Tuesday, January 31, 2012

GUEST POST An economic liberal case for a consumer-driven economy

Adam Smith
Matt Burrows asks how we can build public confidence in the free market.

There has been much talk recently about the reform of capitalism and political economy. There is genuine anger among people about the conduct and the lack of accountability of political and economic elites. This is coming from places I would not expect (i.e. right-of-centre voters) and it is worrying.

I welcome David Cameron's criticism of “crony capitalism”, but I doubt whether the Conservative Party would do all that is necessary to provide change. City financiers fund the Conservatives to 50 per cent of its income (as Nicholas Watt and Jill Treanor showed in the Guardian last year) and the city bonuses demonstrate a desire to revert to `business as usual'.

The general approach of the Right and its big business allies gives succour to anti-capitalists and the Left and its predilection for over-taxing and overregulating wealth creation at the time the economy needs that the most. Labour has been trying to re-establish its socialist credentials and distancing itself from the Blair years. Indeed, Ed Milliband described himself a Socialist.

Therefore Liberals (Lib Dems or not) are ideally placed to reform capitalism. As late as the mid-1960s, the Liberal Party was the party economic liberalism (see James Parry's chapter in Prime Minister Portillo and Other Things That Never Happened). Somehow this was sidelined until recently, allowing Thatcherism and then New Labour to claim (parts of) it with considerable popularity. With the Orange Book we started to take back this position.

One sense of Liberalism - the “little man” against the political and economic establishment" (see James Parry again)- has resonated with me. I prefer “individual citizen” in place of “little man”, but the sense is clear and nor more relevant than the present time. The current economic difficulties, the 'phone hacking and MPs expenses scandals have shown poor judgement by both political and economic elites.

The lamentable conduct has done much damage in the past few years. If popular anger is left unchecked it could harm this country's competativeness by undermining the recovery and dampening entrepreneurship. Therefore, public confidence among consumers in the capitalist economy must be restored. In our own lives,  we are more likely to buy from a company from which that we had received good product or service before.  Why is it that that is not applied more generally?

Being a consumer is what unites us all. There is a need for strong consumer legislation and tough action to prevent (or minimalise) monopolies, monopsonies and anticompetitive practices. These measures are key to the relationship between provider and consumer, and ought not to be merely a bolt-on or concession. There must be both the political will and resources to implement them. Then consumers would have confidence in the businesses and organisations with which they deal and the law and regulatory system able and willing to back them up.

I seek more a consumerist economy than a capitalist one. Adam Smith favoured free markets and in the Wealth of Nations he set out several preconditions for a free market. Among these is the complete knowledge of products by consumers. I want to see government champion its fulfilment. It is curious that the Thatcherite revolution in the Conservative Party seemed to overlook the qualifying aspects of Adam Smith’s work.

This can be applied in two further ways. The Department for Business Innovation and Skills (BIS) promotes both British business and regulates it. How can it perform both effectively? A Prime Minister can shape Whitehall departments almost at will but a Haldane Review is needed for a reconfiguration of government departments to have some permanence.

Therefore, firstly, I suggest a Department of Consumer and Environmental Protection in Whitehall, taking over some responsibilities from (BIS), such as the acting as sponsor department for the Monopolies and Mergers Commission and Office of Fair Trading (OFT). This department should be headed by a Secretary of State, sit in Cabinet and serve as the consumers' champion at the heart of government. This might also bring in some regulatory responsibilities from Energy and Climate Change. A Department for Commerce would take over the responsibility for promoting British business and entrepreneurship.

Secondly, there must be inclusion of consumer groups, and at last one small business organisation – e.g. Federation of Small Businesses (FSB) - in any economic discussions with Government along side big business representation (CBI, IoD and the trades unions (TUC). The inclusion of small business representation is important. They can suffer as the consumer does at the hands of big companies e.g. late payment of invoices from larger business and public sector customers. I would also like to see included charity representation and the smaller trades unions.

One further tentative idea would be to change the Companies Act so that companies be compelled to balance the investment return of their shareholders with the interests of their customers and employees. They would have to account for their activity in this way as part of their annual report. I appreciate this would be burdensome but It should focus minds to develop ways to further these objectives. There is a precedent for this: charities are required to report on the public benefit of their activity in their Annual Report to the Charity Commission every year.

I have tried to show how the relationship between the individual and the economic and power structure can be improved through a consumer-led approach. It would allow the market to function normally yet providing the accountability in the economic sphere that elections do in the political.

You can follow Matt Burrows on his blog, on Facebook and on Twitter.


Simon Titley said...

"As late as the mid-1960s, the Liberal Party was the party [of] economic liberalism."

Er, no. The phrase 'economic liberalism' was unheard of in the party until the early 2000s, when the 'Orange Book' movement got going.

Meanwhile, 'New Liberalism' (what we now call 'Social Liberalism') replaced classical liberalism in the Liberal Party at the end of the nineteenth century - for more details, see the Liberal Democrat History Group's essay on New Liberalism here:
and David Howarth's essay here:

Then we read: "Being a consumer is what unites us all". Speak for yourself!

Being human is what unites us all. Politically, being a citizen is what unites us all. There's more to life than buying and selling, you know.

mattburrows said...

Necessarily and rightly, I had a limited amount of words so certain qualifications and caveats could not be included.

On reflection, I could have phrased that better: "home of" in place of "party of". Howver, reading the history of the Liberal Party of the 1950s to mid-1960s I had the strong impression that the party was not particularly leftish at that time, but I guess these things are relative over time.

I accept I use "economic liberal" is a bit of an anachronism in this case but I used it as short-hand for a set of views that I think are familiar.

Surely being human or being a citizen is a sufficiently obvious point not to have to mention it.

I accept my Liberalism is materialistic and perhaps hedonistic.

For me, someone from lower-middle-class background – my grandparents were working-class Labour Party members - economic freedom takes precedence over social or personal freedom, although those are important too. For me economic liberalism is not merely about dealing with economic inequality and disadvantage but economic freedom and aspiration too.

Simon Titley said...

@Matt - The Liberal Party of the 1950s and 1960s was not "the home" of economic liberalism either. Social liberalism was the dominant ideology of the party by the time of the 1906 election landslide and remained so until the merger with the SDP in 1988. There is copious contemporary literature to prove this point.

Sadly, being human or being a citizen is not "a sufficiently obvious point". Indeed, the underlying problem with your original posting is that this obvious point seems to have passed you by, because your viewpoint is economistic. By economism, I mean the reductionist view that all social phenomena can be reduced to economic dimensions.

I take the contrary view, that life is basically about human relationships (family, friends and neighbours), the natural world, and enjoyment of the arts, intellectual pursuits and other pastimes. Economic activity generates the wealth, goods and services to make these things possible. The economy is not an end in itself.

Please read 'Really Facing the Future' (especially chapter 2) to see a fuller explanation of this view:

Jonathan Calder said...

When I first decided I was a Liberal in the 1970s the party certainly painted itself as being on the side of small businesses.

We were also in favour of industrial democracy in those days, but in the Alliance years that faded into support for employees owning shares in their own companies.

The idea of a consistent, seamless Liberal Party economic policy from 1906 to 1988 is probably a little generous. The parliamentary party split three ways over the nationalisation of steel after WW2, for instance.

Simon Titley said...

@Jonathan - When I first joined the Liberal Party in 1975, the dominant theme of the party's economic thinking was to do with worker co-operatives, mutuals and industrial democracy. That emphasis was lost in David Steel's obsession with the SDP and merger.

That emphasis on industrial democracy is integral to social liberalism, not in contradiction to it. It comes through clearly, for example, in David Boyle and Bernard Greaves's 'Theory & Practice of Community Economics'.

I did not intend to imply that the party's economic policy was seamless between 1906 and the merger. However, there is a historical myth being put about that the Liberal Party was classical liberal (or 'economic liberal') until the merger, and that it was classical liberals who led the opposition to the merger.

As you and I both know, there were no classical liberals to speak of in the Liberal Party of the 1970s and 1980s. The opposition to merger was actually led by the likes of Tony Greaves, Michael Meadowcroft, Claire Brooks and the good folks at Liberator - all from the left of the party.

It angers me that historical revisionism is being used as a political weapon by the right of the party, to use false history as a means of supporting the idea that classical liberals have some sort of prior claim on the party.

This is why the Orange Book ("reclaiming liberalism") was such a fundamentally dishonest work.

Lang Rabbie said...

I have chucked all my Liberators but I do keep back issues of the Journal of Liberal History. Issue 47 from the summer of 2005 "Liberals of the Right?" included a piece about Arthur Seldon (co-founder of the IEA) who was influential in the Liberal Party from the 40s until well into the 60s (not to mention being a leading light of the Orpington Liberals at the time of the by-election)

Simon Titley said...

@Lang Rabbie - Arthur Seldon could hardly be described as "influential" in the Liberal Party. He and his few allies were regarded as very much part of a classical liberal fringe element. He left the party in the early 60s because he was so out of sorts with the party.

mattburrows said...

I didn’t think one sentence would cause so much debate! It didn’t want to spend too many words on it as it wasn’t the focus of what I wanted to say. This did mean I glossed over what is clearly a complex situation.

My intention was to root my views in Liberalism where I think my view belongs and *not* Conservatism, whose free-market/economic liberal credentials are partial and skewed.
The 1950s was the best example I could find and to employ 19th Century reference would be inappropriate as the world and Liberalism has changed much since.

Thank you to Jonathan and to Lang for your comments. :) I thought there was something about the self-employed and the Liberal Party but I couldn’t find the reference. Arthur Seldon and Ralf Harris were Party members (even if they were considered fringe) and Sir Rhys Hopkin Morris, Arthur Holt and Donald Wade were Liberal MPs during this period, who I gather could not be described as on the left of the Party.

I’ve heard about the Party´s interest in industrial democracy and employee share ownership over the years from friends that are long-standing members. I think there’s something in this but I haven’t come to a view on it.

(Some of - not all) the left of the party have said to me essentially that I should not believe x and believe y instead. The implication is that by not agreeing with them I am not a Liberal and that I am deemed not having understood. This I find difficult and frustrating. I interpret Liberalism differently, that is all.

My accept view is somewhat reductionist. Simon, you raise some interesting wider points about family, friends etc. Thank you for the link to the Really Facing the Future. I will read it (once Adobe is working again) and will take it into account in my blogs in the future.

mattburrows said...

What I should have included in my past comment was that I think there are likely to be significant changes to the economy and its structure coming out of this crisis. I believe Liberals of any stripe - and as a movement not merely as a Party - will be expected by voters to have a view and suggestions on how to move forward. If we do not, Conservatives and Socialists will, and I imagine that will be less to our liking.

Simon Titley said...

@Matt - I agree with your last point, which is it why it depresses me to see efforts being made even now to shift the Liberal Democrats in the direction of neoliberalism, when that ideology (quite apart from its intrinsic faults) has reached the end of the road.

We are at a point of fundamental change and we should be debating what sort of economy we would rather see emerge from the wreckage, rather than trying to pump life into a corpse.

Two very good lectures have been published in the past week about the long-term changes going on, and both are well worth reading:

Paul Mason's lecture:

Michael Hudson's presentation:

mattburrows said...

Thank you for that: ) Í don´t have a FB page for politics but I do for my music work. On FB I´m facebook.com/symphonicvapour and on Twitter: @matt_burrows_SV