Tom Miers: The chance to silence howls of protest

THERE is a growing contradiction at the heart of Britain that will define political debate over the next generation. This party conference season is seeing the first glimmers of how it might develop. The surprise is who is ahead of the game. Most observers characterised Labour’s conference as a barren lurch to the Left. Yet it was Ed Miliband who articulated the problem that confronts us with his concept of “predatory” versus productive capitalism. The Labour leader’s speech suffered from a lack of clarity, but it held an important message, and it is one the Tories have to answer.

The problem is how to make capitalism work in the public interest when government – rather than the public or shareholders – takes on the risk of failure. This conundrum has always been with us, but the credit crunch brought it centre stage and heralded a new age in British political economy.

Big government is an inevitable function of democratic politics, as illustrated by the historic proportion of GDP in western nations taken and spent by the state. Yet in the last 40 years another, countervailing force has predominated. This has been driven by the understanding that direct government ownership of the means of production doesn’t work. State-owned companies and service providers act in the producer interest rather than that of the consumer. In other words the public welfare is replaced by the welfare of public sector workers.

This truth was understood not just by the Conservatives but by Labour under Tony Blair, who accepted Tory privatisations and extended the principles of competition and non-state ownership into the remaining public sector.

But this settlement leaves us with a new dilemma – how can the democratic state continue to guarantee the economic welfare of its citizens if it no longer controls the means of production? For the resulting institutions – non-state, but providing goods and services with public welfare in mind – have proved to be deeply problematic, even predatory.

This is the problem that we must grapple with over the next decade and beyond.

In our recent book Democracy and the Fall of the West ,co-author Craig Smith and I described the clash between democratic politics and classical liberalism. One feature of this we dubbed the “Were-Market”, part of the capitalist economy that has been engineered by governments to achieve certain wider social objectives.

Like were-wolves, were-markets look normal but come back to haunt society when least expected. The problems arise when risk is transferred away from profit-seeking companies and onto taxpayers.

The classic were-market is of course the financial sector whose implosion in 2008 has brought home the whole problem. In essence government, particularly in Britain and America, manipulated the mortgage market to achieve a social objective – affordable homes for all. The result was a housing bubble funded by an explosion of borrowing.

The resulting crash has amplified existing public concern that all is not right with the market system. Unease over other were-markets – the railways, the utilities, the Private Finance Initiative, government outsourcing – has grown into a hitherto inchoate mistrust of the whole economic system.

This meshes with another popular concern shared by many on both Left and Right. British industry seems imbued with a culture that does not serve the public well. Again, the wrong incentives are in place, and the market isn’t working as it should. We hear of “rip-off Britain”, of short-termism in the City, of companies selling out too easily and headquarters being taken overseas. The Southern Cross controversy seems a perfect case in point.

If Ed Miliband can build on his conference speech he may be able to develop a coherent theme from all this that resonates both politically and philosophically.

How, in a democracy where government is responsible for people’s basic economic welfare, can we ensure that British institutions act the public interest? This poses a serious challenge to the Conservatives.

They have a hard task in developing a response because they are wedded to an ongoing process of liberalisation. An assault by Labour that chimes with public unease could threaten the central mission of this government, which is public service reform.

For this relies on passing control over health, education and welfare to independent institutions and companies.

For Labour the temptation is to turn its back on reform and return to the 1970’s mantra of state ownership. Labour’s critique of coalition health and education policy has worrying undertones of such an approach.

A more positive, and ultimately more rewarding direction would be to rethink the structure of institutions that have an essential role to play in the nation’s economic welfare.

There is an important early Labour tradition that focused on the working man as a consumer as much as a producer, through co-operatives, mutuals, and friendly societies. This is in contrast to the emphasis on the role of the state as a kind of gigantic charity at the expense of proper workers which Labour drifted into in the late 20th century.

The best hope for Labour is to return to its roots in search of new ways of delivering social justice without the direct participation of the state. Scottish Labour, in particular, has an opportunity here. The SNP has failed utterly to understand the fundamental flaws of state ownership, fluffing even the open goal of a public interest model for Scottish Water.

This allows Scottish Labour to outflank them by offering something new based on an ethos of socialism rooted in the community rather than bureaucracy.

For the Tories the solution is more complex because they are the authors of liberalisation. If they are to answer public unease with the way capitalism has developed they must learn to live with the limits that democracy places on economic liberalism.

The Government has shown it understands this by promising to implement the Vickers report on banking which artificially separates retail finance from the City. The solution, endorsed by Labour, may not be perfect economics but politically it makes sense. The question is whether the Tories can find a coherent approach that tackles other were-markets without smothering industry in a new layer of red tape.

In their conference there is little sign that the Tories recognise the danger of public concern over “predatory” capitalism coalescing into a theme their opponents can tap into. But unless they come up with a better defence of liberalisation and how it can be made to serve the public interest more reliably, they will meet resistance on their core reforms, as the travails of the Health Bill show. Ironically, it may be through public service reform that the Tories discover the answer to this conundrum.

The politics of healthcare, education and welfare make it very difficult to involve normal shareholder-owned companies as the standard institution for service delivery. So the Tories will need to find other structures to deliver choice and competition. If a school, for example, is not to be accountable to shareholders, why not make it answerable to the parents and community it serves? Why not engage charities in the delivery of welfare? Mutuals to offer healthcare?

This could be where Cameron’s “Big Society” comes into its own. Rather like Miliband’s speech, the Prime Minister’s efforts to explain this concept have been ridiculed and almost wilfully misinterpreted by the commentariat.

Again, some of this is his fault. But in the longer term his comments that “there is such a thing as society, but it’s not the same as the state” shows how the Tories and Labour might end up in a similar place.

Both leaders are misunderstood, partly because they are ahead of public opinion. But this gives them a chance to shape it. Whoever does so successfully could dictate the next cycle of British politics.

• Tom Miers is co-author of Democracy and the Fall of the West published by Societas