Why Labour must be the party of the national economy

Today is the Second Reading of the Levelling Up and Regeneration Bill. The Bill is a consequence of an historic realignment in Britain’s electorate that moves the political battleground from the cities and professional classes to the towns, coastal and rural areas of provincial England. It opens up the prospect of a new political period of national development and structural reform of government and economy. But it will only happen if both major parties take up the challenge in a new radical consensus of national renewal that breaks with the era of liberal market globalisation.

Labour must become the party of the national economy and go into the next election with a plan for national reconstruction. It will be a plan to reduce the cost of living, while committing a Labour government to a long term strategy for national economic development.

This will be Labour’s answer to the Tory’s Levelling Up around which the next election will be fought. By being the party of the national economy Labour can start to bridge the class and geographical inequalities dividing the country and its own electoral coalition.

By doing so Labour can take the lead in defining a new political era. The period of globalisation and liberal markets is ending and a new geopolitical age is emerging. Great power rivalry and domestic political discontent is encouraging a turn to national security – economic, military and personal - and the increasing role of the nation state in the internal rebuilding of a covenant between citizens and government.

The return of geopolitics

Labour last came to power in the period of globalisation, which is now being eclipsed by the return of geo-politics. Across the world, free trade and market liberalisation are being challenged by national governments turning to neo-mercantilist policies of state making and national economic development. There is a geopoliticalisation of trade and investment policy, and it is here to stay.

When New Labour created its third way politics and aligned itself to Clinton’s Democrats, state policy facilitated business to lead the globalisation of the economy. Public services and assets were disaggregated and reintegrated into new markets as a series of commodities. Now, national states are reclaiming control as they become increasingly concerned with social security and economic sovereignty.

National governments are working with business to align more closely finance, foreign policy and national security, rebalancing the relationship between market principles and national strategic choices. There is greater awareness that market transactions and foreign investments must not imperil national security. Where once priorities were about promoting the free movement of goods and services by getting rid of domestic regulations and the transactional costs of national borders, governments are now becoming concerned with national economic resilience, strategic assets, redesigning supply chains, and reining in national companies that do business with potentially hostile countries.

Liberalism vs Mercantilism

These are significant changes that will transform our model of political economy. But the history of economics has always been a struggle between the two opposing schools of Liberalism and Mercantilism. For Liberalism what matters is consumers and the maximisation of the cheapest goods and services. For Mercantilism it is the producers, sound production, high employment and good wages. For one, cheap imports are the goal. For the other, it is boosting exports which support production, work and wages. The contemporary dominance of liberal market economics gave rise to a new kind of market state that promoted economic efficiency and individual choice. While the nation state conducted geopolitics through national and international institutions, the market state depends upon international capital markets, transnational corporations and elite networks.

Britain is renowned as a free trading nation. But Mercantilism and economic nationalism only finally gave way to liberal economics when Britain became an imperial hegemon. Free trade is about power relations, and it was Britain’s maritime supremacy over its competitors that encouraged faith in Adam Smith’s invisible hand. The national interest would be best served by free trade and international economic integration, because the British empire was able to set the rules and enforce them in its interests.

With the loss of empire, the decision of Margaret Thatcher’s government to integrate the post war national economy into global markets had inevitable consequences. Domestic manufacturing was severely damaged or off-shored, and national strategic assets were sold off. The share of national income to the labour interest declined as wages stagnated or fell. Returns to capital and profits in the financial sector multiplied. A consumer culture flourished and productivity fell. The shift in the role of the state from service provider to market enabler accelerated the fragmenting of society and the growth of social evils.

The advocates of liberal economics on both left and right dismissed the idea of Mercantilism as archaic and wrong. Their dismissal of it was premature. The financial crash of 2008, the dysfunction of the market state during the Covid pandemic, and the social disintegration caused by globalisation, have all exposed the risks of liberal market economics to people’s security and livelihood. Governments in rich countries are realising that they need to create social stability and fairness by reconstituting their social contracts. ‘Mercantilism is alive and well’, writes the Harvard economist Dani Rodrik. ‘Its continuing conflict with liberalism is likely to be a major force shaping the future of the global economy’.

The politics of nation

The modern Labour Party has been wary of the politics of nation and avoids mention of national borders. But without nationhood, defined by its territorial borders, there can be no democracy based on popular sovereignty. The two developed historically alongside one another. Nationhood is necessary to bind a diverse people into an inclusive citizenship, in a community of rights and obligations with a shared economic fate. It connects parliamentary democracy to the past and provides it with authority and legitimacy by bringing together the state and the people with the idea of nation.

Over four decades this alignment has been thrown out of kilter by the rapidly changing population, by the revolt of wealthy elites from national territorial obligations, by the fracturing of the United Kingdom, and by the disappearance of the old industrial working class and the collapse of its institutions. Once the binding force of British national identity, it has lost its former political representation in the Labour Party, casting the latter adrift.

Take back control was not simply a cry from the towns of provincial England, nor solely a reaction to high levels of immigration. It came from a collective national people falling apart, whose sense of a shared economic fate and national identity has been shattered. Millions looked to the nation as providing their security and sense of belonging. But after decades of globalisation many no longer believed they had democratic representation, nor that they shared in the prosperity of their country.

The future

The world’s economic and political geography is being recast. The Russian invasion of the Ukraine has altered the geopolitical balance of power and precipitated crises in the supply of energy and trade in commodities. The stakes are high. President Biden has told a group of top US CEOs ‘there’s going to be a new world order out there , and we’ve got to lead it.’ Larry Fink, CEO of investment management company Blackrock explains it to his shareholders: ‘the Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades.’

What will this new world order look like? In a speech to the Atlantic Council, US Treasury Secretary Janet Yellan, describes a US strategy of ‘friend-shoring’ supply chains with trusted countries, and extending market access for those countries ‘we know we can count on’ in a network of bilateral and plurilateral trade arrangements. A new kind of US led, exclusionary globalisation, broadly conceived as ‘the world’s democracies’, could be built around a trans-Atlantic bloc, characterised by a virtual, digital economy, technological innovation, and the rapidly developing Central Bank Digital Currency System.

While geopolitical capitalism and big power conflict encourage a turn to national security, a technological revolution is transforming the economy and the lifeworlds of individuals. Labour’s task in this new world order is to stand up for the labour interest by building a resilient national economy across the villages, towns and cities of the UK, with jobs you can raise a family on in every community.

Labour Together has outlined a plan for national reconstruction in Labour’s Covenant. Partnerships between business, government, workers and local communities will bring life to the neglected regions, increase productivity, strengthen supply chain security and boost forms of national self-sufficiency in necessities. Nature’s constraints on economic activity, aligning industrial policy with net zero, will be a spur to greater market innovation and democratic oversight of the national economy.

The plan will prioritise the everyday economy, the supply of basic goods and services that sustain daily life - the food we eat, the homes we live in, the energy we use, and the care we receive. It will deepen and extend democracy, notably in England, by building capacity not just in regions and localities, but within the failing institutions of the British State. This will help to regenerate local cultures, associations and community leadership that provide the basis for devolution and the social infrastructure for a sense of belonging.

Labour Together’s plan for national reconstruction deepens and extends the ambition of the Levelling Up White Paper to create a new model of central government and devolve more power and control to local communities. This is the basis for renewing the democratic covenant between citizens and government: ‘every community has the right to contribute to the national effort’.

Read the last editorial ‘How Labour can overcome culture wars’ and the complete series here.