Amidst the paralysis currently gripping the Conservative Party and British politics more generally, the prospect of a general election remains as one pathway out of present crisis. The Labour opposition is openly pushing for this outcome while quietly preparing for government. However, amongst the leadership and the wider labour movement, there is a growing awareness that a future Labour government would face a series of formidable barriers. Key centres of power within the British state, including the City of London, the Bank of England and the Treasury, are likely to disrupt core elements of Labour’s economic programme, albeit to varying extents. Externally, Labour faces an array of potentially hostile global forces, including international investors, the currency markets and transnational business groups. Overcoming these internal and external constraints will be a central task for Labour in office.
The Labour leadership has begun to develop concrete strategies for surmounting domestic barriers to reform, for example through John McDonnell’s review of the Treasury, while campaigners have begun to chart how social movement activism could help to bolster Labour’s power in office. However, Labour’s analysis of the global constraints which it is likely to face is far more limited. Global capitalism has shifted decisively since the 2008 crisis. A series of strategic opportunities, as well as constraints, have opened in this context. This would be the context in which a Labour government would have to act in order to implement its economic programme. If it is to be successful, it must develop an analysis of the specificities of global capitalism in the present conjuncture.
History is replete with examples of Left Parties who have come to power promising fundamental social and economic change only to fail upon encountering the disciplinary power of global financial markets and creditor institutions. This was exemplified by Francois Mitterand’s failed attempt in the early 1980s to domestically reflate the French economy and, more recently, in Syriza’s capitulation to the Troika in July 2015. The central objectives of Labour’s economic programme – re-nationalisation of the public utilities, the democratisation of firm ownership, increased corporation tax – could face intense hostility from global capital. The prospect of ‘investment strikes’, increased borrowing costs or a run on sterling loom as potential threats. An international backlash of this form would be likely to undermine investment, limit economic growth and lower tax revenues, generating intense pressures on Labour’s economic programme and its room for manoeuvre.
This potentially hostile global environment has meant that Labour’s global orientation has been heavily defensive. McDonnell, speaking at a fringe event at Labour’s 2017 conference in Brighton, revealed that the Shadow Treasury team was preparing for a run on sterling. The question of capital controls – legislative mechanisms designed to stem rapid inflows or outflows of funds – have been identified as a further policy tool in Labour’s armoury. A recent IPPR report by Grace Blakeley, linked to the Commission on Economic Justice that was subsequently embraced by McDonnell, made recommendations to this effect. James Meadway, a senior economic advisor to the Shadow Chancellor, similarly outlined the case for capital controls prior to assuming his position in the Labour Party. Labour’s commitment to fiscal expansion - which has a particular focus on increasing public investment - has been identified as a further instrument which could be deployed to counteract the negative effects of capital flight and sterling depreciation. In this regard, Simon Wren-Lewis, one of the architects of Labour’s ‘Fiscal Credibility Rule’, has argued that Labour’s proposed fiscal expansion would likely lead to a modest increase in interest rates, which would act as a defensive bulwark against flight from sterling.
Labour’s defensive orientation is both understandable and necessary. But it is also limited in two senses. First, the assumption that global markets will immediately exercise ‘discipline’ over a future Labour government fails to account for the specificities of global capitalism in the present conjuncture. Since the 2008 crisis, a number of dynamics have emerged which have partially eroded the disciplinary power of global capital and its supportive institutional architecture. This novel context presents a series of opportunities as well as constraints on a future Labour government. Second, and relatedly, a narrow focus on insulating Britain’s economy from external discipline potentially obscures the wider range of strategies that Labour could deploy in order to defend and extend its economic programme in a volatile global context. In order to better account for how Labour might navigate these global constraints, it is necessary to account for the current specificities of global capitalism.
Global capitalism and the logic of discipline
Following the crisis of 2008, global capitalism has embodied a peculiar combination of the old and the new. Familiar distributional patterns endure, as exemplified by the continuation of rampant inequality, deepening financialisation and tight constraints on public expenditure. But there have also been important shifts within post-crisis capitalism. Unconventional monetary policy has kept the global financial system afloat, albeit at the cost of further entrenching distributional disparities within and between capitalist states. The prospect of ‘de-globalisation’ stalks the world economy as falling trade and foreign investment disrupt long-established patterns of transnational integration. On top of this, an anti-establishment insurgency of the nativist right and radical left has disrupted traditional party politics across Western societies and even threatens to undermine the foundations of the global liberal order. Attempts to resuscitate stable growth through austerity programmes have failed while uneven development has intensified.
This is the global context which a future Labour government will face. It is an unstable and unpredictable configuration, and one that presents numerous challenges to the Left. But the post-2008 conjuncture has also had a profoundly disruptive effect on the strategic capacities of global capital. The ability of business to effectively ‘discipline’ governments depends on a series of institutional and political preconditions. Since the crisis of the 1970s, the institutional architecture of global capitalism has been organised around a distinctive ‘logic of discipline’ which has helped to secure these conditions. Amidst falling profitability and rising labour militancy, this disciplinary logic was first rolled-out across the United States and Britain, as high interest rates, rapid de-industrialisation and the coercive power of the state were deployed to break the power of the organised working class and public sector bureaucracies. Subsequently, this disciplinary logic came to be institutionalised at the national, regional and global levels. Tight ‘rules-based’ fiscal policy, capital account liberalisation, independent central banks, ‘arms-length’ regulatory agencies and transnational legal forms together created the institutional foundations of the neoliberal global order. This architecture served to insulate investment decisions from democratic demands and gave rise to the long financialised upswing of the 1990s and 2000s. This environment, combined with the ongoing erosion of barriers to trade and capital flows, empowered global capital’s ability to shift across national borders and to discipline recalcitrant governments through increased borrowing costs and disinvestment.
However, the post-crash world has disrupted this disciplinary logic. This can be seen across three domains. First, there has been a structural shift towards unconventional policies in the monetary and financial spheres. Through sustained low interest rates and Quantitative Easing, central banks have aimed to avert deflation – falling prices – and to maintain profitability and economic growth. One core objective of QE is to compress bond yields in order to boost investment and growth in the private sphere. This has led to a structural reduction in the cost of borrowing for advanced capitalist states at the core of the world economy. In a context of low global demand and weak growth, investors have fled into the ‘safe haven’ of the sovereign bond markets. This has resulted in a weakening of the disciplinary power of international investors with respect to Western governments, at least for ‘credit-worthy’ sovereigns such as Britain and the United States.
There has also been a weakening in the disciplinary logic of global capitalism in ideological terms. This is reflected in shifts in the policy recommendations of global creditor institutions such as the IMF. In the long upswing of the pre-crisis era, the IMF was a determined advocate of the principles of the ‘Washington Consensus’, which endorsed orthodox neoliberal policies such as sweeping liberalisation, rapid deregulation and tight fiscal constraint. That ideological framework, although still partially in place, has also been notably unsettled in the post-crisis era. In 2016, the IMF broke ranks with Western governments through its report ‘Neoliberalism: Oversold’. In this output, the IMF reversed its previous advocacy of orthodox neoliberal policies and acknowledged that capital account liberalisation and fiscal consolidation both could have deeply destabilising effects on economic growth and stability. This shift to more heterodox thinking has also been reflected in other quarters, for example in calls by the former Chair of the Federal Reserve, Ben Bernanke and others to embrace ‘helicopter money’, which would involve directly crediting the accounts of households through monetary expansion.
These proposals represent a growing recognition on the part of certain global elites that structural shortfalls in demand are the result of an excess of market discipline. The relentless drive of neoliberal capitalism to expose society to privatisation, deregulation and commodification have eroded the foundations of its own stability. Policies to stimulate growth through monetary expansion and fiscal loosening embody attempts to subvert this market disciplinary logic through targeted political interventions. The significance of these ideological shifts should not, of course, be overstated. However, these changes do reveal that the old neoliberal ‘blueprints’ of international institutions are in a state of flux. This reflects, in part, growing divisions between rival fractions of global capital around the appropriate response to the present situation. Whilst large sections of business continue to agitate for minimal taxation, deregulation and fiscal retrenchment, more far-sighted elites acknowledge that the implications of these policies – growing inequality, widening social polarisation and the increased likelihood of destabilising financial crisis – threaten the long-term general interest of global capital.
Third, the disciplinary power of global capital has also been weakened by wider structural shifts in the post-crash global economy and geo-politics. Since the 2008 crisis, there has been a marked decline in global trade and international investment relative to economic output. A process of de-globalisation and intensified regionalisation has emerged, exemplified by increased South-South trade and investment and the failure of global trade deals such as TTIP and TPP. In contrast to the teleological imaginary of the advocates of hyper-globalisation, who anticipated ongoing transnational integration and commercial exchange and the emergence of a benign cosmopolitan global society, a new dynamic of fragmentation has taken hold between capitalist states and economies. In the Eurozone for example, capital fled the Southern European periphery and retreated to safe German bonds. In Britain, the politics of Brexit threatens a regulatory decoupling between the UK and the EU, introducing new barriers to trade and investment between some of the world’s largest economies.
These shifts are compounded by the reconfiguration of geo-politics and the weakening commitment of the United States to maintain the global liberal order. Throughout the post-war era, Washington acted as the key sponsor of both the Bretton Woods settlement and the neoliberal regime which followed it. American power and the US dollar were critical to maintaining the liberal institutions which policed and maintained a rules-based and relatively open world economy. In the aftermath of the 2008 crisis, the Federal Reserve continued to play this role, arranging ‘swap lines’ with key European, Asian and global banks. However, under the leadership of Donald Trump, this commitment to multilateralism has been thrown into question. Trump has initiated a withdrawal from multi-lateral agreements such as the Paris Climate accords and has imposed tariffs on Chinese exports, threatening a trade war between the two key pillars of the international order. The upshot for the left is that de-globalisation and rising geo-political rivalry have become increasingly intertwined, threatening the foundations of the ‘open’ liberal order.
Labour’s economic programme in a volatile global order
All of this has led to a weakening of the institutional framework which underpinned the ability of global capital to discipline recalcitrant left governments. This generates a series of openings which Labour could exploit in concert with its more ‘defensive’ global orientation.
The global shift towards ‘loose’ monetary policy has shaped the development of Labour’s economic strategy. Labour’s programme involves a two-pronged approach aimed at ‘rebalancing’ the British economy. This involves reducing Britain’s dependence on the financial sector whilst increasing output and employment in the manufacturing sector. In this regard, Labour’s key commitment is to develop a National Investment Bank with the aim of rolling-out £250 billion of investment through a network of regional banks over the next decade. The borrowing to finance this – along with other initiatives, such as the ‘National Transformation Fund’ – would be secured through bond markets. The decline in borrowing costs and the resultant relaxation of discipline in post-crisis state financing underpins the conditions for Labour’s restructuring of British capitalism. Of course, the danger of a loss in market confidence and increased borrowing costs upon a Corbyn government taking power remains a risk. But this can be counteracted. The UK retains its own central bank and currency and as such has a range of monetary and fiscal levers through which to quell market unrest. Labour’s Fiscal Credibility Rule, which commits the Party to balance the budget in current spending whilst borrowing to finance large expansions in public investment, provides a mechanism through which growth and confidence could be maintained whilst taking advantage of low borrowing costs. By deploying these policy levers, Labour can attempt to continue to benefit from the reduced borrowing costs associated with post-crisis capitalism whilst insulating itself from a backlash of global creditors.
The ideological flux of the post-crash world and the attendant weakening of ‘disciplinary’ logics within the imaginaries of international institutions creates two strategic opportunities for Labour. First, the emergence of heterodox thinking within global organisations can help to bolster the legitimacy of Labour’s economic programme domestically. McDonnell, for his part, has deftly utilised the IMF’s critique of widening inequality and austerity to bolster his case for Labour’s alternative to austerity and to undermine the Conservatives’ economic credibility. Second, the opening-up of new policy imaginaries at the global scale also creates an opportunity for Labour to ‘upscale’ its transformative programme and to cultivate further shifts in the architecture of the global economy. For example, Labour’s manifesto commitment to introduce a financial transaction tax (FTT) complements similar initiatives pushed by progressive forces within the US Democratic Party and the European Union. Indeed, as a recent IMF report noted, FTTs are currently in place across over twenty major economies and raise in excess of £30 billion annually in tax revenues. If Labour were to implement its proposals in one of the central hubs of global finance, it could both inspire and draw upon a wider coalition of international support and help to shift the global financial architecture. Cultivating transnational linkages with progressive forces, both within other states and in multi-lateral institutions, would be complementary to rather than in conflict with Labour’s defensive international posture.
The combined dynamics of de-globalisation and geo-political turmoil animate the post-crisis capitalist world. Together, these processes make new waves of instability more likely. The slowdown in transnational economic integration will impose costs on some social groups. It also potentially weakens the disciplinary power of international capital and creates new space for national policymaking autonomy. From Labour’s perspective, the increased regionalisation of economic activity underlines the importance of fostering domestic sources of investment and growth. Labour’s ‘Build it in Britain’ campaign – through which Jeremy Corbyn has made the case for channelling public investment towards domestic industries and infrastructure – was in keeping with the realities of global capitalism in the post-crash era. Undoubtedly, decades of wilful neglect and the structural bias of bank lending in the UK towards residential and commercial property over industrial activity means that there will be huge barriers which any plan for ‘rebalancing’ will have to overcome. Nevertheless, continuing with the orthodox policy of unqualified international ‘openness’ in a de-globalising world order represents a dangerous risk, particularly as Britain slips from its status as a global economic and political power. The fracturing of the global economic system therefore not only creates an opportunity for Labour’s economic programme of ‘rebalancing’; it necessitates it.
Labour’s defensive global posture – its contingency planning for a run on sterling, its embrace of capital controls, its willingness to deploy fiscal and monetary levers to counteract the threat of an investment strike – are all necessary. Anticipating and building up the institutional capacity to mitigate global pressures on Labour’s economic programme is an essential first line of defence. But this approach is not incompatible with adopting alternative, complementary strategies of engagement. Since 2008, global capitalism has shifted. The institutional architecture and mechanisms through which global capital has traditionally exercised discipline over recalcitrant left governments are now in flux. This can be seen in a series of structural shifts within the financial, monetary, ideological, global and geo-political spheres. Labour’s economic programme will only survive in government if the leadership and the wider labour movement can navigate this fractious terrain and take advantage of the various strategic openings which have emerged within post-crisis capitalism. Corbynism has emerged as a pivotal strategic point in a rising insurgency against a neoliberal regime still mired in crisis. Labour’s economic programme could embody a first decisive step against this failing global order – but only if it develops a strategic global orientation fit for the task at hand.
Dr Scott Lavery is a Research Fellow at the Sheffield Political Economy Research Institute (SPERI) at the University of Sheffield.[book-strip index="1" style="display"]