Battle of the Systems: Why Economic Renewal Needs Joined-up Thinking

In the first of a two part blog series, Martin Whitlock FRSA discusses why socially progressive economic policy is systematically rejected in the UK.

Many people think that the UK's economic model is broken, and many are promoting policy proposals that will help to fix it. 

With housing unaffordable, there is growing support for schemes that de-couple the price of a home from the asset value of the land it sits on. 

With a boom in low paid, insecure work, and a benefits system that leaves many in poverty, there is unprecedented interest in UBI, a universal basic income. 

With a banking system that inflates asset values and promotes consumer debt while starving the real economy of investment, there is a flourishing movement in favour of sovereign money. 

And with rising levels of illness, overwork, loneliness, and environmental degradation, there is an increasing focus on wellbeing, both as an outcome and a measure for a healthy economic system. 

In addition we have movements for fair trade, social enterprise, revival of the commons, land value tax, the Robin Hood tax, degrowth and many others. Each movement, each campaign, has its preferred policy solution, each designed to make the economy more productive of real value. 

In the terms of a recent RSA research paper, these are all examples of design thinking. They are well thought-out ideas, each of which could make a real difference. The problem is that the system rejects them, through a mechanism that the paper calls a “system immune response”. The effectiveness of great design, the paper argues, is blunted by a lack of “systems thinking”, which means understanding what has to happen for the system to accept a proposed innovation. 

In addressing this problem it's worth noting that this immunity is adaptive, not innate. Adaptive immunity is where the system decides to trigger an immune response to something it does not like. It is not obliged to make that decision, and it did not always do so. 

Forty years ago, the UK had seven million socially-provided homes at affordable rents, and strict controls over rents and tenure in the private sector. Banks gambled with their own rather than the public's money and were cautious for that reason. Mortgages mostly came from mutual societies that matched people's savings to borrowings in a risk-free way. Governments wielded a range of macro-economic tools including exchange controls and the setting of interest rates. Aspects of a sort of de facto UBI were evident in social policy, with free further and higher education supported by maintenance grants, and a benefits system that encouraged people to find work that suited their experience and qualifications. 

Between 1979 and 2007, all this changed. The post-war consensus, that the enhancement of social welfare was a key objective of economic policy, was superseded by a weakly regulated, low-tax, supply-side approach favouring the interests of the owners of capital, characterised as “trickle-down” economics. Over time, a new consensus formed around this approach, which acquired the name of neo-liberalism. 

Neo-liberalism assumes that money, rather than being a tool to facilitate its creation, is a comprehensive proxy for wealth itself, and that policy should seek to maximise the quantity of money wealth by adopting free market rather than socially interventionist policies. Housing has been the poster boy for this theory: 40% of former council homes are now owned by private landlords, rents are uncontrolled and there is no security of tenure. Prices have risen from less than four times average household annual earnings to nearly eight times. Housing in the past 40 years has created a huge amount of wealth when measured purely in money terms, 

Although money has always been associated with private wealth, the idea that the public realm could be valued in this way was a genuine innovation. Prior to the 1980s the state was guardian to a vast portfolio of assets, the perceived value of which lay not in monetary equivalence but in their social contribution. Housing, libraries, parks, sports facilities, utilities, communication networks and a comprehensive public education system all had their origins in the state philanthropy that developed in the Victorian era. More recently the NHS was born out of the same spirit, while transport systems and key industries were adopted by the public realm. The output sought from these assets in policy terms was not a cash return but an improvement to the quality of people's lives. 

Neo-liberal theory rejected state philanthropy in favour of monetising public assets, returning the cash to people to spend in newly created commercial markets. A combination of tax cuts - fuelled by asset sales and the proceeds of North Sea oil - and the tide of “free money” generated by demutualisations, the instant profits made on shares in newly privatised companies and the discounted sale of public housing all gave credence to the neo-liberal principle that money is king.

This explains the “system immune response” to ideas rooted in principles of fairness or the collective good. Unlike socially productive assets (such as the NHS or the road system) which find their value in a shared need, money is an expression of personal ownership. In a highly monetised economy, considerations of property rights and entitlement consume all others. 

As David Cameron discovered with his “big society”, when you parachute social programmes into a system of which the principal driver is personal profit, the system works to co-opt, subvert or exploit them. Many are the public/private partnerships that have ended in tears for this reason. 

Housing is a case in point. Local authorities tasked with providing affordable housing must also leverage their assets for maximum financial gain. Thus, residential sites in the public realm are sold to developers with only a proportion of the proceeds reinvested in affordable homes. By feeding the commercial market in this way, authorities lose control of their housing assets and increase the scale of the affordable housing problem they are trying to solve. 

Proposals for a UBI are similarly vulnerable in an economy designed to capture people's cash or oblige them to borrow it. Much of the additional money may well be absorbed by higher rent and mortgage payments. This, after all, is what happened when hundreds of billions of pounds were injected into the economy through the policy of quantitative easing. The preference of commercial banks to lend against appreciating assets inflated the property bubble and starved the productive economy of investment. 

That the independent Bank of England showered the banks with this largesse, rather than directing it at productive investment, public services or affordable housing, shows the scale of the challenge faced by the campaign for sovereign money in a neo-liberal environment. In a system in which capital flows freely, changing the way that money is created will not be allowed to compromise the conditions that attract foreign capital to support the UK's lopsided balance of payments. 

For the same reason, the likelihood that a UK government will cease to prioritise money growth in favour of human and environmental wellbeing is slim in the extreme. GDP is a terrible measure of the things that people really value in their lives, but while it remains the measure that the money markets judge discussion of the numerous proposed alternatives will continue to be marginalised in political discourse. 

By monetising every aspect of the national economy, neo-liberalism has created an environment in which socially progressive economic policy is systematically rejected. Despite this, however, change is possible. In a further post I will discuss what is needed to bring it about.