George Dibb
With market-driven neoliberalism exhausted and discredited, progressives around the world are coalescing around a set of policies variously called ‘productivism’ or modern supply-side policy.
The UK is no outlier. This week, taking inspiration from the Biden administration, Labour’s Shadow Chancellor Rachel Reeves launched a pamphlet proposing the need for a ‘securonomics’ modern supply side approach in Britain – but what does this mean, and can it work?
Reeves’ ‘A New Business Model for Britain’ sets a vision of how a Labour government would implement a productivist policy programme. This is a major shift from the last-gasp-neoliberalism currently being offered by the Conservative government. Notably, it’s also a shift from the approach of previous Labour administrations, highlighting critiques of Blair’s “knowledge economy”, drawing on the recent work of academic and former Ed Balls advisor, Nick O’Donovan.[i]
At its heart this is a smart political and economic move which leans into a new international consensus, aligns the UK with a global economic hegemon, and positions Labour with a powerful narrative of reform and renewal.
What is productivism and why do we need it?
Economist Dani Rodrik, who welcomed the publication on Twitter, describes how productivist policies ‘emphasise the dissemination of productive economic opportunities throughout all regions and all segments of the labour force’.[ii] Productivists recognise that an over-reliance on market mechanisms is to blame for our economic problems and argue for greater use of the powers available to the state.
Any assessment of the state of the UK economy would conclude it has not been well-served by neoliberal economics. The UK faces a host of challenges: among them flatlining productivity, the lowest levels of private sector investment in the G7, and stagnant growth. This is compounded by political instability consigning the UK to a ‘doom loop’ of tightening fiscal policies that hamper future growth and vice-versa.
There is a clear role for a more active and strategic state acting in the interests of a productive and growing economy. For too long, supply-side reform has been short-hand for tax cuts and deregulation. But there’s a progressive interpretation too. Growing evidence supports state action through active industrial policies, investment in capital, and aiding the adoption of productivity-enhancing technologies and practices. The 1980s consensus that public investment crowds out the private sector has given way to agreement between economists, trade bodies, and unions that public investment can crowd in the business in a catalytic way.[iii]
At the same time, there’s an urgent need for a state willing to use the tools at its disposal to implement an industrial strategy with the aim of a shift towards a net zero economy. Only by actively support the industries needed can we meet our carbon emission targets whilst also capturing the economic upside through domestic reindustrialisation.
What is Labour proposing?
With this pamphlet Reeves combines an economic critique with the optimistic rhetoric of Biden: “There will be world leaders in green hydrogen, clean steel, battery technologies, wind and solar. If we make the right decisions now, and set a clear direction, Britain could be that world leader”. This will be achieved through a larger, more power, agile and strategic state: “A modern state must be more active, making and shaping markets that are essential to a nation’s resilience and future prosperity”.
On specific policies, the piece is expansive, with few new proposals but placing these into a coherent framework of state intervention and partnership. To highlight a few: an active industrial strategy underpinned by statutory institutions; catalytic public investment in green industries; greater public ownership and equity through GB Energy and a National Wealth Fund; corporate governance reform to shift away from short-termism; planning reform to boost supply of housing and infrastructure; devolution of economic powers away from Whitehall; and a greater role for unions and sectoral bargaining for better pay and conditions.
Labour has recently announced that in government they would adopt a Mazzucato-ite mission-oriented approach,[iv] with the first mission being for the UK to have the fastest sustained economic growth in the G7 with good jobs and productivity growth in every part of the country making everyone, not just a few, better off.[v] This embrace of ‘missions’ is a positive step. Regardless of the policies to be put in place, taking the idea of missions seriously means working with a new approach. [vi] Missions should act as a goal above and beyond lowest-cost market efficiency. They should prompt government to ask not ‘What is lowest cost?’ but ‘What will shift us in the right direction?’.
Furthermore, putting productivism into practice requires government to understand the areas where the public sector can be most impactful and steering, and where the private sector can more effectively deliver or provide scale. British economic history offers us examples of successful and unsuccessful attempts to shape and make markets. The UK’s Contracts for Difference policy was transformational in de-risking private investment in offshore wind, leading to the UK becoming a global leader in offshore wind turbine installation.[vii] The development and roll-out of the Covid-19 vaccine provides another positive example. The government’s own Industrial Strategy Council reported how AstraZeneca’s success was a success story of public policy.[viii] The state supported the sector to innovate with patient investment in life sciences research and facilitated innovation and investment during the pandemic by remedying supply-chain constraints, and with purchase-price guarantees.
There are, however, two major questions in implementing a productivist approach in the UK. Firstly, to what extent should supply-side reform be balanced with demand stimulation? And secondly, to what extent can productivism be ‘benign’ towards market concentration and corporate power?
Balancing demand and supply
Put simply, supply-side reform can never be the entirety of the solution to the economic malaise that the UK faces if demand remains suppressed. This is especially true given that the root causes of the UK’s economic stagnation in the past fifteen years have been governments’ choice to pull demand out of the economy through cuts to public expenditure, and an insufficient focus on macroeconomic stimulation of demand.[ix]
The framing of this emerging economic and political paradigm as ‘modern’ supply-side reform positions it as an alternative to demand management, when such approaches must be maintained in parallel. It’s for this reason that ‘productivism’ could be considered a better framing for this group of policies: not only is it more understandable to a wider number of policy-makers (who don’t necessarily see the world divided between supply and demand); it is also more accurate, in that productivism should never mean considering supply alone. Addressing economic inequality – and growth – is both a question of supply and demand.
Fostering an open and dynamic economy
As Jan Eeckhout has shown, firms that are able to establish significant market power such that they face insufficient sectoral competition choose to restrict production whilst increasing profit margins at the expense of employment and with higher prices for consumers.[x] Ensuring markets are competitive, and confronting unchecked market power, is critical to both demand and supply. Given the need for productivism to increase both, as a policy paradigm it must be the enemy of uncompetitive markets.
Reeves recognises that market concentration is a problem in the UK, citing Competition and Markets Authority studies which observed ‘a marked increase in concentration [and profitability] in the years after the 2008 financial crisis’.[xi] The UK has an almost unique position at the forefront of financialisation and rentierism.[xii] Keir Starmer has rightly stated that the aspiration of this approach cannot be ‘merely to replace the public sector while extracting a rent to privatise the profits, while socialising the risk’. This is right, but, to date, little in Labour’s policy programme aims to address the structural factors that have produced such concentrated power and rent-dependency.
A mission-oriented, supply-side approach means being pro-business, but not pro businesses that work against the interests of society or extract from it. It means recognising the power of the private sector when it works with purpose, but acknowledging that not every firm in every sector does that.[xiii] It means recognising that there is no route to prosperity that runs through concentrated markets.
Joe Biden recognises this and has proposed an ambitious industrial strategy approach through the CHiPS and Inflation Reduction Acts. Both of these include carrots and sticks for firms, not just hand-outs. Examples include robust competition policy and clawback clauses on excess profits, as well as making support conditional upon union recognition, good pay, and a commitment to decarbonisation. These are the sorts of solutions that Labour should consider to boost the British economy and confront concentrated markets. Biden is making the US one of the most dynamic economies in the world by combining a pro-worker, pro-fairness, pro-climate and pro-business agenda, all while confronting corporate power. The UK should take a leaf out of his book.
There are many reasons to believe that a modern supply-side agenda would have significant benefits for the UK. To effectively shift the British economy from a position of stagnation to sustained growth will require shifts in the approach and policies of government, a change in how policy-makers engage with markets, a balanced approach with demand-management, and a rebalancing of power away from rent-seeking to productive firms.
George Dibb is Head of the Centre for Economic Justice at the Institute for Public Policy Research (IPPR).
Notes
[i] Nick O’Donovan, Pursuing the Knowledge Economy, London, Agenda 2022.
[ii] Dani Rodrik, ‘The new productivism paradigm?’, 5 July 2022: https://www.project-syndicate.org/commentary/new-productivism-economic-policy-paradigm-by-dani-rodrik-2022-07.
[iii] CBI, ‘Government must make big choices or the UK will lag behind’, 13 September 2021: https://www.cbi.org.uk/articles/government-must-make-big-choices-or-the-uk-will-lag-behind/.
[iv] Labour Party, ‘Five missions for a better Britain’.
[v] The Labour Party, ‘Five missions for a better Britain: securing the fastest sustained growth in the G7’: https://labour.org.uk/missions/growing-the-economy/.
[vi] Prosperity and Justice: A Plan for the New Economy: IPPR Commission on Economic Justice Final Report, London, IPPR 2018.
[vii] Tom Jennings, Helen Andrews Tipper, Jonathan Daglish, Michael Grubb and Paul Drummond, Policy, Innovation and Cost Reduction in UK Offshore Wind, London, UCL Bartlett Institute for Sustainable Resources 2020.
[viii] Industrial Strategy Council, Lessons for industrial policy from development of the Oxford/AstraZeneca Covid-19 Vaccine, London, Industrial Strategy Council 2021.
[ix] Alfie Sterling, Just about managing demand: Reforming the UK’s macroeconomic policy framework, London, IPPR 2018.
[x] Jan Eeckhout, The Profit Paradox,Princeton, Princeton University Press 2021.
[xi] Competition and Markets Authority, State of UK Competition Report 2022, 29 April 2022: https://www.gov.uk/government/publications/state-of-uk-competition-report-2022.
[xii] Brett Christophers, Rentier Capitalism, London, Verso 2020.
[xiii] George Dibb and Harry Quilter-Pinner, ‘The need for a new deal for businesses’, 28 March 2023: https://www.ippr.org/blog/the-need-for-a-new-deal-for-businesses.