“Communism and Democracy: History, Debates, Potentials” – book review

“Communism and Democracy: History, Debates, Potentials” – book review

Reviewed by David Purdy.

“Communism and Democracy: History, Debates, Potentials” by Mike Makin-Waite, published by Lawrence and Wishart, London, £18. Available here.

Mike Makin-Waite seconded the motion to dissolve the Communist Party of Great Britain as a delegate to its final Congress in 1991. He was then active in the CPGB’s successor organisation, Democratic Left, and remains involved in networks concerned with the history of the left. In this book, he offers a fresh and unflinching overview of the history of communism from its roots in the European Enlightenment of the eighteenth century to the collapse of communist regimes in Eastern Europe and the USSR, the demise of the international communist movement and the emergence of a global capitalist system from which the “spectre” of communism has been banished. His central concern is the troubled relationship between communism and democracy.

Those of us who still aspire to replace neo-liberal capitalism by a fairer, greener, happier, more democratic and less divided world cannot avoid looking backward if we are to move forward. For one thing, whenever even modest proposals are mooted to re-regulate markets, increase spending on public services or make the tax system less regressive, our opponents are quick to invoke the ghosts of Marx, Lenin and Stalin. More importantly, as the author notes (p 4), the eclipse of communism has impoverished the Western imagination, undermining belief in the very “possibility of ever shaping the world in line with the democratically agreed outcomes of reasoned consideration, with the aim of meeting human needs.”

Now, almost thirty years since the fall of the Berlin Wall, is a good time to take stock of the strengths, achievements, illusions, follies and crimes of communism. The financial crash of 2007-8 triggered a deep slump and decade-long slowdown from which the world has barely recovered and which has shaken public confidence in global capitalism and neo-liberal policies. Yet the left has made scant progress in articulating and winning support for a credible alternative. On both sides of the Atlantic, populist leaders and movements have emerged to challenge political elites, but more from the illiberal, nationalist right than the liberal, cosmopolitan left, whose commitment to open borders holds little appeal for the victims of global economic restructuring. As yet, there is little sign of the intellectual renewal, political realignment and institutional reform that history suggests are the pre-requisites for resolving an organic crisis of capitalism.

Compare the past decade with the Great Depression of the 1930s. Ten years after the Wall Street crash of 1929, the world was at war for the second time in a generation. But ideas and plans for a managed and socialised form of capitalism had gained traction among the intelligentsia and were about to be put to the test in running a war economy. Similarly, the formation of anti-fascist popular fronts in the late 1930s and of resistance movements during the war prefigured the national-popular governments that presided over progressive social settlements after the war.

The short communist century 1917-89

Given the appalling human rights record of the USSR and the quasi-military character of the Leninist vanguard party, one might suppose that a book about communism and democracy would be rather short. But democracy is a complex, shifting and contested concept. According to classical Marxism, liberal or “bourgeois” democracy is an instrument of class rule that serves to protect private property and to preserve the capitalist system. To create a social democracy, capitalists and landlords would have to be expropriated. In countries with parliamentary systems and universal suffrage, it might be possible to achieve this goal with a sufficiently emphatic electoral mandate, though even in this case force might be needed to quell a “slaveholders’ revolt”. Elsewhere, the first priority of socialists was to establish democratic institutions.

Under the impact of the First World War and the Bolshevik revolution, the international socialist movement split into two hostile camps, henceforth known as social democrats and communists, the former committed to electoral-legislative politics within the framework of liberal democracy, the latter dedicated to defending the Soviet Union and promoting world revolution. Yet while the two sides disagreed about the strategy for achieving socialism, both still aimed to break the power of the propertied classes by taking the principal means of production into public ownership. Once this was done and the government had decided on its policy priorities, a system of central planning would replace the “invisible” hand of the market as the primary mechanism of economic co-ordination, allocating resources among the various branches of production and distributing the social product among the members of society.

The advent of socialism, or “lower” stage of communism, would, it was believed, usher in a superior, more ample form of democracy, encompassing civil society as well as the state and putting the satisfaction of human needs above the pursuit of private profit. Major advances were confidently expected to ensue: inequalities of income, wealth and status would decline; the periodic crises to which capitalism was incorrigibly prone would disappear; and rapid progress would be made towards the material abundance required to sustain the “higher” stage of communism. En route, socialist citizens would acquire both the ability and the desire to participate in the management of productive units and community organisations, as well as enjoying social entitlements over and above the political rights and civil liberties that marked the limit of citizenship status in the “bourgeois” democracies, at any rate prior to the development of welfare states after 1945.

Makin-Waite describes this prospectus as “the promise of modernity”. In the first part of the book, he traces its genesis in the nineteenth and early twentieth centuries. In the second, he explains why the promise failed to materialise. At the heart of his account is the Soviet experience. Having seized power hoping to bring about a socialist revolution, the Bolsheviks found themselves driven, step-by-step, to launch an industrial revolution, with an authoritarian one-party state presiding over a bureaucratic command economy.

This is a familiar story. It is, nevertheless, worth retelling. The author’s decision to focus on the relationship between communism and democracy provides a strong narrative thread through the twists and turns of communist history, highlighting, in particular, the various periods and episodes when communists came to appreciate that liberal democracy is a historic achievement to be cherished, nurtured and defended: the pre-war popular fronts and wartime resistance movements; the Prague Spring of 1968 and the military coup against Chile’s Popular Unity government in 1973 – searing experiences both, which sparked the rise and shaped the politics of Eurocommunism in the 1970s; and Gorbachev’s efforts in the 1980s to bring the Cold War to an end while seeking to promote perestroika (reconstruction) and glasnost (openness) in the USSR.

Gramsci’s concept of hegemony

Gramsci

Presiding over the argument is the stoical, yet resolute spirit of Antonio Gramsci, a founding member of the Italian Communist Party (PCI), who briefly became its leader before being arrested and imprisoned by Mussolini. Gramsci was primarily a theorist of defeat. In his Prison Notebooks, he sought to explain why the Russian revolution had not, as the Bolsheviks confidently anticipated at the time, sparked off similar revolutions in the West. How had the ruling classes in the heartlands of capitalism managed to see off the communist threat? Why the contrast between the collapse of Tsarist autocracy and the resilience of “bourgeois” democracy?

In seeking answers to these questions, Gramsci was obliged to rethink Marxist theory and communist strategy. In particular, invoking the familiar distinction between the use of coercion and government by consent, he gave a whole new meaning to the concept of hegemony, the Greek word for leadership or supremacy. His argument, in a nutshell, was that while the state’s legal monopoly of the means of violence is always a factor in any situation, by far the most effective and least risky way for rulers to secure the allegiance, or least compliance, of their subordinates is not to beat or cow them into submission, but to win their hearts and minds. Thus, in the advanced capitalist democracies, winning and retaining power, whether to preserve the status quo or to pursue a radical alternative, depend primarily on providing the moral and intellectual leadership required to resolve, or at least cope with, society’s main problems.

Coping with a post-communist world

The third part of the book, “Routes for Radicals”, surveys the vestiges of the communist movement in China, North Korea, Cuba and South Africa, together with the various intellectual and political trends which have emerged since the 1990s and which retain some affinity, however loose, with the communist tradition. These include efforts to combine perspectives and themes from Marxist and ecological thought into a new red-green synthesis; the renewal of the left in Latin America (which now seems to have stalled); the anti-globalisation and anti-austerity movements in Europe and North America; the work of the so-called “New Communists” such as Alain Badiou and Slavoj Zizek; the formation of new parties of the left such as Die Linke in Germany, Syriza in Greece and Podemos in Spain; and the rise of Jeremy Corbyn and his followers in the British Labour Party.

The most intellectually innovative and impressive of these post-communist initiatives is the red-green dialogue, a serious attempt to rethink the relationship between capitalism, society and nature. It is, however, still a work in progress and has made little impact on organised politics. The other developments surveyed offer little more than old ideas in new guises. The “New Communists”, for example, reject democratic norms and see contemporary struggles for emancipation as struggles against (liberal) democracy. Thus, Zizek (quoted on p 258) declares that, “… what today prevents radical questioning of capitalism is precisely the belief in democratic forms of struggle against capitalism.” It is unclear whether Zizek really means this or is simply being provocative. He claims to be an unreconstructed Leninist, but this may be a pose. Either way, his apparent disdain for representative government is shared by those advocates of direct democracy who repudiate the state-centred politics of the traditional left in favour of direct action in “local spaces.” Of course, “propaganda of the deed” is an old anarchist enthusiasm and can be a potent form of protest as long as it remains non-violent. But action on the “horizontal” plane of politics can never change the world unless it links up with action on the “vertical” plane as part of a hegemonic project aimed at transforming the state.

Can the communist-shaped hole in our politics be filled by forming a new party or breathing fresh vigour and purpose into an old one? It depends what we hope and expect to achieve by such endeavours. There is no harm in dreaming of a post-capitalist world or in speculating about what it might look like. Dreaming revitalises the brain and utopian thought feeds into ongoing debate about what kind of life is best for humans and what kind of society would best sustain it. But we should bear in mind that the word “utopia”, coined in 1516 by Sir Thomas More, is a play on the Greek words eu (good or well), ou (no or not) and topos (place). Thus, utopia is a good, but non-existent place. It lies outside time and space: “somewhere over the rainbow”, in the words of the song. Political projects, on the other hand, are time-bound and operate in a resistant medium. Political actors must always reckon with natural limits, structural bias, institutional inertia, vested interests and the actions of their opponents, not to mention irreducible uncertainty about the future.

The neo-liberal revolution and the demise of communism have, between them, driven the possibility of a post-capitalist world over the edge of political space into the realms of utopian space. But while neo-liberal ideas and policies have reached every corner of the world, their impact has not been uniform and there are still different types of capitalism in different countries: China is governed by a strong authoritarian state; Sweden remains a high-tax, high public spending state; Germany retains its social market economy; Britain’s capital city still hosts the world’s largest financial and trading hub; and so on. Equally, just as globalisation has not eliminated institutional and cultural variety from the world, so there is no reason to suppose that the neo-liberal form of capitalism will be the last and every reason to do what we can to replace it by a better form, not just by working for regime change at the national level, but by heading off the current slide into international anarchy and rebuilding a rules-based global order.

Advertisements

Scotland’s Other Union

In the debate about whether Scotland should be an independent country, three major topics have proved to be both predictably contentious and genuinely problematic:

  • Scotland’s relationship with the EU in a context where the institutions of the EU are being reshaped in response to the ongoing crisis in the euro-zone, and where, once a new settlement emerges, an in/out referendum on EU membership seems likely to be held, either in the UK as a whole or, if Scotland is independent by then, in the rest of the UK;
  • The monetary and financial options open to an independent Scotland and their implications for fiscal policy;
  • The defence and foreign policies of an independent Scotland, with particular reference to nuclear weapons, the intelligence services and membership of NATO.

In the current issue of Perspectives, we review the first of these topics. In the autumn and winter issues, we shall cover the other two. Thereafter, we plan to commission an article setting out the constructive case for maintaining the Union and to convene a roundtable discussion on the substance, conduct and quality of the referendum debate, inviting participants to reflect on what it tells us about the state of our society and the condition of our democracy.

37-Su13

Independence in Europe: a reality check

Until last year, Alex Salmond and his ministers repeatedly claimed that an independent Scotland would automatically inherit all the UK’s ties and treaty obligations. By analogy with the “velvet divorce” between the Czech Republic and Slovakia, they assumed that once the Union had been dissolved, Scotland and the residual UK (rUK) would inherit the same legal status as successor states. At a press conference in September 2012, José Manuel Barroso, president of the European commission, confuted both claim and assumption, explaining his views at greater length in an interview for the BBC given in December.

Barroso’s intervention should not have come as a surprise: he was merely repeating the position set out by his predecessor Romano Prodi, who in April 2004 told the European parliament that:

“When a part of the territory of a member state ceases to be part of that state – for instance, because the territory has become an independent state – the treaties will no longer apply to that territory. In other words, a newly independent region would, by the fact of its independence, become a third country with respect to the Union, and the treaties would, from the date of its independence, not apply any more.”

The legal basis of Prodi’s view is unclear, but this hardly matters. There are no precedents for the Scottish case. The velvet divorce occurred in 1993, long before the Czech Republic and Slovakia applied to join the EU as separate states. No existing member state has ever split into two, so the question of what happens if both parts want to stay in the EU or if one wants to stay and the other to leave, has never arisen. The political reality is that an independent Scotland would not automatically be a member, but would have to go through the same accession process as have all but the original six member states, and would need to gain the approval of all 27 existing member states (28 after Croatia joins on 1 July).

After some initial huffing and puffing, the SNP sought to play down the difference between their previous assurances of a seamless transition to “independence in Europe” and the prospect that now beckoned of potentially fraught three-way negotiations between Edinburgh, London and Brussels, followed by formal ratification in each member state. John Swinney, for example, declared:

“Assuming there is a yes vote as a result of the referendum, Scotland will still be at that stage a part of the UK. We have always accepted that there has to be negotiation about the details and terms of Scotland’s membership of the EU. Crucially, that would take place at a time when we are still part of the EU, of which we have been members for 40 years.”

(The use of the plural “members” in Swinney’s final sentence reveals his reluctance to accept, or at any rate admit, the difference between being part of a member state and becoming a new state, the central point – of law or Realpolitik, as you prefer – that Barroso, and before him Prodi, had insisted on.)

A timetable for transition

In a bid to restore credibility and regain the initiative, on 5 February 2013 the Scottish government unveiled a timetable that begins immediately after a presumed yes vote in the referendum – then still expected to be held in October 2014, but subsequently set for 18 September – and runs through to independence day on 31 March 2016, followed by the Holyrood election in May. A decision about whether Scotland would participate in the Westminster election due in May 2015 will be taken after the referendum. This schedule raises two questions: Will the EU authorities be willing to open talks with Edinburgh before Scotland achieves formal independence, while Edinburgh and London are still haggling over the terms of independence? And if so, could both sets of negotiations be concluded in the space of 18 months (in practice, only 17 months, allowing one month off for the Westminster election campaign)?

The answer to the first question is almost certainly yes. Neither London nor Brussels will address any of the issues to be settled by negotiation as long as they remain hypothetical, so the Scottish government cannot expect to start talks prior to the referendum, a fact of political life that voters, demanding more information before making up their minds, will simply have to live with. But assuming a yes vote, there is nothing in EU law that precludes a territory that has voted for independence negotiating its accession, while still sorting out the terms of a divorce settlement. And it would clearly be in the interests of all member states to avoid the legal and commercial disruption that would ensue if, on independence day, Scotland were to be removed from the EU until its application to join is approved. Provided everyone co-operates, much of the groundwork could be done before secession. But formally, Scotland would have to be a state before it could accede. Thus, a gap opens up between secession and accession. The formalities take time: accession negotiations with Croatia, for example, were completed in 2011, but national ratification, which is entirely a matter for individual member states, took two more years.

Complications and delays could also arise from the fact that during the transition period, Scotland would continue to be represented in the European Council by the UK government. Barring his unexpected demise or defenestration, at least until May 2015 that government will be headed by David Cameron, whose policy of “less Europe, not more” runs counter to the efforts of EU leaders to resolve the crisis in the eurozone by pressing on with further integration in the form of a banking union and a fiscal union. Negotiations over Scotland’s accession could fall foul of attempts by London to secure a revision of the EU treaties or to start the process of withdrawing from the EU after an in/out referendum in the rUK. I shall return to this problem later.

Whether the trilateral negotiations could be completed on the timescale envisaged no one knows. In their legal advice to the UK government on the consequences of Scottish independence, Professor James Crawford of Cambridge University and Professor Alan Boyle of Edinburgh University express scepticism, opining that three years would be a more realistic estimate. Certainly the scale of the challenge is considerable. The Scottish government would be negotiating with London over Scotland’s share of the UK’s national debt, public assets and oil and gas revenues, along with currency and financial regulation, pensions and social security, defence and foreign affairs, energy and telecommunications, and other, lesser matters At the same time, it would be negotiating with Brussels over the terms of Scotland’s accession to the EU. That said, since the UK has been a member state for forty years, Scotland is clearly not in the same position as Croatia or Turkey, so presumably its commitment to democracy, the rule of law and human rights could be taken as read.

The road to accession

How difficult would accession negotiations be? As John Kerr points out, much would depend on the stance of the Scottish government itself. It would be unwise for Scotland, as a prospective new member, to seek changes in, say, the Common Agricultural and Fisheries policies, however desirable such changes might be from Scotland’s point of view. The best course would be to stress from the outset that its sole aim is to reinstate the rights enjoyed and obligations accepted when part of the UK. This would make it difficult for EU governments uneasy about Scotland’s accession – notably, Spain, wrestling with the aspirations of Catalans and Basques – to raise objections or cause delay.

But there would still be problems over UK opt-outs from the acquis communautaire, the accumulated legacy of EU policies which new members are required to adopt. In ascending order of difficulty, the three main stumbling-blocks are: the Schengen Agreement on border controls, originally organised outside the framework of the EU, but incorporated into EU law under the Amsterdam Treaty of 1999, with opt-outs for the UK and Ireland; the budget rebate secured by Mrs Thatcher at Fontainebleau in 1984; and the opt-out from monetary union negotiated for the UK by John Major at Maastricht in 1992.

The borderless Schengen Area operates very much like a single state for international travel purposes, with external border controls for travellers entering and exiting the area, and with common visas, but no internal border controls. The UK has not signed up, but neither has Ireland, which maintains a separate travel area with the UK. So Scotland could follow the Irish precedent, thereby avoiding border checks at Gretna Green, and could signal its willingness to fall into line with continental member states as soon as London and Dublin do so.

The UK’s budget rebate repays two thirds of the difference between the UK’s contribution to the EU budget and EU reciprocal payments to the UK. Over the past thirty years it has saved the UK some £70 billion at today’s prices, or roughly £2.3 billion a year. The UK now contributes 10% of the budget, far less than Germany, which contributes 20%, and somewhat less than France and Italy. The rebate, originally secured by strong-arm tactics and regarded ever since by the Tory right and the tabloid press as a symbol of national virility, is deeply resented by other member states, not least because the EU budget is a zero-sum game: the less the UK pays, the more all the rest must pay. There is little chance that Scotland would be able to retain the Thatcher rebate, even if it wanted to. Better, therefore, to offer to give it up as a gesture of goodwill. This is, in effect, the price to be paid for joining the club.

New members of the EU now take on a commitment to join the euro when they have satisfied the conditions for doing so. This is not an insuperable barrier to Scotland’s accession. Sweden has no formal opt-out, but retains its own currency and though still committed in principle to joining the euro, is unlikely to do so any time soon. Most Swedes, like most Britons, want to keep their own currency and central bank. For a while, after the successful launch of the single currency between 1998 and 2000, Swedish opinion shifted from “No, not now” to “Yes, but not now”, but since the financial crash of 2007-8 exposed deep flaws in the design of the euro, dividing the northern “core” of the euro-area from its southern “periphery” and plunging half of Europe into depression, the issue has died. In the more benign global conditions of the early 1990s, Sweden made a full and relatively rapid recovery from its own financial crisis and has weathered the recent storm better than most other European countries. Thus, until the euro-area resolves its crisis, no Swedish government would dream of holding another referendum on whether to join it.

So is a commitment to join the euro at some “appropriate”, but unspecified juncture a token gesture, with no real consequences for Scotland? Not entirely, for it sits uneasily beside the SNP’s current policy of retaining the pound and seeking to form a currency union with the rUK. This might be presented as an interim arrangement, to be superseded one day, if and when Scotland and the rUK jointly decide to give up the pound and embrace the euro, presumably after a referendum in both countries. But what if Scotland votes for independence in 2014 and the rUK subsequently votes to leave the EU? The tension between membership of the EU and protecting Scotland’s ties with the rUK would then become apparent, as the prospect of bureaux de change along the Tweed passed from the realms of fantasy to the horizon of possibility.

More generally, in the hurly burly of the referendum debate, even the formal admission that Scotland might some day switch from one currency union to another gives SNP policy a provisional, makeshift appearance, adding to the irreducible uncertainty that the prospect of secession poses for business and financial interests. (The same applies to the proposal that, after a suitable interval, an independent Scotland should create its own currency. This proposal also carries the further risk of provoking conflict with the EU. It is one thing to retain your historic currency, pending a switch to the euro, but quite another to introduce an entirely new one, in preference to the euro).

An invidious choice?

Until now, the working assumption has been that an independent Scotland and the rUK would both remain in the EU. All Scottish parties, pro- and anti-independence, take it for granted that Scots are committed to Europe or, at least, have no wish to leave it. Bizarrely, this includes the Eurosceptic Scottish Tories, who try to scare voters with the threat that an independent Scotland would be forced out of the EU. But with the rise of Ukip in England and the growing likelihood of an in/out EU referendum in the next Westminster parliament, Scots now have to reckon with the possibility that they might end up there alone. Indeed, the SNP has started urging people to vote for independence in order to stay in the EU.

According to Angus Roxburgh, a former BBC Europe correspondent:

“Scots now face an invidious choice: vote next year for independence (and, it is assumed, membership of the EU) and risk the collapse of links with England if it then votes to leave the EU; or vote to stay in the UK and risk being taken out of the EU anyway, courtesy of voters down south.”

This dilemma, he notes, falls into a familiar pattern in British politics. In 18 general elections since the Second World War, the Conservatives have won a majority in Scotland only once (1955), yet they have formed the government at Westminster nine times. Despite voting consistently for the left, Scotland has been governed by Labour for only 30 years out of 68.

How serious is the danger that if Scotland votes to stay in the UK, it could end up outside the EU? Asked how they would vote if an in/out referendum were held today, the British public is evenly divided. According to a Guardian/ICM poll conducted in mid-May, a majority of 43-41 favours withdrawal, with the rest undecided, and this at a time when Europe is in the doldrums and hardly anyone has a good word to say for it. Moreover, only one voter in ten regards Europe as the most pressing issue facing the country.

The meteoric rise of Ukip as an English nationalist party has spooked the Tories because it threatens to split the right and let Labour back into government, whether alone or in coalition with the Lib Dems, just as thirty years ago the rise of the SDP split the left and handed Mrs Thatcher a landslide victory in 1983. But the root cause of Ukip’s success is less antipathy to the EU – 40% of Ukip voters want to stay in Europe – than general disgruntlement with the political class and the decline of Britain. In this respect, their views are a more extreme version of attitudes held by English voters as a whole. Indeed, while the Ukip threat to the Tories is real, it may have been overstated, for though the Tories have suffered most from defections to Ukip, England’s fourth party has also taken votes from Labour and the Lib Dems.

As an “island-race” that once ruled a global empire which has left its mark on the UK’s constitutional arrangements, foreign policy, military posture, trade links and financial system, Britons have always been reluctant Europeans. However, recent history suggests that when questions of geo-political alignment are seriously debated, British voters have no time for “splendid isolation”. In 1975, only months before the referendum on whether to accept the terms of a cosmetic “renegotiation” conducted by Harold Wilson for reasons of party management, opponents of the “Common Market”, as it was then generally known, were well ahead in the polls. In the event, they were decisively defeated by a majority of 2 to 1.

By calling a national referendum at a time of intractable economic crisis – with recurrent strikes, double-digit inflation, dwindling profits and rising unemployment – the wily Labour leader managed to rout his critics on the left, who shared with the Tory right the illusion that Britain could somehow solve its problems by going it alone as a sovereign power, free from continental entanglements and constraints. David Cameron may be hoping to emulate Wilson’s example. It is, however, salutary to recall that though the Labour government of 1974-9 won this particular battle, it went on to lose the war. Just over three years later, its Herculean efforts to manage industrial conflict, control inflation, restore profitability, boost investment and reduce unemployment on the basis of a social contract with the unions, fell apart in the “Winter of Discontent”. With this disaster, responsibility for tackling the crisis passed to the neo-liberal right, which seized the opportunity to emasculate the unions, dismantle the post-war settlement and establish a “free economy” under the aegis of a strong state.

The crisis we face today is different from that of the 1970s, but no less daunting. Besides recovering from depression and rebalancing our economy, we need to repair the fabric of our society and regenerate our democracy within the framework of a new constitutional settlement that gives greater responsibility and fiscal powers to local authorities, as well as extending and strengthening the powers of devolved national governments. And beyond these shores, the historic nations of the UK should all be actively involved in efforts to reform the EU, helping it to regain popular legitimacy. For the moment, this is a project in search of agencies with the will, strength, patience and skill to see it through in the face of organised resistance, structural bias and institutional inertia. In broad outline, we know what needs to be done. The problem is to work out how to get it done and who is going to do it. Nevertheless, in thinking about the coming spate of parliamentary elections and national referendums – in Scotland, the UK and the EU – we should do well to keep both project and problem in mind.

All that is solid melts into air – DLS AGM 2012


 A background paper for the AGM of Democratic Left Scotland,

22nd September 2012

Middle Reading Room, Edinburgh University Students Union, Teviot Row

David Purdy

This paper originated as part of an even longer one dealing with the proposal to relaunch Perspectives under a new title. A report on that proposal will be presented in the morning session of the AGM. What follows is intended as background material for the afternoon session from 2.00 to 4.00 pm, which will be devoted to a general discussion of contemporary politics, introduced by Luke March, Lecturer in Politics at Edinburgh University, under the heading All that is solid melts into air. In section 1, I outline the origins and character of the democratic left (lower case) and of Democratic Left (DL): the former a political disposition or state of mind; the latter a UK-wide political network from which, in 1999 with the re-establishment of the Scottish parliament, DLS separated to become an autonomous organisation. To put this brief sketch in a wider perspective, in sections 2, 3 and 4 I review the changing contours of global and British politics from the early 1990s to the present.

The democratic left

When the final congress of the CPGB voted to disband in 1991, some remnants of its former Eurocommunist wing regrouped under the aegis of Democratic Left. For some time, the aims and character of the new organisation remained fluid, but at a national conference held in Manchester in 1994, it was agreed that DL was neither a party nor a think-tank, but a network open to members of all parties and none. The adoption of this organisational form marked a rejection of class politics, whether in the Leninist or Labourist mould. The centralised and disciplined vanguard party prescribed by Lenin is at odds with a principled commitment to parliamentary democracy, just as the ingrained economism of the British labour movement stands in the way of efforts to democratise the economy.[1] And while class structure continues to shape the distribution of life-chances, it is neither the sole nor always the most important influence on political attitudes and behaviour. DL sought to salvage whatever was still valuable from the wreckage of socialism and to work for a coalescence of the socialist, green and feminist traditions of political thought and action, a project that had already made some headway during the previous twenty years and was thought to offer the most promising basis for building a new political formation. When DLS was formed in 1999, it stood by these revisionist ideas.

Survivors of twentieth-century communism were only too conscious of the historical baggage they carried. They had suffered a loss of faith comparable to that experienced by many educated and thoughtful people in the second half of the nineteenth century as they struggled to reconcile the claims of religion with the findings of science. They knew what they no longer believed, but were unsure what new stars to follow. The only certainty was that no single individual, organisation or school of thought had a monopoly of wisdom and truth. It seemed best, therefore, to follow the advice of John Stuart Mill and try to combine the partial truths offered by diverse, or even divergent, world-views and theories, in the hope that each would correct the omissions, limitations and biases of the others.[2] The tentative, exploratory and pluralistic spirit of this approach is nicely encapsulated by the titles of publications such as Soundings and Perspectives.[3]

The second age of neo-liberalism

It is worth recalling the circumstances in which the democratic left emerged. In Eastern Europe and the former Soviet Union, Communist regimes had collapsed, bringing the Cold War to an abrupt and unexpected end, leaving the US – for the time being – as the world’s sole surviving superpower, and killing debate about the possibility of life after capitalism – perhaps not forever, but at least for the foreseeable future. In the advanced capitalist world, especially in its Anglophone regions, the first stage of the neo-liberal revolution had been completed, the post-war settlement had been dismantled, and a globally integrated capitalist economy was fast taking shape in which Brazil, Russia, India, China and South Africa – collectively known as the BRICS – would become major players, with other large and once poor, but now rapidly developing states such as Turkey, Malaysia and Indonesia following close behind. Within the EU, Germany had been reunited and plans were being laid to admit the fledging capitalist democracies of Eastern Europe and to establish an Economic and Monetary Union, beginning with the replacement of separate national currencies by a single European currency.

In Britain, the left and the trade unions were a spent force, having suffered repeated setbacks and disasters from the mid-1970s onwards, and a fifteen-year-long wave of economic expansion was about to begin. An important political milestone was Labour’s “shock” defeat in the general election of 1992, its fourth in succession. The economic turning point came six months later when sterling was forced out of the ERM (European Exchange Rate Mechanism). Much to everyone’s surprise, the depreciation of the pound stimulated recovery from recession without sparking off a new wage-price spiral: the counter-reforms of the Thatcher years – the abandonment of full employment, the emasculation of the unions and the deregulation of the labour market – were finally bearing fruit.  Shortly after, in 1994, the death of John Smith cleared the way for the birth of New Labour, which set about charting a “third way” beyond both radical new right and conservative old left. Under the leadership of Tony Blair, the party won a landslide victory at the polls in 1997 and went on to win the next two general elections, in 2001 and 2005, the first time Labour had ever secured three wins in a row.

New Labour offered a less abrasive and divisive, more sophisticated and subtle version of neo-liberalism. The party accepted the primacy of market forces and private capital in determining the course, pace, pattern and character of economic development, but accorded the state a vital role in ensuring that individuals acquired the skills and motivations required to make a success of their lives, it being taken for granted that these would be lives dedicated to owning, earning and spending. The Thatcher governments of the 1980s had been more concerned with restraining social spending than with recasting the welfare state and their efforts at social engineering were limited to breaking the power of the labour movement, preaching the virtues of self-reliance and giving people incentives to help themselves. New Labour, by contrast, sought to “modernise” the public services by redefining their purpose, reorganising their structures – often several times over – and opening them up them to the three c’s: competition, contract and choice.

The prime task of social security, for example, was to encourage, enable and, if necessary, compel able-bodied citizens of working age who were, or risked becoming, excluded from mainstream society to find and retain regular paid work. To this end, the payment of benefits was separated from the task of getting claimants (back) into employment, and a variety of rehabilitation, retraining and work experience schemes were launched, mostly run by private contractors. Public services still had to be financed from taxation. But they did not need to be provided by public agencies, under the control of central government. Instead, the work could be contracted out to private providers, whether commercial firms or social enterprises. Thus, although there remained a generic difference between public services and marketed commodities, the boundaries between the public, commercial and voluntary sectors of the economy became increasingly blurred, while business norms and market forces increasingly penetrated areas of social life from which they had hitherto been largely excluded, even under Mrs Thatcher.

The second, gilded age of neo-liberalism came to a sudden, unexpected and ignominious end in 2007, though as always with turning points, it took some time for this to be recognised. On the global stage, the bursting of the US housing bubble in the winter of 2006-7 gave rise to a “credit crunch” as inter-bank lending and borrowing, once used mainly to balance the books of prudent retail banks, but now critical to the trading activities of giant universal banks, began to seize up. Over the next eighteen months, the world financial system suffered a series of convulsions, culminating in the bankruptcy of Lehman Brothers in September 2008 and the near-collapse of several other major banks – most, though not all, headquartered in London or New York. The financial crash, in turn, triggered the onset of the deepest and longest economic recession since the 1930s.

For about nine months, from the autumn of 2008 to the summer of 2009, it looked as though policy-makers had learned the lessons of the Great Depression. The US and British governments moved quickly to restructure and recapitalise insolvent banks, not hesitating to take them into partial public ownership, while the Federal Reserve and the Bank of England provided general support to the banking system by disposing of toxic assets, buying up government bonds with newly created money and bearing down on interest rates, both short- and long-term. At the same time, governments across the world took concerted action to counter the downturn, not only allowing their budget deficits to rise automatically as tax revenues fell and social security spending rose, but also improvising emergency fiscal stimulus packages aimed at boosting total spending on currently produced goods and services so as to maintain employment and prevent the recession turning into a major slump.

Neo-liberal opponents of “big government” were temporarily thrown off balance by the financial crash, which hardly anyone had anticipated. It was not long, however, before they rallied under the banner of fiscal conservatism, warning that without prompt action to cut public borrowing and halt the rise in public debt, governments would lose the confidence of bondholders, with consequences for the real economy that would, they claimed, be even worse than those of pre-emptive fiscal austerity. When market sentiment moves against a country’s bonds, the government is forced to pay higher interest rates in order to borrow. Indeed, it may find itself unable to borrow at any rate of interest. This in turn raises the cost of private borrowing and crowds out private spending, negating the expansionary impact of budget deficits, while adding to the cost of servicing public debt.

From late 2009 onwards, these warnings gained plausibility as a wave of sovereign debt crises successively overwhelmed the governments of Greece, Ireland, Portugal and Spain, threatened to engulf Italy and even lapped at the shores of France. For the most part – the main exception was Greece – the governments concerned were not guilty of fiscal profligacy, but during the bubble years their economies had, to varying degrees, lost competitive ground to Germany and were running persistent trade deficits within the eurozone. In addition, some of them – notably, the governments of Ireland and Spain – had presided over credit-fuelled housing booms and reckless property speculation, which they were unable to prevent because they no longer had their own currencies and their central banks could not control the cost of borrowing. Nevertheless, at the behest of Germany, which as Europe’s economic powerhouse was in a position to dictate the rules of the game and was no longer willing to be Europe’s paymaster in order to do penance for the sins of the Third Reich, governments requiring so-called bailouts – actually official loans jointly funded by the rest of the eurozone and the IMF – had little alternative but to introduce tough fiscal austerity packages until such time as their public finances were restored to health.

The irony is that as a percentage of GDP, the combined budget deficits of eurozone member states are lower than those of the US and UK, while their combined public debt is less than half that of Japan. Yet the rates of interest at which the US, British and Japanese governments can borrow have never been so low. The problem is not the eurozone’s aggregate deficits and debts, but the fragmentation of fiscal authority and the difficulty of persuading increasingly eurosceptical electorates to accept the surrender of national budgetary sovereignty for the sake of creating a supranational fiscal union. Thus, between them, the fiscal conservative backlash and the crisis in the eurozone are exerting a powerful drag on global economic growth, plunging Europe into depression, snuffing out recovery in the US and slowing down export-led expansion in the BRICS, with adverse repercussions for primary producers in Latin America, Africa and Australia.

Britain: the politics of fiscal austerity

A central pillar of New Labour’s fiscal regime was a tacit agreement with the financial sector, whereby in return for light-touch regulation and official tolerance of runaway rewards for fund managers, market traders and senior executives, the rapid growth of financial services and the resulting surge in tax revenue would help to pay for extra spending on public services. In Peter Mandelson’s words: “We are intensely relaxed about those who become filthy rich as long as they pay their taxes.” The crash of 2008 destroyed this pillar. It also forced the government to scrap Gordon Brown’s fiscal rules: to keep current public spending and tax receipts in balance over the cycle, to borrow only for public investment, and to keep National Debt below 40% of GDP.[4] The budget statement of November 2008 cut taxes and brought forward capital spending plans, though the fiscal stimulus was modest: equivalent to 1.5% of GDP over three years. However, between the fiscal years 2007-8 and 2009-10, the budget deficit rose from 2% of GDP to 11%, the major source of the increase being the automatic stabilisers: falling tax revenue and rising social security spending. Over the same period, the ratio of National Debt to GDP ratio rose from 37% to 53%.[5]

Part of the budget deficit was “structural” in the sense that it would persist even if the economy were operating at its full potential. The recession had opened up a gap between the potential level of output and employment and the actual level. If this gap could be closed, the automatic stabilisers would work in reverse, boosting tax revenue and decreasing social security outlays. It was hard to say exactly how large the structural deficit was, but it would eventually have to be tackled either by cutting public spending programmes or by raising taxes.[6]  The issues to be decided were: When should fiscal adjustment start? How quickly should it be completed? And what balance should be struck between spending cuts and tax rises? It was also evident that in the longer run, beyond these immediate questions of crisis management, the country was going to need a new fiscal regime, along with radical reform of the banking and financial system.

To their credit, Gordon Brown and Alistair Darling argued that full fiscal adjustment should be delayed until recovery from recession was assured, though their room for manoeuvre was constrained: by the need to maintain credibility with nervous bondholders and myopic credit rating agencies; and by the need to fend off attacks by the opposition and a hostile press. In a situation where output had fallen 7% below its pre-recession peak and households and businesses either could not or would not increase their spending, no matter how low interest rates were, the best or least bad option was for government to act as spender of last resort. This, of course, entailed continuing to borrow and add to the stock of public debt. But the alternative was worse: prompt recourse to stiff public spending cuts and tax hikes was likely to deepen or prolong the recession, undermining business confidence and entrenching the slump. The budget deficit might even grow, once account was taken of the impact of lower output and employment on tax revenue and benefit payments. “Look after employment,” Keynes was fond of saying, “and the budget will look after itself.”

There was, to be sure, a risk that deficit budgeting would spook the bond markets, but the risk was neither high nor urgent. Given that the outlook for equities was poor, gilts offered investors a safe haven, and the government’s short-to-medium term refinancing needs were limited since the average bond was not due to be repaid for fourteen years. Moreover, unlike members of the eurozone, the UK still had its own currency and independent central bank, which could, if necessary, redeem bonds by creating money. History too offered reassurance: in the three centuries since the Bank of England was established and the bond market emerged, Britain had never once defaulted on its debt; and after both the First and the Second World Wars, the ratio of the UK’s National Debt to its GDP far exceeded the current level, standing at 200% in 1919 and 250% in 1945.

These considerations may have weighed with bondholders, but they failed to convince the electorate. Why was this? In part because, like other governments in office when the crisis struck, Labour was held to blame and received little credit for rescuing the banks and averting a re-run of the Great Depression; in part because there is a difference between staving off disaster and promoting recovery; and in part because the economic downturn coincided with a full-scale crisis of political legitimacy, triggered by popular outrage at the parliamentary expenses scandal. This was widely felt to symbolise the gulf separating Britain’s political elite from ordinary citizens. People sensed that there was something rotten in the state of Britain. They were not mistaken: over the previous thirty years, with one notable exception, the institutions of representative democracy had degenerated: through the hollowing out of political parties, the fall in electoral participation, the debilitation of local government, the demise of Cabinet government, the decline of the House of Commons, the dumbing down of the mass media and the corruption of the press. The exception was the devolution of powers and responsibilities from Westminster to the Scottish parliament and to elected assemblies in Wales and Northern Ireland.

Even so, Labour’s rearguard resistance to fiscal conservatism blunted its impact. Between the autumn of 2009 and the general election of May 2010, a large and longstanding Tory lead in the opinion polls was gradually whittled away. The upshot was a hung parliament, the first time this had happened since February 1974. To be sure, Labour fared badly: at 29% – six points down on 2005 – its share of the vote was the second lowest since 1923, when it replaced the Liberals as the main alternative to the Tories. But the result was not catastrophic: the party lived to fight another day. By the same token, the Conservatives failed to win an overall majority and were forced to choose between forming a minority government and striking a deal with the Lib-Dems. In so far as it is ever possible to discern the will of the people, a hung parliament was roughly what the voters wanted: they had lost faith in Labour without being won over by the Conservatives.

4.      Things fall apart

During the inter-party talks that followed the election, David Cameron and Nick Clegg considered and rejected the option of a minimalist agreement whereby the Lib Dems would support a Tory government on confidence motions and finance bills, without joining a full coalition. This, they concluded, was too flimsy a basis on which to tackle the economic crisis and would soon be followed by another election, with the attendant risk of provoking panic in the bond market. Instead, in the space of five days, the two parties’ negotiating teams crafted a memorandum of understanding setting out a comprehensive and jointly agreed programme for government and signalling their intention to serve a full five-year term.

The Lib-Con coalition announced three central aims: to shift the balance of the economy away from public spending, consumption and imports towards private spending, investment and exports, with financial services shrinking relative to high-end manufacturing; to build a stable financial system so that taxpayers would never again be called upon to rescue insolvent banks; and to restore public faith in Britain’s political institutions. To rebalance the economy, the government would introduce a phased programme of fiscal austerity, starting immediately and weighted towards cuts in public spending rather than increases in taxation. To rebuild the financial system, it promised radical reform of the banks and a new regulatory regime. To repair the political system, there would be new rules for party funding, fixed-term parliaments, a referendum on the Alternative Vote, boundary changes to reduce the number of MPs from 650 to 600 and reduce inequalities in the size of parliamentary constituencies, reform of the House of Lords, and efforts to persuade local authorities in England to adopt elected mayors. Underpinning the programme as a whole was the vision of a “big society”, an umbrella term covering various ideas for revitalising civil society and rolling back the state, of which the most developed were proposals to empower local communities, encourage volunteering and promote social enterprise.

The new government had several major strengths. The memorandum of understanding offered the makings of a serious reforming project, which was embraced with enthusiasm by senior figures in both parties. The government had a comfortable parliamentary majority of 80, which insured it against deaths and defections, whether on the Tory right or the Lib Dem left. And for some time to come, the undoubted pain of fiscal austerity could safely be blamed on the fiscal irresponsibility of the outgoing government. Thus, while Labour was preoccupied with a five-month-long leadership contest, the new government seized the moment to introduce an emergency budget of unprecedented severity. In June 2010 George Osborne announced plans for fiscal adjustment equivalent to 1.5% of GDP each year from 2011-12 to 2014-15, with three quarters of the total coming from spending cuts, including cuts in social security benefits. If all went according to plan, the share of public spending in GDP was set to fall from 47% in 2009-10 to under 41%.

To justify this display of fiscal shock and awe, the Chancellor argued that prompt action to put the budget deficit on a downward trajectory had protected the government’s triple-A credit rating and secured the confidence of bondholders, enabling monetary policy to be kept as loose as possible for as long as necessary. Cheap money, he claimed, coupled with the depreciation of the pound against other currencies by almost 25% since 2007, would facilitate an export-led recovery, helping to revive business confidence, boost private investment and initiate the desired rebalancing of the economy. Thus, far from halting the UK economy’s fragile recovery and tipping it back into recession, this was going to be an expansionary fiscal contraction.

For some twenty months, public support for the coalition remained solid, despite a flat-lining economy, the government’s refusal to contemplate any easing in the scale or timetable of fiscal adjustment and the slump in support for the Liberal Democrats, who paid a high price for ditching manifesto pledges to oppose higher student tuition fees and premature cuts in public spending. Thereafter, however, Labour overtook the Conservatives in the polls and began to open up a strong lead. By July 2012, according to UK Polling Report’s average of all the polls by all the polling organisations, Labour was on 42%, the Conservatives 33% and the Lib Dems 10%. This was broadly in line with the results of UK-wide local elections in May, when Labour did well, the Tories did badly and the Lib-Dems suffered a second successive year of carnage, their total number of council seats falling below 3,000 for the first time since the Liberal-SDP merger in 1988.[7]

Can the slide in the coalition’s fortunes be put down to normal mid-term blues? To some extent perhaps, but the main problem is that little progress has been made towards any of the government’s main objectives. Fiscal austerity is hurting, but not working. GDP is still 4% below its pre-recession peak and between 9 and 11% below its potential level, while total unemployment stands at 2.6 million (8.2% of the workforce) and youth unemployment at 1 million (one in five of those aged 18-24).[8] Moreover, since GDP started to fall again in the fourth quarter of 2011, not only is unemployment, a lagging indicator, set to rise from now on, perhaps eventually reaching 3 million (9.5%), but the target date for eliminating the structural budget deficit will recede further into the future, putting at risk the government’s much vaunted triple-A credit rating.

In a bid to escape from the doldrums, the government has recently announced two new initiatives: a so-called Funding for Lending scheme worth up to £80 billion, whereby the Bank of England provides ultra-cheap loans to the banks provided they, in turn, issue new loans to small and medium enterprises; and a parallel scheme aimed at large companies and worth up to £40 billion, to be spent on infrastructure projects, to be financed by private investors such as pension funds, and to be guaranteed by the government. These desperate measures are a tacit admission of failure and a silent tribute to those who long ago argued for a Green New Deal. But they also reveal the lengths to which the government is prepared to go to avoid public borrowing and state investment – further evidence, if it were needed, that neo-liberalism is not dead, though policy improvisation on this scale shows that there is a long way to go before we get to what might be called neo-liberalism 3.0.

The government has broadly accepted the proposals of the Vickers Commission for changing the structure of banking: erecting a firewall between the retail and investment arms of universal banks rather than splitting them into separate entities, obliging banks to hold higher ratios of equity capital to total assets and promoting greater competition on the high street. The intention is to have the necessary legislation on the statute book by the end of this parliament, with full implementation by 2019 – twelve years after the crisis began. Somewhat faster progress has been made in revamping arrangements for financial regulation. The Bank of England is to resume responsibility for regulating banks, and alongside the existing Monetary Policy Committee, a new Financial Stability Committee has been set up to keep an eye on the financial system as a whole.

Even so, the government still faces major problems in its dealings with the financial sector, both of day-to-day management and of strategic design. The banks have lobbied hard to blunt the edge and slow the pace of reform and skeletons from the light-touch years continue to drop out of the closet, from exorbitant executive pay packages to the Libor rate-rigging scandal. Meanwhile, net lending to businesses continues to fall, as repayments of old loans exceed the take-up of new ones, and banks are accused of taking advantage of repeated injections of cash by the Bank of England to repair their balance sheets rather than easing the supply of credit. At the strategic level, the government’s opposition to eurozone plans for a financial transactions tax sits uneasily beside its desire to demonstrate that British economic policy is decided in Downing Street, not the City of London. It also militates against the creation of a more balanced economy, for if the eurozone introduces such a tax and the UK does not, some financial business currently transacted in Frankfurt and Paris will migrate to London, exacerbating already pronounced economic disparities between the metropolis and the rest of the country.

Public indignation at the behaviour of the banks spills over into the unresolved crisis of political legitimacy. It is a moot point whether the hotch-potch of ideas for reform announced in the coalition agreement were capable of restoring faith in Britain’s political institutions and retrieving the reputation of Britain’s business and political elites. Take, for example, the proposal to replace the First-Past-The-Post method of electing MPs by the Alternative Vote (AV). The trouble was that no one loved AV: the Tories loathed it, Labour were divided and the Lib Dems lukewarm. The Tories had only agreed to put the proposal to a referendum as the price to be paid for coalition. Such a modest reform with such indifferent support seemed an unlikely tool for regenerating democracy even if the voters approved it. Similarly with the bill to replace the half-reformed House of Lords by a mostly elected revising chamber, whose members, chosen by PR from open party lists and serving 15-year terms, were to represent nine regional constituencies: this artful addition to the constitutional cook-book was hardly going to set the world on fire in a modern-day re-enactment of the Peers versus the People. If the purpose of reform is to reconnect citizens with government, why not convert the House of Commons into an English parliament and turn the House of Lords into a wholly elected second chamber of a federal state?

In the event, AV was decisively defeated by a majority of two to one and the impetus for reform was lost. Talks on the funding of parties stalled. Revelations of cash for access and dodgy donations continued to befoul the political stage. Only a handful of English cities opted to follow the example of London in having elected mayors. And when an unholy alliance between rebel Tory backbenchers and a partisan PLP intent on punishing the Lib Dems killed the prospect of reforming the House of Lords, the Lib Dems retaliated by withdrawing their support from legislation to implement the revision of constituency boundaries.

Wrangling within the coalition was compounded by the resurgence of tensions over Europe. As eurozone leaders edged towards closer fiscal integration, steering a perilous course amidst the ice of depression, the fire of the bond markets and the ire of their electorates, Tory eurosceptics stepped up pressure for a referendum on Britain’s membership of the EU. The party leadership had already conceded that a referendum would be held if Britain were called upon to transfer further legislative powers to the EU, and was hoping to secure the repatriation of some powers previously transferred, notably in relation to social and employment policy, which was to be the object of a renewed drive for deregulation. Faced with demands for an early, in/out referendum, Cameron temporised, pointing out – reasonably enough – that it made no sense to ask voters whether they wanted the UK to remain in a trans-national union which was in the throes of an existential crisis and was most unlikely to survive in its current form. Nevertheless, this ancient source of inter- and intra-party strife had lost none of its potency. Indeed, the clout of the Tory right was enhanced by the weakness of the Lib Dems and the threat posed by UKIP, the former fearing electoral annihilation if the coalition fell, the latter confident of ousting pro-EU Tory candidates standing in marginal seats. The coalition was not about to collapse, but it was coming apart, its purpose faltering, its partnership fraying.

Meanwhile, north of the border, another union was coming unstuck. In May 2007, just as the credit crunch was beginning to bite, the SNP emerged from elections to the Scottish parliament as the largest single party, beating Scottish Labour by one seat. After serving a full term as a minority government, skilfully manoeuvring and negotiating to get budgets approved and bills enacted, the party went on to win an overall majority in the 2011 election, an astonishing achievement that Scotland’s hybrid electoral system was supposed to preclude. The SNP was thus finally in a position to fulfil its longstanding promise to hold a referendum on whether Scotland should remain in the UK or become an independent country. Whatever the eventual outcome of the referendum now set for autumn 2014, the march of the SNP from protest to power has opened up the prospect of “an ever looser union” in which the constituent nations of the UK renegotiate their relationships and reconfigure their systems of government. As a result, seemingly arcane debates about constitutional, fiscal and monetary arrangements have begun to connect with big political questions about what kind of society the people of Scotland want to live in and how it is to be achieved.


[1] It is, of course, one thing to reject the old class-based parties and quite another to rule out, on principle and forever, the idea of forming a new democratic party of the left, though no one should underestimate the practical difficulties building a new organisation from scratch, of achieving a significant electoral breakthrough or, indeed, of reconnecting party politics with ordinary citizens at a time when people have lost confidence in the political class and the institutions of government.

[2] Mill based this maxim on his own personal experience of recovering from a nervous breakdown, when he found a corrective to the narrow, calculating and mechanistic ethos of Bentham’s utilitarianism, in which he had been schooled since the age of three, in the holistic, intuitive and developmental outlook of the romantic movement, as expressed in the writings of Coleridge.

[3] Renewal, the title of a comparable publication launched by former members of the Labour Co-ordinating Committee in 1993, conveyed a similar intention to overhaul the left’s mental furniture, though as critical supporters of the New Labour project, its editors, Neil Lawson and Paul Thompson, were inclined to the view that renewal meant applying old values to new times, which appears to imply that there is no need to re-examine the old values themselves.

[4] These rules were more flexible than they seemed. The Treasury altered the definition of the cycle several times to accommodate New Labour’s spending plans and, thanks to PFI and other wheezes, the distinction between current spending and capital spending became fuzzy. Nevertheless, from 1999 to 2001, there were small budget surpluses and from 2001 to 2007 the budget deficit averaged 2.3 per cent of GDP, while the National Debt rose from 29% to 36% of GDP. The deficit was lower than the average of 3.3% under Tory rule from 1979 to 1997 and Brown had kept public debt below the 40% ceiling. Moreover, against charge that the Brown Treasury went on a spending spree, it can be argued that fiscal expansion helped to avert recession after the bursting of the dot.com bubble in 2001 and that the country needed new schools, hospitals and improvements in infrastructure after years of Tory neglect.

[5] It currently stands at 70% and is expected to peak at around 80% in 2016-17, though in turbulent times like these such forecasts must be taken with a large pinch of salt.

[6] Besides the permanent loss of tax revenue from a stricken financial sector, which was overlarge and needed to be slimmed down, there was the problem that the longer the recession lasted, the greater the risk that the economy’s underlying growth rate – the rate at which potential output was growing over time – would fall as physical productive capacity was lost, collaborative social networks got dispersed and individual skills and know-how deteriorated through disuse.

[7] In Scotland, the Lib-Dems lost 74 seats and retain only 56, mostly in the Highlands.

[8] This range-estimate of the gap between actual and potential GDP is based on two assumptions: that when GDP peaked in the first quarter of 2008, the gap was zero; and that since then, for reasons explained in footnote 6, the annual rate at which potential GDP is growing has fallen from 2.5%, the previous long-term trend, to between 1.5 and 2.0%.

 

The crisis in the eurozone

Some thoughts ahead of tomorrow’s meeting on the Crisis and Europe at 1pm in the Queen’s Hotel, Dundee:

The crisis is so complex, intractable and toxic that it’s hard to know where to start. This is not the place to discourse at length on the character, causes and consequences of the crisis or to assess alternative ideas for resolving it. I simply offer some general thoughts, in no particular order of importance.

The single currency: design flaws

As in all major crises, economic and political elements are inseparably intertwined. The 17-member eurozone has turned into a doomsday machine. There were inherent flaws in the design of the single currency which, unlike the US dollar, was supported neither by a federal state with substantial powers of taxation, spending and borrowing nor by a central bank empowered to act as lender of last resort to individual governments. And when EMU was formed, member states gave up the power to alter their exchange rates and set interest rates without making any provision for bailouts, defaults or exits. At the same time, the creation of the euro combined German ordoliberalism, which prescribes balanced budgets, monetary discipline and wage restraint, with the much looser fiscal arrangements of the Mediterranean states which, before they joined the single currency relied on periodic exchange rate depreciation as a safety valve to correct for internal wage and price inflation. The assumption was that southern Europe would eventually converge on the German model.

This did not happen. Instead trade and payments within the eurozone became steadily more unbalanced: Germany and its northern satellites ran persistent surpluses, while the Mediterranean states ran persistent deficits. To take the most egregious example: Greece’s trade deficit is currently equivalent to almost 10% of its GDP despite a four-year slump which has reduced GDP by around 20% below its pre-recession peak. One would normally expect a recession of this magnitude to eliminate a trade deficit by reducing the demand for imports. As it is, Greek businesses simply cannot compete in the single market and Greek trade is in fundamental disequilibrium. The country joined the single currency at around 340 drachmas to the euro. According to The Economist, if the drachma were restored, the exchange rate would settle at around 1,000 drachmas to the euro (leading, incidentally, to a drastic jump in drachma-denominated import prices that would further reduce people’s real incomes at a time when an unemployment rate of 20% effectively precludes any attempt by workers and unions to achieve compensatory increases in money wages).

A crisis of legitimacy and the rise of the nationalist right

Add to these structural flaws the consequences of a credit-fuelled boom in land, housing and commercial property – notably in Ireland and Spain, whose governments did not run excessive budget deficits, but which have nevertheless been overwhelmed by sovereign debt problems through trying to rescue the banks (and with them, it must be said, a large number of ordinary punters who joined in the speculative frenzy) – and you have a toxic brew of economic depression, broken banks and investor panic. At the same time, within the 27-member European Union, the financial and economic crisis has intensified a long-standing crisis of political legitimacy, which goes back at least twenty years. By and large, until the early 1990s, the process of European integration was underpinned by a “permissive consensus” which allowed political leaders to drive it forward without needing to make much effort to carry the public with them. If “Eurocrats” were somewhat remote and unaccountable, this was a defect that could be tolerated in exchange for the benefits that integration was believed to confer: the preservation of peace in a previously war-torn continent and the promotion of economic prosperity. Over the past 20 years, there has been a marked decline in public support for the EU, with adverse shifts in opinion polls, “shock” results in national referenda and falling turnout rates in elections to the European parliament.

Worse still, in one country after another, national elections have brought an upsurge in support for parties of the populist and xenophobic right whose litany of threats to the integrity of the “nation” now includes – alongside asylum-seekers, migrant workers, Islamic terrorists, international criminals, alien cultures and global corporations – Europe’s cosmopolitan political elite who, it has to be said, have failed lamentably to restore the faith of their citizens in European institutions and ideals. Things are not yet as bad as they became in the 1930s when mass unemployment brought the Nazis to power in Germany, fascism consolidated its hold in Italy, Franco’s rebellion plunged Spain into a bloody civil war and democracy was very nearly extinguished across the continent. But the worst economic crisis since the Great Depression has certainly given a boost to the nationalist right and its violent, authoritarian fringe, from Marine Le Pen’s National Front to Greece’s “Golden Dawn” and from Geert Wilders in the Netherlands to Anders Breivik in Norway. These are febrile and dangerous times.

It is also worth noting, as Iain Macwhirter points out in The Herald, 17th May 2012, that just as economic disaster has led most Greeks to oppose withdrawal from the eurozone, despite the hardships and indignities imposed on them, so as we approach Scotland’s referendum in 2014, Scots may well be reluctant to quit the Union: “beware of letting go of nurse for fear of getting something worse”. From this point of view, the resurgence of the right-wing nationalism across Europe is bad news for the civic nationalism of the SNP. The slogan “independence in Europe” now looks distinctly worn and threadbare.

Austerity fatigue

Throughout Europe, the general public is turning against fiscal austerity. This is most dramatically illustrated by the results of the “first round” of parliamentary elections in Greece, where parties opposed to the bailout terms imposed by the troika (European Commission, ECB and IMF) gained two thirds of the popular vote. Austerity fatigue, together with deep antipathy to Sarkozy, also underlies the victory of Hollande in the French presidential election. Likewise, recent regional elections in the German Länder reveal an upturn in the fortunes of the SPD, giving Angela Merkel, who is far more popular than her party, good reason to contemplate reviving the grand coalition and performing a U-turn on macroeconomic policy. She is, after all, a pragmatist: witness her rapid volte-face on nuclear power after Fukushima.

Voters have even turned against Britain’s Con-Lib coalition government, which for nearly two years since the general election of May 2010 has enjoyed a comfortable lead in the opinion polls and even now continues to outpoll Labour on economic competence. Of course, this counts for little on the European stage, from which the British government has become semi-detached, preferring to defend the interests of the City of London from the wings and to appease Tory Europhobes by hectoring the governments of the eurozone.

It seems clear that across Europe, the public has lost confidence in fiscal austerity: (a) because it is hurting, and (b) because it is not working. In most countries – Germany, Poland and the Nordic states are the chief exceptions – GDP is flat or falling; unemployment is high and rising; large firms are hoarding cash, but lack the confidence to invest in fixed capital; public finances remain in poor shape; commercial banks are still trying to repair their balance sheets by selling assets and restricting lending, despite massive injections of free or almost-free electronic money created by central banks; and in marked contrast to the 1930s, when primary product prices fell – ruining farmers but raising the real wages of workers lucky enough to hang on to their jobs – today the terms of trade have turned against Europe as prices of imported food, fuel and raw materials have soared thanks to continuing (though slowing) booms in China, India and Latin America.

The alternative to fiscal austerity

Nevertheless, there is still no clearly articulated and broadly supported alternative to fiscal austerity. There are signs of recognition among Europe’s political elite that they face a serious crisis of political legitimacy, but this has not yet gone much further than the rather trite observation that “austerity is not enough”: i.e. that policies aimed at reducing budget deficits and containing public debt need to be supplemented by “pro growth policies”, generally understood to mean (further) deregulating the labour market, weakening employment and social protection and lowering business taxes. Leaving aside ethical objections and the argument that more of the neo-liberal medicine we have been forced to swallow for the past thirty years will further damage both individual and social well-being, supply-side measures of this kind will make no difference to jobs and growth in the short-run.

In the short run, how much profit-seeking firms decide to produce and how much employment (i.e. total working hours) they offer depends on the revenue they expect to receive from selling the goods and services their workers produce. Firms will not produce more than they expect to sell profitably. Expected sales revenue in turn is governed by actual sales revenue over the current and recent past periods. Thus, across the economy as a whole, output and employment depend, in the short run, on the level of aggregate spending on marketed goods and services. It follows that, as often happens in economics, current conventional policy wisdom is incoherent.

The apparent contradiction between reducing the budget deficit and increasing public borrowing in order to boost public spending can be resolved if we distinguish between different time-scales. In the short-term, we need a strong fiscal stimulus to boost aggregate demand, while assuring the financial markets that in the medium term, once a sustained recovery is under way, the government will raise taxes or restrain public spending so as to bring down the budget deficit and, if necessary, reduce the ratio of public debt to GDP. Austerity, in short, is for the boom. To help win public credibility for such a programme, the fiscal stimulus should be targeted on public investment projects rather than current public spending, preferably slanted towards enhancing energy efficiency, saving energy and reducing carbon emissions. And since the problems we face are pan-European, it makes obvious sense for governments to co-ordinate their macro-economic policies, with those countries that have trade surpluses and/or strong credit ratings acting as locomotive for the rest. Once the immediate economic emergency is over, a long-term green investment programme would form the basis for a new fiscal regime designed to stabilise economic activity in much the way Keynes originally envisaged when plans were being laid during the Second World War for post-war employment policy. A distinction would be drawn between current public spending and public investment. Governments would pledge to balance their current budgets – on average, over the business cycle – while financing public investment by means of borrowing. To counter cyclical fluctuations, an ongoing loan-financed programme of green investment would be speeded up or slowed down, depending on what was happening to the private components of aggregate demand.

The current situation is bad, verging on catastrophic. But we should stay sober and spurn the politics of apocalypse. There is, I think, a chance that a green Keynesian programme along the lines I have sketched could form the basis for changing current conventional policy wisdom and setting in motion a process that would bring an end to the age of neo-liberalism, just as the crisis of the 1930s marked the end of laissez faire and the transition, after the war, to a mixed economy.

What’s wrong with capitalism?

by David Purdy

Interviewed in a recent television documentary, Paul Tucker, Deputy-Governor of the Bank of England, condemned a system in which banks amass profits during a boom, but are bailed out by taxpayers when they go bust, as a “flaw at the heart of capitalism”.1 His views about how to remove this flaw were not recorded, but it is more likely that he was finding fault with the kind of capitalism that has evolved in Britain and the US than that he was criticising capitalism as such.

The distinction between genus and species is central to what follows. Since the collapse of state socialist alternatives to capitalism, the very idea of a post-capitalist civilisation has been banished to the realms of speculation and theory. For practical purposes, we now take it for granted that the only issue worth discussing is what form of capitalism is best or will prevail. Indeed prior to the financial crash of 2007-8, it was widely believed that even this question was on the way to being settled as the Anglo-American, neo-liberal model of capitalism appeared to outperform its rivals. After 1990 Japan sank into protracted stagnation and although the EU escaped from the doldrums of the 1980s and embarked on three major projects – completing the “single market”, building monetary union and absorbing the former Soviet bloc states of Eastern Europe – it signally failed to resolve its internal crisis of popular legitimacy and governance, and far from stemming the neo-liberal tide, got caught up in it.

In the immediate aftermath of the crash, from the autumn of 2008 to the summer of 2009, there was a brief window of opportunity for radical economic reform. The opportunity was lost. Temporarily thrown off balance, the political and business elite were hardly going to embrace the state-capitalist models of development favoured by the world’s rising powers – China, India, Russia and Brazil – and in Europe (though not in the US) they soon rallied behind the banner of fiscal conservatism, spreading alarm about the state of the public finances and setting out to restore “business as usual” by dint of fiscal retrenchment. This is a high-risk strategy at a time when recovery from recession is far from assured and little has been done either to reform global finance or to tackle imbalances in international trade and capital flows, but in the absence of a systemic alternative to the neo-liberal model that combines intellectual cogency with political appeal, our rulers evidently judge the risk worth taking. In that sense, what has transpired over the past three years is a crisis in neo-liberal capitalism, not a crisis of neo-liberal capitalism.

Continue reading “What’s wrong with capitalism?”

Can the Lib-Cons do it? How should we respond?

David Purdy

With the decision of the Liberal Democrats and Conservatives to form a coalition, the realignment of British politics has begun. We now know that in the course of the inter-party talks that followed the election of a hung parliament, Clegg and Cameron (or Nick and Dave, as they wish to be known) considered and rejected the option of a “confidence and supply” arrangement whereby the Lib Dems would support a minority Tory government on confidence motions and finance bills, but would not join the government on the basis of a comprehensive and jointly agreed policy programme. Any such deal would have been an uncertain and short-lived affair, soon to be followed by another election with the attendant risk of provoking panic in the financial markets. Instead, the adoption of the name “Liberal-Conservative”, the carefully crafted composition of the new government and its early policy announcements signal a clear intention to serve a full, five-year parliamentary term, to make a serious effort to tackle Britain’s economic crisis and, in the process, to break the mould of British politics.

The coalition has four policy priorities:

  • to repair the country’s battered public finances by instituting a phased programme of fiscal retrenchment, starting this year and heavily weighted towards public spending cuts rather than increases in taxation, as envisaged in the Conservative election manifesto, with the aim of reducing the UK’s record budget deficit by more than would happen if the government relied solely on economic growth to boost tax receipts and reduce social security outlays;[1]
  • to mitigate the impact of fiscal austerity on low and middle income taxpayers by  raising the standard personal income tax threshold to £10,000, as proposed in the Lib-Dem election manifesto, while ditching the Tory pledge to raise the threshold for inheritance tax to £1 million, retaining the outgoing government’s plan to raise employees’ national insurance contributions next year, but rescinding the planned rise in employers’ contributions (the so-called “jobs tax”)[2];
  • to break up and restructure the banks and to install a new system of financial regulation, a task to be shared between Vince Cable, whose reputation as a financial sage will now be put to the test, and George Osborne, Chancellor of the Exchequer, who will be in overall charge; and
  • to reform key aspects of Britain’s dysfunctional and discredited political system, a substantial task for which Nick Clegg has assumed responsibility, in addition to his symbolic role as Deputy Prime Minister.[3]

Taken together, these measures add up to a bold plan for tackling the twin crises that engulfed and finally brought down Gordon Brown’s government. When the US housing bubble burst in early 2007, the global financial system began to seize up. By autumn 2008, several major banks had become insolvent and Britain, along with most other developed capitalist economies, was plunged into a deep recession from which it has only just emerged. Though culpably slow to appreciate the gravity of the crisis, the government eventually took decisive action to rescue the banks and avert a re-run of the Great Depression. That it received little credit for this achievement is partly because there is a difference between staving off disaster and stimulating recovery, partly because of the success of the Tories in converting what began as a crisis of capitalism into a crisis of public finance, and partly because the economic downturn coincided with the eruption of a full-scale crisis of legitimacy.

Continue reading “Can the Lib-Cons do it? How should we respond?”