Reeve's sorry lesson for us all - have an economic theory
Robin McAlpine
Growth eclipses reaching net zero. The purpose of regulators is to achieve growth. Objectors' rights must be curtailed to push through controversial construction projects. Restrictions on Non-Dom billionaires must be limited. The welfare budget needs to be scrapped. The private sector needs to deliver NHS care. Taking these statements at face value, from what political party do they emanate?
I ask this because something rather interesting happened last week – an economist sort-of admitted that economics is an ideological subject and you can pick different ideologies and do things differently. It might not sound it, but this is an important admission. It could even point to the end of the tyranny of the economists.
But let me rewind, because that opening paragraph would be more impactful if the political party concerned hadn't been so keen for you to draw the conclusions you did. With virtually every statement Rachel Reeves makes she wants you to hear one thing; 'I'm basically a Tory'. Or, more accurately, it's not you she wants to hear it.
To understand the implications of all of this it is worth just reading the words of Oxford University economist Professor Ben Ansell:
“Labour’s current plans on their own will not get them re-elected because there are minimal gains for most and tax rises, which even if disguised, are still likely to have contractionary effects. For the plans to work politically, they have to work economically, which means they need to create a framework for sustained economic growth by 2029.
“But Labour does not seem to have a coherent theory of how that growth might emerge. Worse, the current agenda is a mishmash of different theories of growth that potentially offset one another.”
This is really interesting in a few ways. He points out that both Gordon Brown and George Osborne had theories of growth which were consistent and different. Bear with me for the next few paragraphs if you will...
Roughly, from the start of the 20th century, neoclassical economics become totally dominant with its theory of 'the law of supply and demand'. That gives way to Keynesian Economics in the post-war period since a supply-and-demand approach wasn't going to rebuild Europe.
That dominates until the neoliberal revolution introduces the idea of monetarism, the belief that controlling the supply of money to achieve low inflation is the key to growth. Then Gordon Brown briefly tries to popularise Post-Neoclassical Endogenous Growth Theory (he fails...) in which the key is investment in skills and infrastructure.
But Starmer and Reeves? What Ansell is saying is that they're none of these things because they have no theory behind their actions. They are treating economics as a pick-and-mix of things that have been done before, thrown at the wall in the hope something will stick. Except Keynesianism and monetarism counteract each other (one pushes money into the economy during a downturn, the other pulls money out), so if you do one it undoes the other.
I hope this is making sense for anyone who didn't do economics. We're nearly there, I just need to loop back to why Reeves is talking like a Tory. The Starmer project is basically a shallow misunderstanding of the Blair project. They think that Blair succeeded because low interest rates enabled borrowing that fuelled a consumer and housing boom which created growth and brought down national borrowing costs. That's what they're trying to do again,
Except that's not what happened at all. What happened was that the economy was about to be on an upturn anyway as the mess of 'Black Wednesday' receded and Gordon Brown turbocharged it by encouraging reckless speculation by the banks. The model lasted for ten years until it hit its inevitable end with the financial crisis that was always going to result.
This is the point; those were all things that happened from a particular starting point and under particular conditions. House prices can't start from a low base twice. Banks can't be deregulated again. Bubbles can't expand forever. You can't load the public with personal debt indefinitely. None of that will work again because we are starting from a different place.
Yet this is what Reeves is trying to mimic, in part using practices from a different theory altogether. Mass housebuilding, rampant deregulation of everything, tipping the scales for any big building project no matter what, begging foreigners to invest in Britain – that's what we've been doing for three decades. If it isn't working, it isn't working.
And it isn't working. This is all supposed to happen as a result of 'market confidence'. Labour politicians said that the only reason Britain wasn't growing was Tory instability so many times they seem to have come to believe it, as if all the other major economic issues we face were marginal. Seeing this, markets appear to have bet against Reeves. In response she's sending out the message 'whatever you want you can have' to investors and traders which she believes will restore their confidence.
It won't – not if they don't have confidence in Reeves and Starmer themselves, and they clearly don't. But even if they did behave the way Reeves wants it is very unlikely that it will deliver what she thinks it will because what she is doing is not economics but PR (which markets can smell out). She almost literally thinks you can talk your way to growth.
OK, that's why the UK Government is in deep shit just now, but it has two very important takeaways. First, it highlights what everyone should have known – economics is not a science but a series of ideologies derived from different economic approaches. Monetarism is no more 'correct' than neoclassical economics or Keynesianism. It is a question of what outcomes you want, how they are implemented and the conditions in which you try them.
Monetarism 'works' at creating growth when the conditions are right and if you're happy for that growth to be very unequal. Keynesianism 'works' if there is enough headroom for major investment in periods of stagnation as long as you've not cornered yourself with no ability to borrow. There is not and never was a single set of rules for how economics works.
This is really helpful to be clear about, because it means that we can get past this 'there is no alternative' garbage – there are only alternatives, no absolutes. The real world is still real and none of this means you can do absolutely anything you want, but you don't need to abide by economic practices which do not fit with your own economic theory.
I've dragged you through this economics to help you to understand the key point I want to make; what Professor Ansell said about Starmer has been true of every administration in Scotland since devolution. There has been no government in Scotland that has had a theory of growth or that has ever explained one. Salmond came close in his inaugural speech as First Minister (which was a Keynesian case for reindustrialisation), but he didn't then follow through.
Why? Because all politicians in Scotland rely on Scottish Enterprise to have an ideology on their behalf, and it don't have one either. Scottish economic policy is a continual feedback loop of previous Scottish economy policy and has been since the early 1980s. That's when 'inward investment' became the big theory.
That is a theory of growth, kind of. In reality it was a theory of development. The original phase of inward investment was driven by 'Silicon Glen', and the goal was to modernise the economy by encouraging high-tech investment which would create full ecosystems of high-tech support businesses and domestic start-ups.
Except that isn't what happened and by the time of the Chungwa debacle this entire theory of inward investment should have died. Except it never did, and it is undermining any credible plan for Scotland's economy, in exactly the same way that Reeves is doing to herself with her rag-tag of self-defeating policy soundbites (they're not really policies...).
No foreign investor is building factories in Scotland, they're buying up Scottish assets and speculating on them. This removes these assets from the economy and prevents indigenous businesses from using them to grow. It's exactly like Scottish housing economics where 80 per cent of housing is explicitly built to be unaffordable and is built by foreign companies.
It takes money out of the pockets of Scottish consumers, hands it to English-based mortgage providers who facilitate that money going to English-based property developers. Over and over again Scotland, by having no underpinning theory of what it is doing in the economy, is undermining itself by pursuing actions which keep cancelling each other out – and worse. It is why we export our national wealth at a rate which is simply not suffered by any comparator nation.
So every time a politician says they're focussed on economic growth, see if you can work out how they plan to do it. If there is no theory behind their actions, it is as likely that the actions will cancel each other out or actually make things worse as better. Scotland needs to escape this directionless loop – with urgency.