The Tories are failing to find a market response to Ed Miliband’s anti-capitalism

 
Ryan Bourne
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THE ROLE of the state has long been the major fault line in UK political discourse. This is not surprising, given that the interaction between state and citizen has changed so profoundly over the past 100 years. And with Ed Miliband’s challenge to the market economy last week, and yesterday’s attempted defence by George Osborne, this crucial debate is back.

Historian AJP Taylor once wrote that a law-abiding citizen in 1914 could pass through life only encountering the state in the person of the postman or the policeman. But there have since been two paradigm shifts. After 1945, Labour governments gained support for a systematic cradle-to-grave welfare state. More significantly, the state sought to control the path of the economy by managing demand, and nationalised vast swathes of industry.

This corporatist consensus collapsed under the weight of its own contradictions. Poor productivity, high inflation, and industrial strife paved the way for Margaret Thatcher to offer a vision of a free economy, with a liberated supply side. Both parties have since signed up to a market economy, while using the revenues it creates in tax to fund public services.

Why does this matter now? Miliband thinks we are on the cusp of a once-in-a-generation shift. He feels that the financial crisis fundamentally shook the public’s faith in capitalism. In Miliband’s eyes, the behaviour of banks, and the squeeze in living standards, have given him permission to seek a more active role for the state.

We saw this in his policies. On land, “use it or lose it”. On energy, fix prices to “reset the market”. The government should set minimum wages by sector. Miliband is thinking big about shifting the fundamental relationship between state and citizen – extracting resources to keep the welfare state afloat. The irony is that the economics of an ageing population, technological change, and globalisation lends itself towards further reform of the welfare functions of the state. Yet Miliband’s ambitions still pose a big question to the Tories, and warrant a response – not least because they are populist.

Osborne did this to a degree. He made the case for globalisation and attacked Miliband’s “race to the bottom” narrative. He rightly argued that the dynamic gains of sustained growth are more beneficial for living standards than static redistribution or punitive measures. He declared himself in favour of markets. And he pointed out that just setting prices and imposing higher taxes would have detrimental economic effects.

Yet the Tories can’t bring themselves to make the full-throated defence of the market Thatcher did. Prowl the fringes and you’ll find as many MPs agitating for minimum wage rises as you do for deregulation. Osborne himself is intervening in the housing market, and pays lip service to the need for an industrial policy. Many Tories think the only way to counter Miliband is to adopt left wing ideas.

The market counter to Miliband’s agenda is to show how a big state and corporatism feed off each other: exposing how Labour governments got too close to banks and firms in highly concentrated industries, and how more competition and a smaller state would better serve consumers. But too few Tories are saying it. Miliband is asking the right questions, but giving the wrong answers. I’m not yet persuaded that the Tory leadership knows what the state’s role should be.

Ryan Bourne is head of economic research at the Centre for Policy Studies. @RyanCPS