Labour’s new Shadow Chancellor, John McDonnell, has said that he enjoys fermenting the overthrow of capitalism. So his appointment has spooked many in the City and unnerved most Labour MPs.
It’s not an unprecedented development for the Labour Party. A century ago, a firebrand hard left MP Philip Snowden proposed, on the floor of the Commons, the abolition of capitalism. Ten years later he was Chancellor of the Exchequer. And he turned out to be so orthodox, that some in the City were prepared to fund the erection of a statue in his honour. And he was thrown out of the Labour Party.
McDonnell is clearly of the hard left, but is he just espousing the old traditional rhetoric of the Campaign Group, or is there something more substantial here?
There are contemporary academic underpinnings to many of his views. He often echoes the arguments made by Mariana Mazzucato, author of ‘The Entrepreneurial State.’
The thesis goes like this: Conventional ‘austerity’ won’t work, because it can’t deliver growth that is either sustainable or inclusive. It shrinks the state, undermining its scope to be a positive force. It tilts the emphasis onto a profit-led recovery, which doesn’t work because too little is reinvested. So wealth piles up in non-productive ways, there is no trickle-down, wages become compressed and demand falters. Markets are blind and, in the end, deliver only suboptimal social outcomes.
Instead, we should have new objectives: growth that is inclusive, with shared rewards, and a fresh justification for an interventionist state, actively creating new markets. These are achieved by creating an entrepreneurial state – one that sets the direction of travel, rather than just intervening to fix problems. The state sets that direction, thinks big, takes major risks, but ultimately kick-starts real recovery and earns enough profit from its entrepreneurship to pay for its mistakes.
In this model, the state is a very different creature than it is at the moment. It takes an active lead, it plays a far larger role, takes a wide portfolio of risky activity, and, as a result, so the theory goes, creates more opportunities for the private sector and boosts its courage. The result would be many more technological revolutions, like the internet and GPS. The state would be leading into areas where, as Keynes noted, the private sector was too fearful to tread.
There would also have to be new ways of measuring all this activity. Traditional risk/opportunity analysis is no longer sufficient. Outcomes of state activity could not be measured just by narrow financial return, but by assessing their wider social good.
Of course it would take a bit of money to get all this started. But McDonnell would argue he is not in deficit denial. That can be eliminated by closing off all the opportunities for evasion, increasing taxes on the rich and ending all the corporate tax breaks. In addition, ‘People’s QE’ could create the seed-corn funding for a state investment bank to drive forward funding for wider social goods.
In short this is an end to ‘Tory –lite’ policies of a gentler austerity, and a full hearted embrace of a completely different approach.
These may be the academic underpinnings to much of the Shadow Chancellor’s views. But they are not without their significant problems, including:
How does the state get as smart as it would need to be to be able to make shrewd choices about the future?
Could the state really generate sufficient up-front resources to kick-start this new approach?
How much public tolerance would there be of the failures resulting from backing the wrong horses?
How big is the risk that the pumped up flows of state-backed investment succeed only in driving away alternative sources of free-flowing capital investment?
Might not the new aggressive corporate tax regime deter the very ‘courageous’ investments this approach is designed to unleash?
Would wage-led expansion actually lead to more optimal investment decisions, as opposed to one that is profit-led?
Some of this isn’t new. Previous governments have attempted to use state-backed investment activity to drive growth. It is now largely discredited, and taken to prove that the state just cannot pick winners.
Some of the academic community reject that the ‘entrepreneurial state’ is a reversion to picking winners. Professor Stirling, at Sussex University says that instead, “this is about culturing the most fruitfully cross-fertilising conditions…for collectively seeding and selecting…alternative possibilities…and nurturing the most fruitful.”
We will have to see whether any of that makes it into one of Mr McDonnells’ early speeches as Shadow Chancellor.
One thing we know for certain is that Mr McDonnell is about fully recalibrating Labour’s economic policy stance.
He’s no Philip Snowden. Surely?