficult to persuade bankers to make long-term loans to industry on any scale, or to put up risk capital in sufficient quantities, and hence were driven back into a disproprotionately heavy reliance on their own by now inadequate resources of internal funds to fuel the investment process

Financiers for their part, because of their worldwide interests, lacked any great concern with the successful expansion of the domestic productive base, and instead used their considerable political leverage…to hold successive British governments to policies that were vital to London’s role as an international money market but detrimental to any restructuring of British manufacturing industry (p 207-271).

Larry is absolutely right to say that “the task of rebalancing the economy may be even more daunting than first thought.”  At the heart of Labour’s One Nation project should be a courageous re-investment plan, based on a virtuous wage and demand growth circle.

This in turn demands three things: a) deficit spending on infrastructure and renwed public services; b) re-introduction of Trade Unions to the British economy; c) some form of pseudo-corporatist (possibly temporary) non-investment tax, where it costs corporations and banks more to hold surpluses over a certain percentage limit than it does to invest them productively.

I’m not sure Labour’s One Nation thinkers have fully grasped that yet. Unfortunately, there are unpleasant people starting to wait in the wings who do understand how national economies can be kick-started, but who will be keen to make that happen in ways decidedly inimical to the basic tenets of freedom and equality.  As Phil at AVPS has rightly noted:

There is probably a populist political space in British politics for a Pim Fortuyn-style formation. A right-wing Islamophobia and anti-immigrant sentiment cloaked in a liberal garb, a dashing of authoritarianism, and Keynesian economics could have wide appeal.

For Pym Fortun, read Michael Gove.

  1. December 4, 2012 at 12:01 pm

    “Unfortunately, there are unpleasant people starting to wait in the wings who do understand how national economies can be kick-started, but who will be keen to make that happen in ways decidedly inimical to the basic tenets of freedom and inequality.”

    That would be me, I suppose.

    Lewisham People Before Profit is certainly opposed to both the free movement of capital and inequality.


    • paulinlancs
      December 5, 2012 at 10:16 am

      Can’t understand this.

  2. December 5, 2012 at 12:00 am

    I came up with a wheeze to make point c) more palatable:

    Large corporations and banks that hold surpluses over a certain percentage limit will be required to either start an Venture Capital fund which will invest the excess, or place it with a VC fund. Now this would of course be wasteful because it would be gamed quite a bit and because VC isn’t a particularly good way of improving out economy. But it has the great value of appealing to market types who acknowledge the lack of innovation in the British economy and along the way establishes the principle that we can legislate about excess surpluses.

    • paulinlancs
      December 5, 2012 at 10:15 am

      That’s a very good idea. Will include in a follow up blog on this subject.

  3. December 5, 2012 at 3:29 pm

    The answer is simple. Bank subsidies are inherent to the current fractional reserve system. The solution is full reserve banking, as advocated by a huge number of luminaries throughout history, e.g. Abraham Lincoln, Milton Friedman, and Irving Fisher. As to present day advocates of full reserve, these include Prof Laurence Kotlikoff (in the US) and Prof Richard Werner (who teaches at Southampton University in the UK).

  4. December 5, 2012 at 10:28 pm

    paulinlancs :
    Can’t understand this.

    What is not to understand?

    Lewisham People Before Profit is decidedly inimical to the basic tenets of freedom [of capital]and inequality.”

    We get more than 5 percent in the Greenwich and Lewisham GLA election

    • paulinlancs
      December 5, 2012 at 11:07 pm

      Oh I see. sorry about the typo, have changed inequality to equality. And of course I didn’t mean freedom of capital. I meant freedom.

      • December 6, 2012 at 2:38 pm

        Please don’t apologise.

        When I saw the reference to “unpleasant people” waiting in the wings , I automatically thought you must be talking about me.

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