Though few anticipated the agreement, it is not difficult to understand why David Cameron and Nick Clegg should have made a bargain to share power. By forming a coalition Cameron secured protection from his mutinous right wing, while Clegg became the pivotal player in British politics. What is more surprising is the degree of unity the government has so far exhibited. In Britain we think of coalition government as non-ideological, formed from necessity and living by compromise. When the coalition came to power there were many who welcomed it as a refreshing departure from tribal politics. Others feared that a government made up of parties with such different histories and cultures would lack clear direction – decisions would be fudged, policies too cautious. In fact the predominant feature of the coalition has been its consistent radicalism. At a time of economic uncertainty, deep cuts in public spending can only be an enormous gamble. Despite confident assertions by George Osborne, no one can really know what the result will be. Cameron – commonly seen as a Conservative in a tradition that distrusts ideas in politics – has embarked on one of the boldest experiments in British political history. Even more remarkably, Clegg – the leader of a party that has long supported government intervention as a force for progress – has signed up to a programme that promises an unprecedented roll-back of the state.
Partly this is a matter of strategic calculation. When Clegg signed up to the agreement he knew that a Cameron government would pursue an aggressive policy of deficit reduction. Well before the Conservatives came to power they were studying the drastic action taken in Canada in the 1990s to curb public spending. Osborne’s wild claim when shadow chancellor that Britain’s public finances were in a worse state than those of Greece showed which way the wind was blowing. There was no advantage for the Lib Dems in being part of the government while remaining semi-detached from its central strategy: if the gamble on deficit reduction worked Clegg would gain no credit, if it failed he would suffer the political cost along with Cameron. Unwavering support for the cuts was the only prudent stance.
But it is also a stance that squares with the market liberalism advocated in The Orange Book (2004), a collection of essays coedited by David Laws that included contributions by Chris Huhne, Vince Cable and Clegg himself. The aim of the contributors was to reaffirm a version of liberalism they believed had been lost: one in which support for small government and the free market goes with a strong commitment to civil liberties and freedom of lifestyle. This strand of liberalism was mistakenly discredited, they argued, when Thatcher attempted to link the free market with social conservatism. In its heyday – a time the contributors never precisely specified – liberalism had been a forward-looking movement, which recognised and welcomed the tendency of markets to undermine traditional hierarchies; but with the rise of Thatcherism this tendency came to be seen as a moral hazard rather than an advance in freedom. The task at hand was to reclaim this liberal philosophy from the right and reinstate market liberalism as a truly progressive creed.
The Orange Book liberals were avowedly anti-conservative. The principal target of their critique of British politics was not the free-market right, however, but the powerful social democratic strand in their own party. The influx from the SDP that followed the Labour split in 1981 had reinforced a tradition that goes back to Beveridge and Lloyd George. For the liberals who were part of this tradition – the majority of the party over the past few decades – the free market was simply one way of organising the economy rather than the way the economy organises itself in the absence of government intervention. Far from embodying liberty, markets often worked against personal autonomy. When that was the case they had to be constrained for the sake of freedom. Again, the distribution of income and wealth that the market produced was neither self-evidently fair nor always socially beneficial. If the distribution became too unequal, or damaged society in other ways, government had to intervene. There was nothing intrinsically valuable in the market itself.
In an agenda-setting speech, delivered at the LSE in January 2008, Clegg had signalled his firm rejection of this kind of liberalism. The state was necessary to ensure proper funding of public services such as health and education, he allowed; but once it had done that, government should ‘back off’ and allow services to be supplied privately. He repeated this message on many occasions, but few in his party seem to have realised the nature of the shift that was underway. What Clegg and his fellow market liberals were engineering was a fundamental reorientation in the party’s values. Instead of the type of liberalism exemplified by Hobhouse and Keynes, which accepted that the market had to be curbed when it failed to benefit society, the party was sold a liberalism in which the market became the benchmark by which society would be judged. Rather than being assessed according to standards of freedom and equality, the market became the fundamental norm from which any departure would in future have to be justified.
Among Liberal Democrat activists and some on the Labour left, Clegg is often accused of compromising his principles and selling out for the sake of power. The charge is absurd, for the Con-Lib programme is in many respects a straightforward application of Clegg’s brand of liberalism. Very little compromise was necessary. The Liberal Democrat leader has few reasons to feel uncomfortable with a government that is implementing much of the programme he urged on his own party. Just as much as Blair and Cameron, Clegg aims to replace British social democracy with a version of Thatcher’s market-based settlement.
The confidence with which Clegg defended the shift to market liberalism is striking, not least because the collapse of the market liberal order was underway at the time he gave his speech at the LSE. It may be that the programme he presented expresses deeply considered convictions. More likely, it reflects the workings of an acutely intelligent and at the same time highly conventional political mind. The market ideology of the 1980s Conservative Party has been internalised across the British political class, so that it now seems no more than common sense. Like Cameron, Clegg has known nothing else.
In making his party a vehicle for his own market liberal project Clegg thus continued a trend that has been evident in British politics since Thatcher. She became Conservative leader by chance; but once in office she turned the party into her instrument, a change in its nature that was not reversed when she was toppled. Having been an institution embedded in the wider society, the Conservative Party became a delivery mechanism for a succession of leaders, with political initiative concentrated in a cadre of advisers with strong links to the media. The hollowing out of parties continued with the rise of New Labour, which was invented by fewer than a dozen people who turned a mass political organisation into a vehicle for the Blair/Brown project of market-friendly modernisation. The breakdown of Blair’s relationship with Brown ensured that the transition would not be without friction, but the resulting conflicts were personal rivalries played out within a small circle.
As in the 18th-century elite politics analysed by Lewis Namier, British politics today is shaped by a handful of closely related people. The prosaic reality underlying the media romance of sibling rivalry between the Milibands and marital disharmony in the Balls family is competition within this small group. The new politics which is supposedly emerging around Ed Miliband looks like being not much more than a further iteration of this Namierite struggle, as Miliband entrenches his position by marginalising potential rivals.
In its reliance on the advice and support of a closed circle of media-conscious advisers Cameron’s rise followed a similar trajectory to that of New Labour. But Cameron has never achieved anything like the control Blair exercised over his party. The sharpest tensions within the coalition have not been between Conservatives and Liberal Democrats but among Conservatives, and it would not be surprising if the first resignation were to come from Liam Fox or Iain Duncan Smith rather than Vince Cable. No doubt each of them has genuine objections to aspects of coalition policy. But if any of the three were to walk away, it would be as much from thwarted ambition – one of them was party leader, while the other two might have been – as from reasoned dissent. None of them can claim to be at odds with the coalition’s overall programme or its ideology.
If the coalition is a novelty in British politics, there is nothing that is remotely new in its ruling ideas. Clegg’s synthesis of social with market liberalism makes no advance on the position taken by Michael Portillo when he launched his bid for the Conservative leadership nearly a decade ago, while Cameron’s much touted ‘big society’ is a recycled version of the civic conservatism advocated by David Willetts in the early 1990s. These were attempts to remedy deficiencies in Thatcherite thinking, with Portillo arguing that a free-market economy should be complemented by liberal social values and Willetts maintaining that the corrosive effects of market forces could be overcome by giving greater space to non-governmental institutions – neighbourhoods, churches, charities and the like. The difficulty they faced was reconciling the dynamism of the free market with the need for social stability. This is not a new conflict – it troubled Adam Smith – and in truth it cannot be resolved, but it is all the more acute now that market capitalism is itself in trouble. Vince Cable’s true role may be that of a licensed critic of capitalism, whose assaults distract attention from problems for which the coalition has no solution.
The argument around the coalition’s strategy of deficit reduction has been framed in terms of economic theory, with some seeing it as a replay of the debate between Keynes and Hayek in the 1930s. There are parallels, but too much has changed since that time for their economic theories, or the prescriptions they derived from them, to be applicable today. Whether the Great Depression originated in a misallocation of capital as Hayek maintained, or came about as a result of a collapse of aggregate demand as Keynes believed, does not much matter. Quite possibly the causes cannot be known. Keynes won the argument because he showed how markets can spiral downwards in a self-reinforcing process, which is only accelerated by retrenchment in government spending. Unlike Hayek’s, Keynes’s analysis suggested policies that were politically possible, and which for several decades actually worked.
It is not obvious that these policies can be as effective today. The US has been pursuing a Keynesian-style programme of monetary stimulus, which looks like being continued in another round of quantitative easing – QE2, as it is sometimes called. Whether or not the stimulus will be large enough (some ultra-Keynesians doubt this), it will not be accompanied by any coherent action on the federal deficit. The collapse in Obama’s popularity is likely to result in the Democrats losing control of one or both branches of Congress. Trapped by its archaic and dysfunctional system of government, the US will then be gridlocked. The global economy will continue to drift, and any recovery in Britain will fall away. The situation will be worse if Chinese-American relations founder and China declines to continue funding the US at the level it has done in the past. In that case the crisis will intensify, with results that are unpredictable.
There is also danger from Europe. The austerity package imposed on Greece is not only economically self-defeating (in that withdrawing purchasing power only increases the burden of debt) but politically impossible. No democracy will accept steeply declining living standards in return for nebulous promises of growth in a hypothetical future – especially when the package promising this has been imposed from outside. Whatever European officials may say, Greece is heading for default. The event will be described in terms of restructuring, but for the markets the reality will be clear enough. The future of the euro has not been secured, even if a deeper crisis has for the time being been staved off.
There will be some in the coalition who defend the cuts as a response to these uncertainties. It is not an ideological preference for a small state that drives the coalition’s policies, they will say, but economic necessity: with the world economy in such a fragile state Britain cannot continue to borrow on the scale it has done, and must accept that it cannot afford the social democratic state that was established more than 60 years ago. But it is hard to square this argument with the claim that services will actually be improved by the cuts. Both Cameron and Clegg have insisted that moving away from state provision is not just a matter of saving money: the result, they say, will be services that are more responsive to personal choice. It is true that injecting markets into public services may not save any money; the large changes that are being rapidly introduced in the NHS may end up creating a service that is significantly more costly. This only confirms that the coalition is ideologically driven. It may believe that it is responding pragmatically, but its view of things is shaped by the ideas of the 1980s: ideas that in many respects lag behind events, and which the coalition may yet be forced to discard.
As a consequence of the financial crisis, the market-based globalisation of the past couple of decades is giving way to a model in which states are the principal actors. Chinese state capitalism has weathered the global crisis better than any market liberal economy and even Russia is less burdened by debt. After the implosion of the American financial system emerging economies need no longer submit to the dictates of a ‘Washington consensus’ that was never implemented in Washington. It might be thought that the current phase of globalisation would allow a greater degree of international co-operation. In some ways, however, this new phase is more disorderly. The retreat of American power has left the world without a functioning monetary regime. Economic imbalances are surfacing in geopolitical rivalries and currency wars, and it is unclear how these conflicts will develop. What is evident is that the era in which states were ready to surrender control of their economies to market forces is over. The postwar welfare state may be history, but governments cannot risk leaving their populations without a shelter against chaos. If social democracy is not a viable option, neither is market liberalism.
A roll-back of the state of the magnitude that the coalition envisages will leave people more exposed to the turbulence of world markets than they have been for generations. Inevitably, they will seek protection. The prosperity enjoyed by the majority of those in Britain in the decade leading up to the crash was largely an illusion. Debt-fuelled consumption masked the full extent of the increase in inequality, while the casualisation of sections of the labour force concealed the real scale of unemployment. Reining back welfare benefits and shedding labour in the public sector as the government intends will only make the drop in living standards that is now unavoidable larger and more painful. There is much talk of the coalition’s lack of a ‘narrative of growth’ to complement the need for retrenchment, but in these circumstances its lack of any convincing narrative of fairness may be more disabling. In the terms of The Orange Book, condemning the pattern of incomes that emerges from the market as unfair is a category mistake; there is no standard of fairness independent of the market. There is plainly some awareness of this difficulty in the government. In his conference speech Cameron defended the withdrawal of child benefit from higher earners on the ground that it is fairer if this group makes a larger contribution towards cutting the deficit. At the same time some ministers (including Clegg) have defended dismantling the public sector with the claim that those who work in it enjoy unfair privileges. Public sector pensions are singled out for particular criticism because they provide a degree of protection against the risks of the market that is no longer available to the rest of the population: fairness requires that everyone be subject to the same insecurity. Since the result is to place the settled middle-class life to which many people still aspire beyond reach, it is hard to see this view having much traction.
Iain Duncan Smith has emerged as a kind of reactionary radical who acknowledges the hazards of market society and insists that government must deal with them by encouraging a return to traditional values, even if this means government spending more money. Clegg has supported Duncan Smith in this stance. But it makes little sense to talk about restoring traditional forms of family life while insisting on the necessity of adapting to a highly mobile and continuously changing labour market – a feature of the universal credit scheme announced at the party conference. This is not an inconsistency peculiar to the coalition. It is a conflict inherent in capitalism, which none of its defenders has been able to overcome. Most economic liberals have tended to evade the fact that free markets work against traditional values, including commonly accepted ideas of fairness. Hayek is an honourable exception, but if the market is blind to need and merit, as he candidly admitted, how can those who have no reasonable expectation of benefiting from it be reconciled to their situation? The question is especially relevant at times when the majority of the population belongs in this category. This, in effect, is the question faced by the coalition: how can it weather the hostility that is in store for it when the pain of the cuts begins to be felt?
One answer is that the two parties have every reason to ensure that the agreement will last its full term. Having failed to gain an overall majority in the general election, the Conservatives are – as a result of the unpopularity the cuts will incur – unlikely to improve their prospects in the foreseeable future, while the Liberal Democrats are not going to cut short the first spell in peacetime government they have enjoyed for more than two generations. There are too many people with a stake in the deal for it easily to come apart. Cameron and Clegg have the power of patronage, which they can use to buy the support of their critics. The Tory right may not like the coalition, and is incensed by what it sees as Cameron’s betrayal of Conservative values in defence funding; but defence is not a crucial issue for voters, and even if Liam Fox delivers on his threats and resigns the right has nowhere to go. Similarly, failure in the referendum on the Alternative Vote would be a setback for the Liberal Democrats, but hardly a deal-breaker. The prospect has already been factored into the calculations of MPs, while Lib Dem activists have never been keen on AV, which many regard as worse than the present voting system. Some of these activists are migrating to Labour – a trend Ed Miliband is actively encouraging. But how far Labour will be able to exploit any decline in the coalition’s popularity is unclear. Certainly the government is vulnerable to the accusation that the cuts are unfair. But when times are hard it is not fairness that most concerns voters. More than anything else they want safety, and Miliband will find it hard to persuade the electorate that the party has broken with the policies that preceded the crash or can be trusted to deal with its consequences. He may justify passing over Ed Balls and appointing Blairite Alan Johnson as shadow chancellor as part of a process of renewal in which internecine rivalries are left behind; but the decision looks more like a continuation of such rivalry, with Miliband determined to avoid a threat to his leadership of the kind Brown posed to Blair’s. Rather than challenging the government, the new leader has chosen to secure his position in the party.
The coalition may be stronger than its critics would like to believe, but that doesn’t mean it will be able to carry through its programme. The market liberal agenda it is promoting is a relic from the past that is unlikely to withstand a protracted economic downturn. The determination to scale back debt could itself create the conditions for a U-turn. If the result of the retrenchment projected in the comprehensive spending review is sharply increased unemployment and stubbornly feeble or negative growth, a period of inflation may seem the only remaining option. That was the response in the early 1970s, when Anthony Barber, chancellor of the exchequer in Edward Heath’s government, made his ‘dash for growth’. While never doctrinaire, Heath had begun as something of an economic liberal; but the upshot of Barber’s great inflation was a massive expansion in government economic intervention. It is true that the Bank of England was not in charge of monetary policy, as it is now. But that need not preclude something similar happening again. The bank’s remit continues to be defined by government, and there is nothing to stop this remit being revised if the gamble on deficit reduction fails to pay off. There are already signs that QE may be ramped up to fend off a double-dip, a course of action that could also have the benefit of triggering a burst of inflation, which would devalue debt and enable it to be paid off more easily. A revision of the coalition’s ideology would follow, with government reclaiming its role in protecting the population from the insecurity of the market.
Cameron and Clegg both accept the ideas of the 1980s as embodying the only progressive philosophy. But if there is anything certain about progress, it is that its meaning shifts with events. As Hayek noted in The Constitution of Liberty, ‘what matters is the successful striving for what at each moment seems attainable … Progress is movement for movement’s sake.’ Hayek was referring to the pursuit of changing wants in a liberal market economy. It didn’t occur to him that this liberal conception of progress would be left behind as a result of the self-defeating effects of market liberal policies. But that is surely what will happen if the consequence of fiscal orthodoxy is to exacerbate the fragility of capitalism. It is too early to know whether the coalition can succeed in bringing about a fundamental realignment of British politics on the centre right. But if it does it will be because it has an ability to reinvent itself that Labour at present lacks. Cameron and Clegg belong in a generation shaped by the ideas of the 1980s; but in forming the coalition they have demonstrated an impressive ability to break with the past. They may turn out to be the politicians who lead Britain into a new era of statism.
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