Market fundamentalism has left Britain in the economic relegation zone – it’s time for a rethink

Image: US Embassy London, CC BY-ND 2.0

Two fundamental errors block new thinking on the UK economy. The first is a failure to recognise, empirically, just how poor is the UK’s comparative, like-for-like performance. The second is an inability, conceptually, to abandon the dogma of market fundamentalism in domestic political culture. These errors not only consign the UK to a low-investment, low-productivity, low-income (but high-inequality) path. They also make it impossible to appreciate why this should be so—and what should be done to move on to a more successful (and greener) trajectory.

Innumeracy and insularity

Complacency about UK economic performance stems from a combination of innumeracy and insularity. It was encapsulated in the claim by the prime minister, Theresa May, in the Conservative Party manifesto for the June 2017 Westminster election, that ‘we are already the fifth-largest economy in the world’. As the House of Commons Library had explained a year earlier, this was the position of the UK in a league table of gross domestic product (GDP) using market exchange rates to generate common data in dollars, but adjustment of the data for differing price levels, or purchasing power parities (PPP), demoted the UK to ninth—behind, among others, India and Indonesia.

Yet this is not the biggest problem with blowing a British economic trumpet. The UK is, of course, a state with a large population and so the meaningful comparison is of GDP (PPP) per capita. On this basis, the UK falls to 21st in the world, according to 2016 World Bank data, or 24th according to the International Monetary Fund.

This is not all: the UK compensates for weak performance on GDP by a culture in a European context of long hours (engendering huge problems of work-life balance for women, given the paucity of publicly-funded childcare). So the best comparison should really be output per person per hour. This figure has flatlined since the financial crisis of 2008, after decades of trend growth, leaving the UK a laggard in Europe: in 2006 its output per hour was 109.7 per cent of the EU average; by 2016 that had fallen to 98.4 per cent. But of course the EU includes many weakly performing economies in its southern periphery and the former Soviet bloc. The following table shows how UK productivity measures up if it is placed in a set of ten northern European neighbours.

  Output per person per hour (2016)
EU 28 average 100
Eurozone average 111.6
Belgium 136.7*
Denmark 131.4
Finland 108.1
France 124.8
Germany 126.5
Ireland 178.9**
Netherlands 127.5
Norway 147.3
Sweden 114.7
UK 98.4

Source: Eurostat
* 2015 data, ** The Irish data are highly inflated by transfer pricing by multinationals, thereby shifting nominal output to Ireland to avail themselves of its low corporation-tax rate.

The UK is thus in the relegation zone of this mini-league. Its other members are all in the EU (except Norway in the European Economic Area), yet hardly seem hamstrung by its supposed ‘red tape’. Indeed, the UK also lags the average performance of the supposedly ‘sclerotic’ Eurozone, with its single currency, by a significant margin. And even this is not the full story: the City elevates the overall UK data markedly: disaggregated, these show that while inner London is the richest region in northern Europe, nine out of ten of the poorest regions are also found within the state.

Quite what magic can transform the fortunes of a ‘global Britain’ freed from ‘Brussels’, should the UK continue its lemming-like insistence on unilateral withdrawal from the EU, is thus hard to decipher. The real conundrum is of course the opposite: how Britain, hugely advantaged by being first mover in the industrial revolution at the birth of modern capitalism, should have engaged in such a long, slow decline to its current 21st-century economic mediocrity.

Enter the True Believers

Part of the answer is the cossetting the UK enjoyed through the era of access to protected empire markets. Part too is what the New Left figures Perry Anderson and Tom Nairn identified as the lack of a ‘bourgeois’ revolution in Britain, dismantling feudal ways. Part too is that the City dominates not only the UK economy but also economic thinking in Britain, as evidenced by how media commentary frequently anthropomorphises ‘the (financial) markets’, describing their ‘mood’ as if that of sentient beings. In a fallacy of composition, the performance of the UK economy is thereby reduced to individual market trades, as if these were barter—which, since for every  sale there is then a purchase, implies automatic equilibrium if market mechanisms are not subject to ‘bureaucratic interference’.

In his ‘The General Theory of Employment, Interest and Money’, Keynes however understood the economy as a system of production of goods and services in which labour is the source of value and investment is key. He showed that the classical equilibrium model only applied in the ideal case of full employment; in the typical context of involuntary unemployment, investment (with its multiplier effect) was required to engender sufficient demand for a full-employment equilibrium to be achieved. Look after unemployment, Keynes said, and the budget—enhanced by tax-raising and welfare-reducing employment—will look after itself. And he envisaged the ‘euthanasia of the rentier’ in an economy where public investment loomed ever larger. He argued against the statist ‘socialism’ of the USSR of his day but his economics was by no means alien to a distributed socialism of employee-owned/co-operative enterprises.

Indeed, in the absence of such a transformation of a modern capitalist economy, Keynes’ argument was vulnerable to the charge, as the Keynesian economist Will Hutton recognised, that it could take increasingly inflationary doses of demand injection to sustain a capitalist economy at full employment. And the inflationary spiral of the 1970s, while actually making the case for a more advanced ‘social contract’ rather than a market free-for-all, was used by the True Believers in the classical economists Keynes (like Marx) had criticised to make their ‘neo-classical’ comeback.

‘Market disciplines’ were applied in two devastating waves: the ‘sado-monetarism’ (as William Keegan of the Observer called it) of the Thatcher years and the unrelenting austerity imposed by Conservative-dominated governments in the UK since 2010. These have been characterised by massive disinvestment, with the deindustrialisation of capital in the first period succeeded by the devalorisation of now atomised labour in the second. In this shocking new world of zero-hours contracts, bogus self-employment and food banks, a TUC report in 2016 found that the UK had seen a steeper fall in real wages in 2007-15, still 10.4 per cent below pre-crisis level, than any OECD country except Greece. By contrast, France had seen a rise of 11 per cent and Germany of 14 per cent, over the same period.

Thus a UK economy which once boasted such household names as ICI or GEC, and associated public corporations such as British Steel or British Leyland—is now reduced to a wasteland where there are very few internationally competitive enterprises left. Hence the yawning balance-of-payments deficit, whose unsustainability brings a creeping devaluation of sterling and so further inflationary pressure on living standards. Today’s economic landscape is much more characterised by labour-sweating companies such as Sports Direct than those with high sunk capital such as Rolls Royce.

Hence the fashionable ‘productivity conundrum’ is no riddle at all. With public investment at rock-bottom, vocational training now left to the vagaries of the market, and trade unions and statutory labour protections so weakened, the UK economy has inevitably followed a directionless race to the bottom. With the high road of mutually-supporting levels of investment, productivity and income structurally blocked, the low road of casualisation and super-exploitation of unskilled labour has been opened wide. This is at the cost not only of mediocre economic performance but also of rising inequality as the Precariat expands—on top of the impact of the Thatcher interlude, whose suppression of taxes for the wealthy made the UK already a markedly inegalitarian outlier from the rest of northern Europe.

Beyond market fundamentalism

If the UK is such a poor economic performer, then it could at least seek to emulate its European neighbours and peers. Indeed, it would be foolishness to suggest—as purportedly left-wing UK Brexiters have done—that the UK would be more able to achieve economic progress outside the EU than within. In that sense the far-right-led Brexit campaign makes much more sense as a struggle for an authoritarian, ‘free-market’ British Singapore stripped of residual workers’ rights.

Such emulation involves learning three, really quite simple, economic lessons. The first is that the ‘invisible hand’—a phrase taken wholly out of context from Smith’s (incoherent) usage in The Wealth of Nations, referring to investment domestically rather than abroad—does not apply 241 years later. As Hutton also pointed out, once market interactions are financially intermediated, every purchase does not match a sale—so disequilibria become the norm, not the exception. Moreover, since the globalisation of the economy since the 1970s has been matched by its financialisation, there has been a growing volatility reflected in financial crises of increased frequency and intensity until the global crash of 2008—when it became apparent that the giant Ponzi scheme of exotic derivatives lacking any correlate in the real economy, in which companies such as Lehman Brothers were mired, had to collapse.

As John Kay has demonstrated, the vast bulk of what City financial institutions do is not to invest in the real economy: it is to speculate with other people’s money. So the investment necessary for enhanced economic performance, as well as the maintenance of demand, must be initiated from the public purse—albeit then multiplied through private sources. While the UK has squandered its asset of North Sea Oil, Norway has turned its oil resource into an enduring asset via a sovereign wealth fund. Indeed, such funds can be used, if democratically so desired, to expand the public stake in the economy over time as revenue from existing investments is reinvested elsewhere: favouring enterprises in the ‘green’ economy or those otherwise ‘eco-efficient’ in this way would be an ideal means to bring about the greening of the UK economy, which is a laggard too in such markets as for renewable-energy production. Germany, meanwhile, has its development bank, KfW, going back to postwar reconstruction, and the Landesbanken, involved in regional economic development, providing vehicles for public investment. Of course, until England stops being a European outlier in lacking regional devolution, the latter option is impossible there.

The second lesson is that public goods play an essential role. The market-fundamentalist economic discourse in the UK has completely crowded out the (economic) concept of ‘public goods’—those which are (or, arguably, should be seen as) non-exclusive and non-rival and so properly provided by public agencies democratically accountable to citizens, not privatised and subject to ‘commercial confidentiality’. Knowledge is a prime example, especially in today’s ‘informational’ rather than ‘industrial’ capitalism, as Manuel Castells has described it.

Yet in the UK the education system has been fragmented into a morass of competing providers, including obscurantist ‘faith’ schools as well as privately-sponsored ‘academies’. The performance of this patchwork is inevitably patchy, as the UK’s again-mediocre standing in the international PISA educational rankings demonstrates. The top performers in Europe are Estonia and Finland, which both have unified, comprehensive systems in which youngsters are not differentiated until age 16 when more vocational or academic paths are selected.

The UK’s former high performance in higher education is being rapidly eroded. The more technologically orientated ‘polytechnics’ became universities out of snob value and university is being turned into a ‘club’ good for students from wealthy backgrounds by the abolition of grants and spiralling fees, sacrificing the talents of poorer students. The increasing xenophobia towards foreign students and the threat to internationally significant collaborative research posed by Brexit are additional, entirely self-inflicted wounds. At the vocational level, ever since under Thatcher the industrial training boards were abolished, the fundamental appreciation that individual firms will freeride and poach rather than investing in training their own workforces has been forgotten. By contrast, in Germany firms are required to be members of their local chamber of commerce, through which training is collectively provided at a much higher level for the benefit of all. And the network of Fraunhofer institutes, supported by federal and regional funding, pursue applied research on which firms can draw.

Germany’s huge productivity differential over the UK is also a product of relative trade-union strength—yes, strength. High wages provide a ‘productivity whip’, forcing firms to innovate to enhance productivity, rather than resting on their laurels, if they wish to sustain profitability.

This is an instance of the third lesson which the UK has yet to learn—that social policy is a productive factor. ‘Free-enterprise’ ideology can only conceive of any kind of policy intervention as a ‘burden on business’—hence the ridiculous current requirement that any new regulation affecting business in Britain can only be introduced if three others are abolished.

In this cramped perspective, ‘welfare’ is a labour-protecting device which can only detract from the surplus generated by the private sector—hence it should be as selective and means-tested as possible. The UK has gone far down that route since the postwar highpoint of the measures succeeding the 1942 Beveridge report. When unemployment was (in Keynesian terms, correctly) seen as an involuntary risk, for example, unemployment benefit was graduated according to an employee’s National Insurance contributions. Now it is ideologically identified as a voluntary ‘lifestyle choice’ and so the benefit has been renamed ‘Jobseeker’s Allowance’ and is set at a universal minimum which is below subsistence and subject even then to sanctions if ‘jobseeking’ is not seen to be sufficiently assiduous.

By contrast, in the Nordic countries with broadly universal welfare states, it is recognised that high public expenditure, funded by progressive taxation, is essential to labour productivity—in terms especially of the education and health of the worker—and so to prosperity. Denmark’s ‘flexicurity’ system, for instance, deliberately has high unemployment benefits so that workers don’t hang on to obsolete jobs and active-labour-market programmes train them for new global opportunities.

This extends to a recognition that public funding for the cultural arena—Oslo’s beautiful opera house, for example—is essential to attract the specialised workers so essential to today’s economy for whom the labour market is close to global. There is also a recognition that high-salaried professionals will be willing to pay high taxes for high-standard, personalised public services rather than seek a ‘right of exit’ for private alternatives: childcare, for instance, is not only close to universal across Scandinavia but also employs a largely-graduate workforce.

It might be thought that this is all very well from a social perspective but that such a high ‘take’ by the public purse must nevertheless is a drag on the economy. Far from it: the Nordic countries tend to top the conventional leagues of economic ‘competitiveness’. And a 2012 academic study, which defined the competitiveness as output per potential worker, placed the four main Scandinavians (Sweden, Finland, Denmark and Norway—in that order) among the top seven of 30 countries.  The UK, which often prides itself on being ‘business-friendly’, came in at again a merely middling 15th.


In sum, then, the UK can only move on to a higher economic performance path if it abandons the blinkers of market fundamentalism for a more intellectually robust and evidenced approach. The latter will have at its heart a recognition that the ‘invisible hand’ turns out to be an out-of-control robot arm, that public goods such as knowledge are key to the public interest, and that social policy is not to be dismissed as ‘the nanny state’ but is a core productive factor.

None of this is rocket science. None of it is even particularly radical—though it is way moreso than Labour’s supposedly radical Westminster manifesto this year. It just requires progressives in the UK to look beyond their own shores. Which, of course, demands remaining in the EU to work collaboratively to tame the global capitalist tiger, rather than seeking to stop the world.

  • BC

    Excellent ripping apart of all the claims of the neo-liberal consensus. What immediately strikes me about the exploration of what is working and working well for others is that not even Corbyn’s supposedly extremist Labour Party is advocating anything approaching the radical shake-up the UK needs to catch up with the rest of the industrialised world. We need government to actively direct industrial and commercial policy; we need welfare to be an active component of the economy rather than a safety net for “hopeless cases”; we need to start tackling rentiers and arbitrageurs as parasitic vermin rather than treating their wealth extraction as somehow beneficial to society.

    This is what makes openDemocracy worth having, folks!

    • Robin Wilson

      Very kind. Thank you.

    • Moana

      I too enjoyed the “ripping apart” angle but I think the article ignored one key set of metrics: that current productivity of the global economy is based on exceeding the ecological carrying capacity of the planet. Therefore the piece failed to address the false claim that growth is desirable.

  • xrt89

    “The first is that the ‘invisible hand’—a phrase taken wholly out of context from Smith’s (incoherent) usage in The Wealth of Nations…”

    Agree about Smith being taken out of context but why is Smith’s usage incoherent? It’s just a metphor (which he uses only once in the book) for unintended consequences and one that was used by many others before and after Smith.

    “But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

    Note that a large part of Wealth is taken up with attacking the actions of merchants, politicians and others whose actions have both intended and unintended consequences that are against the public interest.

    • Goinlike

      The author entirely ignores the metaphor. The hand is ‘invisible’ hence it operates automatically and without human intervention.

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