I am writing this as a Marxist economist who, for the long term advocates something much more radical than social democracy. But Society never solves problems that it is not directly faced with, and in the current situation the solution that would be provided by a revived social democracy is the probably the best that can be hoped for. But it needs to be articulated and thought through.

It was a mark of the success of social democracy that it was able to force the rate of profit so far down and maintain such a relative labour shortage that the question of directly social allocation of investment became a real social issue by the late 70s – that was what Bennism was all about. 40 years of neo-liberalism has run down the capital stock and worked on an economic model of labour surplus, low wage, low capital investment growth which has depressed living standards  and raised the rate of profit.

The line put by some of the left that ‘capitalism can no longer  afford social democracy’ is arrant nonsense. The share of property income is very high by historical standards. There is plenty that can be diverted from property income to national investment and raising living standards. But that can only occur when nationalised industry once again plays a leading role as it still does in China.


In a mixed economy the rate of capital accumulation is much higher even with a low rate of profit as shown below. China invests more at any given rate of profit than the private economy of the USA.


Tory claims notwithstanding the UK economy is remarkably weak. Production, Manufacturing and Construction had still not regained pre recession levels in 2014, 7 years after the recession. Such growth as there had been was in services, and what little improvements there had been in living standards since 2013 were in large part due to the fall in the world price of oil and its knockon effect on retail prices. The recovery has been by far the slowest and weakest from any recession since the second world war.

Figure 4- UK GDP output components growth, quarter-on-quarter, indexed from Quarter1 2008 = 100

The Tories laid great emphasis on claims to have reduced the public sector deficit, but in 2014 this still ran at 5.3% of GDP. Their intention when taking office had been to eliminate the deficit entirely over a 5 year parliament. Similar promises have been made with respect to their current term of office.

How are we to explain this signal failure?

Quite simply, because the public sector deficit is largely outwith deliberate control by the government.

Simple national accounts tell us that the following must hold :

Public sector deficit = Trade deficit + Private sector surplus

If the balance of trade is in deficit, then the public sector will run a deficit too. The only exception to this would be if the whole private sector was running a sufficient financial deficit to offset the trade deficit. Since the private sector has been trying to run down its debts since the recession, ie run a surplus, this avenue has been closed. And the balance of trade has been seriously in deficit.

 UK international current account as percent of GDP. Office of National Statistics April 2015 Economic Review.


In 2014 the trade deficit was roughly the same as the public sector deficit – both were between 5% and 6% of GDP. In earlier years after the recession the public sector deficit was bigger than the trade deficit. In those years the private sector was trying to run its debts down. This stopped in 2014 when the Help to Buy scheme led to more people taking out mortgages.

But the persistence of the trade deficit means that it will be almost impossible for the government to hit its public deficit target. Cuts to welfare only reduce the government deficit to the extent that they reduce imports – not much.

When people look back to the 1945 Labour government, what people remember now is the way they set up the NHS and the welfare state – the opposite of what is now understood by austerity. But in its day it was known as an Austerity government, but the austerity of Cripps1 was very different from that of Osbourne. It was an austerity devoted to building up manufacturing and exports in order to escape from the burden of the wartime dollar debts. That went along with high taxation particularly on upper income levels and additional taxes on luxury goods, rationing of bricks to ensure that they were all used to build council housing for workers.

If a government was serious about tackling the deficit – rather than looking for excuses to dismantle the welfare state they would be trying more directly to boost exports and reduce imports. What would that involve?

Exchange Rate Policy

Membership of the EU prohibited one of the old tools that states had for reducing imports. It was no longer possible to impose customs duties on imports. This restriction is now removed.

There has been much debate about joining the European Single Market outside the EU but it is highly doubtful that this would be beneficial. UK has a huge trade deficit with the EU, exporting £135 billion in 2015 versus imports of £225 billion. Moving to WTO level tariffs would probably be helpful in reducing this deficit.

But, being outwith the Eurozone, the UK could always have devalued its exchange rate to discourage imports and encourage exports. This tool was used with success by British governments in 50s and 60s.

Doing it now with a floating exchange rate and an independent central bank is slightly harder but not impossible. Since Black Wednesday (16 September 1992 ) when Sterling crashed out of the European Exchange Rate Mechanism, the UK government has not attempted to control the level of sterling. That debacle was taken to have shown the folly of attempting exchange rate control in modern currency markets awash with hot money. What it actually showed was how difficult it was to hold the value of Sterling up, but that does not mean it could not be forced down.

At present though the Bank of England interest rate is close to zero, which seems to prevent reducing the interest rate which has, in the past, been an important way of pushing down the exchange the value of the £. Today, a serious attempt at devaluation would require the Bank of England either to impose a negative interst rate, or to directly intervene in the currency market by purchasing gold and foreign currencies on a large scale. It might be politically more palatable to take the latter course which could be presented as a prudent buildup of gold reserves.

However this still leaves the problem that the government can no longer dictate the Bank’s monetary policy. That is up to the Monetary Policy Committee whose remit does not run to taking into account the effects of monetary policy on the balance of payments. A government, could however, legislate to change the terms of reference of the Monetary Policy Committee so that they were not just concerned with inflation. They could be required to also maintain a neutral balance of payments. In retrospect, it can be seen that failing to build this into their terms of reference was one of Gordon Brown’s big mistakes.


Given that the trade deficit is about 6% of GDP, it follows that eliminating the deficit would require a net 6% increase in production, about £95 billion with all the increase going either as exports or as import substitution. In a good year the economy grows by 2% or so. It would seem that this could be done in perhaps three years. But this is much easier said than done.

Growth in Britain has typically been growth in consumption or growth in services as shown in Illustration 1. The biggest item of growth in 2014 was in real estate. Far from helping exports, this type of growth tends to suck in imports.

Growth in manufacturing is what is required. Given the small share of manufactures in the UK economy this means manufactures have to grow by much more than 6% to close the trade deficit. In order to grow, and in order to improve productivity there would need to be big investments. If Piketty is to be believed, contemporary European economies have a capital/output ratio of around 500%, so a £95 billion increase in production would require a capital investment of the order of £500 billion If the aim was to achieve the output gain over a 5 year parliament, this implies an investment of £100 billion a year.

That could in principle come from reducing consumption by £100 billion a year, in the Cripps way by disproportionally reducing the consumption of the middle and upper classes. But that was in the aftermath of war, now it would be unrealistic to adopt extreme Crippsian austerity. All gains in output going as exports whilst depressing consumption by £100 billion a year for 5 years would be too steep. It would probably be necessary to allow some of the growth to feed through into consumption and to fund some of the investment by capital inflows. A 5 year timescale would then be too short for the turnaround, a decade more like it.

Forcing investment

Now the EU restrictions on aid to state industry and nationalisation are removed, it is possible to have a long term industrial strategy with the state playing a leading role as it successfully did from the 1940s to the 1970s. Take one example. A state energy industry could invest heavily in wind and nuclear to reduce imports of fossil fuel and carbon dioxide emissions.

For my part I would prefer that was done with AGRs rather than the PWRs currently foreseen, both from the standpoint of the poorer intrinsic safety of the latter, and to restart a domestic nuclear construction industry.

It would be necessary to completely re-orient the banking sector from being oriented around financing mortgages. This has led to a combination of higher debt, and escalating house prices which, these have benefited existing home owners but blocks the next generation from the owning houses. But even more seriously it diverts finance from industrial development.

A potential policy would be to legislate that mortgage debts in excess 3 times the income of the borrower were unenforceable, and to ban loans for buy to let. This would a) put a cap on house prices, b) divert lending into investment.

1Setting out the goals of his 1950 budget he said:

“Our aim is to create a happy country in which there is an equality of opportunity, not too great a disparity of personal incomes, and in which every man and woman can. feel they are welcomed and have a full part to play. It is basic to that kind of life that there should be full employment and full participation by workers in the industrial life of the community.”