the internal and external face of new labour's political economy

447NEW LABOUR’S POLITICAL ECONOMY

David Coates and Colin Hay*

The Internal and External Face of NewLabour’s Political Economy

TO GRASP FULLY THE NATURE AND SIGNIFICANCE OF THE ECONOMIC

policies at the heart of dominant political projects, those policieshave to be studied in the round. They have to be grasped as complextotalities which touch all aspects of the political agenda; and theyhave to be seen as constructed and contested wholes, whose contra-dictions, internal inconsistencies and conceptual limits are as vitalto their trajectory as are their axioms, theories and content.Academically and professionally, the study of policy in this roundedway is often a more difficult task to complete than might be expected,in part because of the powerful divisions within and between theintellectual disciplines which comprise the social sciences. Thedivision between politics and economics is well known, its costswell demonstrated. That within political science, between the sub-discipline of international relations and the rest, is less discussed,but equally potent. Its effect too often has been to separate the studyof foreign and domestic policy to such a degree that the relationshipbetween the two is insufficiently explored. This has been a particularfeature of much of the scholarship on the British Labour Party; itis an emerging tendency in much of the recent writing on NewLabour. There are important exceptions in past scholarship of course— Stephen Blank’s important work on the adverse effect on UKdomestic economic growth of the Attlee government’s foreigncommitments is a classic example — but as yet we are aware of nosystematic attempt to explore the relationship between foreign anddomestic policy in the literature on ‘third way’ politics in the UK.1

* Though all the usual caveats apply, the authors would like to thank the editorsand anonymous referees of the journal for their helpful comments and suggestions.Colin Hay would also like to acknowledge the support of the ESRC for research on‘Globalisation, European Integration and the European Social Model’ (L213252043).

1 Stephen Blank, ‘Britain: The Politics of Foreign Economic Policy, the DomesticEconomy and the Problem of Pluralistic Stagnation’, International Organization, 31:4(1977), pp. 674–721.

GOVERNMENT AND OPPOSITION448

Material is appearing which charts New Labour policy in both thedomestic and international sphere; but we know as yet of nothingthat focuses specifically on the character and interaction of foreignand domestic policy. The purpose of this article is to begin to fillthat void, by focusing on the character and interaction of foreignand domestic economic policy under New Labour.

Two factors make such an assessment particularly essential in thecontemporary British context. Arguably, both ref lect differentaspects of New Labour’s attitude towards globalization. First, bothin opposition and now in government, Blair’s Labour Party has, toan unprecedented extent, emphasized the degree to which inter-national (indeed, global) processes, pressures and tendencies serveas external constraints circumscribing the parameters of politicalpossibility.2 Secondly, and at times in seeming opposition to this (apoint to which we return), Labour has sought to project itself, againin a largely unprecedented manner, as a dynamic internationaleconomic force in the promotion of globalization. One sense indeedin which New Labour is both different from Old Labour and at onewith its Thatcherite predecessor lies in its powerfully held convictionthat the UK ‘economic model’ being developed by its policies isone that should be canvassed and pressed for in the internationalarena. Blairism, like Thatcherism, sees itself both as an ideologicalproject for export, and as one whose domestic success requires theresetting of international (and particularly of Western European)institutions and practices in its image.3

The enthusiasm with which Labour has sought to export its visionof a domestically deregulated capitalism actively promoting tradeand financial liberalization on an international stage should notlead one to overlook the party’s recent conversion to such ideals.

2 Colin Hay, The Political Economy of New Labour, Manchester, Manchester UniversityPress, 1999; Michael Moran and Elizabeth Alexander, ‘The Economic Policy of NewLabour’, in David Coates and Peter Lawler (eds), New Labour Into Power, Manchester,Manchester University Press, 2000; Martin J. Smith, ‘The Complexity of New Labour’,in Steve Ludlam and Martin J. Smith (eds), New Labour in Power, Basingstoke,Macmillan, 2000.

3 In making this observation we are, of course, not suggesting that the Blairgovernment is the first Labour administration to promote vigorously its political andeconomic model. Rather, we suggest that there is something qualitatively distinctiveabout the highly concerted public packaging and external promotion of the ‘thirdway’ which invites comparison with Thatcherism.


For the assumed superiority of the Anglo-US model of deregulatedcapitalism upon which this export has been publicly predicatedref lects a relatively recent revision of New Labour’s economicthinking. Until 1996 at least (and thereafter in an ever more dilutedformulation), Labour’s political economy (domestically and inter-nationally) was animated by a Huttonesque vision of the comparative(and competitive) advantage of a distinctly Germanic capitalism.This was somewhat crudely characterized by the principle of‘stakeholding’ which Labour came enthusiastically to embrace. 4 Yetwhere once New Labour sought to internalize the Germanic model,it now seeks to export the British model. There is a New Laboureconomic message of a complex and integrated kind which isregularly delivered by leading New Labour figures in a string ofinternational venues; and it is a message which has been so deliveredfrom very early in the New Labour project. In opposition, TonyBlair was prone to use overseas venues for the delivery of majorpolicy statements: in East Asia in 1996, and again later in SouthAfrica. In power, Blair immediately addressed the European SocialistMovement in Malmo, and subsequently repeated his call for reformbefore European and world leaders in a string of gatherings fromEdinburgh and Amsterdam to Bangkok and Davos. At home he (andother ministers) have used public conferences and lectures (fromthe ‘New Policies for the Global Economy’ conference of 1994 tothe Mais lectures of the late 1990s) to put their message across; andleading New Labour figures (from Gordon Brown to Clare Short)have regularly surfaced on the international stage pressing the sameNew Labour case. Time and again, New Labour ministers have calledin international forums for the deregulation of labour markets, theliberalization of trade, and the resetting of the role of government— calls which in every case have linked New Labour ‘reforms’ withinthe UK to a New Labour vision of how best to organize and governthe (European) regional and global economy. There is thus alreadyin existence a distinct body of primary data demonstrating thecharacter and interaction of domestic and foreign economic policyin the New Labour project, and indicating the centrality of thatinteraction to much New Labour thinking. These data now need

4 See Will Hutton, The State We’re In, London, Viking, revised edn, 1996; GavinKelly, Dominic Kelly and Andrew Gamble (eds), Stakeholder Capitalism, Basingstoke,Macmillan, 1997.


systematic organization and evaluation. The second section of thisarticle tackles the first of those needs, the last two sections tacklethe second.

THE INTERNAL AND EXTERNAL DIMENSIONS OF NEW LABOUR’SECONOMIC POLICIES

The ‘internal’ face of the New Labour economic strategy is oneconcerned primarily with the establishment of economic com-petitiveness. The policy package here consistently speaks to tworelated but distinct audiences. It speaks to the UK labour movement,and it speaks to UK and overseas business and financial institutions.To the first, New Labour Ministers have projected a new trinity ofconcerns with ‘labour market f lexibility’, ‘welfare reform’ and‘welfare to work’. To the holders of capital, New Labour Ministershave emphasized their parallel commitment to the restraint of publicspending and to a growth strategy built on the openness andtransparency of economic decision-making.

The commitment to labour market reform was evident even beforeNew Labour came to power, when the party was seeking to establisha political gap between itself and previous Conservative admini-strations for which greater labour market f lexibility had long beena cornerstone of economic policy. New Labour chose, as is nowwell known, to retain the vast majority of the Thatcherite labourlaw changes against which Old Labour had set its face, and was inconsequence vulnerable to the accusation that, in its newness, itwas buying into the entire Thatcherite industrial relations package.New Labour in opposition was adamant that it was not: that it wasnot committed to labour market deregulation solely or at any price.Tony Blair insisted rather that ‘the benefits of deregulated labourmarkets have not been unqualified, and increased f lexibility hasnot been won without costs’, and that New Labour would not take‘the cheap labour route’ to economic success adopted by its Con-servative predecessors.5 But even in opposition, when the politicalneed to distance itself from neo-liberal market reforms was fargreater than it would be once power was won, this condemnation

5 Tony Blair, New Britain: My Vision of a Young Country, London, Fourth Estate,1996, p. 2.


of the ‘sweat shop’ growth strategy associated with Thatcherismentered the argument only as a precautionary caveat to a muchclearer and more strident call for greater ‘labour market f lexibility’both within and beyond ‘the firm’. The assertion in opposition wasone of complementarity: a belief that there was no ‘conf lict at allbetween sensible minimum standards at work, including on pay,and a successful labour market’ so long as unions and employerscould generate ‘a new partnership’.6 When in power, however, withthose partnerships far from evident, the New Labour concern withf lexibility took centre stage and the ‘cheap labour’ growth strategybegan inexorably to reappear, no matter how regularly LabourMinisters denied its impending arrival. This was evident in the NewLabour government’s lack of enthusiasm for a generous NationalMinimum Wage. It was evident in the limited content of the Fairnessat Work proposals and it was evident in the rhetoric with whichthose proposals were presented.7 New Labour offered the modestaccretion of individual and collective rights in its 1998 EmploymentProtection Bill as a once-and-for-all corrective to the Thatcheriteindustrial relations settlement, and Tony Blair famously defendedthe new package as still leaving the UK with ‘the most lightlyregulated labour market of any leading economy in the world’.8

Alongside that modest resetting of the labour codes inheritedfrom the Thatcher era has come a much more energetic resettingof the scale and scope of welfare provision. This again was signalledin opposition and triggered quickly when in power: the New Labourbelief that welfare reform was vital because taxpayers would nottolerate the costs of an unreformed system, and because the Partyhad now discovered what Gordon Brown called ‘a modern agendato tackle poverty’.9 The squaring of the circle of modest labourmarket reform and major welfare resetting lay — as far as New LabourMinisters were concerned — in this new agenda, central to whichwas the pursuit of policies of welfare to work. As Gordon Brownput it late in 1997, ‘achieving high and stable levels of growth and

6 Tony Blair, Mais Lecture, 22 May 1995, p. 15.7 Chris Howell, ‘From New Labour to No Labour? The Industrial Relations Project

of the Blair Government’, New Political Science, 22:2 (2000), pp. 201–30.8 Tony Blair, ‘Foreword’, Department of Trade and Industry White Paper, Fairness

At Work, London, HMSO, 1998.9 Gordon Brown, ‘A Modern Agenda to Tackle Poverty’, Labour’s Case, January

1998.


employment will require new approaches from national govern-ments, modernising social security systems, improving work incen-tives through the tax system, removing barriers to growth andencouraging the job-creating potential of small business’.10 The greattrick, for New Labour, was so to reset the welfare state that it wouldpromote work, not dependency: by making (as Tony Blair put it)‘major changes in unemployment benefit, disability, the treatmentof single parents, and pensions . . . to preserve f lexibility in ourlabour markets [while reshaping] the Employment Service aroundan active strategy for work’.11

New Labour set its labour market and welfare reforms alongsidenew mechanisms for inf luencing capital f lows and investment levels.It has not returned to any Old Labour form of direct controls, butneither has it accepted the Thatcherite dictum that ‘deregulationof labour, product and financial markets’ was ‘enough to delivermedium term supply side improvements’.12 What New Labour hasdone instead is to prioritize the achievement of macro-economicstability by the pursuit of what Ed Balls later called policies of‘constrained discretion’ (the creation, that is, of a stable long-termmacro-economic framework within which companies could plan andinvest with genuine certainty, by the setting of definite economictargets and pre-fixed limits to government spending).13 New Labourin consequence (and even in opposition) committed itself to ‘thegolden rule of public finance . . . that public borrowing will be usedonly to finance investment, not public consumption’ and, even then,only ‘prudently undertaken’.14 It accepted the constraint of existingConservative spending plans for its first two years in office; it set along-term inf lationary target; and it moved quickly to grant theBank of England independent responsibility for the setting ofinterest rates to attain that target. The thinking here was clear, asGordon Brown later explained to the Council for Foreign Relationsin New York:

10 Gordon Brown, ‘Personal View’, Financial Times, 11 November 1997.11 Tony Blair, Speech at the World Economic Forum, Davos, Switzerland, 28 January

2000.12 Tony Blair, Mais Lecture, 1995, p. 2.13 Edward Balls, ‘Open Macroeconomics in an Open Economy’, Scottish Journal of

Economics, 45:2 (1998), pp. 113–32.14 Tony Blair, Mais Lecture, 1995, p. 12.


in today’s global economy, there is little place for the fine tuning of thepast which tried to exploit a supposed long-term trade-off betweeninf lation and unemployment which proved elusive. But equally in today’sderegulated liberalised financial markets, governments can no longer tryto deliver stability through the rigid application of rigid monetary targets.Instead the answer to the uncertainty and unpredictability of ever morerapid financial f lows is clear long-term policy objectives, the certaintyand predictability of well-understood procedural rules for monetary andfiscal policy, and an openness that keeps markets properly informed andensures that objectives and institutions are seen to be credible.15

It is vital to grasp that New Labour has not simply pushed this agendainternally, or used its presence at international forums merely todescribe and justify its internal reform programe (though of courseministers have taken every international opportunity to make thatdefence). Ministers have also pushed for a resetting of the (European)regional and global economic order in the image of their internalsettlement. For the package of policy measures just described —what we might term the internal face of New Labour — has beenaccompanied by a developed external face as well. The call forgreater labour market f lexibility has been matched by an enthusiasticendorsement of the ‘globalization processes’ that were supposedlymaking labour market f lexibility so vital. The Protestant work ethicso evident in Labour’s internal New Deal has been matched by itsAdam Smith-like endorsement of the merits of free trade. Thesensitivity of New Labour ministers to the adverse effects oninvestment f lows of the taxation burden of the welfare state hasbeen paralleled by an enthusiastic endorsement of foreign directinvestment. And the determination of New Labour to triggerinternal growth by restraining state spending has a definite parallelin the reform packages advocated by New Labour for internationalorganizations such as the IMF, and in the policy role canvassed forEast Asian governments by New Labour ministers during theiroccupancy of the European presidency. The internal face of NewLabour, keen on f lexibility, welfare reform, work-fare and limitedpublic spending, sits within the emerging New Labour canonalongside an external face keen on global change, reduced tradebarriers, unregulated capital mobility and state moderation.

In particular, the enthusiastic endorsement of globalization as aprocess has been a marked feature of New Labour rhetoric from

15 Gordon Brown, Speech to the Council for Foreign Relations, New York, 16September 1999, p. 6.


the very beginning. Time and again, both in opposition and inpower, New Labour leaders have emphasized ‘the growth ofincreasingly global markets and global culture’, 16 and the emergenceof ‘24-hour round the world, round the clock capital markets inwhich the daily f lows of foreign exchange are already almost asmuch as twice the monthly f lows of trade’, a world characterized by‘the global sourcing of companies’ and ‘a new wave of technologicalchange’.17 And New Labour leaders have consistently drawn aparticular policy message, that of free trade, from this new globalreality: ‘the best way to promote efficiency in production is throughcompetition, liberalization and open markets — not through mono-poly, state subsidy or preferential procurement’.18 Not surprisingly,therefore, New Labour ministers have regularly positioned them-selves at the forefront of the call for unregulated world trade, asthey certainly did at the WTO meeting in Seattle. With protesterscamped outside the meeting, and parts of the city under martiallaw, DTI Minister Stephen Byers reasserted the New Labour viewthat ‘a shared commitment to open trade and commerce has beena driving force for growth’ and that in consequence ‘the essentialanswer to the problems of the moment is not less globalization —not new national structures to separate and isolate economies —but stronger international structures to make globalization work inharder times as well as easy ones’.19

One consequence of this enthusiasm for unregulated trade hasbeen a particular propensity to push stridently for a resetting ofEuropean labour market institutions in the New Labour image. Thatwas the message at Malmo in 1997, and again at Davos in 2000, andat all European stops in between. The Blair call for reform wasclear in 1997: that European labour costs needed to be cut, that theachievement of labour market f lexibility was central to enhancedEuropean economic competitiveness, and that this f lexibilitywas being denied largely owing to outmoded notions within theEuropean left itself. How else are we to interpret his observation at

16 Tony Blair, New Britain.17 Gordon Brown, Speech to the Conference on New Policies for the Global

Economy, 26 September 1994, p. 3.18 Tony Blair, Speech at the Annual Friends of Nieuwspoort Dinner, The

Ridderrzaal, The Hague, 20 January 1998, p. 2.19 Stephen Byers, Plenary Address to the Opening Meeting of the World Trade

Organisation Ministerial Meeting, Seattle, 30 November 1999.


Malmo that ‘our aim must be to tackle the obstacles to job creationand labour market f lexibility — cutting unnecessary bureaucracyfor the small firms that are likely to be the main job creators,completing the single market, promoting welfare to work initiativeswhich bring real jobs within reach of those now excluded from thelabour market, making sure the Social Chapter and EmploymentChapter help job creation, not hinder it.’20 The Blair message atthe Hague in 1998 was sharper still: ‘in the sensitive area of labourmarket reform, Europe had made some limited progress’ but thatthe EU still needed ‘to make a modern labour market work better.High levels of unemployment are not social protection.’21 And themessage had not changed, or softened, at Davos two years later. Ifanything, it was yet more strident — at the Lisbon Special EuropeanCouncil the EU would have to choose, either ‘to continue with theold social model . . . rooted in the 60s and 70s’ or make ‘a definiteturning point towards the reform agenda, retaining the values ofthe European social model but changing their application radicallyfor the modern world’.22

A second consequence of the New Labour enthusiasm forunregulated trade has been New Labour inertia on calls for the re-regulation of labour markets and for the public management ofcapital f lows. The new Labour government was able to avoid fullinvolvement in the Multilateral Agreement on Investment (MAI)row at the WTO, but subsequently pressed for a renewed round oftrade negotiations that would include investment. It has been bullishon the benefits (particularly those which might accrue to the UKeconomy) of unregulated capital f lows and foreign direct investment.Tony Blair’s opposition to something as modest as the Tobin tax isalso on record. Such a move, he suggested in an interview withJohn Humphreys, ‘is the wrong thing to do too, because you actuallywant people to be able to move money very, very quickly’, andbecause its introduction would open the door first to exchangerestrictions and then to import controls.23 And on the issue of labourstandards in international trade, the New Labour silence has been

20 Tony Blair, Speech to the Congress of European Socialist Parties, Malmo, Sweden,6 June 1997, p. 5.

21 Tony Blair, Speech at Nieuwspoort Dinner, p. 7.22 Tony Blair, Speech at World Economic Forum, p. 4.23 Conversation with John Humphreys, cited in Marxism Today (November/

December 1998), p. 26.


deafening. New Labour was even outf lanked on this by the Clintonadministration. The Clinton response to the protesters in Seattlewas quite different from that of New Labour; and in consequenceClinton went to Davos with one message, Blair with another. Clintontook the Seattle protest as a ‘wake up call’ to the internationalcommunity, as an opportunity to widen the groups involved in tradenegotiations and to stop ‘viewing with contempt those new forcesseeking to be heard in the global dialogue’. Tony Blair, by contrast,argued that ‘the worst thing we could do for developing countrieswould be to shelve the trade liberalization agenda and sit back whiletrade barriers were re-erected round the globe’. His response tothe events at Seattle — what he called ‘the right conclusion’ — was‘that we have an enormous job to do to convince the sincere andwell-motivated opponents of the WTO agenda that . . . tradeliberalization is the only sure route to the kind of economic growthneeded to bring their prosperity closer to that of the majordeveloped economies’.24

New Labour ministers have also played a key role in the orchestra-tion of reform at the level of international economic agencies. Tosome extent this enthusiasm for global reform has been understood,within New Labour circles, as the international parallel to NewLabour’s attack on poverty at home. Certainly when Gordon Brownwas f loating his long-term claim for party leadership early in 1998,he was prepared to make that linkage, presenting, as a supplementto his ‘modern agenda for tackling poverty’ in the UK, proposalsfor debt relief for the poorest of the less developed economies (andto his credit, those proposals have remained high on his personalagenda). But the main thrust of New Labour’s advocacy of reformwithin the IMF and WTO has derived not from its anti-povertyagenda so much as from its general growth theory, where the callfor reform acted as the international parallel to New Labour’sinternal exercise of ‘cautionary discretion’ in monetary andfiscal policy. Abroad, as at home, New Labour has consistentlyargued that economic growth is best guaranteed by the absoluterequirement for fiscal and monetary policy to be oriented towards‘discipline, stability and transparency’ in order to producemacroeconomic conditions of stability and certainty. 25 Abroad, as

24 Tony Blair, Speech at the World Economic Forum, pp. 3, 6.25 Tony Blair, Speech at the World Economic Forum, p. 6.


at home, New Labour has argued that this in turn requires ‘reformof the financial architecture’ by the establishment of ‘a frameworkof internationally agreed codes and standards, new disciplines’,greater levels of international financial regulation, ‘new frameworksfor crisis prevention and resolution’ based on private–public sectorcooperation, and ‘new social principles allowing for immediate debtreduction’.26 At home and abroad, that is, the New Labour alternativeto either renewed capital controls or total capital marketderegulation has been the establishment of f inancial regimescharacterized by ‘openness and transparency’, ones based on whatEdward Balls listed as New Labour’s four key economic principles:‘stability through constrained discretion, credibility through soundlong-term policies, credibility through maximum transparency, andcredibility through pre-commitment’.27

CREDIBILITY AND COMPETITIVENESS IN THE THINKING OF NEWLABOUR

Throughout its first term, then, Labour’s activism on the domesticeconomic front has centred on its dual aims of promoting credibilitythrough a new institutional architecture for the conduct of monetarypolicy and on the promotion of a strategy of competitiveness throughan ambitious programme of labour-market and welfare reform. Asinternal economic goals, both credibility and competitivenessrequire external, indeed international, validation — validation regu-larly invoked in rhetoric which is strikingly Social Darwinian in tone.As Tony Blair told the international elites gathered at Davos in 2000:

The key to the management of change is reform. The pace of reform hasto match the pace of change. Societies that are open, f lexible, able easilyto distinguish between fundamental values, which they must keep andpolicies which they must adapt, will prosper. Those that move too slowlyor are in hock to vested interests or what I have called elsewhere theforces of conservatism, reacting negatively to change, will fall back.28

As with Margaret Thatcher before him, Tony Blair is not for turning;and the resulting consistency with which credibility and competitive-ness have been (and continue to be) pursued give New Labour’s

26 Gordon Brown, Mais Lecture, 19 October 1999, pp. 2–3.27 Edward Balls, ‘Open Macroeconomics’, p. 129.28 Tony Blair, Speech at the World Economic Forum, 28 January 2000, p. 1.


economic policy a striking unity across policy areas and over time.New Labour therefore seems poised to score high for policycontinuity as Old Labour did not. But how will New Labour scorefor policy effectiveness? Will its record be better on this than OldLabour’s? Here, as we will now argue, there is room for somescepticism. New Labour may have ‘joined up’ its internal and externaleconomic policy in a way that Old Labour did not; but the substanceof the policies so conjoined — and the theoretical systems under-pinning them — are of a kind that are likely in the end to disappointboth Old Labour enthusiasts for social justice and New Laboureconomic modernizers alike. Neither New Labour’s courting ofcredibility nor its supply-side concerns for competitiveness areproblem-free in this regard.

Studiously Courting Credibility. Within a week of Labour’s electoraltriumph the new Chancellor, Gordon Brown, announced thatoperational responsibility for the setting of interest rates wouldbe ceded to the Bank of England. The theoretical origins ofthis institutional overhaul of the governance of monetary policyare not difficult to trace. 29 They derive from public choice theory,Friedmanite monetarism and, most explicitly, the rational expecta-tions revolution of the mid-1970s. They also mark a return toa far older tradition of liberal political economy and to a conceptionof central bank independence on which the Bank of Englandwas once predicated. Closely following the work of Friedman, whohad challenged the (Keynesian) notion of a long-run trade-offbetween inf lation and unemployment, the rational expectationsschool derived what it identified as the ‘time-inconsistent’ inf la-tionary preferences of elected governments. Given a (belief in the)short-term trade-off between inf lation on the one hand andunemployment and/or growth on the other, governments wouldseek to engineer a ‘political business cycle’, over-inf lating theeconomy in the run-up to an election in order to reap the short-term electoral benefits of growth with little consideration for thelonger-term consequences (a suppression of long-term growthpotential and an increase in the ‘natural’ or ‘equilibrium’ rate of

29 Space prevents a full consideration of the practical motivations underpinningthis significant institutional overhaul. Nonetheless, the significance of the adoptionby the EU in the Maastrict Treaty of an independent European Central Bank shouldnot be underemphasized.


unemployment).30 What this meant, in essence, was that governmentscould not be trusted to stick to any inf lation target they had set forthemselves, given that it was rational for them to renege on any suchbargain. Market actors, assumed here to be similarly rational in theirexpectations, would anticipate this, thereby coming to adapt theirinvestment decisions in the anticipation of inf lation arising from thepolitical business cycle. Such rational expectations served to set inplace a hysteresis effect for which there is simply no solution whilstmonetary policy remains in the hands of elected politicians. Thus asEd Balls argued, in an admirable summary of the new orthodoxy,

an incoming government might declare that it wanted to achieve lowinf lation, but this government’s incentive would always be to cheat anddash for growth, knowing that the resulting recession would only comealong later. But, as Friedman pointed out, the result of trying to exploitthis short-term trade-off between unemployment and inf lation was simplyto build in higher inf lation expectations (and therefore higher long-terminterest rates) with no long-term gain in terms of output and employment.31

On this thinking, it was only by ceding responsibility for monetarypolicy to an independent authority (an independent central bank)mandated constitutionally to deliver price stability (in the case of theFederal Reserve or European Central Bank) or a specific inf lationtarget (in the case of the Bank of England), that credibility could berestored, with consequent (beneficial) effects for the trade-off betweeninterest rates rises and resultant def lationary outcomes. Hence cameNew Labour’s rapid and dramatic paradigm shift from discretionaryto rules-bounded and institutionally-guaranteed inf lation targeting.

New Labour ministers understandably presented this ceding ofauthority as a positive as well as a radical move; but in doingso they claimed too much. True, by empowering the MPC of theBank of England, they aligned the UK with a dominant inter-national paradigm requiring monetary policy to be restricted to

30 F. E. Kydland and E. C. Prescott, ‘Rules Rather than Discretion: The Inconsistencyof Optimal Plans’, Journal of Political Economy, 85:3 (1977), pp. 473–92; R. E. Lucas,‘Econometric Policy Evaluation: A Critique’, in K. Brunner and A. Meltzner (eds),The Phillips Curve and Labour Markets, supplement to the Journal of Monetary Economics,1 (1976), pp. 19–46; and on the political business cycle, A. Alesina, ‘MacroeconomicPolicy in a Two-Party System as a Repeated Game’, Quarterly Journal of Economics,103:3 (1987), pp. 651–78; ‘Inf lation, Unemployment and Politics in IndustrializedDemocracies’, Economic Policy, 8:1 (1989), pp. 58–98.

31 Edward Balls, ‘Open Macroeconomics’, pp. 120–1; see also Brown, Mais Lecture,pp. 7–14.


the adjustment of interest rates by an independent monetaryauthority. But they also tied their own hands as policy-makers insignificant and potentially damaging ways. For interest rate hikesare a particularly blunt instrument of monetary policy, imposing asthey do def lationary pressures across the entire economy. Particu-larly in an economy characterized by both regional and sectoralsegregation, such bluntness in the key policy instrument can onlyserve to institutionalize a def lationary bias in the most disadvantagedsectors and regions of the economy. In this sense, the institutionalarchitecture established by ceding operational responsibility formonetary policy to the Bank of England has backed the Chancellorinto a corner of his own making. Either he simply ignores the adverseeconomic consequences (say, for export-oriented manufacturingsectors of the economy and for Northern England, Wales andScotland) of a monetary policy inappropriate for the conditions ofthe entire economy, or he reneges on the spirit of operationalindependence by intervening directly to counter sector-specif icinf lationary pressures. Insofar as identifiable inf lationary tenden-cies are currently associated with the housing market, such inter-ventions might take one of two forms: a further increase in thestamp duty payable on properties over a specific sum; or a moregeneral increase in the burden of direct taxation, which might serveboth to douse demand in the property market whilst providing theexchequer with resources to encourage investment in research anddevelopment, physical and human capital formation. The govern-ment’s half-hearted endorsement of the former and existing pledgeson fiscal policy which effectively eliminate the second (hypothetical)option altogether, indicate that the burden of monetary policy islikely to remain with the MPC. Thus Britain will continue to pay aninterest rates premium for suppressing sector- and region-specificinf lationary tendencies (associated, in particular, with comparativelylow rates of taxation for high earners).32

32 Of course, the problem here is not strictly the ceding of operational independenceto the Bank of England, but the absence of compensating fiscal and supply-side policiesat a regional level which might militate against the bluntness of monetary policy as ameans to deal with unevenly distributed inf lationary pressures. It should also be notedthat, regardless of the formal status of the Bank of England, interest rates in Britainhave consistently been set with little consideration of their effects for manufacturingindustry or regional inequalities. In this sense, operational independence has merelyserved to institutionalize a series of already well-established tendencies.


Nor is this the only difficulty created for New Labour by theceding of authority to the Bank of England in this way. There areothers, more intimately connected to the long-term structuralweaknesses of the British economy. Throughout the post-war periodmanufacturing activity within the UK has been characterized byrelatively low rates of productive investment, ref lective of the highcost of capital and the endemic short-termism, risk-aversion andoverseas orientation of UK-based financial institutions.33 Conse-quently, UK manufacturing has suffered (and continues to suffer)from significant capacity constraints, such that relatively modestrates of economic growth (currently somewhere between 2.0 and2.5 per cent per annum) see the economy operating at full capacity.Clearly growth rates in excess of this figure will inject furtherinf lationary pressures (and consequent expectations) into theeconomy, necessitating pre-emptive hikes in interest rates from themonetary authorities. The consequences are easy to see. If monetarypolicy is restricted to the setting of interest rates, then Britain willendure an interest rates premium over competitor economies if itis to meet a given inf lation target. Here, too, path-dependent feed-back (hysteresis) effects can be identified.34 For any comparativeinterest rates rise increases the relative cost of capital, furtherdepressing levels of productive investment with direct effectsfor physical capacity. Britain’s new institutional architecture formonetary policy seems foredoomed to exacerbate and institution-alize the long-term structural weakness of the British economy, tosay nothing of its implications for the exchange rate upon whichthe competitiveness of export-sectors of the economy is premised.Whilst an over-valued currency may be good news for the City thisis likely to provide precious little comfort for already beleagueredmanufacturers producing for export markets.

33 For reviews of the literature see Simon Bond and Tim Jenkinson, ‘TheAssessment: Investment Performance and Policy’, Oxford Review of Economic Policy,12:2 (1996), pp. 1–29; Michael Kitson and Jonathan Michie, ‘Manufacturing Capacity,Investment and Employment’, in Jonathan Michie and John Grieve Smith (eds),Employment and Economic Performance: Jobs, Inflation and Growth, Oxford, OxfordUniversity Press, 1997; Matthew Watson and Colin Hay, ‘In the Dedicated Pursuit ofDedicated Capital: Restoring an Investment Ethic to British Capitalism’, New PoliticalEconomy, 3:3 (1998), pp. 407–26.

34 Avinash Dixit, ‘Investment and Hysteresis’, Journal of Economic Perspectives, 6:1(1992), pp. 107–32.


The Competitive Imperative: Rendering Welfare Conditional. Ofcourse, credibility is not an end in itself, even for a Labour Partylong out of off ice and so more keen than perhaps longer-established governments to establish its capacity to govern. Rather,and as frequently reiterated by the Chancellor, credibility is seenby New Labour as ‘a necessary pre-condition to deliver [its] . . .objectives for growth and employment’. It is, in short, seen as anecessary but not sufficient condition of competitiveness in anera of globalization, as a key ‘external’ precondition for growth,sitting alongside New Labour’s more ‘internally focused’ ones:greater f lexibility in labour markets, investment in human capitalformation and attempts to make ‘work pay’ through reform of thewelfare state.

For, internally, New Labour’s chosen route to competitivenesslies primarily through its elimination of supply-side rigiditiesthought to impede wealth creation. In this respect, there are clearparallels between New Labour’s thinking and policy and the‘trickle-down’ economics of the Thatcher/Major years, parallelsthat are staggeringly (even embarrassingly) clear when the contentof ministerial speeches is analysed in detail. The quotation belowis from Stephen Byers’s 1999 Mansion House speech, but it couldequally have come from earlier Mansion House addresses by eitherNorman Tebbit or Lord Young. This is Byers on the role of theDTI:

The reality is that wealth creation is more important than wealthredistribution. It is successful and prosperous businesses which can employmore and more people and also ensure that public finances are sound, sothat we have the resources to fund those essential public services likehealth and education . . . Entrepreneurs take risks in the face of uncertaintyand open up new markets. Government should and must not hinder them,but work to ensure that the market functions properly and contributes toa strong, just and fair society. There can be no return to the outmodedinterventionism of the old left. The corporatist state was tried and itsimply did not work.35

Underpinning such a view, from New Labour spokesmen no lessthan from their Thatcherite predecessors, seems to be a submergedconception of market outcomes, under conditions secured by aregulative as opposed to interventionist state, as necessarily just,fair and equitable in their own right. On such a set of under-

35 Stephen Byers, Speech at the Mansion House, 2 February 1999, pp. 1, 2.


standings, the role of the state is then limited — to ensure labourmarket f lexibly and, as Byers again suggests, to ‘resist burdensomeregulation of the labour market’ originating in Europe.36 What NewLabour means by labour market f lexibility is certainly consistentwith Thatcherism. If f lexibility can be achieved either within theworkplace, as highly skilled workers adapt themselves to a range off lexible tasks, or externally, within the labour market itself, asemployers avail themselves of the opportunity to hire and fire, thenit is clear that New Labour in power has prioritized the latter. Thoughthe government is understandably loath to admit it, this does presentdifficulties for an administration which, at least publicly, predicatesits policies upon a conception of social justice. For without an activeand interventionist industrial strategy, there is little chance of anyrevision to the regime of the competitiveness of the British economy;and the problem becomes one of inheritance. As Donald Sassoonnotes, ‘after eighteen years of Conservative government, the distinc-tive competitive advantages of British industry are low wages, lowtaxes, weak trade unions, poor working conditions, a f lexible labourforce and limited job security’.37 Labour’s attitude to what it sees asthe dangers of an over regulated European-style labour market arenot difficult to discern from this. As Anne Gray has argued, ‘arguingthat a stronger Social Chapter might threaten jobs, Blair appearscontent with the Tory legacy of a national economic strategy whichhas attempted to secure competitive advantage through low labourcosts, low social security charges and legal repression of tradeunions’.38

New Labour’s proximity to Thatcherism on these issues has clearimplications for the one aspect of its articulated strategy to promotecompetitiveness that does set it apart from its Thatcherite, if notfrom the Major, predecessors: namely its enthusiasm for what itterms human capital formation. For the UK, as all the availableempirical evidence makes clear, has comparatively high rates of

36 Stephen Byers, Mansion House, p. 6.37 Donald Sassoon, ‘European Social Democracy and New Labour: Unity in

Disunity?’, in Andrew Gamble and Tony Wright (eds), The New Social Democracy, Oxford,Blackwell, 1999, p. 24.

38 Anne Gray, ‘New Labour — New Labour Discipline’, Capital and Class, 65 (1999),pp. 1–8.


labour turnover;39 and this, combined with its characteristically highcost of capital, its propensity to downsizing through mergers andacquisitions and a corporate culture which prioritizes dividends forshareholders over reinvestment, has long conspired to block highlevels of physical and human capital formation. Consequently, andin comparison to its European partners, Britain is a relatively low-wage, low-skill economy, one whose comparative position is merelyexacerbated by successive attempts to further liberalize Britain’salready f lexible labour-market. If labour turnover is high and labourshedding is simple, why invest in the skills of your workers whenyou can poach those skilled by others and when any investment inhuman capital you do make will only enhance the mobility in thelabour market of those in whom you invest? There is, then, a cleartension in Labour’s economic strategy. Were it serious about raisingthe level of human capital formation in Britain, with consequentbenefits for the internal f lexibility of the economy, it would be well-served by tightening rather than loosening its regulation of thelabour market. New Labour will not do this, even though there is atrade-off between internal and external f lexibility here which NewLabour ministers simply fail to acknowledge.

A similar preoccupation with supply-side blockages characterizesand compromises New Labour’s determination to promote ‘welfareto work’. Here the government has increasingly sought to resuscitateits historical commitment to full employment, albeit a ratherdifferent conception of full employment than that characteristic ofOld Labour. In the hands of New Labour, full employment refers toa condition in which there is rough parity between vacancies andthose claiming benefits (i.e., what, elsewhere, would be seen as theeconomy’s ‘natural’ or ‘equilibrium’ rate of unemployment). Onsuch a definition the economy is currently close to a condition offull employment,40 though this is not the case for a number ofregional economies where sizeable disparities between the number

39 R. Barrell (ed.), The UK Labour Market: Comparative Aspects and InstitutionalDevelopments, Cambridge, Cambridge University Press, 1994; C. Crouch, D. Finegoldand M. Sako, Are Skills the Answer? The Political Economy of Skill Creation in AdvancedIndustrial Countries, Oxford, Oxford University Press, 1999; J. Philpott ‘ThePerformance of the UK Labour Market: Is Anglo-Saxon Economics the Answer toStructural Unemployment?’, in T. Buxton, P. Chapman and P. Temple (eds), Britain’sEconomic Performance, London, Routledge, 1998.

40 E.Crooks, ‘Brown’s Jobless May Be No More’, Financial Times, 17 February 2000.


of benefit claimants and vacancies persist.41 Given such a conceptionof full employment and such a labour market situation, it is notdifficult to see why New Labour ministers regard (any residual)unemployment as essentially a supply-side phenomenon, or why, asJamie Peck has noted, that ‘the New Deal has been designed andrepresented as a resolutely supply-side program, framed in a policydiscourse which downplays or even excludes issues such as jobcreation and job availability’.42 Quite simply, the demand for labouris assumed to exist if the benefits structure can be so reformed asto provide incentives to move from ‘welfare to work’ (such asstringent welfare conditionality, the National Minimum Wage andWorking Family Tax Credit) and provided the unemployed can berendered ‘employable’.

The strong element of compulsion which characterizes NewLabour’s contract with welfare claimants is therefore both intelligibleand central to its welfare-to-work strategy. The authoritarian tonewas well-captured by Alistair Darling, Secretary of State for SocialSecurity, writing in The Independent that ‘the new regime will be fartougher than people thought . . . We will end the something-for-nothing approach that has characterised the past’.43 But put likethat, the New Deal has little to do with building a modern high-wage, high-skill economy, no matter what other ministers mightclaim. It has much more to do with promoting the ‘employability’of welfare claimants such that they can satisfy the (assumed) demandwithin the labour market. In one sense, of course, this too is a strategyof human capital formation; or perhaps more accurately, a strategyof social capital formation, since as Keep and Mayhew have percep-tively observed, ‘much of what is being labelled here as skills appearsto be personality traits or attributes that may only partially beamenable to change and enhancement through training andeducation as traditionally conceived’.44 In the hands of New Labour,

41 E. Erdem and A. Glyn, ‘From Welfare to Work’, Financial Times, 17 February2000.

42 Jamie Peck, ‘Getting Real with Welfare-to-Work: Hard Lessons from America’,Renewal, 7:4 (1999), pp. 39–49.

43 Alistair Darling, ‘We Make No Apologies for Our Tough Benefit Regime’, TheIndependent, 10 February 1999.

44 E. Keep and K. Mayhew, ‘Vocational Education and Training and EconomicPerformance’, in T. Buxton et al. (eds), Britain’s Economic Performance, Oxford, OxfordUniversity Press, 1998, p. 53.


it is already becoming clear that — for all its good intentions —welfare-to-work is becoming more about instilling in those claimingbenefit a resigned acceptance of the f lexi-time, hire-and-fire labourmarket they must endure (as a condition of continued receipt ofsuch benefits) than it is about providing a genuine ‘ladder toopportunity’. Indeed, given the path dependence of labour markettrajectories, New Labour’s New Deal may actually serve to preventskilled workers returning to highly skilled employment; and certainlywhile unemployment remains so regionally concentrated, it seemsinevitable that ‘the welfare-to-work client base [will be] largest inprecisely those parts of the country where the labour market isweakest, implying that the New Deal may have least purchase as apolicy tool in those places where it is needed most’. In any event,the ultimate test of the welfare-to-work programme has to be nothow it performs whilst the economy is operating at or in excess offull capacity, but how it performs in recessions. And as Kleinmanand West have argued persuasively, ‘if the level of demand is low, ifthe economy is in recession, if business confidence is low, then thelikelihood [that such] schemes [will have] any appreciable effect onemployment or employability is also extremely low’.45

New Labour therefore finds itself caught between rhetoric andperformance much as Old Labour did before it. It claims to havefound a new route to competitiveness and prosperity based onhuman capital formation; but its attitudes to labour market regula-tion and to welfare reform lock it onto an older economic trajectory:one that consolidates a predominantly low-wage based niche forUK manufacturing in an increasingly competitive global economy.Preaching the virtues of deregulation and industriousness may wellwin New Labour credibility in international financial markets, as itdid in earlier decades for the governments of Margaret Thatcherand John Major; but it is likely to prove more difficult to sustaindomestically under less auspicious economic conditions.

45 M. Kleinman and A. West, ‘Employability and the New Deal’, New Economy, 3(1998), pp. 174–9.


REFLECTIONS ON THE TWO FACES OF NEW LABOUR’S ECONOMICPROJECT

Whatever else may or may not be said about the adequacy of NewLabour’s linking of the internal and external faces of its economicproject, one thing at least is clear. Labour’s project is certainly asrhetorically coherent as its Thatcherite predecessor, and for the samereason: it rests on a clear theoretical base. The theoretical under-pinnings of Thatcherism were neoclassical. The project was self-consciously anti-Keynesian. The theoretical underpinnings of NewLabour’s project are post-neoclassical. The project is self-consciouslyinspired by the new growth theory, by (as Gordon Brown put it in1994) ‘post-neoclassical endogenous growth theory’.46 Thisconsciously-adopted theoretical inspiration provides the key to eachof New Labour’s central economic concerns. It is the key to NewLabour’s commitment to growth via macroeconomic stability. It isthe key to New Labour’s prioritizing of investment in human capital.It is also the key to New Labour’s lack of enthusiasm for capitalcontrols and re-regulated labour markets. New growth theory standsonly one shade away from classical growth theory in its attitudes tothe centrality of market forces as triggers to competitiveness,efficiency and long-term capital investment. New growth theory isnow very fashionable in progressive economic circles, and NewLabour has both succumbed to that fashion and done much topromote it.

In fact, New Labour’s policies seem coloured by a second andrelated fashion, too: one that is more hybrid in quality (and onwhich we will comment more fully in a later article). In British policy-making circles these days you find arguments of a neo-Schumpeterian and a neo-Weberian kind sitting alongside ideasgleaned directly from the new growth theory.47 The Schumpeteriantheme is ref lected in New Labour leaders’ understanding of thedynamics of capital accumulation in imperfect markets — theirsensitivity to the crucial importance of technological innovation

46 Gordon Brown, Speech to the Conference on New Policies for the GlobalEconomy, 1994; Edward Balls, ‘Open Macroeconomics’.

47 DTI, Building the Knowledge-Driven Economy, Competitiveness White Paper,London, HMSO, 1998; Our Competitive Future: The Economics of the Knowledge-DrivenEconomy, London, HMSO, 1999; M. Sharp, ‘Technology Policy: The Last Two Decades’,in Buxton et al. (eds) Britain’s Economic Performance.


particularly by large companies, and to the associated and vital roleof an economy’s science and engineering base in the creation oflong-term economic competitiveness. The neo-Weberian voice isthere in New Labour’s enthusiastic endorsement of the ‘neweconomy’ as one that is primarily information-based.48 New Labouris not just concerned with human capital formation. It also seesitself as developing technologies, and investing in skills, to survivein the new ‘knowledge-based economy’ of computer-basedmachinery, information technology and genetic engineering. Thereare even echoes of a (rather dated) post-regulationist ‘f lexiblespecialization’ argument in its glorification of small technologycompanies, research triangles and science parks. So whatever elsethis New Labour project is, it is more consciously theorized thanany Labour project before it, and all its theories pull in one direction:towards investment in human capital, and in the science base ofotherwise entirely unregulated large global companies.

This conf luence of theoretical sources has already ensured thatthe political economy of New Labour in office is significantlydifferent both from Old Labour’s more avowedly Keynesian econ-omic understandings and from the party’s more recent (andextremely brief) f lirtations with the Germanic tradition of ‘stake-holding’. In fact, New Labour’s enthusiasic endorsement of com-petitiveness and credibility as core parameters of economic policyhas brought UK economic policy firmly into line with what GregAlbo has correctly identified as the growth strategy currentlygenerally popular among European and North American centre-left parties — the strategy of ‘progressive competitiveness’. In theUK as elsewhere, this is a strategy for economic growth built aroundinvestment in human capital, and as such, one which stands incontrast to the more general propensity of centre-right parties toseek growth primarily through wage-cutting and demand constraints(Albo’s strategy of ‘competitive austerity’).49 Moreover, and as wehave sought to demonstrate, the internal and external faces of NewLabour’s pursuit of progressive competitiveness have been, and

48 Charlie Leadbetter, Living on Thin Air: The New Economy, London, Viking, 1999.49 G. Albo, ‘Competitive Austerity and the Impasses of Capitalist Employment

Policy’, in L. Panitch (ed.), The Socialist Register 1994, London, Merlin, pp. 144–70;and ‘A World Market of Opportunities: Capitalist Obstacles and Left Economic Policy’,in L. Panitch (ed.), The Socialist Register 1997, London, Merlin, pp. 1–43.


remain, impressively consistent rhetorically. As we have shown indetail here, New Labour’s espousal of the politics of constraineddiscretion and fiscal prudence at home have regularly been matched,and are currently still being matched, by its persistent advocacy ininternational forums of an external financial order characterizedby openness and transparency. Similarly, its domestic politicaleconomy of labour market f lexibility and the elimination of supply-side rigidities has been mirrored on an international stage, and isstill being mirrored, by consistent attempts to recast the Europeansocial model in the image of this domestic settlement (most recentlyat the Lisbon Special European Council).

Yet consistency and adequacy are not the same thing; and theimpressive degree of coherence in New Labour’s political economyshould not blind us to the continuing contradictions within the project(contradictions which the rhetorical coherence serves only toobscure). These continuing internal contradictions, problems andshortfalls are, in our view, best conceptualized as a series of tensionswithin and between a rule-bound fiscal and monetary orthodoxyon the one hand and a very particular reading of endogenous growththeory on the other. They are summarized in Table 1.

Taken together these contradictions seem to us to raiseunavoidable and serious questions about the long-term viability ofNew Labour’s strategy of progressive competitiveness. In fact, thepersistence of so all-pervasive a set of difficulties at the heart ofNew Labour’s enthusiastically advocated economic policy paradigmleads us at least to two general points of conclusion.

The first is this: that New Labour has certainly compounded itsown problems by settling upon what seems to us to be a particularlylimited (though certainly popular) reading of endogenous growththeory. Endogenous growth theory (post-neoclassical or otherwise)is not merely a synonym for the need for human capital formation,as much of the literature (and Labour speechwriters) seem to assume.As Nick Crafts explains, ‘the basic idea of endogenous growth isthat long-run growth in income per head depends on investmentdecisions rather than, as in traditional growth theory, resulting fromunexplained or exogenous improvements in technology’.50 Thus, inaddition to investment in human capital (skills), endogenous growth

50 Nick Crafts, ‘Post-Neoclassical Endogenous Growth Theory: What are its PolicyImplications?’, Oxford Review of Economic Policy, 12:2 (1996), pp. 30–47.


theory places at least equal emphasis (indeed, arguably rather greateremphasis) upon the positive externalities arising from investmentin physical capital (capacity), research and development and newproduct development.51 Given Britain’s widely acknowledged cap-acity constraints (discussed above), New Labour’s tendency torelegate physical to human capital formation as an economicimperative in the name of post-neoclassical endogenous growththeory is therefore both perverse and ironic, leaving the government

Table 1The Internal Contradictions of New Labour’s Political Economy

Credibility Competitiveness

1. Interest rates hikes are a blunt 1. Labour f lexibility achievedinstrument of monetary policy through the labour market is diffi-in a regionally and sectorally cult to reconcile with an overridingdivided economy. commitment to social justice.

2. Inf lationary pressures arising 2. Labour-market f lexibility militatesfrom existing capacity constraints against human capital formation asare exacerbated by Britain’s new labour turnover is a disincentive tomonetary policy regime. Interest investment in human capital.rates rises increase the cost ofcapital, limiting productive 3. Human capital formation withoutinvestment, thereby compounding prior physical capital formation isexisting capacity constraints and putting the cart before the horse.stoking inf lationary pressures.

3. Such a monetary policy regime 4. The promotion of ‘employability’institutionalizes an interest rates may serve to drive highly skilledpremium over Britain’s competitors workers into low-skill labour withand an uncompetitive exchange path-dependent lock-in effects.rate, penalizing exporters.

5. Labour’s supply-side ‘welfare-to-work’ programme is not counter-cyclical and is unlikely to proveeffective with the economyoperating at less than full capacity.

51 On investment in human capital see R. E. Lucas, ‘On the Mechanics of EconomicDevelopment’, Journal of Monetary Economics, 22 (1988), pp. 3–42; on investment inphysical capital see Paul Romer, ‘Increasing Returns and Long-Run Growth’, Journalof Political Economy, 94 (1986), pp. 1002–37; on investment in research and developmentsee Paul Romer, ‘Endogenous Technological Change’, Journal of Political Economy, 98(1990), Supplement, pp. 72–102; for reviews see Crafts, ‘Post-Neoclassical EndogenousGrowth Theory’; Sharp, ‘Technology Policy’.


singularly ill-placed to address the long-term structural weaknessesof the economy, by prioritizing investment in human capital whileBritain suffers from a distinct lack of investment in the physicalcapital which a highly trained workforce might deploy.

But in the end, the issue for us is not whether New Labour’s takeon the new growth theory is or is not warranted, but whether newgrowth theory is up to the job that New Labour has set for it: torestore the competitiveness of UK-based industries in a mannercompatible with the extension of social justice. The big questionunderpinning the unity of New Labour’s internal and externaleconomic policy is whether New Labour has chosen theories thatwill last, theories which will enable it to square its (often laudable)social ambitions with its economic programmes. We arguethat it has not, because of inadequacies in all three theories ofgrowth and economic change which it has deployed. The neo-Weberian imagery of a ‘weightless economy’ just misses entirely thelabour processes underpinning it — processes characterized notprimarily by high-wage, high-skill technological innovation, but bylow-skill, routinized white-collar and service work of a highlyexploited kind. Schumpeterian fantasies of cost-free economies ofscale emerging from the dynamic research and development initia-tives of large corporations similarly miss the speed with whichtechnological diffusion forces those companies back into com-petition on the basis of wage-cutting and work intensification. Andpost-neoclassical endogenous growth theory simply fails to appre-ciate the complexities and contradictions of processes of capitalaccumulation in a world system now rapidly proletarianizingpeasantries across North and East Asia and South America. Thecumulative strategy advocated from this mêlée of theories — thestrategy of progressive competitiveness set against a backcloth ofcredibility — is indeed distinctive from the strategy of competitiveausterity canvassed by the Thatcherites; but though different, it isjust as limited.52 Indeed, it is as likely, as was Thatcherism before it,to generate a general ratcheting down of wages and conditions forworkers in the UK (and Western Europe); and because its fate issimilarly constrained, the likelihood of its reinvigorating the UKindustrial base and guaranteeing longevity to New Labour in poweris low indeed.

52 David Coates, Models of Capitalism, Cambridge, Polity, 2000, pp. 251–64.

the internal and external face of new labour's political economy

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