Corbyn - Historical Relic or Visionary?

The accusation that Labour leadership contender Jeremy Corbyn is trying to “turn the clocks back” serves to obscure much more than it explains.  In fact, take any time to dig beneath the headlines and we find that Corbyn has not argued for a return to the policies of the 1980s at all.  He did not, it turns out, call for the nationalisation of the means of production, distribution and exchange.  Rather, he made the case that some "natural monopolies" such as the railways and the energy companies should be operated on a not-for-profit basis.  He did not even stipulate that these utilities should be taken into state ownership – a sensible position given the ease with which neoliberal governments have been able to sell off state assets.  Similarly, while the tabloid headlines screamed out that Corbyn wanted to reinstate Clause 4 of the Labour Party constitution, it turned out that he had called for a fundamental rethinking of Labour’s purpose which would arrive at a modern equivalent of Clause 4.

In fact, it is very difficult to make the case that Corbyn is attempting to recreate the politics of a bygone age.  However, this allegation can be made of his opponents.  The New Labour dinosaurs – Alistair Campbell, Alan Johnson, Peter Hain, etc. – all claim that the road to electoral victory lies in recreating the glory days of 1997 when an evangelical Blair (as yet untainted by war crimes and corruption) effectively out-Thatchered the Tory Thatcherites.   In case you haven’t noticed, that was eighteen years ago!

Nor is it just the Blairite wing of the Labour party that is trying to turn the clocks back.  Labour’s Tory opponents have an even bigger problem on their hands since the economics of neoliberalism failed so spectacularly in 2008.  Insofar as Osborne and Cameron have a long-term plan at all (and for the most part, the slogan is little more than a means of deflecting attention away from short-term failure) it is to recreate the politics of 1984 – a confident Tory party that had just secured a massive majority on the back of the Falklands war, freed to deregulate the banking and finance industry; sell off public housing on the cheap in order to pump up house prices; and sell off state run industries on the cheap in order to pump up the stock market.  Today, schemes like Help to Buy and the plan to force housing associations to sell off their housing stock; the sale of the remaining state assets; and using taxpayers’ money to keep the banks solvent, are each intended to revive the glory days of Thatcherism.

There is a major flaw in both the Tory and Blairite positions.  We – those of us who live and work outside the City of London – have been in a depression since 2008.  That depression is the result of the policies put in place in the early 1980s, and developed to their conclusion by Blair.  For more than thirty years, the wages of working and middle class people in the UK have been falling in real terms.  The Thatcherite solution to this was threefold:

1. Encourage female employment.  While this may have been a positive choice for some women who were able to move into relatively high-paid professional careers, for most women it meant low-paid/low-skilled work in the service sector in order to maintain their families’ standard of living 
2. Offshoring manufacturing served to keep the price of goods low, even as it undermined employment and living standards within the UK 
3. The explosion of credit after the “big bang” in 1986 gave working people the illusion of increasing wealth as the value of their homes grew faster than the real value of their wages.  So long as we could keep rolling over the debt, we could keep the economy growing.

All of this came to an end in 2008.  While much of the media has focused on the growing level of government debt, it was actually the limits of private borrowing that provided the underlying crisis.  Although most people (including most MPs) continue to believe that government creates money, in fact more than 95 percent of the money in circulation is borrowed into existence every time a bank makes a loan.  As a recent Bank of England paper explained:

“In the modern economy, most money takes the form of bank deposits.  But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans.  Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” (my emphasis)

This was the dynamic and liberating policy that the Thatcher government unleashed in 1986, and that New Labour took to its logical conclusion between 1997 and 2008.  It worked in the 1980s because the UK economy was emerging from a series of crises and recessions in the 1970s and early 80s.  Businesses were seeking investment to grow, but the old system in which the Bank of England controlled the money supply left business starved of cash.  A similar situation prevailed in the housing sector – people’s mortgage applications were routinely turned down not because they had poor credit ratings, but solely because the banks had already loaned up to the limit set by the central bank.

By 1986, the Thatcher government had largely won the “state v market” argument.  With the deregulation of banking and finance (which was also pursued by Reagan in the USA, and quickly spread across the developed world) the money supply would be determined by the collective actions of bankers – who (probably correctly) were deemed to be wiser than civil servants.  Since banks were thought to be risk-averse, government assumed that they would not engage in reckless lending.  But by underwriting successful business, and by extending prudent levels of credit to consumers, they could play their part in generating economic growth.

By the time New Labour came along, there was no real opposition to this belief.  Rather than reining in the banking and finance industry, Blair removed much of the remaining regulation (mirroring the Clinton administration in the USA).  New Labour became “extremely relaxed” about people getting filthy rich – largely on the back of government contracts and Private Finance Initiative deals that were spectacularly poor value to taxpayers.

The problem was that, despite their celebrity status under Blair and Brown, bankers were not particularly wise.  In fact, after 1986, bankers behaved in more or less the way that bankers have always acted throughout history: 

• Initially conservative as a result of the recessions of the 1970s and early 80s, the bankers tended to lend only to the safest businesses and consumers 
• Since the majority of these tended to be successful and profitable, the bankers convinced themselves that they had some kind of Midas touch, and began lending to riskier ventures and less credit worthy consumers 
• As by now the economy was growing, even these riskier loans tended to be successful and profitable, so the bankers began to take even greater risks, fuelling asset and housing bubbles barely different from the Dutch tulip bulb bubble 
• By the early 2000s, what was in reality a global Ponzi scheme was reaching its limits.  People who should never have been considered credit worthy were being offered 125 percent loan to value mortgages with very low initial interest rates in the belief that rising prices would allow the debts to be repaid.  
• Then2008 happened!

There is one key reason why Osborne and Cameron cannot hope to recreate the conditions of 1986.  Put simply, the 2008 crash was the unforeseen consequence of the Big Bang “solution”.  Our current crisis does not concern the supply of credit (money), but rather the demand.  Private (i.e. company and household) debt is higher today than at any time in our history.  The credit card is maxed out.  Too many people and companies are struggling to service the debts they already have to allow for a new round of credit-fuelled economic growth.  Indeed, without quantitative easing and historically low interest rates the private sector debt bubble would implode, rendering most of the banking and financial sector insolvent.  Put simply, you cannot pump up a debt bubble that is already at bursting point.

If Osbourne and Cameron cannot hope to recreate the conditions of 1986, then any Blairite attempt to regenerate the glory days of the late 1990s are doubly doomed.  The whole New Labour project was based on the myth of what economists called “The GreatModeration” – that somehow globalisation had ended the cycle of boom and bust, and replaced it with a perpetually growing economy based around manageably low rates of inflation.  Governments would be able to afford things live exorbitant PFI deals if the economy kept growing.  Firms could increase workers’ wages in line with inflation.  Consumption could continue for ever.  But each of these has now turned into its opposite.  Government debt is much harder to pay off; companies have stopped investing; wages are falling; and consumers are reluctant to take out new loans.

Another way of looking at this picture is to understand that cyclical crises are an inherent component of capitalist economies.  Every 30-40 years, the economy is plunged into a crisis that is largely the result of the unforeseen consequences of the “solutions” to the previous crisis.  So, for example, the Keynesian state funding in the aftermath of the Second World War created both the boom of the 1950s and 60s, and the conditions for the recessions of the 1970s and early 80s.  Similarly, the privatisation and deregulation that generated the boom of the 1990s also created the conditions for the collapse since 2008.

This change in economic fortunes can also be seen in the radical political fracturing that occurs every 30-40 years too.  Reforms introduced in 1870 to manage industrialisation and the growth of the urban population had run their course by the turn of the twentieth century.  The fracture came in 1906 with the election of a Liberal government that introduced a series of (in their time) radical social reforms, including state pensions and labour exchanges.  They were also the last government to make serious changes to Britain’s unelected House of Lords.  Interestingly, following the First World War, it was the Tories who became the beneficiaries of the Liberal reforms – remaining in office for almost all of the 1920s and 30s, yet not attempting to reverse the reforms.

Something similar began to occur prior to the Second World War.  The depression of the 1930s persisted, particularly in the old industrial regions of the UK.  Many of the political movements that had arisen out of this discontent coalesced around the Labour Party which had entered government in 1940 as part of Churchill’s coalition, and which was swept into office in July 1945.  This government introduced far more radical policies than those of 1906, including the National Health Service, social security and pensions, public housing and nationalised utilities. Once again, it was not the party that introduced the reforms that became its inheritors.  After 1951, three successive Tory governments chose to embrace and build upon the Labour reforms.

The Wilson (Labour) and Heath (Tory) governments reaped the unforeseen consequences of the post-war settlement.  State funding had become inflationary; nationalised industries had become inefficient; and a series of external shocks (such as the OPEC oil embargos) plunged the UK economy into several – seemingly intractable – recessions.  Unusually, it was a Tory party (which had rejected traditional conservatism in favour of a neoliberal radicalism) that (after a failed attempt at austerity between 1979 and 1983) introduced the new politics of the private market.  However, as with previous reforming governments, it was the opposition that was to reap the benefits.  By 1996 it was a resurgent New Labour party – clothed in the vestments of Thatcherism – that was to embrace and build upon the Thatcher reforms; confining the Tories to opposition for 13 years.

So where are we now?  

Arguably we find ourselves in the same part of the economic/political cycle as the Tories of 1905 and 1939, and of Labour in 1979.  We have a government desperately trying to recreate the conditions of its earlier success by implementing the very policies that are now fuelling the crisis.  But we also have the opposition of 1970 and of 1929-31 – parties so wedded to the narrative of the past that they cannot break free.

Insofar as Corbyn (at least potentially) offers a winding back of the clock, it is to early 1945 – when a confident Labour Party felt able to pursue its own policies rather than respond to those of the opposition – or to 1975 when a confident Margaret Thatcher felt empowered to do away with the post war settlement in favour of the private market.  Corbyn could yet play a similar role, defining the new political narrative that will have to emerge out of the ashes of the Thatcher/Blair project.  But this will not be achieved by turning the clocks back – not to 1997 or to 1945 – but by developing the policies that the UK needs to get us out of the current economic and political stagnation.