Opinion: Labour’s embracing of economic liberalism is to be welcomed

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

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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!

  • Andrew Suffield 9th Feb '12 - 10:07am

    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.

    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.

  • david thorpe 9th Feb '12 - 12:08pm

    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…

  • Tony Greaves 9th Feb '12 - 2:00pm

    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

  • paul barker 9th Feb '12 - 2:30pm

    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.

  • Robin Martlew 9th Feb '12 - 2:55pm

    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.

  • 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.

  • Malcolm Todd 10th Feb '12 - 12:39am

    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?

  • Robin Martlew 10th Feb '12 - 9:35am

    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!)

  • david thorpe 10th Feb '12 - 2:50pm

    @ 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

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