Ed Miliband was right to identify ‘responsible capitalism’ as a major challenge of the age, argues Ann Pettifor

In the speech he made at the ‘Google Big Tent’ in 2013 Ed Miliband defined ‘responsible capitalism’ as ‘where companies pursue profit but we also have an equal society, power is in the hands of the many and where we recognise our responsibilities to each other.’

It is hard to argue in principle with that aspiration as a matter of ethics, but it does not go very far in policymaking or political discourse.

Miliband was not the only party leader to invoke ‘responsible capitalism’ – David Cameron did so in a 2012 speech, in which he said, ‘We should not just stand up for business, but also stand up to big business when it (is) in the national interest … The previous government’s turbo-capitalism turned a blind eye to corporate excess – while we believed in responsible capitalism and would make it happen.’

He accused Labour of a ‘Faustian pact with the City’, ‘allowing a debt-fuelled boom to get out of control’, and of creating a series of ‘lethal imbalances in our economy’.

Cameron’s speech, while sharper, was politically and brazenly hypocritical. For the Tories have a diabolically Faustian pact with the City – and they honour it at every opportunity, in government and out. Furthermore, Conservatives place intense pressure on Labour members of parliament to honour this Faustian pact too, even at the risk of undermining Labour’s electoral base.

The Conservatives lost three elections in a row as a consequence of a grave financial crisis (‘Black Wednesday’) on John Major’s watch. Labour continues to pay the price for an equally grave, global crisis under Gordon Brown’s leadership. Miliband offered a credible analysis of the causes of the crisis – predatory finance capitalism – but no credible alternatives for Labour’s management of capitalism. Cameron was lucky, and escaped direct responsibility.

Miliband had first to shed New Labour’s (d)alliance with reckless speculators and rentiers in the City of London, and its commitment to ‘light-touch regulation’. This he did in his big speeches.

But he needed to have said and offered more.

Responsible capitalism requires a government held responsible by the electorate – for managing responsible capitalism.

To manage responsible capitalism is to promote productive as against speculative economic activity – via support to research and development and innovation, regulation where needed, taxation, and other levers. In the United Kingdom it means giving more policy support to manufacturing (in its broadest sense) and less to the financial services sector – as part of the rebalancing which all parties say is required.

It means focusing on full, decently remunerated, reasonably secure employment – which will require legislation. The UK is one of the most deregulated labour markets among ‘developed’ economies, and permits unjust behaviour which drives down standards and incomes – and productivity.

The crisis revealed how Miliband’s ‘predatory’ private finance sector had ‘crowded out’ what he rightly called the productive sector of the economy. Economists Stephen Cecchetti and Enisse Kharroubi of the Bank for International Settlements argued this year that, ‘the growth of a country’s financial system is a drag on productivity growth … Financial booms are not in general growth-enhancing, likely because the financial sector competes with the rest of the economy for resources. Second … credit booms harm what we normally think of as the engines for growth – those that are more R&D intensive.’

This is important. Rather than the public sector crowding out the private, as ‘classical’ economic ideology claims, an excessive finance sector crowds out and weakens other sections of the market economy. Moreover, the strength of the finance sector and City of London tends to raise the value of sterling, making it harder for exports to compete.

Miliband’s speeches did not spell out what Labour would do to manage the finance sector, to manage capitalism to prevent the crowding-out of the productive sector, and to prevent future crises. So while he clearly believed in responsible capitalism there was no certainty he would ‘make it happen’ – to quote Cameron.

The electorate were therefore not assured that under Labour another crisis would be averted.

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Ann Pettifor is director of Policy Research in Macroeconomics – PRIME and a member of Labour’s economic advisory committee