William Beveridge Lecture, Social Liberal Forum
Is a liberal and democratic society compatible with globalization?
July 16th 2017
Dani Rodrik, one of my favourite economists – a Turk teaching at Harvard – wrote some five years ago that we may be discovering that democracy is not compatible with unconditional globalization; and that if we have to choose, we must prefer democracy and open society to globalization. I take that as my text, and will explore its implications for Liberals, who believe in open societies and international cooperation but also in individual freedom within settled communities. I have a second text, which is President Macron’s declaration that France must support a market economy, but not a market society’ – which is a good phrase for us to adopt in Britain, when Corbynistas are close to rejecting the market as such and the Conservative right sees the market as governing social provision.
Liberals are opposed to excessive concentrations of power and wealth, either in public or in private hands. Yet globalization in its various aspects has concentrated power and wealth in a number of state and corporate actors to a degree unknown since the late 19th century.
At the end of the 19th century, British politicians and public didn’t worry about the impact of rapid technological change and financial globalization on British sovereignty and British society, because we were an imperial power – over-confident, already slipping behind the United States and Germany in education, scientific innovation, and industrial production, but still in our own estimation an ‘exceptional’ country. Some politicians and industrialists worried about free trade, because of German and American competition from behind rising trade barriers – but most Liberals stayed loyal to their free trading faith.
At the end of the 20th century, in contrast, our country was seized by a desperate nostalgia for imperial exceptionalism, in a world that we no longer dominated, with a refusal to accept that we had no choice but to share sovereignty with our neighbours in a far more complex and inter-connected world. The existential angst that has gripped the Conservative Party, our right-wing media and many of our intellectuals led to the EU referendum, and the victory of the ‘Leave’ camp. There’s a total contradiction between a commitment to free trade and a passionate defence of sovereignty and control of borders; but that’s where the Eurosceptics stand.
Many of those who voted ‘Leave’ blamed the EU for the changes in their lives brought about by rapid and disruptive technological change and the collapse of industrial production and employment. In reality, the driving forces for that transformation have largely come from elsewhere, and its impact has been heightened by the policies of successive British governments. But we have to recognise that the impact of globalization on open industrial societies has created a substantial group of ‘Left Behind’, many of whose grievances are real and justified. I have been chairing a working group of Liberal Democrat peers on the ‘Left Behind’ over the past six months, drawing on the work of the Open Society Foundation and many other think tanks and university researchers, as well as our own campaigning experiences in Britain’s cities and towns.
Thomas Piketty and many other economists have shown that globalization has lessened global inequality, but worsened domestic inequality within industrialised countries. That effect has been sharpest in countries with weak welfare provision, and low public expenditure on education and training – the USA and Britain. We’re all familiar with the result: insecure employment at low wages for the unskilled, well-paid careers for the highly-educated, locked in to succeeding generations by the differences in support from family and local community, and in motivation and self-confidence, which mould children’s development. The sharpness of the divide within Britain was increased by three particular factors:
- the outdated practices of the British economy at the end of the 1970s, after years of inadequate investment, complacent management and trade union resistance to change;
- the speed with which these old – and outdated – industries collapsed under the impact of Thatcherite economics, after 1979;
- and the policy choices chosen by Margaret Thatcher to use the revenue stream of North Sea oil to lower taxes, rather than to accumulate a sovereign wealth fund or to reinvest in innovation and education. Between 1985 and 1995, on OECD figures, tax revenues in the industrial democracies rose on average by 2%; but in the UK they went down by 5%.
Liberalism was created by free traders. Cobden and Bright – pictures of whom, inherited through my wife’s family, hang on my living room wall – saw free trade as the means by which concentrations of wealth, and monopoly privilege, within one country were undermined through wider competition, as limiting the powers of competing states to accumulate wealth and power at the expense of others, and so to contribute to open borders and peaceful exchange. Liberal reformers in the USA at the end of the 19th century revolted against the power of corporate monopoly, legislated against cartels, and introduced tighter market regulations. In Britain and the USA between the wars governments intervened effectively to manage the failings of free markets; but, as we know, the battle for dominance of the conventional wisdom in the Anglo-Saxon world has been won over the past forty years by followers of those continental European economists who lived through the alliance between corporate power and fascism in Germany and Austria, and drew the conclusion that the state itself was the biggest threat to markets, and must be shrunk to allow enterprise and individual talents to flourish.
We have to engage in the intellectual argument about the structure of markets and of trade. The Leave campaign promised a world in which free trade was the default option, and market regulation through international negotiation unimportant. Liam Fox clearly still believes this, though most others now understand that it’s fantasy. We do not live in a free trading world. Worse, the government that Theresa May’s administration most relies on for a free trade deal – the American - is protectionist, and represents a country that is structurally protectionist. Unregulated free trade is an ideology, not an achievable policy. Trade relations have to be negotiated, through hard bargaining and detailed trade-offs.
The theory of global free trade is that all benefit from the removal of constraints. Perhaps, if the end of the Cold War in 1989-90 had led to the triumph of democracy and limited government that the neo-liberal ‘End of Ideology’ proclaimed, it might have delivered such a benign outcome. But, as we know, democratization failed in Russia, and was blocked in China, and authoritarian governments have managed trade to their economic and political advantage over the last 20 years. The benefits of globalization have not been distributed evenly across the world, as free trade theorists would like to believe: they have benefitted China and other effective authoritarian states in east and south-east Asia disproportionately, while failing to benefit the most open economies like Britain and the USA and the poorly-governed but resource-rich states of sub-Saharan Africa (now effectively exploited by China).
Britain and the United States have run structural deficits with the rest of the world for extended periods. The British deficit is now at around 6% of GDP, financed by the selling-off of assets to foreign governments and offshore entities. China – and Germany – in contrast have large structural surpluses, dependent on others accepting their exports in return for the transfer of assets or financial reserve; Germany’s is now larger than China’s, 8% of GDP. The Middle East oil-producing states also generate huge surpluses, although changes in global energy production may be removing their structural advantage.
One of the central illusions of the Eurosceptic campaigns over the past 20 years has been that the central threat to British sovereignty comes from Brussels. The most damaging loss of control to Britain, I would argue, following Harold MacMillan’s remark of 30 years ago about ‘selling off the family silver’ to finance present consumption without painful saving, is in the progressive loss of domestic ownership of key assets, from landed estates in Scotland and Surrey to property in London, from innovative companies taken over by foreign investors to football clubs acquired as trophies by the super-rich from across the world. Is a country in which a large proportion of its Premier football clubs are owned by ‘politically-exposed people’ from the Gulf states, China and South-east Asia, as well as American billionaires, still one that ‘belongs’ to its own people? Is it chauvinistic to worry about the gradual conversion of the British economy into a branch economy for American, German, Indian, Chinese and Gulf-Arab corporations, as well as an offshore financial centre for international funds and a tourist destination for the newly-rich from countries that have gamed globalization to their greatest advantage?
China’s gaming of globalization is the most worrying phenomenon: state support for a determined export drive, focussing increasingly on dominating the new technologies, with the apparent political strategy of re-establishing the regional dominance and global status that European powers took away from it between the 17th and 19th centuries. 180 years ago Britain forced China to open its borders to the opium trade in order to reduce the imbalance in trade that British demand for silk, tea and porcelain had created. Now we can only ask them go buy more mansions in London and more shares in British assets, and send more tourists, to reduce the gap.
But we should also recognise that Germany presents a major problem – for the Eurozone, for Britain and for the global economy. Surpluses that do not adjust to market forces, through changes in exchange rates or shifts in patterns of consumption or spending, impose constraints on others – as we have seen. Prudent Germans, committed to saving and investing, and resistant to increasing their overseas aid or defence spending, continue to accumulate reserves, without accepting how much this damages the interests – and constrains the economic choices – of others.
Germany is also, of course, a major problem of perception for the British. I heard – and read – many versions of the remark that ‘we beat the Germans in two world wars, and now they want to tell us what to do’ in the years running up to the EU Referendum; popular resentment of Germany runs underneath much of British Euroscepticism. Anglo-Saxon economics has also found the German economy hard to understand; I used to tell my students at the LSE that according to the principles taught by the LSE Economics Department, the German economy should have collapsed ten years ago. In reality, we have much to learn from Germany: a self-consciously ‘social market’ economy, banks that see a central part of their mission as to finance local companies, active government support for innovation and collaboration between scientific research and industry, ‘FinanzAusgleich’ that spreads financial support across the different regions. But we need to engage with their different strengths and weaknesses, and their different understanding of economics, not withdraw behind the English Channel.
The most painful lesson from the past 30 years of globalization is that Britain has been living above its means. We dismantled much of our industry, outsourced production to China and elsewhere, maintained a level of economic growth through consumption, sustained through low taxation and our structural trade deficit. Higher taxes, higher domestic investment, both private and public, is needed; but all political parties have so far judged this to be politically unacceptable. Is the mood now at last shifting?
A social liberal response
We found ourselves squeezed out of the public debate in this general election. If we are to bounce back we have to find themes and concerns that resonate with the public, beyond the small core constituency we represent. In some ways the mood of the public debate is shifting. Significant Conservatives and business leaders now talk of industrial strategy, which was a phrase condemned by everyone to the right of centre over the past three decades. The crises in health and education have exposed the limits of cutting taxation to all except the deepest ideologues. The management of Brexit so far has been incompetent, and the contradictions of the government’s position are becoming more apparent. The dreadful fir in Grenfell Tower has destroyed the credibility of calls for ‘a bonfire of regulations.’
But there’s a sour mood in much of our public, and a cynicism about democratic politics – and about the inequities of our market economy – which will take a long time to overcome. To pitch ourselves back into the political debate, I suggest that we need to discuss a number of awkward and difficult issues, which are in many ways uncomfortable for liberals to address: tax, responsible capitalism, citizenship, and migration. And we need to explore further some traditionally liberal themes that will benefit from refreshing: mutual ownership as an element in a regulated market economy, the appropriate role of an active state, local democracy and its reinvigoration, and above all the central Liberal value of education and training.
To start with tax: if you follow the business pages of the Times or the publications of the Institute for Economic Affairs and the Taxpayers’ Alliance, you will know that there has been a sustained effort to persuade us that it’s impossible to take more than 35% of GDP in tax: try to take more, and avoidance and evasion will rise, investment will shrink, and the economy will suffer. The message comes directly from American free market ideology, from those who wish to shrink the state as far as they can, whatever the demands it faces. We have to challenge that fallacy. The economies of Germany and the Nordic states, even of France, manage to sustain economic growth and promote social harmony with tax rates substantially higher than this, without frightening off domestic or foreign investors. OECD figures for 2016 show UK tax revenues as32.5% of GDP – below the member country average of £34.2%, which is pulled down by the USA and Canada. Germany is at 37%, Sweden at 43.5%.
The demands on public spending are rising, with our ageing population, improvements in health care enabling novel but costly treatments, international competition in state-supported research and innovation, and the increasing importance of education for all citizens. British experience in privatizing infrastructure has not suggested that reliance on private Investment for transport links, social housing, energy and water is a cheap alternative to public funding; George Osborne’s suggestion when Chancellor that the Chinese would provide the investment needed to build the ‘Northern Powerhouse’ was a classic example of wistful thinking – and of mortgaging our future to avoid paying what is needed now. It’s possible that the public mood towards taxation is at last shifting, a little; but we face a long and hard task of persuasion to convince voters to recognise that each of them has to contribute. Labour has ducked the issue by suggesting that it is only the rich who will have to pay more; we know that a progressive tax system for a fair society means higher taxes for the top 20/30%, not just for the top 1%.
Second, we need to be much more vigorous in insisting on responsible capitalism: by which I mean moral leadership by the leaders of private companies and banks. We’ve seen some classic examples of irresponsible capitalism in Britain – Philip Green, Mike Ashley, and multiple bankers from Fred Goodwin on. I’m struck by how little reforming corporate leadership there has been in Britain since the 2008-9 crash, how little recognition that rising salaries for CEOs and worsening conditions for their workers are weakening the social fabric of the society within which they operate. Part of the problem is that British corporate governance is in need of reform – a problem which Vince Cable addressed when in government, but which I regret he was unable to push through to legislation. CEOs answer to shareholders, a rising proportion of which are investment funds from outside the UK; so their incentives, under existing company law, are to look to their share prices and their dividends and ignore the social and political context within Britain.
We should also seek to promote a larger mutual and non-profit sector within our economy, after the destruction of so many mutual in the Thatcher years. The dominance of for-profit companies in the care home sector, for example, is unfortunate; and the private utility sector – water, electricity, gas, railways – has generated more profit than the investment that was hoped for. The Cooperative Movement, sadly, has staggered from scandal to scandal: but can we find ways to encourage cooperatives to flourish in new fields, from local credit unions to new enterprises?
Part of the problem we face is that globalization, in the form of foreign takeovers and cross-national mergers, has weakened domestic corporate leadership. The directors of regional banks, the CEOs of companies based in Manchester, Leeds or Newcastle, are no longer there to create the ‘place-based industrial regeneration’ that government is now beginning to discuss. LEPs draw in the regional managers of multi-national companies, many of whom are committed to their roles for as long as they stay in their posts; but it’s striking that BEIS documents often refer to universities as triggers for regional regeneration rather than financial or corporate leaders. And – I would argue, though some of you may not agree – that the looseness of the UK’s takeover rules, and the short-term culture of Britain’s financial institutions, continue to lead to too many of Britain’s new enterprises being swallowed by American or Asian takeovers as they grow: thus failing to generate the new regional leaders, the new players in the global market, that will revitalise the British economy. The contrast with Germany is striking: greater support to German companies from financial institutions, tighter restrictions on takeovers, contribute to maintaining a dynamic domestic economy the benefits of which are dispersed across the country rather than concentrated in and around the capital.
Theresa May accused those who supported international cooperation with our European neighbours of being ‘citizens of nowhere’: a phrase which her speechwriters adapted from David Goodhart’s writings on national identity and community. I think we should throw this phrase back at her, and point to the real citizens of nowhere who are undermining Britain’s social cohesion and economic autonomy: the super-rich from autocratic states, who have made their money through patronage or corruption, whom we allow to buy privileged access to residence and eventual citizenship through Tier One (Investor) visas, who thus import corrupt and non-democratic values into our polity and worsen the structural inequality of our society; the British citizens who take their companies and their money offshore, most often to UK dependencies operating as tax havens, or to the Channel Islands or Monaco; the tax avoidance industry in London, accountants, lawyers, wealth managers and estate agents who cater to these groups without asking where their money comes from or is going to. We should be a little more populist in attacking these groups and their lack of commitment to our country. We should also campaign for tougher tax enforcement, for tighter control of the tax havens that profit from British sovereignty without accepting effective supervision from the UK, and for restrictions over the flow of contributions from these citizens of nowhere to the Conservative Party and to right-wing camapaigns.
Thirdly, then, we need to engage with the difficult concept of citizenship. Part of the feeling of grievance by the Left Behind is that the benefits of economic transformation in a globalized world flow to foreigners and immigrants rather than to people whose families fought for this country and built the prosperity of this country. We don’t need to sympathise entirely with their perspective: but we do need to understand why they feel so excluded and embittered – not only the older generation, but many also of the younger generation who inherit their parents’ disadvantages. A national community is held together by a social contract, of shared rights and obligations that apply to all citizens. The strongest concept of a social contract emerged when the British state demanded that all of its citizens were mobilised to fight for its survival, in World Wars 1 and 2; we should remember that the development of the welfare state was closely associated with the social solidarity generated by war, and by the discovery that the some of the poorer classes lacked the nutrition and the education needed to provide effective service for their country. Social solidarity has weakened over the recent decades, as memories of war have faded. The idea of an ‘underclass’ of ‘undeserving poor’ has re-emerged, in the writings of Douglas Murray and others: a feckless group of disorganised benefit scroungers unwilling to do an honest day’s work. The rich and advantaged know little about the poorer regions of Britain’s cities and countryside, and only a minority hold to a sense of responsibility for them.
There isn’t room here to go into detail fully on the problems of the Left Behind and how to address them. But we should recognise that a society that allows an underclass to fester will suffer from riots and radicalism: as we have already witnessed in the summer of 2011 and in a range of violent outbreaks from left- and right-wing extremists. Labour has neglected this group to a remarkable degree; Liberals should appeal to the sense of national community and solidarity to craft policy responses to their needs. I was struck in talking to teachers in Bradford, for example, that the pupil premium was seen as vital in tackling the structural disadvantages of schools in white working class areas. Education and training are vital to break the cycle of deprivation from one generation to the next. One of the important pull factors in immigration comes from employers’ understandable preference for already-trained workers from eastern Europe, motivated to work hard and earn money, over less motivated locals who need to be trained on the job. Cuts in school budgets, cuts in social services, including children’s social services, the destruction of social housing, have all built in disadvantages which we must campaign to use public provision and public spending, at local and national level, to redress. It’s a symbol of Labour’s abandonment of this underclass that it focussed in the 2017 election campaign on relieving the cost of tuition fees rather than on funding education, training and apprenticeships for the disadvantaged – repeating the mistake that, I would argue, we made in the 2010 campaign.
One of the most difficult aspects of the concept of citizenship is that it assumes a sharp distinction between insiders – and their privileges and obligations -and outsiders. That raises awkward questions about how migrants are treated. But it also raises questions about what obligations we should require of British citizens – rich or poor – in return for the privileges they receive. Obligations to pay taxes should be self-evident – which is why we should be campaigning against the whole tax avoidance industry and the efforts it has made to encourage celebrities as well entrepreneurs to get out of their obligations to pay. The state used to require national service, in return for education and welfare, and assistance in finding employment. Should we investigate some form of civilian national service for all, as a means of bringing our national community together, and of strengthening national identity across social and regional divides? As David Goodhart and others have pointed out, the Left behind have a strong sense of local and national community: they want to be ‘citizens of somewhere’ – but have not thought through what that requires them to contribute to the common good. The better off and privileged in our divided society may be almost unaware of the poorer parts of their country and society. Could we develop an obligation of civilian service for, say, a year for all reaching adulthood, working in nurseries, schools, hospitals, and care homes more often than in the armed services? That would help to root young people within their national community, rather than leaving them confused about identities within a globalised world.
And dare I suggest that it may be necessary to revisit our blanket opposition to some form of registered identity as part of citizenship, since one of the many undercurrents of confusion and discontent within British society is that the status of some who live here is unclear? The data revolution has so far transformed the relationship between the state and the citizen less than it has that between corporations and consumers. Historically, Liberals have strongly opposed identity cards and state collection and retention of personal data. In a data-rich world, in which the numbers of people – citizens and non-citizens – who cross our borders inward and outward each year continues to rise, this may also be an area in which we need to reconsider how best to reconcile Liberal principles with current possibilities and problems.
The Leave campaign successfully hijacked the issue of migration, turning it from a global into a European issue. But migration from the European region has never exceeded immigration from the rest of the world. Immigration from Eastern Europe, where population is stable or falling, is finite. Immigration from Africa, the Middle East and Asia, where populations will continue to rise for decades, where climate change and water shortages, corrupt government and civil conflict will drive millions of people to seek safety and a better life in wealthier and better-governed countries – most often across the Mediterranean in Europe. Global population is predicted to rise by a further 2-3 billion over the next 2 to 3 decades; neither the regions in which those additional people will be born nor the regions to which they may try to escape will be able to absorb that scale of growth without social conflict. 1- 1.5 bn of that growth will be in Africa. The migrant flow across the Mediterranean can only rise. We have to recognise that popular support for fiscal redistribution and welfare spending is linked to the cohesion of the national community – as the rise of populist parties in Sweden and Denmark now suggests.
I have no answer to this long-term challenge; it poses existential problems to liberal values, given our commitment to individual liberty for all but our parallel commitment to liberty within settled communities. We have to recognise that neither Britain nor the rest of Europe will be able to combine the maintenance of national cohesion with the acceptance of a flow of migrants on this scale, establishing their own communities in the countries to which they move. We know that fear of the rapid social change that large-scale migration brings was one of the major motivations for voting Leave in the EU referendum, and that a sense of place and of familiarity with local community is part of what binds the disadvantaged in societies together. How do we construct a coherent response without abandoning some parts of our values?
Globalization weakens the nation state, and also shakes the foundations of local communities. For most people, however, identity is found within their local and national communities. The impact of globalization on Britain has been sharpened by the weakening of local democracy: Conservative and Labour emphasis on larger units for local government, the Conservative squeeze on local authority revenues, preference for city mayors over representative local government. One principle of democracy is that there should be some contact between the citizen and her representatives, and some accountability for local services. Wards of 10-15,000 voters, schools outside local authority control, parks and libraries hived off, break the link between the ordinary citizen and public authority; increasing the sense of powerlessness and alienation that rapid economic and technological change, driven by remote forces, have generated. Liberals therefore also need to argue the case for local democracy, and to reinvent local government, against the trend of managerial efficiency and centralised control.
And, against those who pursue free market ideologies on the right, we should more loudly champion the concept of public service. The doctrines of public choice economics that many Thatcherites swallowed, that people are only motivated by personal interest and financial reward, have been pernicious in their impact on public servants and their commitment to non-financial values. Public service is a part of citizenship, and deserves higher respect. Those motivated by concepts of public service more than by financial gain are natural Liberals, too, whose efforts we should applaud in creating the conditions of liberty.
It goes without saying that Brexit hangs over Britain’s future, liberal or illiberal. Eurosceptics convinced themselves that the EU was a protectionist club and a threat to British democracy, and that freedom lay in embracing the rest of the globe, above all the English-speaking countries. It is beginning to dawn on some who voted to leave that the EU is in reality the best-regulated single market in the world, that the values of its governments and publics – while plagued by nationalism, populism, self-interest, and other faults that British politics also display – are closer to British values than those of China, the Gulf states and the other potential partners of a ‘global Britain’. Globalization over the past half-century has developed under benign American leadership, governed by rules that have largely been crafted in Washington. American leadership is now in doubt. The Chinese-American economic and strategic relationship is likely to be increasingly fraught, in an unbalanced global economy disrupted by regime collapse and internal conflicts across two of the five continents. Britain has pursued economic policies more open to the world than almost any other, over several decades. We have attracted imports, foreign investment, and a steady flow of poor – and rich – migrants from across the world. That openness has had costs as well as benefits, to national prosperity, autonomy and solidarity. It may be prudent, in a more troubled world than we anticipated 25 years ago, to retreat a little.