“Although the crash saw the collapse of market fundamentalism, it also saw the collapse of tax renevues.” © Joe D

Since the financial crash of 2008, centre-left parties across the developed world have been wrestling with the question: how do we do social democracy when there’s less money around?

Of course both right and left have experienced philosophical discomfort since the crash of 2008. For the right, the catastrophic failure of global financial markets destroyed the certainties of market fundamentalism that had built up since the late 1970s. It turned out that markets are fragile things, needing care and attention, and the rules, norms and behaviour on which they depend to work in the interests of all suffered from decades of neglect.

The divisive social consequences of market fundamentalism had already been revealed before 2008. What the crash did was destroy this view of markets on its own terms: as an engine of efficiency, stability and prosperity. The right responded cleverly to this legitimacy crisis by trying to rewrite the history of the crash as soon as it happened as a history of state failure, not market failure. The rewriting continues. I’m sure we’ll see a lot of it in the Conservative Party’s election campaign.

For the left, the challenge was more surprising but no less profound. Because although the crash saw the collapse of market fundamentalism, it also saw the collapse of the tax revenues on which its commitment to social investment and redistribution depended. If 2008 exposed the Conservatives to an excessive reliance on market fundamentalism, it exposed Labour to an excessive reliance on revenue from a narrow slice of the tax base, in particular the City of London. Of course, tax-and-spend continues to be a crucial part of any programme of government (whatever the right tries to tell us). But the crash made it much more difficult for cash transfers and public spending to bear as much of the progressive load as was the case during the New Labour period. But the case for rethinking how Labour should govern in a social democratic way is not simply, or even primarily, based on fiscal necessity. It is a case based on seeing social democracy as fundamentally about building a better kind of economy, not just compensating for the side-effects of the economy that we have. This “supply-side” approach to social democracy is commonplace to centre-left parties across the developed world, but less familiar to the Labour tradition in the United Kingdom. With the exception of Harold Wilson’s crusade to modernise British industry in the “white heat” era of the mid-1960s, Labour’s economic policy has preferred the levers of tax-and-spend to those of economic restructuring.

This has to change. If we are serious about overcoming the long-term economic challenges Britain faces—from soaring inequality and declining real wages to boosting productivity and international competitiveness—Labour must become the champions of a supply-side revolution from the left.

The starting point for that is honesty about what can and cannot be achieved. Change will be incremental and long-term. It will take more than one term in office, and must be achieved in partnership with, not in defiance of, British business. It must not simply be a matter of picking our favourite north European country and copying it wholesale. Instead, Labour’s challenge is to map out a series of achievable reforms that, over time, help shift Britain towards a higher-wage, higher-skill economy, sustaining higher standards of living and a more competitive private-sector economy.

All this suggests a diverse and very different agenda to that of postwar British governments. It means incentives and constraints are needed on employers to radically improve their record in vocational training. It means boosting competition in banking and energy markets. It means reforms to our labour market, including increasing the minimum wage and eliminating exploitative zero-hour contracts, which make work more rewarding and secure, and also create an incentive for more employers to invest in the productivity of their workforce.

It also means thinking of government’s industrial policy role in a different way. Modern industrial policy should be less a matter of who gets which subsidies, and more a matter of how to encourage employer organisations to exercise greater self-governance over companies in their sector; using government’s procurement policy to promote best practice in areas such as skills training; and putting the export needs of British companies at the centre of government activity abroad.

It also means having the courage to shift power away from Whitehall to help build thriving local and regional economies. The logic of the British economy before 2008 was a growing division between a productive minority in the southeast and everyone else. After the crash, the challenge of regional policy is to build the clusters of institutions—at city and regional level—that can raise productivity and reduce inequality across our country.

A social democratic approach that takes this supply-side agenda seriously is both fiscally credible yet potentially transformative. It challenges Labour to care as much about raising productivity and competitiveness as it has done about redistribution and public investment. But, if we embrace it properly, it holds out the prospect of achieving a more enduring solution to the challenges of social injustice that have motivated progressives for generations.

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