Social market liberals of the world, unite!

We need to restate the case for  the free-market policies and liberal politics that have ushered in an age of unprecedented prosperity

Oliver Letwin

Theresa May on election night, 2017:  Move on from that disaster (©Stefan Rousseau/PA Wire/PA Images)

The deficiencies of the Conservative campaign in the 2017 general election were painfully obvious. But these are easily curable problems. The problem is that, underneath this, there is something much more fundamental (and hence much more long-lasting) going on.

During the 1980s and 1990s, Margaret Thatcher re-established free-market liberalism as the dominant political force in Britain. Subsequent governments — New Labour, Coalition and Conservative alike — carried forward the social market liberal agenda in a remarkable four decades of broadly consistent policy making in our country.

But this happy continuity of rational social market liberalism is now under threat from many quarters. Around the developed economies of the West, we see various forces of unreason gathered or gathering. A phenomenon sometimes described as “populism” — in truth, better described as illiberal demagoguery — threatens from the right. Various varieties of “mixed economy” state socialism threaten from the left. On the one side, we have Geert Wilders and his PVV in the Netherlands, UKIP (albeit now much reduced) in Britain, AfD in Germany, M5S as well as the Northern League in Italy, Marine Le Pen’s Front National in France and Donald Trump in the US; on the other, we have Syriza in Greece, Jeremy Corbyn’s Labour in the UK, Podemos in Spain, Die Linke in Germany, and Bernie Sanders in the US.

We are warned that the post-war order is fracturing; that the Western institutions which guaranteed liberalism, free trade and global capitalism (EU, WTO, Nafta, Nato) are now discredited — and that, with them, ecology and global citizenship have been knocked off their pedestals, to be replaced by more muscular rightist and leftist concerns with nationality, community, “positive rights” and the will of the people democratically expressed.

For those who buy into this thesis of massive fracture, there is a strong temptation to regard Theresa May’s premiership in the UK as itself an example of the radicalism of the age, a rupture with the past decade of liberal Conservative politics: a new form of muscular, nationalist communitarianism that has rejected laissez-faire liberalism and European free trade, seeking instead through the power of the state to tame capitalism and to ride roughshod over markets. According to this thesis, the unnecessary and ill-judged snap 2017 general election in Britain is a classic example of the global trend towards polarity of Right and Left — with the Conservatives reuniting the Right and Corbyn reuniting the Left, both on the basis of rejecting the social market liberalism espoused in different forms by Tony Blair and David Cameron.

This analysis — both in its general form as a description of what is happening in the developed Western economies, and in its specific form as a description of what is happening in domestic UK politics — is highly attractive to journalists and academics, for whom it provides that most dangerous of commodities: an interesting narrative. But it is in fact, a morass of ideological, chronological and psephological confusions based on a failure to understand both what has happened and what is happening.

To cut through the confusion, we have to disentangle discontents. First and foremost, there are the long-dated effects of the 2008 crash. In many ways, what is surprising is that there has been so little reaction given the severity of what happened. A decade later, we may not yet have seen the end of the ricochet effects on some of the European banks — and we certainly have yet to see the real wages of many people who were previously at or near to median income reach the level they were at before the crash. Even in Britain, where the flexible labour market has kept employment high and unemployment low throughout the period, and where tax credits have made up a significant part of the income lost by the hardest-pressed working families, there was bound to be some political reaction.

Second, and following directly from the first, there are the fiscal effects of 2008 — causing governments throughout the West to address significant (in Britain’s case, huge) fiscal deficits through long and difficult periods of fiscal consolidation. This presents fiscally responsible governments with the need to find means of reducing the deficit further while increasing spending significantly in some key areas: inevitably, this will necessitate tax increases — politically challenging, even if cleverly targeted.Third, there is the education and training deficit. As new information, communication and manufacturing technologies have come to dominate large parts of our lives, in contrast to the dire prophecies made by those who predicted mass disemployment, the productivity gains brought about by these technologies over four decades in well-managed economies such as the US, the UK and Germany have (as always before) gone hand in hand with growing, not diminishing workforces. But the gap has widened between the value of labour for those who have the skills either to manipulate the new technologies themselves or to deliver the services that they support, and those who do not possess any of the now-valued skills. Inevitably, the pictures of  bright young people celebrating the fruits of their highly-paid and highly-skilled labour in glitzy metropolitan restaurants and wine bars have stirred a political reaction among those who have missed out on the skills and the pay.

Fourth, there is the demographic shift. As the population in Western countries has aged, so-called “dependency ratios” have increased. More elderly people have come to depend for longer on the pensions and savings that they have managed to accumulate during their working lives. In Britain at least, the poorest pensioners have been very highly protected — and have seen their real incomes rise annually in a period when incomes for many working households were flat or declining. But, even in the UK, for those slightly better-off (but still by no means well-off) pensioners living on small savings or annuities, the prolonged period of vanishingly low interest rates following the crash, combined with the effects of increasing longevity on annuity rates, have produced massive impacts on real incomes, which had not been expected before 2008 and for which the pensioners in question had as a result not prepared themselves.

Fifth, there is globalisation, free trade and migration. At a time when incomes for the low-skilled have been held down by the effects of the crash, they have been put under further pressure by the availability of even cheaper labour in emerging markets. This has played into the latent xenophobia of those who seek protection from the competition of “those bloody foreigners who are taking our jobs”. Against the background of the effects of the crash and of the widening gap between the returns on skilled and unskilled labour, it is hardly surprising that the Brexit campaign in the UK, and Trump in the US, should have been successful in turning such latent feelings into kinetic effects at the ballot box.

Sixth, there is the democratic deficit. Most of the phenomena that have afflicted those who were “just about managing” up until the crash can, to one extent or another, be laid at the door of international entities that are described as being “beyond our control”. And the demographic shift makes these non-democratic international organisations particularly electorally toxic because, to many among the older part of the population, they represent not a settled arrangement with which they have grown up but a constitutional outrage with which they are disinclined to put up.

Together, these six phenomena more than adequately explain — indeed, as Louis Althusser would have said — they “over-explain” the rise of the demagogues of Left and Right across much of the Western world. However, once they are set out calmly, it also becomes evident that they are historically contingent. These problems and challenges and tensions were present long before 2008. And yet, they didn’t generate anything like the massive wave of resentment which we are at present witnessing until the latent feelings were given real force by the long-lasting effects of the 2008 crash on lower-skilled workers and the less well-off elderly.

This suggests, in turn, that the power of the illiberal politics of Right and Left that we have seen unleashed in various forms across the West is itself historically contingent — a temporary reaction to a set of economic events. The political reaction provoked by the events of 2008 can and very likely will dissipate once the economic effects of 2008 are overcome — at least if those of us attached to social market liberal democracy hold our nerve.

But, to sustain democratic support for social market liberal policies, we need to make the case for them all over again. Nowhere is this more true than in Britain.
Beneath the superficial catastrophes of the Conservative 2017 election campaign, the deep defect was the complete absence of any serious argument in favour of the social market. There was no attempt to illustrate why free markets, inward investment and the entry of skilled labour can generate (and have generated) sustained economic growth, underpinning jobs and prosperity. There was no effort to explain how, through sharing the proceeds of such growth, we can — and can alone — sustain the fine public services and the properly structured welfare system through which a social market economy delivers social justice.

As a result of lacking these powerful positive arguments for the liberal social market, Conservatives were deprived also of the only powerful critique of Corbynomics — namely, that it fosters a cruel illusion of handouts for all while employing, in the pursuit of an egalitarian fantasy, state controls, nationalisation, deficit financing and investment-destroying levels of taxation which will inevitably undermine the ability of the free market to produce the growth and the exchequer revenues on which the public services and welfare system of a social market in fact depend.

So much for analysis. What about the future? What should liberal Conservatives do next? The answer is that we should promote policies that will actually address the underlying issues. The temptation, of course, is to seek some sudden cure-all, some new way of solving the challenges facing us. But this is neither necessary nor possible.

We continue to live in a prosperous and stable society, enjoying both liberties and a quality of life that few in the history of the world have been able to enjoy. As we struggle to deal with what are, in essence, the long-dated effects of 2008, we need to keep our eyes firmly on what will work rather than on what might sound fashionably populist. This means that we need to deliver a Brexit which includes a comprehensive free trade deal with the EU as well as friction-less customs transactions, and thereby preserves our strong industrial and commercial interests, while liberating us from the jurisdiction of the European Court of Justice. It also means that we need to maintain policies on tax, public spending, public borrowing, public services, deregulation, infrastructure, technology transfer and inward investment that will increase domestic productivity and stimulate domestic growth. But, beyond these economic considerations, it means that we need policies on tax thresholds, public services, welfare, redistribution, social policy, international aid, environmental stewardship and corporate social responsibility that will make the free market a sufficiently social market and the basis of a sufficiently liberal state, to be justified in the eyes not only of those in the middle of their lives who are prospering but also those who are looking for security in retirement, those who are young, aspirational and liberally inclined, and those who are concerned about the fate of the least advantaged and of the planet.

None of this will be easy or straightforward. Providing good, sane government isn’t ever easy or straightforward. But the fact that doing the right thing isn’t easy shouldn’t be taken as a reason either for pessimism or for making concessions of a kind that would lead us to do the wrong thing. As we pass through uncertain times and changing circumstances, the values of social market liberalism are permanent — because they are the truth about what works best for our people, our civilisation and our planet. There is no reason for them to be abandoned. Now, more than ever, we need to govern by them.

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