Economic growth as social change

Raising economic growth requires the government to defeat some vested interests.

Economic development has historically always meant a far-reaching transformation of society’s economic, social and political structure (Paul Baran, The Political Economy of Growth).

Every society, when left on its own, will be technologically creative for only short periods. Sooner or later the forces of conservatism...take over and manage through a variety of legal and institutional channels to slow down and if possible stop technological creativity altogether (Joel Mokyr).

Baran and Mokyr are not ideological soulmates. But they both saw a fact missing from politics now - that sometimes, sustained significant economic growth requires a transfer of political and economic power from the forces of conservatism that hold back progress to those groups that engender it.

We’re not necessarily talking ‘bout a revolution here. Let’s take three examples.

- In the early-mid 19th century Britain dismantled the apparatus of mercantilism such as the navigation laws and corn laws; increased the political power of the middle classes via the Reform Acts; and facilitated the spread of shareholder-owned companies through the 1844 Joint Stock Companies Act and 1855 Limited Liability Act. Economic and political power thus shifted from the regressive “landed interest” to the more progressive bourgeoisie.

- After WWII the “commanding heights” of the economy were nationalized, a welfare state was funded by high taxes on the rich, and full employment meant that firms lost the disciplining power of the sack in exchange for an assurance of high aggregate demand. Power shifted somewhat from private capital to the state, unleashing three decades of rapid growth.

- In the 1980s Thatcher shifted power from trades unions to management, thus boosting growth (for a while!) by raising profit margins and animal spirits.

This isn’t to say that far-reaching transformations of power are always necessary; permanent revolution is a bad idea. Tory governments in the 50s mostly accepted the post-war economic arrangements and the growth they delivered. And the post-1997 Labour government, whilst doing a goodly amount of income distribution, largely left intact the power structures of Thatcherism - so much so that Thatcher herself said that her greatest achievement was Tony Blair.

It should by now, however, be obvious that those structures have stopped delivering growth. In the last 20 years real GDP per person has grown by just 0.6% a year compared to 2.3% per year in the previous 50 years.

This is the central fact about politics now. Stagnation has fuelled the rise of the far-right. It has squeezed real incomes thereby fostering discontent with mainstream politics. And it has reduced tax revenues, meaning that public services cannot be improved without raising taxes. The government’s unpopularity isn’t merely a failure of communications or the result of bad decisions by Starmer and Reeves. It’s also the product of economic failure.

Such stagnation means it’s not longer sufficient, as it was in the 90s, for governments to offer policy stability and let capitalist dynamism alone produce growth. Instead, now is a time when we need one of those structural transformations.

What form should it take?

There are ideas on the right, centre and left.

Some on the right want (pdf) to cut the power of the “bureaucratic class” that enforces the regulations which they believe are strangling growth. That would entail a shift in power from that “class” towards private sector management.

The centre, best embodied by Stian Westlake and Sam Bowman, also has ideas that mean transferring power. Tax simplification would cut the power of lawyers and accountants; shifting tax from incomes to land would hurt landlords whist helping workers and business owners; tougher competition policy, the break-up of monopolies or measures to encourage business start-ups would disempower incumbent companies; and fewer planning restrictions would shift power from Nimbys to construction companies.

Even the left has some ideas. In a recent paper (pdf), Gabriel Zucman and colleagues say there is “a strong positive association between equality and productivity”, which suggests a case for stronger egalitarian policies, and not just income redistribution. They might include: investment in education especially in the early years; more worker democracy; a maximum wage; more direct democratic control of utilities and government outsourcing; a basic income; universal basic services; mutualization of the public sphere to permit more rational policy debate; a sovereign wealth fund; controls on finance and management power generally to reallocate labour away from bullshit jobs and “socially useless” finance; or a sovereign wealth fund. All of these entail a shift not just of income but of power.

The Labour party, however, is showing little interest even in centrist ideas, let alone leftist ones. Yes, reform of planning laws and help for small businesses (such as rates reform) are good ideas. But are they enough? And would stronger worker rights really encourage firms to invest in boosting productivity rather than the most egregious forms of exploitation, when 25 years of rising minimum wages have not done so?

This lack of interest arises from the fact that, as Ben Ansell says, the party has no clear theory of growth. It has no analysis of capitalism.

This could be because, like Lieutenant Kaffee, it cannot handle the truth - that capitalism is failing most people and will continue to do so without strong remedial action.

One reason it can’t do so is that it doesn’t understand the essence of politics. Politics is not about cosy debates or soundbites on silly TV shows. It’s about conflicts of interest. Giles Wilkes is right to say (pdf) that raising growth “will often involve hurting some interests to further others.”

Right now, the social transformation needed to raise growth requires the government to face down the powerful interests of, if not capital in general, then at least the more regressive elements of it such as rentiers, monopolists and media barons. If you really want economic growth, you need to fight for it.