Abby Innes offers the second in a short series of articles on the political economy of the manifesto. Here she considers how the party’s economic strategy is made up of incompatible ideas and paradoxes

Innes, Abby

LSE Research Online

5/26/2017The economy and the Conservative manifesto: economicimagination in a time warpblogs.lse.ac.uk /politicsandpolicy/the-economy-and-the-conservative-manifesto/Abby Innes offers the second in a short series of articles on the political economy of the manifesto.Here she considers how the party’s economic strategy is made up of incompatible ideas andparadoxes.“A strong economy built on sound public finances, low taxes, better regulation and free tradedeals with markets around the world…a new deal for ordinary, working people giving them adecent living wage and new rights and protections in the workplace…fairer corporate governance,built on new rules for takeovers, executive pay and worker representation on company boards…modern industrial strategy and major investment in infrastructure, skills, research and development”(p. 12)These ideas promise a marriage of political economic models not known for their institutional compatibility. Theydraw, on neo-liberal, supply side economics that seeks to leave businesses unencumbered by tax or regulation; theunprecedented state interventionism of the American New Deal; the stakeholder coordination and the flattenedcorporate hierarchies of Germany and the Nordic economies, and finally; second-generation ‘endogenous growth’and investment theories which argue that economic growth increases from strong investment in human capitaldevelopment, R&D and infrastructure, and that the private sector will under-invest in all three.So, has the Conservative Party moved to the economic centre-left as much of the media commentary claims? If youput these strategies together do you get the best of all ‘varieties of capitalism’? Or is John Kay right when he callsthis the ‘topical treatment of symptoms’? How are voters meant to decide?What the manifesto lacks is any analysis of why these are the policies we need now. As with its evocations of ‘ thestate’ this is a text that discusses archetypes – the ‘modern joint stock company’ and ‘small businesses’ – notstructural dynamics. The manifesto is as Panglossian as incumbents’ manifestos tend to be: we will be the mostinnovative country in the world, though recently ranked below Belgium.But not entirely: it acknowledges “the UK’s slow productivity” growth, the lack of worker protection in the ‘gig’economy, and that “senior corporate pay has risen far faster than corporate performance”. Nevertheless, without anydiagnosis of how we got here economically – of who gained and who paid – how are voters meant to know thevalues by which a Conservative government would act?This might matter less in stable times: in a growing economy with rising living standards. But the UK has seen adecade of economic slowdown, poor productivity and declining real wages that look set to fall further with Brexit. Atthe root of this is ‘financialisation’. As Natascha Van de Zwan has set out, in the UK, as in the US, financial marketsand institutions have increasingly displaced other sectors of the economy as the source of profitable activity. In largecorporations – 53 per cent of UK turnover in 2016 – we see the ascendency of shareholder value and a shift fromthe value-creating ‘retain and reinvest’ model of the post-war era to an extractive system of ‘downsize and divest’.This dynamic has penetrated corporate life so that even non-financial corporations emphasize their financial activityand set high dividend payments as the highest priority, i.e. over investment. Finally, finance has spread into everyaspect of life and across classes so that low to high earners alike are incorporated into financial markets through1/3pension plans, home mortgages and other mass-marketed financial products. These trends increase the systemicrisk from financial markets and sit at the core of our growth without prosperity. This manifesto speaks of excessiveexecutive pay but it considers this a matter for shareholders. On financialisation writ large it has nothing to say.The manifesto is shot through with internal economicparadoxes that indicate less a concerted shift to thecentre-left than a lack of underlying analytical strategyaltogether. In an era of unprecedented corporate profitsand cash holdings, from what analytical basis is itcoherent to cut corporation tax further to encourageinvestment but to pull the UK out of the Single EuropeanMarket? Discuss!The steady, ‘competitive’ reduction of corporate tax ratesover the last thirty years has failed to fulfil its promise ofincreased productive investment or wage growth (see above). This shouldn’t be surprising: the arguments for taxcompetition derive from value-loaded deductive mathematical models from the libertarian Chicago School. Robustempirical economic scholarship, in the meantime, has demonstrated how negligible corporate tax rates arecompared to market size, real income, skills and infrastructure levels etc. as the host factors that actually determineforeign direct investment. 2016 research estimates that EU membership increases foreign direct investment into theUK by around 28 per cent.Likewise, what drives the manifesto commitment to ‘a modern technical education’ and workers consultation inpublic limited companies? These are constructive ideas which evoke the coordinated market economies of Germanyand Scandinavia and their higher productivity. But the latter are stakeholder systems characterized by patientbanking finance. They have encompassing trades unions and business associations which coordinate across entiresectors on training, investment, R&D, wage bargaining, and employment and unemployment protection.Cooperation is institutionalised across strategic dimensions.It is unlikely, then, that the outcomes of these models can be achieved through their faint suggestion in fragments:that the manifesto’s call for UK PLC boards to appoint one solitary director from the workforce will do much to re-establish a long-term investment and employment horizon. As Tom Clarke shows, Section 172(1) of the UKCompanies Act 2006 imposed a director’s duty to act with regard not just to the interests of shareholders but alsoemployees, suppliers, customers, the community and the environment. And this proved a singularly ineffective pieceof corporate law because it operates in a political economy of institutional relationships geared to the short term.Directors’ duties have in no sense amounted to stakeholders’ rights. The manifesto commitment to renew technicaleducation looks strong but un-costed – so will the funding come from the existing university and education budget,with schools already facing a real terms spending cut? And if the spending is new, why should large corporationscontribute less for the investments from which they will gain?Finally, the manifesto makes much of ‘sound public finances’, but, to take just one example of fiscal perversity, inwhich strategic framework is smuggling the number one issue for the reinforcement of capacity in Her Majesty’sRevenue and Customs? Revenue losses from smuggling run to billions per year but HMRC estimates the tax gap –between taxes owed and taxes paid – at £36 billion: an estimate that underplays tax evasion by multinationalsaccording to many tax scholars. Under the supply-side policies of recent years, HMRC has been actively redirectedto take a ‘partnership’ (lax) approach to multinational ‘tax planning’ (legal avoidance) as part of tax competition. ButHMRC employees see tax planning as the source of most of the tax gap for large businesses. Given the abjectredundancy of corporate tax competition, why not tackle that?Philip Hammond has suggested the UK might have to become a full-fledged tax-haven as our growth strategy ifBrexit goes badly. That’s Plan B. But what is plan A? Emerging markets put all their developmental effort into tradingwith economies higher up the chain of value-added. Hard Brexiteers are unique in thinking that it’s wise, once you’re2/3situated at the top, to do the opposite.Their manifesto has cherry-picked Labour policies such as a cap on energy prices and increases in the living wage.But on the brink of the most perilous economic step in the UK’s modern history it remains unclear on what analyticalgrounds the Conservatives decide their economic priorities. Even so, a deeper problem is apparent: between theImperial nostalgia, business as usual on climate change and the conception of the joint stock company as theresponsible home of innovation and investment, the Conservative economic imagination operates in a time warp._____About the AuthorAbby Innes is Assistant Professor of Political Economy in the European Institute, LSE.Image credit: Pixabay, Public Domain3/3

The economy and the Conservative manifesto: economic imagination in a time warp

Abstract

Similar works

Full text

Available Versions

LSE Research Online