Inside Story

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Britain’s economic tunnel

3 December 2012

An endless recession has changed politics and livelihoods. But in a many-sided national argument there is no consensus about its lessons, says David Hayes


Near-zero growth and stuttering reform: the British chancellor, George Osborne. H.M. Treasury

Near-zero growth and stuttering reform: the British chancellor, George Osborne. H.M. Treasury

“WHERE everything is bad, it must be good to know the worst.” The idealist philosopher F.H. Bradley (1846–1924) had far bigger concerns than Britain’s economic condition, but his aphorism has a peculiar modern resonance when set against this country’s years of financial crisis since August 2007, when the tremors from Wall Street’s hedge-fund collapse signalled the financial implosion to come. It is not just that so much about the economy – the graphs, the trends, the figures, the whole damned atmosphere – has seemed so bleak. It is not just that the glimmers of light – a stat here, a report there – have been so meagre. The real frisson is produced by the sense that the bottom of the pit has yet to be reached, and may turn out to be unappeasably vast.

If only we knew. But we don’t know and can’t know. It is this combination of grimness and uncertainty that gives the “great recession” its peculiar character – for policy-makers whose every pulled lever induces only a splutter (if that), and for citizens who have had to adjust to a world of debt, insecure employment, squeezed wages, rising bills and restricted horizons.

THE reverberations from Wall Street hit Britain early, when the government issued emergency support to one of the country’s main mortgage-lenders, Northern Rock, whose iniquitous house-of-cards expansion had left it prostrate. After a febrile weekend of elite summitry, amid a share-price collapse and a rush of customer withdrawals that threatened the once-respected institution with collapse, Labour’s prime minister Gordon Brown and chancellor Alistair Darling decided to guarantee all deposits in the bank, later extending a minimum guarantee across all UK banks.

If August 2007 was the prelude, the drama in the chronology of the crisis arrived a year later, when a series of events in the United States – the government takeover of housing giants Freddie Mac and Fannie Mae, the sale of Merrill Lynch, the bankruptcy of Lehman Brothers – began to expose the unsavoury lending practices and cosmic indebtedness of leading financial institutions. Again, this stage of the crisis was initially experienced in London as the local version of an America-centred shock, but as Britain’s leading banks buckled, the government – propelled by Brown’s urgent memo-to-self, “recapitalise now” – took further emergency action: the nationalisation of Northern Rock and then Bradford & Bingley, a further extension of deposit support, a rescue package for the whole banking system worth £50 billion plus £200 billion in short-term lending. The Bank of England also launched a money-printing spree in March 2009 worth £75 billion (this turned out to be the first tranche of five, whose value to date amounts to £375 billion). Britain’s already vast public debt ballooned further, though wider damage seemed to be contained over the next year, and after a precipitous slump in output and tax revenues the economy returned to very modest growth in 2009–10.

The most expensive piece of elastoplast in history – until the ones to come – seemed for a time to have checked the flow of funds and confidence. Some analysts (such as the Sunday Times’s David Smith, in his fine The Age of Instability [2010]) – even began to refer in nervous retrospect to “the crisis of 2007–09.” But as the unsettling new lexicon – “credit crunch,” “deleveraging,” “quantitative easing,” “too big to fail” – became embedded in public discourse, so awareness began to grow on this side of the Atlantic too that this was becoming a watershed period likely to have generation-long effects.

As the financial meltdown “spread like an aggressive ulcer” through Britain’s high streets (as Frank Bongiorno put it in one of his astute post-crash assessments for Inside Story), the bright future that British political leaders had been competing to offer dissolved before their and their voters’ eyes. In a fervid pre-election atmosphere, the politicos suddenly needed a new story. What would a “recession politics” look like? No one could answer with certainty. The kids in the back offices, advisers or wonks, and even some of their ministers or shadows could barely remember the last (early 1990s) recession; but anyway, this one is different, so maybe it doesn’t matter?

Perhaps, though, there was also something heaven-sent for both main parties in the crisis: a Labour government that had seemed enfeebled under Gordon Brown could claim good crisis management on the biggest issue of all, while David Cameron’s Conservative opposition could mock Labour as the party whose carelessness had landed the nation with gargantuan debts.

In the event, Labour found that keeping the show on the road wasn’t enough. After thirteen years in office it had too much to live down, and the Conservatives’ qualified victory in the May 2010 election allowed them to reacquire a once-familiar glow of power when Cameron became prime minister. But by 2011, as the glow faded and Labour under its new leader Ed Miliband was struggling back onto its feet, new fronts in the political (and intellectual) argument over Britain’s economy began to proliferate with dizzying speed.

THE elite bankers were to blame, everyone could agree: their arrogance, their greed, their bonuses (always “obscene,” though “eye-watering” has since raced ahead in the cliché wars), their esoteric but clearly dodgy financial instruments (from “credit default swaps” to “collateral debt obligations” via “sub-prime mortgages”) that they were only too happy to offload onto the desperate, the poor, the invisible suckers (Gillian Tett’s Fool’s Gold is a vivid guide through the morass, informed by the author’s training as an anthropologist). Beyond that, though, a vigorous debate took unexpected directions. For if policy responses in the immediate post-2007 period induced a Keynesian turn, endorsing the state’s position at the heart of the action, by 2010 the unfolding scale of indebtedness (ever more of it sovereign as well as business and household) came to encourage a Hayekian (or more broadly “Austrian”) mood favouring progressive reductions in the state’s outlay.

This intellectual contest took shape against the backdrop of the austerity program of the Conservative–Liberal Democrat government, which in 2010 – with Labour still comatose – effectively prosecuted the case that substantial cuts were essential to restore sound finances after a decade of Labour’s profligacy. Under Labour – a period that Gordon Brown called “the great stability,” giving David Smith his title – state spending as a proportion of GDP had risen from 37.2 per cent in 1998–99 to 47.7 per cent in 2009–10 as the government devoted increased resources to health, education, welfare, public sector employment (by 12 per cent from 1997 to 2009, reaching six million in total), and latterly to staunching the system. Growth was modest (an average of 1.96 per cent from 1997 to 2009, as against 2.7 per cent under John Major’s Conservatives from 1990 to 1997). Private sector employment growth was unimpressive (and the numbers here were boosted by the entry of eager young east-central Europeans after their countries’ accession to the European Union in 2004). And trade figures were embarrassing (the current account deficit grew from near zero in 1997 to 2.6 per cent of GDP in 2007, partly reflecting the decline in Britain’s manufacturing from 21 per cent to 12.5 per cent of GDP by 2010).

The crash of 2007–08 was not Labour’s doing, but it exposed the limits of its economic management, the flaws of its proclaimed “light-touch” regulation of the financial sector (which by 2008 represented 8.5 per cent of GDP and 4 per cent of employment), and the bursting of Brown’s incautious pledge in March 2007 that “we will never return to the old boom and bust.”

The main component of chancellor George Osborne’s austerity plan was to reduce the state’s structural deficit from 10.1 per cent to 1.1 per cent of GDP over the government’s five-year term. This was to be achieved by a range of spending cuts and freezes to permanent programs, savings on projects and sell-offs of government property. (Admiralty Arch in The Mall, built in 1910–12 to commemorate Queen Victoria, was sold to a Spanish company and is to become a luxury hotel.) Meanwhile, a determined focus on labour market and welfare reform, including a mix of pressure and incentives to lead the unemployed to work, and a revival of the private sector, would energise the economy and (via an inflow of tax revenues) contribute to a benign deficit-slashing cycle.

By October 2012, after two years of near-zero growth and stuttering reform, the government’s strategy had long looked threadbare. Every target – for growth, inflation, and borrowing – had been missed. The slender 1.5 per cent growth of 2010, in effect bequeathed by Labour, soon petered out. Accumulated public-sector borrowing had risen to £1.06 trillion, 67.9 per cent of GDP, a near-doubling in a decade (the unadjusted measure of debt, with all financial liabilities included, was £2.3 trillion, 147 per cent of GDP). The arrival of “double-dip recession” left the departmental reforms with everything to do, yet public spending continued to increase even amid cuts (because of existing commitments and inflation-graded increases) and there was little light from the private sector.

Consumers intent on paying down accumulated debt were reluctant to spend and businesses in the same condition reluctant to invest; bankers equally haunted by damage past and to come were busy rebuilding their cash reserves and reluctant to lend to small businesses; prospective home-movers were reluctant to trade because of a depressed market that prevented the kind of housing boom that had been an exit-route from earlier recession. The trade deficit continued to grow, even after the presumptive boost from a currency whose value had fallen by 20 per cent since 2007. The country last had an annual trade surplus in 1983. The shrinking pound added to inflation and further eroded cash savings, which had provided a hedge against poverty for many pensioners already hit by near-zero interest rates. In addition, the epic crisis in the eurozone (Greece’s first bailout in May 2010 coinciding with the Tories’ arrival in power) meant Britain could not look to its leading European Union partners for a boost.

Against this background, the announcement of 1 per cent growth in the third quarter of 2012 came as an immense relief, regardless of the probable contribution of the one-off royal jubilee and the Olympics. The government hailed this and other indices – unemployment hovering at 2.51 million, or 7.8 per cent, for instance – as a vindication that the economic strategy was on course. The jobless figures are indeed consistently smaller than most experts anticipated at the outset of the crisis, though youth unemployment (at 20.8 per cent) remains a big worry and the Office for National Statistics reports that 10.5 per cent of the workforce is “underemployed.”

The many months of relentless bad news have corroded the faith of many of the Conservatives’ media supporters, their doubts reinforced by a profusion of scandals and multiple examples of misgovernance. The fractious Conservative mood is reflected in the proliferation of coded dissent on the backbenches, with the members of the Free Enterprise Group who produced the anti-statist manifesto Britannia Unchained: Global Lessons for Growth and Prosperity the most prominent advocates of a muscular marketism. From another direction, a report on regional economic policy by Michael Heseltine has reaffirmed the veteran Tory’s longstanding support for strategic industrial intervention, which has been seen (if not by him) as a criticism of the government that commissioned his report.

For a Labour opposition whose record in office was by turns battered and mocked throughout the first half of the parliament (with the agreement or consent of millions of voters), the coalition’s economic troubles are a vindication of its critique – and especially that of the bullish shadow chancellor Ed Balls – that too-far, too-fast austerity would fail even in its own terms. True, Labour itself proposed serious spending cuts in its 2010 election manifesto, but it can claim also to have championed state investment as a means of necessary stimulus to prevent a renewed slump. Now, having re-earned the right to be listened to by the electorate, and enjoying a consistent lead in the opinion polls, the party leadership is thinking hard about what kind of economic legacy it might inherit in 2015, and what to do if it gets that far.

THE arrival of a new era in public life always reverberates in the worlds of media, ideas and culture. It’s hard to exaggerate just how great the shift in Britain has been since 2007. From the daily coverage in newspapers, on websites, and by broadcasters to think-tank research, academic life and book publishing, the effort to make sense of a post-crash world has been prolific. But where to look for guidance? The debt-volcano that consumed homes, livelihoods, and glass palaces also swept through orthodox economics, making many of its governing assumptions – about individualism, behaviour, rationality, the market itself – look inadequate and obfuscating. This was a kind of intellectual liberation. In an extraordinary swirl across the corpse-strewn battlefield, five main themes have dominated: history, finance, inequality, capitalism, and lifeworlds.

First, history. After the initial shock, every rupture provokes a search for origins. When, beyond shorter-term governance failures, did things start to go wrong? Was it 1929, and the inability to learn the right lessons from the great crash; or 1945, when longing for the fruits of victory lured Britain into living beyond its means and creating a welfarist dreamland? Or was it 1979, when free-market zealotry tore up the social contract and allowed business to break free of restraint and its obligations to society; or 1986, with the “big bang” liberalisation of capital markets and subsequent “demutualisation” of building societies? Is the core problem the death of socialism, or the rebirth of supercharged capitalism? Does the solution require a new balance between state and economy, or getting real about creating a competitive, low-tax, high-productivity growth model?

Second, finance. An off-the-map asset bubble had brought ruin. How to repair the damage? If the answer is improved regulation of the offending institutions, what is the best model – and how can this avoid undermining the positive part of the City of London’s contribution to the economy? By contrast, if the catastrophe reveals systemic flaws and the City is at their core, what kind of radical surgery is required, and feasible? And who would be its agents?

Third, inequality. A crash precipitated by irresponsible bankers earning bloated incomes, whose price was to be paid by blameless millions expected to endure a decade or more of hardship, insecurity, poverty – what greater symbol exists of a world gone wrong? The gulfs in wealth and life chances had always existed in class-divided Britain, but they were becoming even larger and more visible – and at the very time the ameliorations (or masks) of social mobility and welfare universality were seizing up. If a new landscape of inequality was being created, overlaying and accentuating the old one in the process, what could and should be done to repair it?

Fourth, capitalism. The epicentre of crisis was the City, but the effects of breakdown (including corruption and illegality) were system-wide. If finance was rotten – especially where, as in Britain, it was so powerful an industry – then capitalism was rotten. Moreover, a foundation of trust and ethical principles was essential for a market economy to work – and this had to be intrinsic; no state, independent agency or set of rules could supply it, even if they were necessary regulators. What then were the options for a “good” (or better, or responsible) capitalism? And if it was concluded that this was a chimera, how to go beyond it and to where?

Fifth, lifeworlds. A society-changing event opens minds, shakes certainties, shreds expectations. Soon, the issues at stake are seen to go far beyond the initial problem. What if the challenge is not to “fix” things, find “solutions,” make “reforms” – on the grounds that these betray a deficient, mechanical, mindset – but to find ways of living and being (greener, more communal, less frenetic) that move beyond a society where money, consumption and business exert so much power? If so, how can this more “qualitative” way of thinking be nurtured and spread, and the new ways of living it be created?

It must be acknowledged that the schema is simplified, for the themes are often as interlinked in argument as they are in reality. Moreover, there is no single conversation, even if the “silos” (to use Gillian Tett’s image of the financial system’s key structural weakness) are inching closer: most discussions tend still to remain within tight communities of interest, or polarise along political lines. Yet amid this huge agenda, there is some consensus. At a minimum, all sides of every question tend to agree that the convulsions of 2007–08 represent a turning point from a discredited past to a troubled present and a shadowy future. About what precisely has ended and begun, however, there is little agreement, in part because too much is still unknown.

“WHERE did it all go wrong?” is a good candidate for the modern British question. Once, the “Whig interpretation of history,” a benign view of the nation’s serene advance to the status of example-to-the-world, held sway, its dominance confirmed by gentle mockery in the classic satire 1066 and All That. Today’s counter-orthodoxy of uniform declinism, whose rightist and leftist variants each have deep roots, can be encountered in purest form in the Daily Mail (of which “every page,” Francis Wheen memorably said, is “designed to leave you hating someone or something”) and the Guardian (of which every page is designed to push your head nearer the oven). But if the economic crisis has joined old adversaries in the conviction that the country is going to the dogs, it has also sharpened divisions over when the process started.

Among the rich academic literature of “declinism” there have been (occasionally willing) conscripts to the country’s history wars. Martin Wiener’s thesis in English Culture and the Decline of the Industrial Spirit, 1850–1980 (1983) – that the institutional nexus of a complacent Victorian establishment hostile to money-making was responsible for longer-term incapacity – seemed to support the proto-Thatcherite project then underway. Correlli Barnett graduated from scornful critique of Labour’s post-war collectivism to apocalyptic fulminations in the Mail’s why-oh-why column. Also in the 1980s, a generation of think-tankers emerged into the light (those from the Institute of Economic Affairs being the most influential) to propose that state-centred economics and welfare dependency were the real “British disease,” for which a “flexible labour market” was the principal cure. (Its formative years are tracked by Richard Crockett in Thinking the Unthinkable: Think-Tanks and the Economic Counter-Revolution, 1931–83 [1994]).

The case was always contested, but it had a wider resonance. In his book Britain Since 1945: The People’s Peace (1992) the Labour-aligned historian Kenneth O. Morgan sourced a shift of national mood to 1970: a “growing disillusion with the Fabian planners, Keynesian economists, Beveridgean engineers – the consensual liberal positivists who had governed the realm like so many conquistadors for a quarter of a century.” That was a different elite to the one Wiener had in mind, but it was equally seen as a force of reaction and blockage. The resentments fostered under it, and the recent memory of the social turbulence and economic sclerosis of the 1970s, helped the 1980s medicine go down. A new-old left addicted to self-comforting anathemas of “neoliberalism” – the portmanteau cliché to beat them all – tends not to look back that far, except to resource its nostalgia.

Today, the contours of declinism have again changed. It is the economic priorities of the post-1979 era (marketisation, privatisation, finance-focused policy) – dominant under eighteen years of Conservative rule, but scarcely altered under Labour’s thirteen after 1997 – that are broadly viewed as culpable for the present morass. The elite principally under assault is composed of financiers and heads of businesses (especially privatised utilities), and the politicians who allowed them to become so powerful. The more pungent analysis of this era extends the argument from the policy level to the systemic and ethical (as in Will Hutton’s classic The State We’re In [1986] and its latest iteration Them and Us: Changing Britain – Why We Need a Fair Society [2010]). The institutional and intellectual obstacles facing the vision of “a good capitalism in a good society that embraces opportunity and innovation” remain formidable, however.

If the City of London was at the heart of the crisis that hit Britain’s economy in 2007–08, the most convincing explanations trace its origins to the reshaping of the financial industry in the preceding decades. A whirlwind of policy decisions and processes beyond anyone’s control – free capital movement, deregulation of financial services, computerisation, changes in the governance and oversight of banks and building societies, globalisation itself – effected a revolution from within Britain’s financial sector whose consequences were cultural and psychological as well as institutional. The context has been portrayed in luminous detail by David Kynaston in his magnificent four-volume history of London’s financial district, usefully compressed into the single-volume City of London: The History (2012) and by Philip Augar in The Death of Gentlemanly Capitalism (2001), which examines the ruination of Britain’s investment banks (and whose title borrows a phrase employed by the historians of empire P.J. Cain and A.G. Hopkins, though there in the context of an argument about finance capital’s draining effect on the real economy).

In the background, the relative decline of Britain’s manufacturing sector – accelerated by the savage recession of the early 1980s – was making finance more important to the economy as a whole. When the downsides of the deregulatory “big bang” started to impinge, most immediately in the crash of October 1987 – and even Margaret Thatcher in 1986–87 expressed “great concern” about the surge in executive salaries and confessed “I understand the resentment” – there was neither appetite nor obvious tools for remedial action. The near-forgotten “Stop the City” demonstrations of September 1983 and March 1984 may have raised the temperature but could not light a spark. Finance increasingly set the standard of value in the corporate sector, reinforced by the cult of shareholder value to the exclusion of all other company purposes, and the new fetish of rewards and bonuses. As Philip Augar writes, “In an age of weak nation states, discredited systems of representative democracy and infinitely mobile, infinitely amoral international capital, the City had – almost by default – won the arguments and was calling the shots.”

Several powerful accounts – among them Roger Bootle’s The Trouble with Markets: Saving Capitalism from Itself (2009), Graham Turner’s No Way to Run an Economy (2009), and Andrew Gamble’s The Spectre at the Feast: Capitalist Crisis and the Politics of Recession (2009), the last two being the best marxisant analyses of the crisis – map its elements with precision. The Financial Times’s John Authers, in The Fearful Rise of Markets (2010), traces the long-term financial remodelling in a way that accentuates the twin sense that surrounds the breakdown, of policy failure and unstoppable momentum.

The prescriptions that emerge from these works vary, as do those from the foreseers of doom, who include Alex Brummer (in The Crunch: The Scandal of Northern Rock and the Escalating Credit Crisis, 2008), who had warned in 2002 about Northern Rock’s business model, Ann Pettifor (in The Coming First World Debt Crisis, 2003), John Plender (in Going Off the Rails, 2003), and Will Hutton, as well as Robert Shiller in the United States. Their proposals range from new oversight mechanisms and stringent banking reforms to international coordination and a tax on financial transactions. But even the least radical are nowhere near to implementation by the government that, in political terms at least, was the beneficiary of the crisis. The reforms of the Conservative–Liberal Democrat coalition (where Cameron and Osborne are joined by the Lib Dems’ Nick Clegg and Danny Alexander to form the core “quartet”) amount to the announcement of a limited internal “ringfence” between investment and retail banking, as proposed by a commission headed by the economist John Vickers, and various smaller adjustments on capital holdings, regulation and transparency.

The suggestion that banks should be separated by institutional function to protect customers and enforce new governance regimes, proposed by many observers (including Augar in his Reckless: The Rise and Fall of the City [2009]), or that they should be broken up and their size limited, has gone nowhere. Elsewhere, copious evidence of well-organised tax minimisation by leading corporations (among them Starbucks, Google and Amazon), and of the City’s complicity in the huge black hole of evasion-by-haven charted in Nicholas Shaxson’s Treasure Islands: Tax Havens and the Men Who Stole the World (2011) solicit at best promises from government about improving revenue collection – but even here, with no real sense of conviction. The acclaimed appointment of Canada’s leading banker Mark Carney as the next governor of the Bank of England to replace the unimaginative Mervyn King at least introduces a fresh voice to this doleful picture.

By the late 1980s the growing power of the finance economy was being felt in many ways, from share flotations of the newly privatised utilities to the end of local, personalised banking. It took time for the realisation to spread that the City was “more successful at creating claims on wealth than wealth itself,” as Philip Coggan writes in Paper Promises: Money, Debt and the New World Order (2011); and just as long for financialisation’s larger social effects, such as widening inequality, to become a serious factor in political discussion. In part this was because the economy was growing, albeit modestly, and real incomes rising – a process interrupted by the recession of the early 1990s under John Major, but which then continued through his remaining years in office and the Tony Blair–Gordon Brown period. A crucial factor was the long-term boom in house prices that followed perhaps Thatcherism’s most transformative (and popular) policy, the granting to tenants of local councils the right to buy their homes. The combination of purchase and subsequent sale at a higher price lubricated an ever-extending “housing ladder,” and came closest to the “cascade” of wealth to the newly individualised working class that Mrs Thatcher had pledged would be the fruit of her free-market revolution.

The largesse brought benefit to millions, though at a crippling long-term cost to the wider economy (the issue is dissected in a neglected book by John Muellbauer, The Great British Housing Disaster and Economic Policy [1990]). The damage included the diversion of huge amounts of badly needed capital to an unproductive resource, a widening and unnecessary chasm between public and private realms, restraints on mobility, a serious shortage of council dwellings, exploding household-level debt, and a more regressive tax system to cater for the interests of house-owners and ensure the bubble continued. (The historian Timothy Garton Ash once drily noted that when the Hungarian dissidents he was visiting asked what was uppermost in the minds of Oxford intellectuals these days, his instinct was to reach for the Magyar equivalent of “mortgages.”) In most cases, the full extent of the mania became clear only with the crash, when millions discovered themselves locked into an asset of static or depreciating value, and millions more (mainly young) locked out of ownership by sheer unaffordability.

The creation of “popular capitalism” via a “property-owning democracy” was emblematic of a larger flaw in the era’s governance, namely the dissociation of effort and reward (which Keynes saw as the equivalent of the death of meaningful society). Between 1998 and 2010, the balance of earned income between the average British employee and CEO moved from 1:45 to 1:120. The annual bonus rounds in the City reached £1 billion in 1997; by early 2011 their value was £7 billion. Here, as so often in Britain, a policy produced by a mix of ideology and earnest desire to reverse the work of predecessors, then implemented in slipshod and wasteful fashion, created new problems and inequalities that were left to successors to unravel, or fail better.

The imbalances of Britain’s housing-dependent economy amplified the effects of the bust. At the high end of the scale, the finance economy produced and hosted a wealthy new class – the 0.1 per cent rather than the Occupy movement’s 1 per cent, says Chrystia Freeland in Plutocrats: The Rise of the New Super-rich and the Fall of Everyone Else (2012). The diverse effects cascaded through the society. In central London, 81 per cent of homes are now being bought by people born outside Britain (the proportion in the city as a whole is 22.8 per cent). This is but one example of the disconnect examined in Ferdinand Mount’s discursive yet forensic The New Few, or A Very British Oligarchy (2012). Mount, a thoughtful Conservative who in another lifetime was head of Mrs Thatcher’s policy unit, highlights the similarities between and the dangers of the exclusion from majority society of “two detached classes,” the very rich and the very poor. “[The] unbridged ground of the oligarchs and their indifference to the normal obligations and restraints,” he writes, “do engender a sense that society has lost its recognisable moral shape and, with it, its legitimacy.”

In this environment, the arguments of the social epidemiologist Michael Marmot, and his successors Richard Wilkinson and Kate Pickett (co-authors of The Spirit Level, [2010]) – that ever greater relative inequality has pervasive and damaging effects across society, and that it harms everyone – have become an influential reference point. The social geographer Danny Dorling (Injustice: Why Social Inequality Persists, [2011]) treats inequality as a dynamic phenomenon replenished by social and economic change, allowing new forms to emerge even as older ones diminish.

So abundant is the evidence in Britain of market (and regulatory) failure, it’s no wonder that radical questioning of capitalism itself is flourishing – its ethical foundations, its capacity to deliver, its ability to adapt and reinvent itself, its tendency to market-crushing oligopoly, its “turbo-,” “hyper-,” and “zombie” deformations, the peculiarities of its Anglo-American model. True, many of these concerns long predate the crisis: arguments for some version of renovated capitalism in Britain appear during every extended downturn (usually alongside the “return” of Karl Marx, reported on each occasion with identical surprise or approval).

IS ANYTHING different this time? The gravity and durability of the crisis – at five years it is already longer than any twentieth-century recession – have made the ground more fertile. A range of frustrations nurtured in the good years – about overweening consumerism, commercialism and marketisation, about infringements on public space and resources, about stress and the work-life balance – was readily available to add weight to an economy-based critique. The result has brought new voices and movements into the fray, with Occupy, aided by the inspired binding element of an artfully inclusive slogan (which the alchemy of luck and timing helped become viral) the most spectacular.

The anti-City movement’s accidental colonisation of the vicinity of St Paul’s cathedral in October 2011, in forcing an uneasy cohabitation between protesters and the church, also rekindled the pre-existing debate about the values capitalism needs to retain its legitimacy: trust, stewardship, responsibility. Again, much of this was not new: Gordon Brown had as prime minister in 2009 delivered a lecture at St Paul’s on the topic, part of a series of debates hosted by the cathedral. (Kevin Rudd was another speaker.) The former chair of HSBC, Stephen Green, had by then carved a niche as a high-profile corporate advocate of ethical capitalism, as in his Good Value: Reflections on Money, Morality and an Uncertain World (2009). A fresh twist in this crossover area is the appointment of the former oil executive Justin Welby as the next archbishop of Canterbury, spiritual head of the worldwide Anglican communion.

Dialogues on capitalism and morality have their uses, but it’s not just hard-core activists who sense their potential for comfortable diversion. The beef can only be the entrenching of agreed changes (including ethical) in policy and regulation, and their absorption into institutional and individual behaviour. There is no lack of ambitious proposals, many centred on a long-term rebalancing of the economy from dependence on finance, allied to a serious focus on education and training, and export-led growth, as the only way to tackle huge debts. Yet a governance system with little appetite for strategic reform, whose levers of coherent change-making are absent or disabled, is nowhere near even basecamp. For their part, Labour leader Ed Miliband and his close adviser Stewart Wood show interest in aspects of Germany’s social economy – specialised regional industrial partnerships, a high-level technical base, strong export-led manufacturing. This too is another case study in eternal recurrence, in that the rediscovery by Britain’s centre-left of Germany and its Mittelstand model – also a consistent theme of Will Hutton’s work since the 1980s – is a quinquennial (or so) event. In the 1960s, Sweden was the Shangri-la of Labour’s “social democrats.”

Will anything be different next time? A lot may hang on the answer. But even the aim of moving Britain closer to Germany – vaulting as it is – will not satisfy the deeper needs that a prolonged recession has raised or enhanced in many diverse constituencies. The search for more fulfilling ways of communal living, working, sharing and trading, from the local outwards, with ecological balance at their heart, has flourished as a result of the crisis. Its many different forms include local currencies, the “transition towns” movement and other low-carbon micro-communities, and numberless non-profit or small-business experiments. Their intellectual inspiration is also various; it includes the classic environmentalism of Limits to Growth (1972), Richard Layard’s Happiness: Lessons from a New Science (2005), the Aristotelian micro-solidarities of Alasdair Macintyre, and the practical anarchism of Colin Ward.

This heterogenous social phenomenon, brought into being by tens of thousands of citizens propelled by circumstance or choice towards new lifeworlds, also draws on the widespread conviction that the financial shipwreck is but one part of a wider crisis that encompasses climate change, energy supply and planetary sustainability. The scale and unavoidability of these problems make radical rethinking and action essential. Here too there are many useful reference points, from David Boyle and Andrew Simms’s The New Economics (2009) and the “transition project” of the New Economics Foundation, to Tim Jackson’s indispensable Prosperity without Growth: Economics for a Finite Planet (2008).

The argument is rooted in the incontestable reality of growing resource constraints, and combines compelling logic and moral force. It is now embodied to various degrees in countless lives, initiatives, and institutions. At the same time, the crisis that has given it increasing life and currency also generates powerful counter-forces. Among many are the consequences of material hardship – including fear, caution and pessimism – which inhibit the boldness, ambition and confidence that a long-term ecological vision demands.

A MORE robust capitalism, a fairer and more equal society, a sound ecology – all this is far from the daily priorities of a government whose economic horizons are largely short-term (and for which “long-term” means the election due in 2015). The government’s green agenda, a vaunted part of the Conservatives’ “decontamination” strategy in opposition, has largely been shed, pushing any form of “transition economics” even further away. The absence of the growth-produced tax revenues expected to cut into the debt mountain leaves it casting around for headline fixes (a tax on expensive homes, the use of “investor visa” funds to boost employment) whose impact, even if they were implemented, would be marginal.

There are, though, three qualifications to the picture of unrelieved economic gloom where (as the FT’s magisterial Martin Wolf says with chilling understatement) the “sources of future growth are obscure.” The first is that Britain’s economic condition and prospects are more than ever influenced by what happens in the outside world (which also means that the government’s domestic projections contain big dollops of guesswork). The European Union’s recession and the prolonged eurozone crisis, while keeping alive the sense of relief here that Britain chose not to adopt the single currency in 2002 (and reinforcing widespread “Euroscepticism”), also depresses Britain’s most important export market. But parts of Europe, and more so the United States, have recovered marginally better from the shocks of 2007–09, and a continuation of the trend would help lift the struggling British galleon. In Europe’s case at least, that currently looks unlikely, but in any event the reality is interdependence.

The second qualification is that the true state of the British economy – the subject of George Osborne’s much-anticipated “autumn statement” to parliament on 5 December – is both more varied and more opaque than shorthand depictions often allow. On an individual level, many people (not just the rich, or those in the more prosperous south) are thriving: in part because they work in more secure or growing branches, in part because they have adapted well to changed circumstances. The “hourglass” economy, where top and bottom of the labour market are less squeezed than middle tiers, is producing a healthy number of private-sector jobs – 1.2 million since early 2010 (against a loss of 460,000 in the public sector) – defying predictions and precedents alike. In some urban areas, or in the alcohol-fuelled “leisure economy” where (for example) TV’s favourite stand-up comedians or legions of reformed pop-rock-punk bands perform to sellout audiences paying monster prices, austerity feels a long way away.

On a sectoral level too, even in areas of northern England or Wales which are associated with industrial decline, some pockets are flourishing (engineering, aerospace, cars). Manufacturing is down, but not out. The China wind has blown good news to luxury goods exporters (Scotch whisky, designer fashion, high-end motors). Education plays a global role, and international students bring huge benefits which can become long-term (though academics and businesses worry about an over-restrictive visa system). The creative industries, including design, advertising and television, have a worldwide reputation and reach. There are other examples, some explored in the BBC journalist Evan Davis’s lively book Made in Britain: Why Our Economy is More Successful Than You Think (2011), whose empirical and non-partisan approach is a refreshing counterweight to Will Hutton’s sublime angst (and even more to the catastrophism of Larry Elliott and Dan Atkinson in Going South: Why Britain Will Have a Third World Economy by 2014 [2012] – fittingly, a collaboration between the economics editors of the Guardian and the Mail on Sunday).

The third qualification is in fact more of a caution, since it concerns an area that makes exact assessments of how the economy is faring harder than it should be: the vital one of official statistics. Successive governments’ massaging of (for example) the unemployment figures, by various tricks of reclassification, is easily decoded. The much-remarked strangeness of the great recession has been accentuated by conflicting signals sent by leading indicators, including on inflation, where two separate measures are utilised (headline, based on the retail price index, and core, based on the consumer price index). Chris Giles, the Financial Times’s economics editor, argues that the “deficient and out-of-date” retail price index formula “grossly overstates inflation.” This can have serious implications for the calculation of living standards and GDP, the assessment of future trends, and policy decisions in areas such as pensions and welfare benefits. Another item for Mark Carney’s crowded in-tray at the Bank of England.

So the unknowing, or in some cases ambiguity, that hangs over Britain’s economy concerns the present as well as the future. The weight of the past – the legacy of decisions made and paths not taken, and the limits they impose – will continue to exert a heavy influence, whatever government is in charge. But, again, it is the inability to imagine the end of the crisis, coupled with anxiety about how bad it could get, that gives this downturn its peculiar flavour: Laura (Riding) Jackson’s “there is a story to be told about us, for the telling of which we all wait.”

What, after all, could that “unappeasably vast” outcome look like? A decision by the ratings agencies to deprive Britain of its triple-A credit status, even a “triple-dip” recession – these alone would be manageable. The real spectre is a form of structured default. That may sound alarmist; after all, there are several ahead of Britain in the queue, and even the worst scenarios would put the possibility several years away. But the figures and trends are implacable (and in a post–Nate Silver world, they rule). It is worth recalling that in Nouriel Roubini’s Crisis Economics: A Crash Course in the Future of Finance (2010), the familiar list of troubled European states tends to be followed by the drumbeat “…and even the UK.” It might not happen – but that’s the point. Roubini, who looks black holes in the eye and doesn’t blink, emphasises that uncertainty, unlike risk, can’t be priced.

So if Britain’s political season is misty, the economic one combines deep fog with occasional, enigmatic streaks of light that could as well be signs of a returning storm as of brighter days ahead. Beneath the leaden sky, the relentless daily rollercoaster of instant economic news and comment hurtles on, often radiantly brilliant but equally often ragingly partisan in ways that make it effectively a subset of party politics. This matters, for there is ever more need for independent strategic thinking about Britain’s real economic options in an environment of great constraints and limited choices.

Britain’s financial misgovernment has created an accumulation of problems which allow for no easy or quick answers. The difficulty is reinforced by the fact that the very tools of governance, and therefore of change, are so infirm. Yet it may be that – until the country gets serious about transition economics, which may be forced on it sooner that it thinks – some as yet unarticulated synthesis of hard, consistent reformism that pursues greater inclusion for both ends of the social spectrum will emerge as the only viable path. (Ferdinand Mount recommends a “strategy for social coherence,” and offers some good suggestions to that end.) Perhaps, too, that synthesis will make the coded Keynes–Hayek association of these years an honest one. After all, Hayek writes in The Road to Serfdom: “[Where] it is impossible to create the conditions to make competition effective, we must resort to other methods of guiding economic activity.”

It’s a long shot, and a generation’s work. New models of political economy are not built overnight. Meanwhile, there’s a lot to do just to keep the galleon afloat. •

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