Labour's Industrial Strategy

John McTernan was unfortunate in his timing. His plea for Labour to drop the pretence that the green prosperity fund was anything other than an industrial strategy came only days before the long-heralded confirmation that the expected next government will not be spending £28 billion per year transitioning to a low-carbon future or anywhere near that figure. Lost in the debate over whether this latest u-turn shows Labour cleaving to the Tory agenda or simply incapable of sincerity is his use of a term suggesting a more dirigiste approach to the management of the economy than has been visible of late. As a confirmed Blairite, McTernan would no doubt insist that New Labour had an industrial strategy, but in substance this amounted to little more than acquiescence in the once-fashionable idea that letting the financial sector do as it pleased would ultimately benefit all. In fairness, that was a strategy with a long pedigree in British politics. The formal industrial strategy of the postwar years was, like the wider concept of planning, an atypical interlude in a history otherwise tending towards laissez faire.

The UK's fitful attempts to craft an industrial strategy between 1940 and 1980 reflected the nature of the economic model that developed over the much longer period between 1750 and 1890. The technological advances of the age, which every schoolkid learns to recite as a series of names (Arkwright, Bessemer, Stephenson etc), gave the UK a significant first-mover advantage as they did not spread sufficiently rapidly to allow other nations to quickly develop competitive domestic production. There were two consequences of this: the growth of export-oriented capital goods sectors in the UK (shipbuilding, railways etc) with the corollary of a firm commitment to free trade, and the defensive adoption of protectionist policies by many of those competitors in an effort to shield and develop domestic production (notably the USA). The common ground was a commitment to sound money - the gold standard - which in turn benefited the UK by making the City of London the central nexus of global trade and capital financing.

The extroverted nature of British industry led to sectors dominated by multiple, small-to-medium size manufacturers specialising in niche products and selling to a global market. In contrast, the protectionist policies of the UK's chief competitors encouraged vertical integration within captive domestic markets, the classic example being the development of Standard Oil in the US, a company that spanned extraction, refining, distribution and retail (a model that remains central to the oil business today). The institutional effect of this was the emergence of the large-scale corporation and a tendency towards merger as a means of achieving growth, particularly notable in Germany around steel production, which was only occasionally restrained by anti-trust laws (e.g. the break-up of Standard Oil). After World War II proved the inefficiency of further expansion through territorial aggression, this birthed the modern multinational. 

While all this was going on, the UK found itself pulled between competing interests. The established capital goods and manufacturing sectors lobbied government to preserve their export markets, which gave rise to the conflict between free trade and imperial preference (the latter being an attempt to stunt the growth of capital production and manufacturing in the colonies, which inevitably failed because no one seemed to appreciate that this wasn't what the dominions themselves wanted). Meanwhile, there was a conscious effort to consolidate the fragmented primary goods and manufacturing sectors during the twentieth century, notably coal, steel and automobile production. Typically, this was done by a combination of nationalisation, the encouragement of private sector mergers, and various schemes in between where the state would act as a sleeping partner underwriting private capital with public money. 

What remained a constant was the interests of high finance and the influence it exerted on the UK state - what Giovanni Arrighi, in The Long Twentieth Century, refered to as its "pecuniary rationality". Despite the retreat from the gold standard and the emergence of capital markets in New York and Tokyo, the City of London continued to exert sway over the state's fiscal policy and industrial strategy, constraining the former (the "Treasury view") and showing little enthusiasm for the latter. Indeed, if nationalisation in the UK was characterised by a willingness to preserve the existing management culture and resist workers' control, it was also marked by a desire to side-step the City's lack of interest in domestic opportunities and to short-cut the process of private sector consolidation. The problem was that the fiscal constraints inevitably led to under-investment in those nationalised industries by the state: neither brave enough to defy the money markets nor brave enough to reform British management.

The technological first-mover advantage that the UK benefited from in the late-eighteenth and early-nineteenth centuries (roughly 1760-1840) now looks like a historical one-off, both in terms of the transformative effects it had on society (e.g. urbanisation) and in its duration, though you could make an argument for China's economic catch-up since 1978 being an echo of it, albeit through the absorption of common technologies into an untapped domestic market and then through labour cost arbitrage with the West. Subsequent cycles of advance, notably the second industrial revolution (1870-1914) and more recently the digital revolution (1970-1990), saw new technologies dispersed globally in ever more rapid bursts. This in turn means that the boost to GDP growth arising from new technologies tends to be weaker and much shorter. While tech-boosterism is still a thing among politicians and pundits, the likes of Tony Blair look increasingly naive in their fetishistic belief that the embrace of technology alone can transform a nation's fortunes. 

Today, growth above the historic mean, or even above the level of national comparators, can only arise in two ways. One is a historic conjuncture in which secular trends and contingent opportunities coincide to produce a benign environment. For example, a demographic bulge that rapidly adds youth to the working population or the demands of reconstruction after a period of major destruction. The second is a major change in the composition of the economy that provides a higher-level comparative advantage. For example, the discovery of oil, or other valuable resources, within a territory or the rapid expansion of an export-oriented industry that cannot be quickly replicated by competitors (such as semiconductor fabrication). Of course, these developments themselves entail risks, notably the resource curse in the first instance and exposure to fluctuating foreign demand and currency speculation in the second. A safer approach may be a state-led change in the compostion of the economy but for a developed nation with already mature technology like the UK such a change is more difficult to achieve: you can't just take it off the shelf as the Chinese did.

Outside these exceptional circumstances, the ambition for most states will be growth close to the international average. For developed economies, that's been around 2% per annum over the last twenty years. The UK is currently at about 0.5%, so there's certainly headroom, but getting closer to 2% won't generate the sort of tax incomes, ceteris paribus, required to fund much long-term investment, particularly given the demands to boost day-to-day spending on the NHS, social care and crumbling local goverment services. The green prosperity fund - or green new deal if you prefer, emphasising the pro-labour and pro-social aspects - offered a potential way out of this bind: a major retooling that would boost growth in the short-term and make the economy more competitive in the longer-term so sustaining that growth (or at least enabling the UK to keep up with its peer group). In rejecting the idea of using the green transition to boost growth, Labour are not simply allowing the Tories to set the agenda, or giving up on the climate crisis, they are confirming that the stranglehold of the City, last seen during the Truss debacle, remains very much in place. 

Labour hasn't been the party of the workers since the 1970s, and even then workerism was only one of a number of competing ideological strands, but it did retain a credible claim to be the party of growth long past that point and as recently as 2019. With this announcement, Starmer and Reeves have confirmed that it has given up that claim and is now simply the party of sound money: the "fiscal rules" have become a fetishistic end in themselves rather than the means to a particular fiscal end (higher spending, lower taxes etc). The move to the right on policy (i.e. all those promises reneged), like the authoritarianism and managerial brutality, are not simply the instinctive behaviours of the right wing of the party. They are an expression of an overarching commitment to sound money that inevitably produces a conservative, pessimistic mindset and a preference for austerity: the constraint of the growth they claim to be in favour of. Labour has no industrial strategy because it has no growth strategy beyond a pious hope.