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Time to move on from the old economic model

Daniel Bentley, 13 November 2013

Recent GDP figures have been encouraging, but the question is increasingly arising: what kind of growth are we rekindling and how is the UK economy shaping up not just for the next few years but the next few decades and beyond? Are we simply reverting to an unsustainable reliance on London and the South-East, the financial services industry and private (if not public) debt?

This is the underlying concern of our latest volume, published today, by Patrick Diamond, a former Downing Street adviser under Tony Blair who now lectures in public policy at Queen Mary, University of London. He warns of the dangers of a return to “business as usual” in economic thinking, saying too many politicians at Westminster are content simply to shore up “the old economic model” that led to and intensified the pain of the last recession.

Rather than simply focusing on a rapid return to growth to the exclusion of wider considerations, politicians need to look beyond simply winning the next general election and think strategically about the long-term challenges facing the economy, he suggests.

“Most politicians are apparently content to operate within familiar territory of ‘business as usual’, returning as quickly as possible to the pre-2008 growth model which is most likely to achieve immediate political and electoral success,” he writes in Transforming the Market: Towards a new political economy. “As a consequence, there has been too much emphasis on the self-correcting properties of markets on the right, and the magical powers of government intervention on the left.”

Diamond says there has been too little clarity from the major parties about the scale and nature of the reforms required to develop a new growth strategy for the UK.

“The Coalition government has emphasised its pursuit of economic orthodoxy, prioritising low inflation and public debt, ‘sound money’ and loose monetary policy as the primary levers facilitating a rapid return to British prosperity. In contrast, the opposition Labour party has sought to promulgate the Keynesian alternative premised on aggressive monetary and fiscal policy interventions designed to bolster aggregate demand.

“The emphasis within both approaches is on shoring up the old economic model, despite evidence that a more fundamental crisis of the ‘mass production paradigm’, which until recently defined Western market capitalism, is underway.”

Calling for a “national economic strategy”, Diamond urges a massive shift of power to the regions that would that would put communities, councils and other civic leaders in charge of a localised economy. This would involve giving councils and other regional bodies more powers to support businesses and local infrastructure projects – including the expansion of regional airports – and using public procurement to support small firms.

He says major cultural attractions like the British Museum and the Royal Opera House should be re-located to Northern cities and that the House of Lords should be given a regional base. A new “super-ministry” of economics – taking powers from existing government departments including the Treasury – would also be needed to drive such a redistribution of power away from Whitehall and encourage “bottom-up” growth with a new emphasis on community-based SMEs, mutuals, co-operatives and social businesses.

Faith in the traditional remedies of both main parties – Keynesian stimulus and market fundamentalism – is “rapidly receding”, he says. “The sense of a deepening crisis in political economy and the suspicion that neither of the conventional ideological approaches in British politics holds water has grown deeper since the crisis broke five years ago … neither of the dominant intellectual paradigms in British economic debate – Keynesian stimulus nor market-centred austerity – offers a viable political economy strategy for the United Kingdom over the decade ahead.”

Transforming the Market: Towards a new political economy is available from Amazon here.

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