Reimagining conservative economics

Centre-right leaders of the future must seek a new synthesis between markets, community and the nation state

Towering Columns

At ConservativeHome, Levelling Up Secretary Michael Gove makes the case for reformed markets in service to families, communities and the national interest.

So we need to make the case against the drift back to socialism and permanently lower growth with renewed vigour. But we also need to renew the case for markets and capitalism, recognising there is more to do to bolster manufacturing, guarantee energy security, incentivise investment in innovation, and extend home ownership. We must argue for markets properly reformed so they work free of vested interest. Growth from productive investment, and the jobs this creates, are distinct from rentierism or the predatory capitalism of acquisition over production. Conservatives must always be the party of work, home and family – not the speculator, proprietor, or rapacious asset manager.

Some of the most exciting economic thinkers and writers of our generation have outlined how we can develop a truly inclusive economic vision. In recent years Dani Rodrik, Angus Deaton, and Oren Cass have all written brilliantly on how national political economy can once again be made to work for sovereign nations, placing growth and fairness together at the centre of democratic policy making…

..Truly free and fair markets, operating under the democratic governance of nations operating in the interests of their citizens, are the surest route to prosperity. Democratic politics is on a constant mission to reform, refine, and improve markets in the service of humanity. This has been true for all of modern economic history, and it’s true now.

In The Telegraph, Nick Timothy reimagines the future of conservative economic thinking, calling for British reindustrialisation and a new synthesis between market and state.

The nation state provides the best social forum for the promotion of community, good work, solidarity and altruism. It is not a neutral entity to be bought and sold, or made the object of international rent-seeking. Equally we must challenge the idea of maximal economic efficiency – or at least the kind of short-term efficiency sought by consensus policymaking – at any cost. Instead, the objective of policy must be the flourishing of workers, families and communities. 

On these terms – indeed even on its own – our existing economic model is bust. Like in many other Western countries, our growth is sluggish, and wages stagnant. Our birth rate is declining, and immigration is rocketing. Investment is low and productivity is poor. We have trade and budget deficits and a large stock of debt. Our exposure to the bond markets means there are no easy shortcuts, so tax cuts without big spending cuts, or debt-fuelled spending sprees, are off the table. 

At the heart of our problems is a simple truth. We cannot go on consuming and importing more than we produce and export. As the US economist Tyler Cowen noted this weekend, Britain does not make, do or sell enough of that the world needs, nor even enough of what we consume. Consensus policymakers insist that the trade deficit does not matter. They say we can make up for it by attracting inward investment instead, since the flow into Britain of foreign capital creates jobs and sustains the currency. But our desperate need for foreigners to buy assets in sterling leads to all sorts of perverse outcomes. 

On his Substack, Sam Dumitriu investigates how Hinkley Point C became the world’s most expensive nuclear power station, and proposes options for change.

Building Britain’s first nuclear power station in almost three decades was never going to be easy, but boy have we made it harder than it needs to be. The sheer number of changes required by our nuclear regulator not only meant using more concrete and more steel, they also limited our ability to learn from Finland and France’s experience. Delays caused by a drawn-out process of permitting and planning haven’t helped either. But, even within a single project, productivity is increasing as engineers learn from experience.

So, what needs to be done then to cut costs? I can think of a few things.

Replication and learning are key to improving productivity, so reforming our nuclear regulator should be a priority. Where designs have been approved elsewhere by respected regulators in places like France or the US, we should defer to their judgement and not insist on as many changes. Just as our Medicines and Healthcare products Regulatory Agency now grants automatic approval to drugs approved elsewhere by respected regulators, the Office for Nuclear Regulation should automatically approve reactor designs certified as safe elsewhere. It would mean that if South Korea’s KEPCO wanted to build their tried-and-tested low cost reactor here then they wouldn’t have to make thousands of changes and build an almost bespoke design just for us.

But wider changes to planning policy are needed. Environmental Impact Assessments and Habitats Regulations should be reformed too so developers don’t need to engage in extremely costly mitigation measures and produce tens of thousands of pages of documentation to build a new nuclear power station. It also needs to be made much easier to make changes as a project develops. And there's a deeper question that needs to be asked about the way we regulate nuclear energy. Have we gone too far in the pursuit of safety? Do we pay more to save a hypothetical life in nuclear energy than we do in any other areas of life, such as on the road or when we regulate other forms of energy?

At CapX, Ellen Pasternack says historic government childcare policy is out of step with parents’ actual wishes.

In Civitas’s new report, we argue that fuzzy thinking on the objectives of childcare policy has resulted in intervention that is wildly ineffective and inefficient. Despite years of state-subsidised childcare, there has been remarkably little change in maternal employment rates, or in the proportion of children using childcare. If the purpose of childcare policy was to increase employment rates, narrow the gender pay gap, or improve children’s educational outcomes, there may be any number of ways we could do this much more effectively for the same money.

As well as this, surveys repeatedly show that most parents want to spend more, not less, time with their children; and evidence that childcare actually benefits children – especially the youngest children, to whom subsidised childcare is increasingly targeted – is weak. We may be able to increase the maternal employment rate – but is this worthwhile, if it’s not what mothers themselves want?  And we may be able to increase the number of children in childcare – but what is the point of this if there isn’t a clear benefit to those children?

The key problem that childcare policy ought to solve, we argue, is that pre-school children need full-time adult supervision, and that many parents cannot afford to provide this, whether by stopping paid work in order to do it themselves, or by paying someone else to do it. Our current economic system requires almost everybody to have a regular income to survive day-to-day: there is no space in this model for the unpaid work of raising children, though it is vital to wider society. Essentially, we are faced with a free-rider problem: non-parents benefit from children being raised, but parents alone face the very high costs of raising them.

On the think tank Onward’s new Substack, Anastasia Bektimirova and Allan Nixon say the UK risks falling behind the curve of AI innovation.

The biggest risk to Britain’s AI hopes is a knee-jerk regulatory reaction from politicians. So far the Government has struck the right balance, taking a liberal approach to AI regulation that doesn’t stifle innovation. Last year’s AI White Paper carefully focused on empowering existing regulators to issue guidance and regulate the use of AI within their industries; it didn’t argue for creating new bodies. Because of Britain’s approach, we can attract people who find the more restrictive regulatory regimes in America and EU too burdensome to comply with. 

But there have been worrying signals the UK’s pro-business approach is wobbling. The Government's response to the White Paper hinted at potential binding regulations of foundation models, with reports that legislation may be coming with more stringent controls. That would be a major mistake. Instead the UK should continue to pursue a streamlined approach to AI regulation, fostering investment and innovation. It should look to seize on its competitive advantage to be more agile than the US and the EU.

AI is one of the Government’s five priority technologies in which the UK can clearly gain strategic advantage. By unlocking its data wealth and expanding access to compute, Britain has a real opportunity to lead on AI, with a laser-focus on foundation models to power the AI sector. But that relies on politicians refraining from heavy-handed regulation and investing in public goods where necessary.

At UnHerd, Thomas Fazi recounts Karl Polanyi’s argument that markets have always required the state - and that true laissez-faire is a myth.

“There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course,” he wrote. “Laissez-faire was planned… [it] was enforced by the state.” Polanyi wasn’t just referring to the “enormous increase in continuous, centrally organised and controlled interventionism” needed to enforce the logic of the market, but also to the need for state repression to counter the inevitable reaction — the countermovement — of those bearing the social and economic costs of disembedding: families, workers, farmers and small businesses exposed to the disruptive and destructive forces of the market.

In other words, the support of state structures — to protect private property, to police the dealings of different members of the ruling class with each other, to provide services that are essential for the reproduction of the system — was the political prerequisite for the development of capitalism. And yet, paradoxically, market liberalism’s need for the state to function is also the main reason for its enduring intellectual appeal. Precisely because pure self-regulating markets cannot exist, its advocates, such as contemporary libertarians, can always claim that capitalism’s failures are due to the lack of truly “free” markets.

And yet, even Polanyi’s ideological enemies, neoliberals such as Hayek and Mises, were perfectly aware that the self-regulating market is a myth. As Quinn Slobodian has written, their aim was “not to liberate markets but to encase them, to inoculate capitalism against the threat of democracy”, by using the state to artificially separate the “economic” from the “political”. In this sense, market liberalism can be considered a political project as much as an economic one: a response to the entrance of the masses into the political arena from the late-19th century, as a result of the extension of universal suffrage — a development most militant liberals of the time were vehemently opposed to.

Wonky thinking

In the second report in the Future of Conservatism project at Onward, Gavin Rice and Nick Timothy argue for a renewed direction for conservative economic thinking. In A Conservative Economy: Building a fairer and more productive nation, they call for a long-term manufacturing and export revolution together with radical housebuilding. drastically lower net migration and a stronger voice for workers and families.

Capitalism is the greatest force the world has ever seen for driving up living standards through innovation, technology and growth. But aspects of its current form do not serve the economic goal of shared prosperity or serve the common good. Financialisation and rent-seeking have enriched overseas A Conservative Economy 8 investors and provided returns to financial capital, but often at the expense of the real economy.

At the core of many of Britain’s economic problems is its comparatively weak productive capacity and net exports. We do not make or do enough goods and services the world wants and needs to buy. And where we do make things we often do so less productively than many other countries, due in part to a deficit in skills, infrastructure and fixed capital investment. The comparative decline of production industries has led to a wide and persistent current account deficit, currently 3.1% of GDP.

Britain is world leading in high-value services but our trade surplus in services does not compensate for our large deficit in manufactured goods. This drives regional inequality as returns to UK exports tend to accrue in London and the South East. The trade deficit is therefore a symptom of poor productive capacity and a cause, with ever more capital sucked into one corner of the country, and invested in dormant assets rather than growing industries.

The need to finance the current account deficit leaves Britain dependent on selling overseas investors its housing stock, its equities and its debt. It must be constantly vigilant to the threat of capital flight, constraining policy choices and leaving it beholden to foreign ownership, even when it is undesirable. This can lead to underinvestment, irresponsible governance and the separation of risk and reward, as the Thames Water debt scandal exemplifies.

Our national deficit in savings contributes to this import dependency model, with UK incomes being spent on imported goods rather than invested in productive industry. As a country the UK does not save enough, and its savings are ineffectively deployed. Regulation of pension funds has been catastrophic, pushing UK capital into low-return bonds and real estate. Around 60% of UK-listed equities are foreign owned, indicating inadequate deployment of Britain’s capital pools, with investment income accruing overseas. Overall UK investment lags behind the OECD in both the public and private sectors.

Too much speculation has turned housing into a tradable asset, inflating the market and pricing families out of ownership. Britain’s liberal M&A regime enables predatory asset-stripping, and our regulatory and tax regime combined with loose monetary policy have promoted debt financing and leveraged buyouts to the detriment of investment. Weak corporate governance rules have allowed executive pay to rise far above average salaries regardless of performance, and a fashion for share buybacks has sucked capital into inflating share prices rather than business growth.

Economist Tyler Cowen set out a diagnosis of the UK’s growth problem, pointing first to lack of specialisation and decline of manufacturing.

Take the basic non-growth of the UK economy since 2008 (productivity, real wages, per capita gdp) and compare it to their peer countries (which are those?).  If you had to assign the causes of that shortfall to various factors, how would you do it?

Recently I had lunch with a few well-informed Brits, and they were suggesting that NIMBY was responsible for at least half the problem.  I thought I would give my mental estimates, and see what general opinion on the question looks like.  Such an exercise never can be very accurate, but at the very least it is a good way to calibrate world views.  Here goes!

1. The UK economy not specializing in making things that either foreigners or its own citizens want to buy.  In other words, trends turned against the country.  Its brand of European/global finance and business services just didn’t do that well.  Where were the major tech companies?  Was it in the right segments of manufacturing at the right time?  (For part of that period, Germany was. The Netherlands still is.)  Did it ride any boom in resource prices, as Australia and Canada did?  No.

50 percent.  Over the decades, I see growth rates move around so much, even when policies don’t change much, that this is usually my #1 culprit.

2. Brexit: 20 percent.

3. NIMBY: 15 percent.

4. Lack of cheap energy, energy building restrictions: 10 percent.

5. General decrepitude of some of the population somehow mattering more than before: 5 percent.  Keep in mind we are trying to explain the recent growth gap here, not theorizing about levels.  Otherwise it would be more.

Book of the week

We recommend No Way Out: Brexit from the Backstop to Boris by Tim Shipman. The third book in his Brexit quartet, Shipman retells the Tory Party’s attempt to resolve the Brexit withdrawal deadlock and the eventual fall of Theresa May.

Together the first two books provide evidence for a theory of power which, I will argue, this and the concluding volume prove beyond doubt. Those who succeed in politics know where they want to go strategically, how to get there tactically and have the necessary skills to execute their plans, so that they can turn goals into reality. Politicians lacking any one of these three attributes struggle; those lacking two, fail; those lacking all three are an irrelevance or an embarrassment to themselves…

…Like many in Westminster, I am a devotee of the works of Robert Caro, whose magisterial multi-volume biography of Lyndon B. Johnson is the gold standard for all political writers. No Way Out is firmly in the ‘Caro school’ (in its length and themes if not in its elegance or insight), in that it aims to be a study of power: how people find it, hold it and use it and the ends for which they do so. My contention is that Brexit, which surprised both victors and vanquished in the 2016 referendum and was a mystery to both, was the greatest political conundrum visited on the British ruling class in eighty years. It destroyed David Cameron then consumed the careers and attention, directly and indirectly, of his three immediate successors. Brexit was, for some, a huge problem to solve or to mitigate, to others it was a one-in-a-generation opportunity to grasp. The story of this sequence, and this book in particular, is that of how Britain’s leading politicians sought to navigate both hurdles and opportunities, while not agreeing on which were which. In doing so, both sides would push themselves and Britain’s unwritten constitution to breaking point.

This was a political, parliamentary, legal and diplomatic drama, but most of all it was a human drama, red in tooth and claw. As I wrote at the start of All Out War, this is not an explanation about why Brexit happened, nor a political argument about its merits. This is elitist history, which focuses on the actions of the politicos around Theresa May who made the decisions; the senior civil servants tasked with enacting them; the senior Commission and Council personalities they negotiated with; and the major factions in Parliament who sought to thwart them.

If pre-2016 Westminster was largely obsessed with the clever idealism of The West Wing, marinated in the farce of The Thick of It, the parable of these years became Game of Thrones, the pseudo-medieval sword and shagging epic pitching warring factions against each other in the quest for the throne. For the Mayites, the Corbynistas, the Johnsonians, the Lib Dems, SNP, ERG and the DUP, for the Labour moderates, the Tiggers and the numerous branches of the Remainer Bresistance - the pro-dealers, Norway-Plus people, customs union fans, People’s Voters and and full-blown revokers - read the Lannisters, Starks, Baratheons, Martells, Greyjoys and Tyrells. There is a parallel too in the mysterious actors across the Narrow Sea (aka the Channel) who were better organised and frequently misunderstood - able to deploy dragons against the unicorns of others..

Quick links

The UK economy will be the worst performing in the G7 next year, the OECD predicted.

Public sector productivity is down 6.8% on Q4 2019 despite increased investment levels.

Changes to the NHS’s constitution will declare sex to be a biological fact.

The Government announced removal of the cap on places for faith schools, which will allow new Catholic free schools to open.

Recent work visa rule changes have cut numbers coming to the UK.

Leaked documents showed 20,000 migrants on visas have lodged asylum claims to remain in the UK.

Deliveroo, Uber Eats and Just Eat have committed to implementing tougher security checks on illegal working.

Labour has lost votes in areas with high Muslim populations as part of a possible backlash against its stance on Gaza.

Shadow Health Secretary Wes Streeting said a vote for Conservative London mayoral candidate Susan Hall would be a vote for “white supremacists”.

New polling showed over half of Germans have net critical views of migration, especially from Islamic countries.

45 people were arrested following protests in Peckham against the movement of asylum seekers to a barge.

More than 50 MPs and peers wrote to the Prime Minister calling for action to limit phone use in schools.

China launched a space mission to the far side of the Moon.

The World Health Organisation will be able to require Britain to hand over 20% of its vaccines in the event of a pandemic, according to a treaty due to be signed next month.

The High Court ruled the Government’s net zero strategy unlawful for failing to be specific about how targets will be met, following litigation by Friends of the Earth and the Good Law Project.