The British economic policy debate feels more open than it has for a generation. Leaving the European Union last year knocked away a stout pillar of the old model that framed the debate for virtually half a century. The recovery from the pandemic-related collapse in output has seen politicians of all parties promising to “build back better.” The economic shock delivered by the banking crisis in 2008 and the political shock of the Brexit referendum in 2016 have left thinkers looking for a new political economy.
On the right some seek to revive a Thatcherite—or even Gladstonian—spirit, with talk of a free-market, buccaneering, “Global Britain.” On the left, there is much excitement about the possibilities, precluded in the last generation, to roll forward the economic borders of the state. Boris Johnson’s government—its majority built on four dozen seats won from Labour across the English north and Midlands and Wales—is a quite different creature from that of David Cameron. University economics, for so long a domain of desiccated models and cost-benefit calculations, pulsates with fundamental questions about what money is and whether public debt matters. Talk of “tough choices” and the prioritisation of deficit reduction now take a back seat to the rhetoric of “levelling up” and a proactive role for public policy in shaping markets and driving growth.
For all those who have fantasised about throwing off the long technocratic reign in favour of a radical transformation to match those supposed to have happened in either 1945 or 1979, this is a wonderful time to be alive.
And yet. What immersing myself in economic history—and British economic history in particular—has taught me is that real clean breaks are few and far between. Why? Because whatever happened before always shapes what comes next. So despite the rhetoric of transformative change, I suspect our policy paradigm is unlikely to move too far from a deeply ingrained, hands-off liberalism, which permeates not only the last few decades of public policy, but our whole culture and the British way of doing business.
Much as they might wish it were otherwise, politicians and their economists never get to write on a blank page. Choices made by their predecessors shape the range of options available to them. Marx wrote that “men make their own history, but they do not make it as they please; they do not make it under self-elected circumstances, but under circumstances existing already, given and transmitted from the past.” Which is really just a fancy way of telling the old joke about the tourist asking for directions and being told “I wouldn’t start from here.”
Those making choices about the direction of Britain’s political economy in 2021 are working in a 200-year-old tradition of economic liberalism that is almost hardwired into our institutions. That is not to say the economy can never be shunted off these tracks, just that doing so is far trickier than generally assumed—which might be why so many previous attempts at a fundamental reset have failed.
If you want to grasp the course of British economic—and indeed political—history, the essential starting point is that Britain was the first country to industrialise in a meaningful and widespread manner. The industrial revolution was the turning point in global history, the point at which technology opened up a path to a future—far in the distance at first—where life would no longer be nasty, brutish and short for most people. Along with the dark satanic mills came many social problems as well as great riches for the few. But so too did it see the first stirrings of sustained economic growth at the sort of rate that would, for the first time ever, translate into improvements in living standards, wealth and longevity that could be felt within a single human life.
The fact it happened first in Britain was a historical accident, but a crucial one. It made the country richer, faster and more confident than its neighbours. It allowed what was, in the grand scheme of things, a reasonably small island nation off the coast of Europe to capture an outsized global role and rule the largest empire the Earth has ever seen.
Unless one believes that there is something innately special about the inhabitants of these islands, however, such a lead could never be maintained forever: others were bound to look at what we had achieved and imitate, adapt and improve on it. In the bigger picture, the economic history of Britain since the mid 19th century is, inevitably, a history of relative economic decline.
But it was in those early decades of industrial pre-eminence that the core institutions and habits of the British economy took shape—and it was a time when the country appeared to be doing something right. The dictums of free market thinkers seemed worth listening to when the relatively liberal British economy was establishing a lead over its European rivals that would take decades to overturn. While competitors later undertook what historians dub “big push industrialisations,” using government policy to direct their economies to catch up to British techniques and levels of output, British governments rarely saw the need for anything so dirigiste. Laissez-faire might be a French term, but it was more in keeping with the domestic wisdom of Smith, Ricardo and Mill that the British elite slowly imbibed.
“A deeply ingrained, hands-off liberalism permeates the British way of doing business”
If anything, the lesson contemporaries took from the early 19th century was that there was a case for an even more liberal approach. Industrial protection was not really an issue before there was any competition to seek protection from. And with the repeal of the Corn Laws and the embrace of agricultural free trade in the 1840s, Britain was left well-placed to benefit from falling global food prices during the great globalisation of the late 19th century. The old landed interest felt the squeeze from the open door to trade, but the forward march of the social forces of progress picked up, with the fast-growing urban working class benefitting from cheaper food while their bourgeois employers avoided the pressure on wages that could otherwise have threatened them.
Sometimes, blind faith in the invisible hand would have disastrous human effects. The Poor Law Amendment Act of 1834, which sharply cut payments to the poor and introduced the misery of the workhouse, was—as the eminent historian Gregory Clark has noted—explicitly driven by the works of not only Smith but also Bentham, Ricardo and Malthus, and should perhaps be regarded as “the mother of all welfare reforms.” But for enough of the people enough of the time, the progress of Victorian Britain seemed real enough to avoid revolution, serious upheaval or regime change.
So for good or ill, the spirit of British economic policy remained deeply liberal. Even when competitors seemed to be catching up or pulling ahead, there was deep reluctance to involve the state in any response. By the last third of the 19th century, it was clear that the next wave of industrial innovation relied upon an educated and proficient technical workforce, and yet Whitehall dragged its feet in responding. Britain was unique in requiring compulsory primary education before making primary education free, preferring to fall back in many places on a patchwork of schools reliant on churches and voluntary contributions. As Robert Lowe, the then Liberal chancellor, put it: “I hold it as our duty not to spend public money to do what people can do for themselves.”
While other countries drove investment with state-backed industrial banks, Britain left its financing to the private sector and its well-developed stock market and banking system. And capital shouldn’t have been in short supply. After all, unlike economies made up of subsistence farmers (who never have much of a surplus) industrial economies can save and by the late 19th century Britain—as the first one of those—had a national savings rate of around 10 to 15 per cent of GDP each year, low by modern standards but higher than any of the nation’s major competitors.
While Germany and the United States, and later Japan, were keen to put their own savings to work in building railroads, telegraph lines and gas works, hands-off Britain left it to the market and the individual to decide where all its savings went. And they went where returns were highest: usually abroad. Instead of modernising further at home, the world’s first industrial nation took to funding industrialisations far beyond its shores.
This same laissez-faire approach to economic management was pursued by both Tory and Liberal governments right up to the start of the 20th century. The defining thinker of the time was John Stuart Mill. Mill himself lost his parliamentary seat in 1868 to the Conservative candidate—and later cabinet minister—William Henry (or WH) Smith. As the Times put it, the electors preferred the unknown Conservative who sold books to the famous Liberal who wrote them. But it is hard to say that he lost influence.
If Mill defined the overall framework, Gladstone shaped the fiscal element in ways that outlasted even his own exceptionally long career. In 1940, the wartime minister of labour, Ernest Bevin, quipped that he wanted his own influence to match that of the Grand Old Man: “I hear Gladstone was at the Treasury from 1860 to 1930.” And if anything, that was an underestimate; his spirit still arguably haunts the corridors of Britain’s finance ministry now. It was back in Gladstone’s day that the Treasury emerged as the pre-eminent department in Britain’s government machinery, but it didn’t achieve this by increasing the budgets it managed. Across 19th-century Europe as a whole, the state’s share in the economy gradually rose, but in Britain it fell.
Paying down the debt incurred through victory in the Napoleonic Wars was seen as the primary task of Treasury officials. Gladstone himself, and generations of officials who embodied his views, saw a great danger in politicians competing for votes by promising spending on certain projects. It is fair to say he would probably not have been a fan of Boris Johnson’s “Towns Fund,” which just happens to be pouring money for the vague purposes of “levelling up” into many of the seats he recently won.
To avoid such tricks, Gladstone, building on the principles of his reformist Tory mentor Peel, emphasised the neutrality of the state in economic matters. Taxes on agriculture should, for example, be balanced against equivalent taxes on industrial activity. The state should certainly not be in the business of redistributing income between the classes. Control of spending was viewed as crucial to maintaining this sort of impartiality and preventing the return of the “old corruption.” Curiously, these edicts about keeping the state out of the economy drew the Treasury deep into domestic policy—far more so than its counterpart finance ministries on the continent. Because tight control of the purse strings was the basis of Treasury power, departmental spending plans had to be agreed with HMT in advance and voted annually through parliament.
The broad assumptions of Victorian policy—the belief that unconstrained individuals, acting in their own best interests, could further the collective good better than state direction—long survived the Victorian age. From world wars to the rise of Labour, all sorts of 20th-century challenges and developments would soon push society and politics in a more collectivist direction. But old British habits of policy and management died hard—if they died at all.
The traditional hands-off approach remained in evidence across education and training regimes, banking and finance, as well as wider government policy. Business followed it too: competition between atomistic profit-making firms, each fixated only on their own bottom line, has long been the norm across most sectors of UK PLC. Employer and sectoral organisations, unlike their European neighbours, have rarely had much power. Firms continued to be run for their owners and managers, rather than taking account—or being expected to take account—of the interest of wider stakeholders such as employees or suppliers.
Remarkably, the spirit of something like economic liberalism even found a home in British trade unionism. Its core tradition, which developed out of the skilled, or craft, guilds and unions of the early industrial age, is a belief in “free collective bargaining.” That is, unfettered negotiations between employers and their employees at the level of the individual firm or even individual site, to determine pay and all other terms and conditions. The first footsteps of the British labour movement into electoral politics were about enforcing the right to such bargaining and ensuring that the state stayed out of industrial disputes. More than once, that central belief has clashed with the priorities of the wider British left: as late as the 1980s some trade unions opposed a minimum wage as a state incursion on their own turf.
Back in the 1940s, union attitudes to what most elsewhere on the left—and even some on the right—hoped would be an economic revolution based on planning was, at best, mixed. In the Attlee years, the so-called “Gosplanners,” named after the Soviet Union’s planning apparatus, wanted a true command economy—the continuation of wartime controls, with substantially state-directed investment decisions, state-set production targets and all the rest.
“Gladstone saw a great danger in politicians competing for votes by promising spending on certain projects”
By contrast, the more liberal left became known as the “Thermostaters”—they wanted the state to use Keynesian aggregate demand management to regulate the temperature of the economy overall, maintaining steady growth and employment, but cautioned against the state getting dragged into wider micro-management. In the end the Thermostaters won out, in no small part thanks to the backing of the Trades Union Congress.
The British unions certainly wanted full employment—after all, nothing strengthens their bargaining hand more. But equally, they were committed to free firm-level collective bargaining. Under sufferance, they would put up with active government allocation of labour during a war, but they would not wear it in peacetime. Workers had to be free to work where they wanted to work and be able to freely combine to bargain a good wage. Whatever the theoretical appeal of a more “socialist” planned economy, it was incompatible with the British tradition of trade unionism just as much as the British tradition of business. And as the postwar years ground on with the balance of payments crises and later inflation, every attempt to answer these problems with something new—from Macmillan’s corporatist NEDC to Harold Wilson’s incomes policies and social contracts—would eventually run into the old hands-off religion of free collective bargaining and unconstrained, freely competing firms. It is hard to run a corporatist state without any corporatist institutions.
And what of the supposed great break of 1979? Just as the collectivist turn of 1945 can be overplayed, so too can the turn back towards individualism after 1979. Certainly the unions were restricted, and the economic borders of the state ordered into retreat, through privatisation, welfare cutbacks and the ditching of the commitment to full employment. But the Thatcher government retained a far larger footprint than any before the war, and sometimes its priorities aligned with the pre-existing social democratic drift: indeed, it was during the 1980s that state spending on health surpassed state spending on defence for the first time. Even after the large Thatcherite cuts in top tax rates, the tax system remained more progressive than in the 1920s or 1930s. So there were limits to the government’s ability to turn back the clock, and—perhaps more to the point—there was a limit to how much neoliberals had to do when so many traditional liberal habits of thought and practice had never been banished.
In this new mercurial economic moment, there is a temptation to look back on the economic history of Britain to emphasise the radical breaks: to dwell on those two great supposed turning points of 1945 and 1979. Both heralded important changes, but both contained much in the way of continuity.
Attlee, before becoming prime minister, once argued that “the City in the middle of a socialist state is as anomalous as the Pope in Moscow,” and yet the City escaped major reform when he was in charge. Yes, the Bank of England was nationalised and capital controls were imposed as part of the global Bretton Woods monetary regime, but the core functions and operations of the capital markets were left alone. Even as the “commanding heights” were nationalised and the welfare state built, other aspects of the Victorian liberal inheritance lingered on: free competition between individual firms, free collective bargaining within them and a free-for-all instead of any sort of organised training regime. Parts, only parts, of what Attlee did were undone by Thatcher, but the truth is that her supposed “revolution” could also draw great strength from the things that he never did.
In short, British economic policy is better understood as a story of continuity than change. The British economy of 2021 retains much of the liberal framework of the 19th century, mixed with a selective dose of mid 20th-century collectivism. If Attlee couldn’t shake off the first half of that, neither could Thatcher the second.
If political leaders as determined and effective as those two didn’t rewire the British economy as fundamentally as is widely assumed, then what are the odds of Johnson pulling it off today? Even his friends probably would not describe him as imbued with a comparable ideological consistency and focus. He is certainly an expansive character, and it seems that his crowd-pleasing instincts incline him to a “buy now, worry about the bill later” attitude, which certainly represents quite a break with the long decade of Conservative austerity before he arrived at the top.
“If Attlee and Thatcher didn’t rewire the economy as much as assumed, what are the odds of Johnson pulling it off?”
The real point, though, is not about the character of our leaders, it is about how choices made deep in the nation’s past continue to shape its direction deep into the future. The old Gladstonian nostrums of fiscal policy will not be entirely banished by even the largest of personalities. Many ingrained institutional instincts remain: a desire to keep a firm hand on spending, a suspicion of new projects, the wish to keep taxes as low as possible and gnawing anxiety about the debt. The Treasury, senior hands will quietly admit, is still a department where its ability to say no to the spending plans of Whitehall peers is prized above innovative policies.
None of which is to say that politicians are powerless, far from it. But as they dream up a “new British model” or vow to “build back better,” they would be wise to acknowledge and accept that they are not starting from the hoped-for blank page. Just at this moment, the successful rollout of the vaccine programme has left Whitehall with a rare spring in its step and a new confidence in the ability of the British government to manage large-scale projects. Perhaps the incomparably more multi-layered challenge of “levelling up” really will proceed in the same way. But, equally, it could go the way of test and trace or PPE procurement in 2020.
What can be said with more confidence is that whatever the merits of interventionist vs laissez-faire economic management, in Britain a very long record suggests that the latter tends to mesh more naturally with our existing institutions. Any programme for a more muscular and dirigiste British state will not be accomplished by changing priorities in Whitehall alone. It will take a far wider overhaul of the British economy—and perhaps even the whole British way of thinking.
