The recently published ‘Financing Investment’ report, produced for Shadow Chancellor John McDonnell, sets out elements of Labour’s new economic thinking. But how radical is it?
Given that the UK is something of a poster child for neoliberal policies, rolling back some of its worse excesses is not an outrageous aim. But the past decades have weakened the underlying economy. Brexit adds a whole other dimension of uncertainty. To discuss reforms involves an argument about the capacity of the system to change but it also depends on the nature, coherence and ambition of any programme. People project their hopes onto Corbynism, but is it really the roaring lion they imagine?
Ambitious new thinking seems hard to find. Owen Hatherley recently commented on one Corbynista book that its proposals were decent enough but “nobody between the 1910s and 1980s would ever have called this socialism”.
Is the economic thinking any different? ‘Financing Investment’ is a report whose lead author, Graham Turner, heads a group of City of London analysts at consultancy GFC Economics. The interim report, published in late 2017, is a brutal analysis of the problems facing the UK’s economy. The final report, published on 20 June, is more concerned with solutions.
The report calls for a 3 per cent growth in productivity over (an unspecified) time. Many left-wing economists were expecting a different type of target. The favoured one is to raise median wages – wages are relatively easy to measure, and they are what people are concerned with. There is no point in having rising productivity if workers don’t gain, which is exactly what has been happening for a long time. If Labour adopts a productivity target as official policy I suspect it will be a sign that they are afraid to set a wages target.
More peculiar the focus is on labour productivity. Productivity measurement is very problematic. A crude measure one can use is that of output per hour worked. But a measure is not a good target. You can push up labour productivity by cutting the labour input and its cost. You can replace workers with machines. But do we want a nationalised rail network with no human staff, just computers driving the trains and monitoring our journeys?
In any case even a moderate transformation means doing things immediately which may drive a labour productivity measure down – ceasing to sweat the existing staff and assets in the public and private sectors, for example.
Equally peculiar is the suggestion that the remit of the Bank of England (BoE) should be extended to cover productivity growth. Even the Financial Times said that “the idea that the BoE, with its limited range of tools, could increase sustainable productivity growth to a rate not seen in modern times is simply not credible”. Productivity is the outcome of concrete things like investment and research and development but it is also the outcome of everything else that we do. Why would you attempt to give an unaccountable central bank a finger in every pie?
The productivity target is also absurdly ambitious given the poor performance of past decades. It leads the authors to romance the degree to which our lives are being transformed by new technology and artificial intelligence. Even the much derided Blockchain is invoked as driving capitalism forward.
Those familiar with the history of the Labour Party will know that it has long tradition of pushing productivity. Growth provides the resources to pay for reforms. This helps avoid questions about distribution – so long as the pie is getting bigger there is more for all of us. It appeals to the more conservative sections of the population, including the trades unions leaderships. It appeals to those outside who might be threatened by other aspects of Labour’s programme. But the objections made in the past have even more force in a world worried about resources and climate change. Yet Labour’s gut conservatism about real policy shifts has been revealed by the way that so many of its pro-Corbyn MPs voted for the expansion of Heathrow airport days after this report about rebalancing was published.
Turner and McDonnell will want us to focus on the arguments about bank finance for investment. Much of the discussion here is sensible but not especially exceptional. And there are two big elephants in the room.
The scale of the crisis has to a degree been mitigated by Keynesian-style policies. But these have been ‘underhand’ and inconsistent. Both reports recognise that many of the benefits have been sucked away into the finance sector. Friendly radical Keynesian critics had hoped for a more coherent endorsement of demand expansion.
Turner and McDonnell may well reply that last year’s Labour election manifesto, albeit vaguely, addressed some of the issues. But McDonnell has indicated from very early on that he will not challenge the independence of the Bank of England. The report endorses this and uses language and concepts familiar from the austerity debates. This accounts for some exasperated cries that in parts it is warmed-up neoliberalism.
Then there is the issue of private investment. It seems clear that Labour sees the economy in terms of a slightly larger state sector, a strong private sector made up of big capital and a vigorous small and medium sized sector. Here we encounter the second elephant in the room.
The normal expectation is that profits will be the main source of investment for big companies. But UK-based companies (and especially public ones) have one of the worst records for this in the ‘advanced’ world. The report is reluctant to name names but the collapse of Carillion allows them to comment in the final report that it had “poor management, a lack of vision [and] investment in future growth opportunities was sacrificed for short-term gains”. (p. 90) This could easily be a judgement on the UK corporate sector more widely. So what is to be done here? This is related to the question of control – something which is even more of an issue when we consider multinational firms with supply chains that stretch across several countries.
People talk about the need to change the company legal form but no-one is clear how to do this or if it can be done unilaterally in one country. State direction does not seem to be on the table so we are left with ‘persuasion’ and bribing in terms of incentives and financial assistance for investment.
The aspiration of the report seems to be that if a better climate is created for outside assistance to small and medium sized firms and start ups then this might have an inspirational effect on the big companies. This sounds pretty optimistic. It is all the more so when the report says that “now, investors are rewarding companies prepared to forgo dividends to focus on growth”. (p. 90) This seems to mean those who buy shares. I am not sure this is true or that, given what we know, financial markets are that rational.
Big infrastructure provided by the state should not be a problem to finance because the government has the means to raise the money. But this still leaves the question of what to spend it on. Some of us think the whole rebalancing agenda needs to reconsider the preference for big projects like HS2, the Thames Tideway, Hinkley Point and Heathrow in favour a larger number of smaller and medium sized projects around the country. If nothing else you get a bigger economic and political ‘bang for your buck’ than with super projects. But the splits over Heathrow shows that in the Parliamentary Labour Party there is still little appetite even for this.
Big infrastructure projects have always been collaborations and short of the socialist revolution it is unclear how they could be brought in house – unlike much other outsourcing. “Private sector involvement is critical.” But how do you control big construction in the wake of collapses like Carillion? By “flexible, nimble and responsive” collaboration (p. 103). This is language straight from the New Labour idea of ‘world class commissioning’.
The report does talk about an ‘industrial strategy’ being led by a Strategic Investment Board with the help of a National Investment Bank and a National Transformation Fund. It even fleshes out elements of their possible organisation but is vague about where they should put their efforts. Past policy has put so many eggs in so few baskets that it is difficult to know where to find the baskets to put new eggs into. Nevertheless a more determined attempt needs to be made, all the more so given the strategic role in the UK economy of military contacting, corrupt financial institutions and dubious big Pharma.
Instead we have too much focus on financial and banking minutiae. This even includes the suggestion that the Bank of England and the investment institutions should be relocated to Birmingham. Sadly the force of this idea is then mitigated by the suggestion they be sited next to Birmingham New Street Station. We cannot be specific about so many big things but we can about this. Those involved will need a quick get away to civilisation – god forbid that anyone should actually live in the nether regions!
So where are we? In his discussion of the interim report Michael Roberts attempts a Marxist critique. We can also unravel the hidden elements of things like productivity. But Labour is not and never will be a Marxist party. It is a reformist party with a patchy record of delivering reforms. Many people think that this mould is being broken. But what is being talked about seems not that ambitious, not sufficiently precise and focused, and not necessarily coherent. It is not much of a lion’s roar.
 The Report claims that a sustained 3 per cent rate of growth is only a small uptick on the annualised labour productivity growth rate since 1950 of 2.4 per cent . A increase from 2.4 to 3 is one quarter – not a small rise. This post-1950 rate includes the Long Boom. Real productivity growth has been anaemic and uneven for a couple of decades or more and held up by spurious value creation in, for example, the financial sector. The report argues that semi-conductors are an area where high rates of productivity growth are being achieved as if a single industry or part of it can stand for a whole economy or that it can transform a whole economy. But it also recognises that the normal data shows that the gains of computing technology have been less than is claimed and that they have been falling. But this does not matter – there is measurement error. The full gains are not measured by conventional indices. We need what is called an hedonic index. Already in the 1930s people we saying the effects of new technology were not being captured by existing output indices. So to get the actual long run productivity rate one doesn’t just have to use an hedonic index for the now in one sector – one has to calculate a consistent long term series for everything. Without this one has no way of knowing if the productivity problem has got worse: it could have been worse in the past, and if so recent growth will be overstated. But suppose this is all wrong. A cynic might also say, by your own admission things are better than they appear, so where is the productivity crisis and the need to change what we are doing?↩
 The maps in the interim and final report (pp. 162-171) are worth looking at for a scary depiction of how unbalanced the UK is it when to comes to the location of some new technology developments.↩
 The report raises a lot of technical issues. For example, it seems to welcome (p. 29) recognising investment in intangibles including branding as a gain. But in the case of Carillion (and many other companies) intangible value can disappear over night.↩