A New Political Economy for Britain

David Sainsbury

In a recent article in Foreign Affairs, entitled 'The Future of History', Francis Fukuyama pointed out that despite widespread anger at Wall Street bailouts, there has been no great upsurge of support for leftwing political parties. This lack of leftwing mobilisation he attributed, I believe rightly, to a failure in the realm of ideas. The financial crash of 2008 revealed major flaws in the neoliberal view of capitalism, and an objective view of the last 35 years shows that the British economy has not performed well compared with the previous 30 years in terms of economic growth, financial stability and social justice. But progressive political economists have not yet put forward a credible alternative. If you want to oppose a bad idea, you have to put forward a credible good one.

Progressive politicians and policymakers need, therefore, to debate what should be the outlines of a new progressive political economy, which is clearly different from the neoliberalism that has dominated political debate for the last 35 years, but which equally is not seen as a return to the failed policies of the 1960s and 1970s. A number of attempts have been made in recent years to describe such a political economy. We have had 'responsible capitalism', 'ethical capitalism' and 'moral capitalism'. But I do not think that any of them have either stated clearly what goals they are seeking to achieve or credibly described what role the state needs to play in order to achieve them. To say simply that one is in favour of responsible capitalism, ethical capitalism or moral capitalism does not advance the argument at all, as no one is arguing for irresponsible capitalism, unethical capitalism or immoral capitalism. It fails what the late Simon Hoggart called the law of the ridiculous reverse.

It might be argued that we do not need to have a view about political economy, that a pragmatic approach to policymaking is all that is needed for political success. I think to take this view is a mistake for two reasons. First, if a political party's programme of reform is going to attract voters, it must be able to state credibly how the state is going to achieve the party's goals. Second, if a political party does not state clearly what its political economy is, then it can be certain that its opponents will pin one on it that is politically disastrous.

A new progressive political economy must be based on a firm belief in capitalism – that is to say on an economic system in which most of the assets are privately owned and production is guided and income distributed largely through the operation of markets. But it must also incorporate three defining beliefs of progressive thinking: the crucial role of institutions; the need for the state to be involved in the design of institutions in order to resolve conflicting interests and provide public goods; and the use of social justice, defined as fairness, as an important measure of a country's economic performance.

It was a great mistake of neoclassical economists not to see that capitalism is a socio-economic system, and that institutions are an essential part of it. The financial crash of 2008 was made far worse by a number of institutional failures, such as the high level of leverage that banks were allowed to have. Endless empirical studies have shown that four institutions have a major im