Theresa May and the Varieties of Capitalism

Rhetorical commitment to social justice has featured in every new Prime Minister’s No. 10 doorstep speech in recent years. Theresa May’s remarks were well crafted and confidently delivered but it is her commitment to economic reform, not social mobility and fairer life chances, which has surprised observers. She starts her premiership with bold promises to reduce excessive executive pay, set higher bars for foreign takeovers of British firms, legislate for workers on company boards, and devolve economic powers to cities. She has even included “industrial strategy” in the title of a government department, where once mere mention of the term was banned.

May has been pursuing this agenda in speeches and interventions over a number of years. It consciously echoes older, pre-Thatcherite conservative traditions, drawing on Chamberlain municipalist and Macmillanite Tory heritages. Although the development of her ideas pre-dates the referendum on the UK’s membership of the European Union, Brexit gives the Prime Minister a new opening, since it forces the construction of a new political and economic settlement, both within the UK, and between the UK and the EU. May will position her reform agenda as a post-Brexit national (and unionist) economic project: one which gives each of the regions and nations of the UK, its social classes and major economic interests, a stake in the future.

Such a project is shot through with risk, not least in meeting the political challenge of reconciling restrictions on free movement of workers from the EU with continued access to the single market. But fatalists will argue that fundamental reform of British capitalism is also chimeric. To use the terms of the academic Varieties of Capitalism (VoC) literature, Britain is a Liberal Market Economy, whose fundamental institutional features – flexible labour markets, low rates of unionisation, firm level bargaining, reliance on general, rather than vocational, education, and so on – are inimical to reform on continental, coordinated lines. The structures for collaboration between firms and unions, and the dense networks of institutions that support long-termist, highly skilled and high-productivity capitalism in Northern Europe simply don’t exist in the UK. On this account, May would do better just to loosen the spending taps, and invest in infrastructure, R&D and skills, while leaving corporate governance reform, industrial strategy and regional policy to Heseltinian romantics.

In large part, these debates focus on the supply side of the economy and how to reform it. But from within the comparative political economy academic literature a new focus on how the demand side can explain differences in national economies has recently emerged. In an important paper, Lucio Baccaro and Jonas Pontusson of the University of Geneva develop a new analytical approach that focuses on differences in components of aggregate demand in the explanation of national growth models:

“Borrowing from post-Keynesian economics, we emphasize the demand side of the economy and place the distribution of income, among households and between labor and capital, at the center of our analysis. We focus…on cross-national diversity, but in contrast to the Varieties of Capitalism (VoC) literature inspired by Peter Hall and David Soskice, we do not conceive this diversity in terms of institutional equilibria that predate the crisis of Fordism in the 1970s. Our analytical framework identifies multiple growth models based on the relative importance of different components of aggregate demand—in the first instance, household consumption and exports—and relations among components of aggregate demand. Our 'growth models' are more numerous and more unstable than Hall and Soskice’s 'varieties of capitalism.'

Empirically, we illustrate our approach with data for Germany, Italy, Sweden, and the United Kingdom over the pre-crisis period 1994–2007. In all four countries, the Fordist model of wage-led growth ground to a halt as the institutional channels whereby productivity growth fed into household consumption and investment—most obviously, collective bargaining based on strong unions—eroded in the 1970s and 1980s. Germany, Sweden, and the United Kingdom illustrate, we argue, three different solutions to the problem of finding a replacement for the faltering 'wage driver', whereas Italy is a case of persistent failure to solve this problem. Over the period 1994–2007, the United Kingdom relied on household consumption as the main driver of economic growth, spurring household consumption through a combination of real wage growth and the accumulation of household debt. In marked contrast, Germany came to rely on export-led growth, repressing wages and consumption to boost the competitiveness of the export sector. Sweden enjoyed robust growth of both exports and household consumption. Italy, finally, experienced sluggish growth in both domains and, hence, overall stagnation.”

This is a startling and original thesis, with numerous implications. It draws attention to the fact that the growth of the financial services sector, by allowing the UK to run a current account deficit, benefited workers as well as the banks, since it made possible robust growth of domestic consumption, thus boosting demand for low-skilled labour and pushing up real wages (at least until 2003-4) – as well as facilitating expansion of household credit and boosting the tax revenues that underpinned investment in public services. This is in sharp contrast to Germany, where a low-wage, low-skilled service sector developed alongside the dominant export-orientated manufacturing sector in which real wages were held down to preserve competitiveness, exporting demand to the rest of the Eurozone.

Of course, much has changed since the financial crisis. The UK’s productivity has slumped, growth has been relatively weak and real wages have been stagnant. A heavy price has been paid for financialisation, and the UK has yet not found a new, sustainable growth model. Baccaro and Pontusson speculate that where growth is consumption-led, governments of both centre-left and centre-right will respond to downturns by stimulating domestic consumption, which is indeed what happened in the UK, despite a restrictive macro-economic fiscal stance. Yet constraints on household credit and the prospect of falling real wages will also inhibit consumption-led growth, while business investment is currently paralysed by Brexit uncertainty. That suggests that government investment will have to rise to usher in, if not a new era of state-led economic development, then at least one in which public sector investment and strategic intervention plays a much more central role.

Baccaro and Pontusson also point to the importance of high-end exports in the UK economy, such as business services and higher education, but also, of course, financial services. These sectors will be accordingly critical to any post-Brexit future economic settlement forged by the Conservative government. As the authors put it, “any hegemonic social coalition must arguably include the financial sector, which has played a crucial role in enabling the United Kingdom to run persistent current account deficits, benefiting workers as well as capitalists.”

How a new Brexit era growth model takes shape will therefore have as much to do with the social coalitions that underpin it, as with the ambitious supply-side reforms outlined by the Prime Minister. It will sharpen up the political choices that need to be made in the coming months and years – overlaid on the shifting territorial politics of the UK, as well as its social class and economic interests.