State intervention is back. In part one of a two-part article, Chris Nineham looks at the myths and politics behind state involvement in the economy

Read Part Two here

Well before the Coronavirus wake up call, a combination of economic dysfunction and popular discontent had put paid to the idea that letting the market rip was an adequate approach to government.

There have been three recent and high profile left attempts to gain control of state machines and change direction through government intervention. The Syriza experiment in Greece, the Corbyn project in Britain and Sanders’ attempt to win the Democratic Party nomination in the US have all ended in disappointment. But they have touched the imagination of millions and both their popularity and their failures have generated widespread discussion.

Even the right has had to find ways to try and channel growing discontent with neoliberal globalisation. In Britain, Boris Johnson’s Tories won last year’s election by adding some big ticket spending promises to the basic message of getting Brexit done.  

The Coronavirus has exposed the shortcomings of free market fundamentalism like never before. Both austerity and the profit motive have been widely blamed for disastrous government responses. The terrible impact of the virus in Britain can partly be put down to the already desperate state of public services here due to decades of underfunding.

Often under pressure from public opinion many governments have responded with massive state intervention, in the process ripping up the neoliberal copybook. All this has caused some nervousness in ruling class circles, but the prospect of a savage slump partly as a consequence of the virus ensures the question of state intervention is going to remain at the forefront of politics.

The neoliberal state: fiction and fact

Free market ideology claims government intervention is counterproductive by definition.

The turn led by Margaret Thatcher in the 1980s towards the free market, the outsourcing and cutback of services and corporate invasion of what was left of the state has been a disaster for working people. It was part of a wider project of transferring wealth and power from the working class that has come to be known as neoliberalism. Services have been slashed, inequality has soared, private and public debt have surged. Average pay has fallen in real terms while working hours have massively increased.

Reaffirming that democratically elected governments should be able to shape the way society works is obviously important. It challenges the fatalism of free marketeers who claim not just that there is no alternative to the market but that there is no such thing as society. But rejecting the free market ideology of the neoliberals is only the beginning of wisdom.

The reality of neoliberalism has been very different from the rhetoric. For all the talk of a small state, government spending has grown in absolute terms and remained roughly steady as a proportion of GDP in Britain over the last few decades. Rather than being cut back, the state has been retooled to serve the purposes of the new capitalist strategy. Even welfare spending has increased. This is partly the result of the terrible impact of free market economics on peoples’ lives and the resistance that has produced, partly the growing number of older people in society and partly the fact that outsourcing is a very inefficient and costly way of providing services. The National Audit Office estimated that by 2018, 50 per cent of total government spending on goods and services (£93.5 billion) went on third party providers.[i]

Huge amounts of state resources have been redirected to serve the interests of big finance in other ways. Much of this isn’t recorded in records of government spending because it is undertaken by the ‘independent’ Bank of England. Banks and other financial institutions have been protected and supported by the state supplying liquidity to secure higher profits.

Since 2008 in particular, central banks in many countries are permanently on call, adding further stimulus whenever growth flags because productivity growth is so slow.

There are then different kinds of state intervention, and they don’t all benefit working people. Famously at the time of the 2008 banking crisis the British government spent billions bailing out the banks and then embarked on a policy of quantitative easing (QE) that pumped money into the coffers of the banks to keep big finance solvent. QE involved the purchase of £375 billion of government debt by the Bank of England. This was about equal to 50% of the entire annual spend of the UK government, and more than the entire combined annual budgets of the NHS, Education and Welfare. We were spared a 1930s type slump, but not only were huge sums diverted to the financial sector, but the debt caused by the intervention was used to justify a new round of savage cuts billed in all-in-it-together terms as ‘austerity.’ The result was a new phase in the redistribution of wealth from poor to rich, and accelerating inequality. 

State origins

The modern state emerged in close relationship with the capitalist classes and has long played its part in ensuring conditions are right for the pursuit of profit.  In England, the two centuries after the revolution and restoration of the mid seventeenth century saw the steady development of capitalist production and the gradual transformation of the British state into a set of institutions with some of the trappings of aristocratic and monarchic rule but essentially serving the interests of the capitalists.

From the eighteenth century onwards for example, parliament finished the job of enclosing land that had either been owned by smallholders or regarded as common. Between 1760 and 1870, about seven million acres, nearly one-sixth the area of England, was enclosed in this way.[ii] This often brutal process of what E.P Thompson called ‘class-based robbery’ both concentrated land in the hands of the big landowners and forced landless and small peasants out of the countryside and into the pool of ‘free labour’ in the cities. The existing system of poor relief was also scrapped to enhance conditions for capital accumulation.

The state also helped directly in accumulating capital into the hands of capitalists. Recent research has shown that a massive programme of government payments to compensate slave owners for the loss of their ‘property’ after abolition in 1833 gave a huge impetus to commercial development. Most of the twenty million pounds paid out by the government ended up funding new commercial projects including the railways, the City of London and other regional financial centres.

In the years that followed the state played a growing role, becoming more and more involved in the administration and expansion of empire in particular. In 1858, the British government took over the East India Company and assumed direct control over India establishing the British Raj. Unlike many previous colonial land grabs, Britain’s late nineteenth century involvement in the brutal scramble for Africa was largely organised by government.

This symbiotic relationship between the state and the emerging capitalist class led Marx and Engels in the 1840s to argue that the modern state had a clear class character, that it was in fact, in the words of the 1848 Communist Manifesto, ‘nothing but a committee for managing the common affairs of the whole bourgeoisie’. This view was popularised by the launch of the International Workingmen’s Association in 1864 and later by the experience of working people of Paris who rose up in 1871 and ran the city themselves for a few months through new, highly democratic institutions. Marx’s conclusion from the Paris Commune was that the old state had to be dismantled and replaced from below. In The Civil War in France, an official statement of the General Council of the International, Marx wrote that because state institutions were so shaped by capitalist interests, ‘the working class cannot simply lay hold of the ready-made State machinery and wield it for its own purposes.’ It was Marx, Engels’ and the early socialist movement’s radical approach to the state that Lenin summarised and defended in his famous 1917 pamphlet State and Revolution. 

The great acceleration

State spending surged in the following century as great power rivalry led to war. The graphs of government spending of the G7 leading economies over the long twentieth century are remarkably similar. Spending increases were a response to the economic and military priorities of the capitalist classes and were pursued by governments of left and right.

The great acceleration in spending that started around the time of World War One was driven partly by investment in the military but also concerns about social stability. In Britain, a pre-war increase in welfare spending was spearheaded by Lloyd George’s Liberals in response to growing social discontent, and also to a scandal about the unhealthiness of British recruits to the army during the Boer War. Competition with other capitalist powers was never far from the ruling class’s mind. During his speech introducing what was called the People’s Budget in 1909, Lloyd George pointed out that Germany had had a national insurance system against sickness since 1884. With a reference to the arms race between Britain and Germany he commented: “We should not emulate them only in armaments.”

Spending was further stimulated by the breakdown in world trade created by the two world wars which placed a premium on national production. Trade in manufactures rose steadily from the late nineteenth century until 1914. It fell back during and after World War One and then slumped during the 1930s, falling to half its 1914 value by 1950.[iii]The result was not just increased state intervention but in many countries a growing fusion of state and capital. The most complete expression of this worldwide trend were the state capitalist regimes of Russia, China and Eastern Europe. Britain was a fairly modest case, but from Japan to Brazil, from Argentina and Spain to Italy the state in countries with very different political regimes developed a wide degree of economic control over the economy whether ‘private’ or nationalised.

The resulting worldwide increase in state spending helped pull key economies out of the depression of the 1930s and laid the basis for the long boom that began some years after World War Two. It is clear from the numbers though that it was more than anything the surge in military spending in the war that lifted the US out of slump. Unemployment was still at 14 percent on the eve of US entry into the war in 1940 despite eight years of relatively high public spending.[iv] As JK Galbraith argued, ‘The Great Depression of the thirties never came to an end. It merely disappeared in the great mobilisation of the forties.’[v]

Post Wold War Two, the Cold War generated a new surge in military spending. The resultingly permanently high levels of arms spending stimulated economic activity, had enormous spin-offs in terms of research and innovation and had the added advantage of taking large chunks of capital out of the cycle of production and offsetting the tendency of the rate of profit to fall. [vi]

Pressure from below

If there was an international trend towards state control of the economy, the nature of the resulting spending policies depended partly on the balance of social forces. The wave of working class militancy that swept much of the world after the 1917 Russian Revolution stimulated early welfare spending in many countries. In Britain for example there was a surge of spending on public housing from 1919. After the defeat of the unions in the General Strike of 1926 this particular spending spree came to an end.

After World War Two there was widespread feeling that there should be no return to the economic catastrophe of the 1930s. In Britain, this mood was expressed most obviously in Labour’s landslide victory in the 1945 election. More thoughtful members of the ruling class had already sensed the mood for change. Two years before the election, Tory reformer Quintin Hogg had remarked, ‘if you do not give the people social reforms they will give you revolution’.

Partly responding to this mood, Attlee’s Labour government nationalised important parts of industry, massively expanded welfare, instituted a state education system and, of course, founded the National Health Service. In the years after the war, popular pressure continued to be important. The boom in council housing for example was partly the result of a series of huge rent strikes and squatting campaigns in the ten years after the war.[vii]

But even in this case, the policies of the Labour government need to be understood as part of the worldwide trend towards increased state intervention. Capitalists saw state investment as an important way to reboot economies brought low by war and depression. The nationalisations tended to be of unprofitable industries that were nevertheless important to the wider capitalist class. Any talk of the democratisation of industry or workers’ involvement in management was ruled out of order and the capitalist owners were always compensated very generously for their losses. In the words of Paul Foot:

‘The coal-owners for instance, responsible for at least a century of exploitation, starvation and eviction in mining areas, picked up £164 million in Government stock (equivalent in 2002 to £2.5 billion). This massive pay-out, repeated in the proposals for electricity, gas, cables and aviation, tipped the balance of class forces in favour of the rich…Indeed, some argued that the payment of such huge sums in compensation for clapped-out old stock and vulnerable industries diverted the resources of the rich into more profitable areas than they would otherwise have occupied.’[viii]

Even welfarism had a logic for the capitalist class beyond tactical concessions to working people. In general, capitalists concluded the extra spending was justified by the fact that as industry modernised there was a greater need for an educated stable and skilled workforce. Taken together these factors led to a broad consensus in ruling class circles. The post-war period of radical reform was short-lived. By the late forties, the Labour government was rowing back on some of its commitments and taking a tough line against escalating working class demands.[ix] But in the following decades both Tory and Labour governments oversaw a mixed economy with a historically high level of state spending and intervention in industry, an economic consensus that came to be called ‘Butskellism’ after the names of the Tory and Labour chancellors respectively, Rab Butler and Hugh Gaitskell.

The collapse of Keynsianism

This consensus broke down in the 1970s. Recent literature tends to emphasise the ideological offensive organised by neoliberal intellectuals around the Mont Pellerin Society. But their ideas would never have taken hold in ruling class circles if it hadn’t have been for the manifest failure in capitalist terms of the mixed economy and moderate Keynsianism.

The failure was clear in the first major post-war economic crisis of 1973 -75 but also in the sharp fall in profit rates from the late sixties. Most calculations in fact suggest profit rates in Britain more than halved between 1950 and 1975. The retreat from Keynesianism began in 1975 under the Labour Government of Jim Callaghan. The government had been elected on a left wing programme in 1974, promising to use state intervention to organise a ‘fundamental, irreversible shift in the balance of power and wealth, in favour of working people and their families.’ It faced establishment hostility from the start. Civil servants, the security services and the media all played their part in destabilising the government.

Tony Benn, the most left wing member of cabinet, was a particular target. Benn experienced bare-faced obstruction from civil servants in his department. According to his diaries, his Permanent Secretary, Sir Anthony Part, treated him ‘like a consultant psychiatrist would a particularly dangerous patient’ and asked him incredulously if he really intended to go ahead with his radical economic programme. When Benn assured him that he did, Part replied, ‘well, I must warn you, in that case, that if you do it, you will be heading for as big a confrontation with industrial management as the last Government had with the trade unions’.[x]

Sir Anthony Part wasn’t joking. Big business and finance organised investment strikes and runs on the pound, and the Bank of England and the International Monetary Fund backed them up in a series of confrontations with the government. With the support of all wings of the establishment, they managed to force a u-turn from the government. The mainly moderate Labour leadership went along with big business’s demands to muzzle the left, and then proved no match for the forces ranged against it. Rather than calling out those that had blackmailed and bamboozled his government, speaking to the Labour Party conference in 1976, Prime Minister Jim Callaghan launched the now-familiar idea that you can’t buck the market:

‘We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I will tell you in all candour that that option no longer exists, and that in so far as it ever did exist it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment.’[xi]

Instead of managing to use the state apparatus to win progress for working people, Labour succumbed to state and big business pressure and began the imposition of a new economic model that would cause misery for millions. Its last few years in office witnessed the biggest decline in working class living standards since the 1920s.[xii]

Chris Nineham’s book The British State: A Warning is available to buy here.

Notes

[i]David Walker and John Tizard (2018) ‘Out of Contract: Time to move on from the ‘love in’ with outsourcing and PFI’, London Smith Institute, p.5.

[ii]G. Slater (1913) ‘Historical Outline of Land Ownership in England’, in The Land, The Report of the Land Enquiry Committee, (London: Hodder and Stoughton).

[iii]Calculation by A. Winters, in Financial Times, 16 November 1987.

[iv]Kindleberger, Charles P, 1973, The World in Depression 1929–39 (Allen Lane) p. 272.

[v]Galbraith, John Kenneth, 1993, American Capitalism (Transaction). P. 65.

[vi] One of the clearest accounts of the ways arms spending helped to fuel the long boom is Mike Kidron’s Permanent Arms Economy, available here: https://www.marxists.org/archive/kidron/works/1967/xx/permarms.htm

[vii] Don Watson, (2016) Squatting in Britain 1945-1955.

[viii]Paul Foot, (2005), The Vote: How it Was Won and How it Was Undermined, Penguin, London, p.325.

[ix] See Chris Nineham (2019) The British State: A Warning, Zero Books p61/2.

[x]Tony Benn (2005) The Benn Diaries 1940-1990, Random House, London, pp.302 and 287.

[xi]Quoted in Cliff (1988), The Labour Party: A Marxist History, Bookmarks, London, p.322.

[xii] See Cliff (1988), p.322.