On Wednesday, Ben Ansell (political economist and Professor of Comparative Democratic Institutions, University of Oxford) provoked discussion by publishing an essay exploring whether Labour have a theory of growth. It’s a good question. In fact, it’s the question that prompted me and Neil Lee to convene some of country’s leading economists to dissect the party’s economic plans a year and a half ago.
We compared the party’s proposals against most of the academic theories Ansell lays out and agree none of them fit entirely neatly. The preoccupation with driving up investment (see, for example, the government’s pension reforms) might fit with a neoclassical theory – indeed, at times it reminds me worryingly of the earlier and cruder Harrod-Domar model, which sees growth as a direct function of capital stock. The commitment to industrial strategy fits with developmentalism. The most promising – explicitly embraced by Rachel Reeves – is the “modern supply side” approach associated with Joe Biden’s Treasury Secretary Janet Yellen. Yet Ansell identifies supply side policy with the crude tax rate obsessed version of Liz Truss – not even the more plausible, but quieter, supply side reforms of Jeremy Hunt, boosting investment incentives and childcare.
But if there is a lack of overarching vision, we were less inclined to see this as a failing of Rachel Reeves and her team, but rather as a reflection of the state of the discipline of economics. Chastened by the financial crisis, and undergoing a ‘credibility revolution’ that encourages the more empirically robust methods of micro research, economists have grown ever more modest in their claims and tended to eschew grand theory. That makes it harder to find ‘off-the-shelf’ academic growth theories in the way that policymakers could in the 1990s.
I’m also less sure than Ansell that it matters that Labour’s approach cannot be so easily corralled into a single doctrine. He argues that the different theories are incompatible, but they do contain substantial overlap. Ansell presents the history of growth theory as “grand, clashing economic schools of thought”, but the way I was taught it presented them often as evolutions of adaptations of one another. For example, neokeynesian theories don’t just throw out the Solow model, but “endogenise” (incorporate) technological change. Supply-side and Keynesian theories are reconciled by distinguishing the “short run” (when output depends more on demand) from the “long run” (when supply drives growth).
To be clear, there are direct conflicts between alternative approaches. For example, economic planning is inconsistent with a pure free market approach. Yet where these occur, I think Labour have mostly successfully indicated how they intends to resolve them. Their signals on industrial strategy suggest they will seek to guide the market in sectors deemed to be strategically significant, but that they will stop short of ‘picking winners’ and favouring particular firms.
One area where Labour have made a clear choice, but which does not seem to have been widely noticed, is on the labour market. Some commentators have been puzzled by policies to strengthen workers’ rights, raise the minimum wage and increase national insurance, all of which are deemed ‘anti-business’, and make it harder to hire. But reading between the lines, the clear implication is that Labour favour quality over quantity when it comes to jobs – they are willing to lose some low wage, low productivity roles in the expectation that raising standards drives up productivity and perhaps entices more people into work. That may or may not be a wise gamble, but it is a clear judgement that entails an underlying theory of how the labour market operates.
However, I believe the biggest question on economic growth is not which theory you subscribe to, but your diagnosis of what the strongest binding constraint on growth is. It’s less about which parameters are in your equation, and more about the value of the derivative.
That is because the tougher decisions facing the government concern which levers to prioritise: where to spend financial and political capital. And here, again, Labour have set out their intentions reasonably clearly already. Rachel Reeves has already said in so many words that “the single greatest obstacle to our economic success” is the planning system. Planning reform is unmistakably at the heart of Labour’s plans for the supply side of the economy. Securing greener energy is also evidently part of the plan (though it’s not always apparent whether this is intended to help through demand side – creating jobs directly – or the supply side – reducing firms’ energy costs).
Conversely, I don’t think Labour deny that human capital contributes to growth. But the most natural explanation for their reluctance to increase education funding and support increased immigration is that they don’t believe it is the key limiting factor. And an unwillingness to ease frictions with the EU suggests that trade is not intended to be a primary driver of growth (though the Chancellor’s recent trip to China is evidence trade won’t be entirely neglected).
Despite the mishmash of models underpinning the government’s conception of the economy, there is a discernable plan. Whether it is the right plan, and one they can execute effectively, remains to be seen.
