The first sign that man is moving from the reckless abandon of late youth to the windswept comfort of early maturity can be found in his reaction to the sight of falling snow. Where once it would have been an excuse to declare the days schedule defunct, this year it signalled only the onset of boredom.
Consequently I dusted down my new year’s resolution to ‘laugh a lot more’ and began thinking about Labour’s attitude to economics. I propose to look at the Labour leadership’s deeper economic instincts to provide a guide as to how they might actually run the economy.
Ed Balls famously endorses post neo-classical endogenous growth theory: a theory which might be regarded as a left-wing version of the famous ‘trickle down economics’ which Thatcher practised.
Post neo-classical endogenous growth theory argues that if a government concentrates on creating high-skill, high-salary jobs, the wealth created by these jobs will create further, lower skilled jobs down the line, for less skilled workers to do, culminating in full employment without the government having to intervene.
This is a fundamentally liberal theory, and is much closer to the economic liberalism of Keynes than to the social democratic tradition of labour.
The problem with this theory and how it was applied in Britain is that successive governments of both the other parties ensured that most ‘high end’ value added jobs in the economy came to London and the surrounds, and even if one accepts the trickle effect, Britain is quite simply too large for all the regions to benefit from such a policy .
Under the coalition, the focus has changed, the talk is of rebalancing the economy, with thousands of apprenticeships created and a determination to revive manufacturing.
But perhaps the biggest clue to the current Labour leadership’s economic DNA can be found in relation to their rejection of the “lump of labour” theory .
Lump of labour theory states that there are a finite number of jobs in the economy at any one time, so the only cure for this is for the government to directly create jobs in equal number to the amount unemployed.
This theory fell from favour among most economists quite some time ago, they declare it a fallacy. Indeed “lump of labour fallacy” is now far better known than the original theory, which is now only used by ardent protectionists and crude neo-fascists trying to give their prejudices an economic veneer.
But it wasn’t always thus. ‘Old’ Labour politicians believed that government’s should pursue a ‘full employment’ policy, because they subscribed to lump of labour theory, which is also a central tenet of a Marxist analysis of capitalism.
For post neo-classical endogenous growth theory to be effective, ‘lump of labour theory’ must be a fallacy, because post neo-classical endogenous growth theory, as we have seen, is predicated on there being an elastic number of jobs in the economy even without direct government intervention.
Thus it could be argued that labour have abandoned ‘full employment’ as a policy, and embraced the more economically liberal stance of people like Vince Cable, who have been arguing for a generation that ‘lump of labour theory is a fallacy’. By embracing such a view, the two Eds are embracing classical, economic liberalism.
The reason they appear to be such ineffective leaders of the opposition is that they must constantly neglect their liberal instincts for the rhetoric of the left in order to keep their grassroots happy. In reality Ed Milliband has shown himself on numerous occasions to be a classical liberal.
On economics and a range of other matters, his instincts are much closer to the Orange Book than the Red Flag, which must be awkward for those in the Liberal Democrats who have, since the formation of the coalition embraced Milliband as an alternative to the economic liberals within the Lib Dem leadership. Still its an improvement on previous attempts by Lib Dems to embrace Tony Blair, who has described himself as a ‘conservative on economics and foreign policy’
Liberals of all hues should rejoice that as historically with the Welfare State, Climate Change, the EU, the leadership of the Labour party are starting to embrace liberal solutions. .
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
21 Comments
David, Perhaps I demonstrate (again, as no doubt others here would say!) my economic illiteracy. I haven’t even heard of “the lump of Labour theory / fallacy”. Is it a somewhat derogatory description by laissez faire economists? I cannot for the life of me understand the rejection of decisions by public bodies to employ directly more people. Surely, if managed properly, this is, in addition to getting some work done which may not be done with purely a profit motive in mind, a good way of sharing the fruits of the common pot? Those of us of a certain age remember Thatcher’s condemnation of public sector jobs as “not proper jobs”, which struck me as barmy as well as cruel. As a follow up to that, those of us with a leftist tendency, which was most of us in the Alliance at the time, thought the economic ideas of nuLab paid too much obeisance to Thatcher. In an era of economic hardship, surely Thatcher derived economic ideas lose any attraction they may have had when the economy was booming? Part of the situation that the misguided Welfare Reform Bill seeks to “correct” is the legacy of the 1980s, the breaking of communities and industries. Our critique of Gordon Brown should surely be his limpet like clutch to Thatcherism, not any alleged hangovers from Marx!
We’ve been here before. They continued embracing liberal solutions for a year or two in government, then turned and ran in the opposite direction.
(Also, the trickle-down theory is as seductive as it is misleading: seductive because it really works, and misleading because it works only in such tiny amounts that few people at the bottom of the pile will experience any real benefit. I suspect – but have no evidence to support this suspicion – that this approach to job creation would prove unsatisfying for similar reasons)
Are we meant to celebrate all three parties falling into step? I’d rather at least one of them had a goal of full employment, even if only for the sake of healthy democracy.
I say this as a “trained” economist but economics really is a load of rubbish.
So many theories, so many people developing their whole world view around what some bloke said in the 1700’s about “invisible hands” but no empirical tests that actually show whether the theories are actually testable and reproducible.
The problem is if I want to prove that say, the (much abused) Laffer curves prediction that lowering tax rates can lead to increased revenues then I have to be able to isolate the effects of this from the whole of the rest of the economy which is impossible.
Therefore it always comes down to political dogma.
Ok firstly, thanks for the comments.
Timak, Vince Cable in his memoirs describesd working in India and seeing how the move to economic liberalism helped to revive that economy. He explains in his book the evidence of this is a way far superior to the way I could, and certainly I couldnt in the space allocated on this site.
@Adam
The problem isnt with full employment as an aspiration, it should always be an aspiration, the problem is that to craete full employment that is sustainable is a challenge and more realisab;le in the long rather than the short term, Lbaour’s deification of full employment policy, and their muddle headed method of trying to achieve it by rejecting a fundamental truth of economics….
@ andrew
I agree with your post, to be fair to Labour, post neo-classical endrogenous growth theory, and particularly the statist way in which they applied it, aims to make the trickle down economics theory work for a graeter number of people….
@ tim
As I say Vince Cable is ardently a supporter of the lump of labour fallacy and is not a trickle down economist.
Nor is the lump of labour fallacy a way of denigarting state intervention, its not. Statee intervention to aid employment relies on lump of labour being a fallacy, but to work it also relies on the jobs which are craeted adding economic value not just social value, and therefore creating more jobs.
The problem is that Keynes, a graet Liberal, advoacted the state intervening to craete demand, which is not simply the same as creating jobs…but the left, somewhat missapropriated him that way…
For me the economists who are on the right side of the argument in terms of how to tackle this economic downturn of which the government has contributed are the likes of Joseph Stiglitz, Paul Krugman, Goerge Soros, and Martin Wolf. None of them are in the Labour party.
Joseph Stiglitz in particular, who is the former Senior Vice President and Chief Economist of the World Bank and author of the book “Globalization and it’s Discontents” knows a lot about what needs to be done to help countries in debt, and also knows about the kind of neo-liberal policies that fail. I wonder where he fits in to your peculiar world view? Can you quote what his opinions are on “lump of Labour”? I can’t.
Those who support deregulation of financial services do so because they are influenced by “economic liberal” theories, but as we know this led to a chronic market failure in the banking system that contributed greatly to the economic recession in 2007/8 and which is making it hard to get out of economic recession even today. I very much doubt that 2005 – 2015 will go down in history as a golden age in economic liberalism anymore so than the 1930s.
I agree with most of this but not sure about:
“The problem with this theory and how it was applied in Britain is that successive governments of both the other parties ensured that most ‘high end’ value added jobs in the economy came to London and the surrounds, and even if one accepts the trickle effect, Britain is quite simply too large for all the regions to benefit from such a policy ”
What did they do to ensure this?
Well, this article seems to be another good reason not to support Ed Miliband!
Beveridge recognised that it is an important job of government to influence the economy in such a way (and take other measures) that result in “full employment”. Indeed his proposals for welfare depended on it. That is still an important job of government.
Oh yes – it is also the job of economics to serve the wider interests of society. Which is why the kind of extreme free market economics promoted by “economic liberals” and their soul-mates in other parties and none are fundamentlalyh wrong. So just forget all this endogenous rubbish and take a step out side into the real world!
Tony Greaves
Very interesting article but arent you putting too much weight on what Labour says ?
Ther seems to be an assumption that a, Labour Politicians often say what they mean;
b, they understand what theyre saying.
For me, one of the big problems working with Labour (& “The Left”) is that they dont really get the idea of Truth, hence their willingness to jump on & off bandwagons with no sense of shame.
I am ajmost driven to give uip being a Liberal sfter some seventy years if this is the way we think!
I am definitely an anti Capitalist AS We Know It! But I do believe that Full employment is possbible and that ‘lumps of labour theories are rubbish.
What is wrong is that we are tied to assessing what we can do now and into the future by how we can aquire what others have done in the past!.
It is possible to devise exchanges of goods and services by who can produce them and who needs them now without relevance to the past, but we are all so bound up in, ‘defunct economists’ that we are not prepared to consider them!
Genuine freedom, Individuality, and opportunity can only come about when ther is involuntary unemployment is eradicated and with the sort of rubbish expressed in ‘lump labour ‘theories we shall never get there!
i repeat momotonously that CAWKI is unfair, inneficient, undemocratic and unworkable. Unfair in that its rewards don’t match the effort put in, inneficient because it relies on unemployment, undemocratic because it concentrates wealth and power in fewer and fewer hands, and unworkable …well the nmber of people tring to work it demonstrated that.
I remain an ancient nerd I suppose! But I also remain convinced that I’m right! Don’t we all?
It is quite clear from this article and others that you really don’t know what you are talking about.
If the idea of ‘full employment’ is Marxist then both Keynes and Beveridge must have been Marxists. Which, incidentally, they most definitely were not.
Full employment isn’t predicated on the idea of a lump of labour anyway. You can believe that it is the government’s duty to ensure that the maximum possible number of people are in employment without accepting that there is a lump of labour, the two beliefs are not mutually exclusive.
Anyway, the facts speak for themselves. Since the end of the post-war consensus there has been a much larger percent of the population in perpetual unemployment.
And, speaking anecdotally here, try telling people that there is as much work as you want there to be when you are unemployed and applying for any job.
The direct implication your muddled (and bizzarely politicised) position is that there aren’t a set number of job opportunities at any one time and, ipso facto, that the number of jobs neither decreases or increases. Essentially you are arguing that there is an infinite number of jobs. Try again.
“Post neo-classical endogenous growth theory argues that if a government concentrates on creating high-skill, high-salary jobs, the wealth created by these jobs will create further, lower skilled jobs down the line…”
Except, of course, that it hasn’t worked. A huge number of people are unemployed or under-employed and many jobs are filled only because immigrants have taken them – and not only on lower wages either. So we have (metaphorical) starvation amidst plenty. Far from being, “a fundamentally liberal theory…” this is fundamentally BS.
As with all big lies, the secret of success is to start with a grain of truth – to dress the wolf in sheep’s clothing to fool the sheeple (and, as it has turned out, political leaders that should know better). And in economics what matters is usually the unstated assumptions – like for instance that unemployed coal miners will instantly morph into bankers, that the super-rich will spend all their income on socially useful projects so keeping money circulating and that banks will preferrentially invest in technology start-ups instead of buy-to-let speculations. The idea could have been made to work but only if laws and regulations existed to close off damaging diversions and channel energies to productive ends. But that didn’t happen and it was never going to happen because the dodgy economics was always just a smokescreen.
Meanwhile, back in the real world, people who loose their job mostly go unemployed, around 20% leave schools functionally illiterate (what lumpen labour jobs will they get?) and the wealthy mostly got that way by property speculation or by high-earning City jobs which are fundamentally extractive (redistributive in a bad way) rather than creative or socially useful or wealth enhancing for society. Wealth is not recycled into projects that create domestic jobs but piled up uselessly and exported to tax havens – a process enabled with “helpful” legislation by govts that then weep crocodile tears about the impossibility of taxing wealth as opposed to endeavour.
Too many liberals are lulled to sleep by the frequent use of words such as “free” when what is really meant is free to pillage and construct monopolies. And all those monopolies and oligopolies make things expensive – around a 30% premium in the case of supermarkets alone (don’t even think about the impact of excess property costs!) which in turn raises our cost of living so real industries can no longer compete so there are less jobs and so on. The end point is that we become neo-feudal.
Three cheers for the IMF and their glorious campaign to squeeze the trickle out of trickle down! Do you really think Edward Carleton Tufnell was a better economist than Adam Smith, J.S. Mill, Alfred Marshall or John Maynard Keynes? Really?
“Those who make the fallacy claim fail to offer specific evidence of the supposed belief in a fixed amount of work.”
The above statement appeared (without attribution) in an IMF Working Paper on retirement and youth employment in Belgium. Here is a challenge for you, David. Find the missing evidence for the claimed belief in a fixed amount of work.
Hint: the lump of labour fallacy claim is a COMPOUND claim. The first part is a claim about people having a belief. The second part is a claim about the alleged belief being a fallacy.. Unless the first part of the claim can be demonstrated, the second part of the claim is immaterial. The fallacy claim is itself a fallacy.
What is the point of the Labour Party? Discuss.
(OK … apart from keeping the likes of the 2 Eds off the streets and away from where they could do any serious damage … unless they get elected … )
If the premiss of this article is true, and Labour has embraced economic Liberalism, then there will be an awful lot of disappointed Labourites out there. Again.
What I think it does is point to the need for at least 5 political groupings rather than the 2 1/2 we have currently.
Read this: Lump of labour fallacy (Wikipedia).
There is no “lump of labour theory”. It’s an economists’ description of an unthinking assumption lying behind some naive economic theory.
If you can show anywhere ehere an economist, Labour-supporting or otherwise, declares in favour of a lump of labour theory, I’ll eat my hat. If you can’t, why should we take any of the rest of what you say seriously?
I’m particularly puzzled by the reference to Keynes as an “economic liberal” — what on earth do you mean by that? Are you seriously suggesting that Keynes had more in common with those who call themselves economic liberals today than with those social democrats who followed (or claimed to follow) essentially Keynesian economic policy for 30 years after WW2?
It’s interesting to read Robin Martlew’s critique of “Capitalism as we know it. Tonight I attended a talk by Mark Littlewood, who argued (legitimately, in my view) that if an industry is given state guarantees then that will inevitably lead to risky behaviour – because the risk is externalised, and therefore irrelevant. This is potentially far more significant than pay structures: our banking system rewards risky behaviour, and it’s hard to see how a regulator can hope to keep up. This is a direct challenge, of course, to the view Geoffrey Payne expresses above, which assumes that a regulator actually can do it, if only the right levers are pulled and the right rules set. Maybe it can be done – maybe – but given that banking is already one of the most heavily regulated industries in Britain the track record so far is not great.
Incidentally, while I leave the above open to debate to some extent, I agree wholeheartedly with Mark Littlewood (and disagree with Geoffrey Payne) that the 2008 crash was not a market failure. It was a market correction, which is rather different (though, in this case, it shattered our highly fragile economy). A market failure is when the price mechanism does not successfully reconcile supply with demand. The term “market failure” does not just mean “the market hasn’t done what I want”. Indeed, that definition completely misses the point of the market, which is that it allows decisions to be made without any single person having to possess all the information and process it correctly (which is highly inefficient, usually actually impossible, and always tends to reduce individual freedom of action). This is what should attract any liberal to market mechanisms: they are the ultimate in the decentralisation of economic power, provided that they are free rather than perverted by monopolistic practices. There are problems, of course, and we need to address those, but I have very little time for those who simply dismiss markets as some sort of fad. They aren’t: this is our liberal inheritance, and it’s time to take it back from the Tories, who aren’t very good at using it.
To Rob, and probably many more
Exactly! I am trying to suggest that CAWKI, Capitalism As We Know It, is a misguided system. Most of us are hypnotised by the weight of conventional comment that takes CAWKI as the only way forward. Marxism or Communism don’t come into it! Liberal Eye, who ever s/he/they are, seems to be nearer the facts than you are Rob.
CAWKI is based on theories of competirion which concentrate wealth and power, I believe that people are at least as much cooperative as competitive and that our economy needs reshaping to recognise and utilise that!
This by no means denies the place of markets and competition. Each of which can have both beneficial and distorting effects on social behaviour.
While we believe that unemployment is a ‘natural phenomenon’ we will fail to recognise the huge potential for sustainable growth and a fairer and more equal society! however, if, and I believe we have to, we accept that unemployment of any extent beyond transisional is socially and economically wasteful, we are looking at a revolution in economic practice and we have to face up to that! CAWKI is reliant on unemployment!
(I wish there was a spell checker here!)
@StuartWheatcroft – I do not know if you remember the building societies? Northern Rock is a good example. It lasted over a 100 years as a building society, including through the 1930s. Then the sector was deregulated, Northern Rock became a bank and within 15 years it had to bailed out by the government.
I would say the overwhelming concensus in the Liberal Democrats, including most of the economic liberals is that the failure of the banks in 2007/8 was down to light touch regulation. Mark Littlewood is very much out on a limb here if he is suggesting that we should get rid of the regulators. What is true is that it is hard to regulate the banks, it is not an elelgant solution at all. But if they cannot do their job then quite frankly the banks should be nationalised rather than be allowed to do again what they did to us in 2007/8.
I think that Mark Littlewood’s definition of market failure is a technical one. In markets companies that do not perform should go out of business. But with the banks they were too big to fail. That is the consequences of them failing would have been catastrophic to their customers and the wider public. Even George W Bush felt he had to save the banks in the US, so on economic policy Mark is to the right of him! Normal market rules should not be allowed to apply to banking, the concept of contagion that is being widely discussed in the news over the past 5 years is itself an indicator of market failure.
I would say that markets work perfectly where people have perfect information on the products and make perfectly rational decisions. Which is almost always never. Advertising does not usually encourage rational thought, more often it is manipulative and deceptive – and without regulators it would be even worse. And if people did think rationally there would be no such thing as the gambling industry, which logically can only survive if it extracts more money from you than you get back in return, and more often by a very wide margin.
@ Stuart.
The search for profit always involves risk and more profit means more risk so giving state guarantees is deadly dangerous. No leass an expert that Andrew Haldane, the Bank of England’s Director for Financial Stability argues that risk is a toxic by-product which damages innocent bystanders – in this case us taxpayers.
http://www.bis.org/review/r100406d.pdf (pdf)
And regulators can perfectly well control this. The reason they don’t is because they spend so much time minutely examining leaves that they never see the forest. My theory is that this is because there is widespread bunking off going on. When some past govt designed the system they probably back off touch measure in the face of determined financial lobby (intentionally if Tory, by cowardice or ignorance if other). And when it comes to enforcement is is so easy to keep busy examining irrelevant minutiae, especially if senior ministers talk of the importance of “light touch” regulation. But if Parliament had the guts to impose a complete split between retail and investment banking, to legislate that main board directors of deposit-taking institutions should not enjoy limited liability and that fiduciary principle would be enforced with fines levied on dividends (so shareholders would see for themselves the deduction) – then we would see a very different banking sector.
@ Geoffrey Payne,
Thsoe economists all believe in the Lump of Lbaoru fallacy.
Stiglietxz is a phenemoneal critic of globalisation and highlights the problems of neo-Liberal sdolutions.
Thats why I dont support Lbaour, when stiglietz was highlighting the problems of neo-liberal solutions, The Labour Party was the ONLY UK party advoacting completely neo-Liberal polciies,
There are no Neo-Liberals in the Lib Dem Parlaimentary party, but there are many Classical Liberals.
iTS arguable there are some neo-Liberal Toriies, for example, Ken Calrke, who is neo-Liberal on economic matters if nothing else.
The Lib Dem Leadership is made up of predominantly Classical Liberals, and people like Vince Cable were highlighting the problems of neo-Liberalism when Laboru were prcaticing it.
I agree with you regarding the buiolding socities, Thats why the Classical Liberals in the Lib Dems strongly opposed the demutualisation, whien the neo-Liberals in Lbaour and the Conservatives in the Tory Party acted together, as they often do on economic matters, to push it through.
Poeple like Stiglietz highlight structral problems, which I think they are correct about, and I think a growing consensus, inclujding among Classical Liberals in the Lib Dems would say that Stiglietz et al are corrcet in their analysis of the structural problems, but before you canr epair the structure, you have tp repair the leak, which is what we are doing now.
@ Stuart
Capitalism as we know it deserves to die, and be replaced by a capitalism in which vested interests do not cotnrol everything as they do now. Thats rhe Classical Liberal Solution, and the Lib Dems were founded to acjieve that, they wanted to be a party indepedent of the vested interests of the left, i.e. the Unions, and the right, i.e. the oligopolists.
@ Malcolm, your right, marx didnt call it the lump of labour theory, it called it lumpen proletariat, economists adopted the term lump of Lbaour to explain the fallacy.
@ Sabndwhichman
The IMF are not better economcist than Keynes, Smith et al. thsoe are classical liberal econiomists and if they had been at the controls of the world economy instead of the IMF i dounbt we would be in this mess……
@ Liberal Eye,
Your right, it doesnt work, how could I be arguing it works, when Im criticising Lbaour, who used that theiry and bankrupted the country, but it is liberal, in that it advoactes minismising state intervention, its just that its neo-Liberal, not classical Liberal.
@ Tony Greaves,
there are no classical economic Liberals in any other parties, there are neo-liberal economic Liberals in the Lbaour party, and they got us into this mess.
Im not aware of classical economic liberalism being prcatioced in this country bvy any government, the ONLY politican I hear advoacting it, is Vince Cable, and he has been proved right for most of the last devade.
Classical Economic Liberalism differes from neo-Liberalism in that..classical Liberal economsits advocate state intervention in makrets in order to make markets free, because they believe that without intervention it will never be free, that goes back to Adam Smiths most fsmous quote, and the business establishment didnt like him for it.
@ Rob
Marx was not the sole advoacte of full employment, he was the first to do so, Keynes and beveridge also advoacetd it, and I think full employment should be the first aspirartion of any government, but I dotn think a full employment policy, as defined traditionally by Lbaour is the way to acjhieve it, I think achieveing it through calssical Liberal solutions is the way to achieve it……..and so did Keynes and Beveridge, which is why both of them were members of the Liberal Party in Parliament, and have little enough truck with the Labour party.
@ Simon
I would answer that in two ways
1) Labours decision to tery to push more and more people to University, at the expense of Voacational training
and both the previous governments’ decisions to deregulate the city
Bottomwood, at The Economist has once again mounted the magazine’s boilerplate soapbox to declaim (falsely, as usual) on the lump-of-labour fallacy or what I call the lump-of-labour fallacy follies. Ordinarily, there’s only so many times a bloke will hit himself on the head with a brick before he realizes the brick is not going to give way. But two hundred and thirty-two years of fallacy follies suggests that economists WANT to keep making the same mistake over and over again. Could it be because their remit is to talk down the high price of help and when they can’t think of any good reasons, there’s always the bad old lump.
Well, I’ve drafted up a brief essay on the IMF staff’s sorties into stop-me-before-I-dissemble-again plagiarism and the long, sorry history of the fallacy follies. I call it “The lump of labor hoax: evidence, inference and the blur of bamboozlement.” If I wasn’t such a realist, I’d say that should put the final nail in the zombie fallacy claim’s coffin, but I’m afraid the will to believe in the economists’ very own private Tooth Fairy, Santa Claus and Easter Bunny rolled into one is too strong to ever break.
Never mind Santayana, then, ye Liberal Democrat post-neoclassical endogenous growth theory enthusiasts! Carry on with your forgetting history., in the long run we’re all doomed to repeat… and repeat… and repeat…