A FAREWELL TO KEYNES?

New Statesman & Society, 23 February 1996

The free-market right has long dismissed the ideas of John Maynard Keynes as outmoded. Now much of the social-democratic left is doing the same. But has Keynesianism outlived its usefulness? Paul Anderson and Kevin Davey investigate

Sixty years ago this month, John Maynard Keynes published his magnum opus, The General Theory of Employment, Interest and Money, a book that even his detractors say revolutionised the way that the world thought about economics. Precisely what the legacy of that revolution comprises, however, is now seriously contested – and not just by the free-market right whose nostrums were Keynes' target.

There are still some who echo the accepted wisdom of left and right in the 19508 and 19605, that The General Theory provides nothing less than a working theoretical framework for the management of the economy to secure full employment. But today these enthusiasts are outnumbered by sceptics. Even in social democratic circles, where Keynes enjoyed unparalleled influence for nearly 40 years after his death in 1946, his star is on the wane. Of the few social democrats who still call themselves Keynesians, most are careful to distance themselves from what is popularly known as" Keynesianism" – and there are many on the left who now argue that Keynes' insights were specific to a time and a place long gone. For them, as for the new right, Keynes 'most enduring achievement is to have established the discipline of macro-economics and to have pioneered the techniques we use to measure the performance of national economies.

Who is right? It might appear a cop-out to say so, but there isn't an obvious answer. With Keynes, as with most other thinkers who have spawned an "ism", there are protracted arguments about the relationship between what the master said and meant and what his followers – particularly those who popularised and systematised his ideas – interpreted him as saying.

As usual, however, it is easiest to start with the "ism" – which in Keynes' case can be traced back to the transformation of the ideas of The General Theory into a neat (but somewhat crude) model of the way economies work by his disciples John Hicks and Alvin Hansen. What might be called the doctrine of Keynesianism used the Hicks-Hansen model to show that the state has the ability to secure full employment by borrowing to boost the overall level of demand in the economy. .

There is no doubt that Keynesianism in this sense had an enormous influence on economists. By the mid-1960s, it was dominant in just about every university economics faculty: even the arch-monetarist Milton Friedman declared in 1966: "We're all Keynesians now." The extent of its influence on government practice is, however, arguable. It used to be accepted wisdom that Keynesian demand management was responsible for the unprecedented long boom enjoyed by the western industrial economies in the 25 years after 1945. But in recent years, this idea has come increasingly under fire, as economic historians have demonstrated that even Britain and America, the two countries most directly influenced by Keynesianism, did not systematically run budget deficits to boost demand until the 1960s, while the two most successful economies during the long boom, Germany and Japan, were fiscally conservative. On this view, Keynesianism was not really applied until the end of the "golden age" was already in sight.

Nevertheless, there's a strong case that Keynesianism did play a major part in the boom. In the words of Keynes' biographer Robert Skidelsky: "The explicit or implicit commitment to avoid a collapse in demand – and just as important, the belief that Keynesian policy would work if required – may well have secured the expectations necessary to sustain the private investment boom for so long." Even if government policy wasn't particularly Keynesian, in other words, the postwar boom wouldn't have occurred had investors not believed that Keynesianism had smoothed out the business cycle.

By the mid-igyos, however, the golden age was-over – and with it the hegemony of Keynesianism among economists and policy-makers. By the mid-1980s, Keynesianism was everywhere in retreat and the free-market right triumphant.

So what went wrong? The problem both for the real world of economic policy-making and for Keynesianism as an ideology is easy enough to identify: the arrival of "stagflation", the coincidence of rising unemployment and rising inflation, in the late 1960s. But the causes of stagflation were hotly contested at the time and remain so today. The free-market monetarist right blamed Keynesianism, arguing that the assumption (not actually made by Keynes himself) that there was a simple trade-off between unemployment and inflation ceased to work as soon as people started taking inflation for granted. The constant boosting of demand simply fuelled inflation without having any effect on unemployment. Keynesians replied by blaming factors outside western policy-makers' control: the oil-price shock of 1973-74, the explosion of wage militancy throughout the industrialised world after 1968, and the collapse of the Bretton Woods system of managed exchange rates.

At first, governments tried to muddle through. Most tried to maintain demand while attempting to dampen inflation with incomes policies. When that didn't work, they allowed unemployment to rise to counter inflation. And when that in its turn proved painful, they allowed inflation to rise to counter unemployment.

By the mid-1970s, it had all spun out of control – and nowhere more so than here in Britain. Faced with rampant inflation, rising unemployment and a currency crisis, the Labour government went cap in hand to the International Monetary Fund for a loan – and the IMF insisted on swingeing spending cuts as a condition of lending the money. At the 1976 Labour conference, prime minister James Callaghan announced that the Keynesian era was over. "We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending," he said." I tell you in all candour that this option no longer exists and insofar as it ever did exist, it injected a higher dose of inflation and a higher level of unemployment. Unemployment is caused by pricing ourselves out of jobs quite simply and unequivocally."

The door back to the forgotten world of laissez-faire economics had been unlocked. In the next few years, every major industrialised country followed Britain's lead. The last country to attempt a Keynesian dash for growth, France under Francois Mitterrand's Socialist government in 1981-83, was forced into a humiliating U-turn by rising inflation and a balance of payments crisis. For the next decade, Keynesians were marginalised. Their theories were displaced by the market dogmas that Keynes thought he had disposed of, their old and apparently irrelevant tools of intervention – exchange controls, deficit financing – abandoned by governments unilaterally and through international treaties.

Keynesianism was, however, too deeply entrenched, and too productive, to disappear overnight. Indeed, it even remained an important feature of the avowedly anti-Keynesian governments of the 1980s. As in so many other ways, they said one thing and – when the occasion called for it – did another. By cutting personal taxation and increasing the budget deficit to finance military expenditure between 1983 and 1985, US president Ronald Reagan claimed to be providing supply-side incentives. In fact, he was clearly putting old-fashioned Keynesianism back into practice. In Britain, chancellor Nigel Lawson's boom of the late 1980s – the product of tax cuts, low interest rates and rising public expenditure – was a similar exercise in hypocrisy. Even today, major infrastructure projects (like road-building and the Eurofighter) bring unacknowledged but indisputably Keynesian benefits to an economy.

Keynesianism by stealth is not the only type to have survived the free-market counter-revolution. Keynesian true-believers – such as the Cambridge School in Britain – were quick to foresee the consequences of savage deflation. In 1980, for example, Wynne Godley predicted that the government's fiscal policies would produce three million unemployed within three years. He was ignored by the monetarists – but time proved him right. For a time, the majority of social democrats also kept the Keynesian faith. The Alternative Economic Strategy that dominated Labour thinking in the early 1980s was a strange hybrid of state socialism and Keynesianism, combining pre-Keynesian Labour emphases on the ownership, control and planning of industry with a commitment to reflation. Although such a perspective has long since been abandoned by the Labour leadership, its Keynesianism survives in the ideas of many dissidents in the party, from Peter Shore on the right to Roger Berry on the left.

Ever since the collapse of the French Keynesian experiment, however, there have been growing doubts among social democrats about the feasibility of "Keynesianism in one country" because of the increasing globalisation of the economy. No medium-sized nation-state, the argument goes, can possibly hope to counter the power of the markets. If Keynesianism, in the old sense of demand management to secure full employment, is ever to work, it will have to be at a regional or even global level. Such a point of view is certainly in keeping with the spirit of Keynes himself. An early exponent of the need for coordinated international economic policies, particularly on interest and exchange rates, he was one of the architects of the Bretton Woods system of managed exchange rates that lasted into the early 1970s.

But there are major obstacles to the creation of the institutions necessary for regional Keynesian intervention, as Europe shows. European Commission president Jacques Delors' plans for a modest European Union programme of public works to compensate for the deflationary effects of the Maastricht treaty were killed by conservative opposition – and with the electoral prospects for social-democratic parties poor in every major EU country except Britain, it is unlikely that anything like them will be put into practice for the foreseeable future. To make matters worse, there's also the question of whether regional Keynesianism would work even if there were the political will for it at intergovernmental level. To Meghnad Desai, the pace and scope of globalisation are such that even regional attempts to manage demand are doomed, "What most people think of as Keynesian economics and Keynesian policy is dead," he says bluntly.

And indeed, if Keynesianism is about expansionist demand management, many of today's self-styled Keynesians don't really deserve the name. Will Hutton, for example, whose The State We 're In has been the best-selling book on economics in years, argues that Keynes has been traduced by his systematisers and popularisers: he was actually far more important as an advocate of reforms that would change the ways in which investors behave than as the father of high public spending demand management. Other "new Keynesians" are primarily interested in supply-side policies for the labour market, a topic on which Keynesianism had little to say at the height of its influence. This trend is reflected in mainstream social democratic politics, where the current emphasis is on curing unemployment through education and training rather than bv boosting demand.

For these economists and politicians, the legacy of Keynes has not been properly understood: "what most people think of as Keynesian economics" is not what Keynes meant at all. Robert Skidelsky agrees with them. He insists that, far from encouraging inflation, Keynes was implacablv opposed to it – and he was not averse to the idea of imposing old-fashioned austerity if it got out of control. The General Theory was not the theoretical licence to print money that 1960s-stvle Keynesianism claimed it was," he argues. Neither would Keynes himself have endorsed the massive extension of the role and powers of the state that has come to be associated with his ideas.

On this reading, Keynes is neither the hero whose brilliant reworking of economics saved capitalism from the business cycle, nor the villain whose ideas were responsible for the inflationary crisis of the 19708. Which is probably an accurate assessment – but hardly the stuff on which a revival of his influence will be made.

MISUNDERSTOOD OR OUTMODED?

"By bastardising Keynes into the simple advocacy of high government spending, both the right and the left secured important political objectives. The left was given the means to temper the Marxist/socialist tradition in British politics into a devotion to the idea of a high public spending social democracy, while the right translated Keynesianism straight into the tradition of paternalist intervention to preserve the status quo. It suited neither to interpret Keynesianism as it actually was: a demand for the state to change the behaviour of financiers and businessmen by prosecuting an active fiscal policy in tandem with an assault on the portfolio preferences of the financial institutions."

WILL HUTTON The Revolution That Never Was, 1986

"Keynes saved capitalism from its worst crisis; it survived and revived and now has seen him off...The Gadarene volatile behaviour of thousands of operators on stock markets around the world imposes a real time constraint on governments. This is a discipline that is hard to fight against. Global coordination of economic policies may work to regulate these markets and global Keynesianism may be possible in theory. But such scenarios require a lot of consensus and a strong regulatory authority which can punish free-riders. We are a long way from that, much as we may wish otherwise."

MEGHNAD DESAI What is Left of Keynes? 1994

"Keynesian policies come to us today wrapped up in a history of rising inflation, unsound public finance, expanding statism, collapsing corporatism, and general ungovernability, all of which have seemed inseparable fromthe Keynesian cure for the afflictions of industrial society. We do not want to traverse that path again. By the 1980s, Keynes, who was praised for having saved the world from Marxism, had joined Marx as the God that failed... If we are to draw a lesson from postwar historical experience, it is that Keynesianism works best as a discretionary resource in a rule-based framework which places strong constraints on the actions of governments and which promotes the well-being of peoples through the widest possible measures of free trade. Those who look for inspiration from Keynes today are more likely to be impressed by the care and thought which he gave to the design of the Bretton Woods system than with Keynesian prescriptions for the parochial diseases of individual economies."

ROBERT SKIDELSKY Keynes, 1998

LISTENING WITH ONE EAR: KEYNES AND THE LEFT IN HIS LIFETIME

The history of Keynes influence on the left during his lifetime and on the Labour Party in particular, is complex. It began with his assault on the Versailles treaty's insistence on punitive German reparations for war damage, The Economic Consequences of the Peace (1919). Keynes had resigned as a Treasury civil servant to write the pamphlet, which became a bestseller and according to his biographer Robert Skidelsky, made him “a hero of the left": "Henceforth the intelligentsia of the left always listened with one ear to what Keynes was saying."

But Keynes' critique of laissez-faire economic orthodoxy from the mid-1920s, starting with his polemic against returning to the gold standard, A Tract on Monetary Reform (1923) at first found few takers in the Labour Party (let alone to its left). One reason was that Keynes was distrusted as a prominent member of the Liberal Party: in the late 1920s, he was the brains behind David Lloyd George's radical Liberal programme for tackling unemployment, most famously spelt out in The Yellow Book: Britain's Industrial Future in 1928.

Political tribalism was by no means the whole story, however. On one hand, the Labour leadership was unstintingly orthodox in its economics. The dominant figure in Labour economic policy-making in the 1920s was Philip Snowden, the chancellor of the exchequer in Ramsay Macdonald's 1924 and 1929-31 Labour governments, a fierce proponent of free trade, low public spending and maintenance of the value of the currency. Keynes's ideas were anathema to him. On the other hand, most of Snowden's critics on the left took it as axiomatic that capitalism was on the verge of a fins-crisis and could not successfully be reformed. For them, Keynes’s alternative simply made no sense.

Not that Keynes thought much of Labour. Although he saw the potential for a Lib-Lab coalition, he disliked Labour's class politics – "the class war will find me on the side of the educated bourgeoisie – and he was dismissive of the left's anti-capitalism. “The Labour Party has got tied up with all sorts of encumbering and old-fashioned luggage," he wrote in 1927. "They respond to anti-communist rubbish with anti-capitalist rubbish. The consequence of all that is that, whether in or out of office, the business of orderly evolution seems likely to remain with the Liberal Party.”

For all this, Keynes had sympathy with some of the ideas of the Independent Labour Party, which had at least realised that unemployment could be reduced by increasing the overall level of demand in the economy (although its policy ideas were far-removed from Keynes's own). On the right of the Labour spectrum. Ernest Bevin, the general secretary of the Transport and General Workers Union, was close to Keynes on economic policy from the time of his warnings of the deflationary consequences of returning to the gold standard. And in Oswald Mosley, then a maverick Labour MP with a significant following on the left, Keynes had an articulate disciple who consistently advanced a programme of public works and monetary reform along the lines of Lloyd George’s proposals.

But Mosley flounced out of the Labour Party in early 1931, after the government rejected his pleas for protectionism and public spending to counter the effects of the slump that followed the 1929 Wall Street Crash. And the advice of Keynes and Bevin (who both sat on the Macmillan Committee on Finance and Industry set up by Snowden in 1929) was ignored by the government at every turn. In August 1931, Macdonald and Snowden infamously preferred to desert Labour to form a National government with the Tories and the laissez-faire wing of the Liberal Party, rather than deviate from plans for swingeing spending cuts, including reductions in unemployment benefit) as demanded by the bankers and the orthodox economists.

The general election that followed, which saw Labour reduced to 52 seats and the Lloyd George Liberals to four, was a sensational political victory for laissez-faire orthodoxy. But the debacle of 1931 also made Labour intellectuals much more receptive to Keynes as they struggled to understand what had gone wrong, and as he developed the over-arching economic theory that reached maturity in The General Theory of Employment, Interest and Money, published 60 years ago this month.

Well before The General Theory, Keynes’s polemical writings – he was a prolific contributor to newspapers and magazines, including the New Statesman, whose board he chaired after its merger with the Liberal Nation in 1931 – had had a profound effect on the "New Fabian" thinkers who were to play a key role in formulating the policies on which Labour won the 1945 election, among them G D H Cole, Hugh Dalton, Evan Durbin, Hugh Gaitskell and Douglas Jay. It was his magnum opus that realty made the difference, however. Cole described it in the New Statesman as the most important book on economics since Marx’s Capital: Jay embraced it enthusiastically in his widely read 1937 book, The Socialist Case.

Meanwhile, Keynes continued to contribute directly to Liberal thinking; and there were even some Tories who drew on his ideas (among them Harold Macmillan, whose The Middle Way was published in 1938). But it was in the United States, where President Franklin D Roosevelt's New Deal programme for economic recovery drew heavily on his thinking, that Keynes’s impact in the1930s was greatest. In Britain it took the 1939-45 war for his influence to become pervasive.

Brought back to the Treasury after publishing How to Pay for the War in 1940, he played a central part in British wartime finance. He negotiated the Lend-Lease scheme with the US that provided Winston Churchill's coalition government with arms after Britain’s money had run out, and in 1944 he was the chief British representative at the Bretton Woods conference that set up a managed postwar international currency system and brought about the World Bank and the International Monetary Fund.

After that, he negotiated the US loan that kept Britain afloat after the war had ended. Domestically Keynes played a significant role both in William Beveridge’s 1942 report that provided the blueprint for the postwar welfare state and in the 1944 White Paper on employment that famously accepted government responsibility for maintaining a high and stable level of employment. Earlier in 1944, someof Keynes's most enthusiastic followers, among them Joan Robinson and Nicholas Kaldor, had drafted Labour’s own, much more explicit, policy document committing the party to full employment.

What Keynes's influence on policy would have been had he lived longer has been the subject of much speculation. He was an adviser to the 1945 Labour government's first chancellor, Hugh Dalton, and, according to Dalton's biographer Ben Pimlott, his influence is discernable in Labour's first two budgets to the extent that Dalton "accepted that fiscal policy could be used without qualms as a long-run full-employment weapon".

Nevertheless, Dalton was by no means as enthusiastic a Keynesian as his successors. Keynes died of a heart attack in April 1946 at the age of 62 – before what can properly be termed the Keynesian era had really begun. (Paul Anderson)

IT'S THE ARMS, NOT JUST THE MEN

New Statesman & Society, leader 16 February 1996

The Scott report should provoke more than ministerial resignations. It makes imperative a radical shake-up of British foreign policy and a new strategy to wean British industry off its reliance on the arms trade

The timing of the release of the Scott report on arms sales to Iraq is just about as bad as it could be for New Statesman & Society – yet more proof that there really is an international conspiracy to ensure that the most important events happen between NSS going to press and its reaching the newsstands. At least Robin Cook was granted three hours' viewing of the report before publication: we have to comment sight unseen.

But that's enough grumbling about the lot of the weekly magazine. Things could be much worse. Because Sir Richard Scott was explicit from the start about what he was looking into, and because the inquiry hearings were held in public, we have a pretty good idea of what is at stake.
It will be a big surprise, for example, if the report is not critical of the way that government ministers modified guidelines on arms sales to Iraq and then misled public and parliament about having done so. Similarly, it is almost inconceivable that Scott will not have harsh words for the ministers who signed Public Interest Immunity certificates in an attempt to prevent businessmen charged with selling arms to Iraq proving in court that they did so with the full support of the government.

Most commentary on the report in the days immediately following publication will be on these two aspects, not least because there is a real possibility – if the opposition plays its cards right – of securing at least one ministerial resignation. Most vulnerable is Chief Secretary to the Treasury William Waldegrave, one of the ministers who lied about the arms-sales guidelines being changed, closely followed by Attorney General Sir Nicholas Lyle, who was responsible for the PII certificates that could have sent innocent men to jail. Less likely to have to go are the ministers who unquestioningly signed the certificates, although they will certainly be severely embarrassed by what Scott has to say.

And of course, it's quite right that the initial focus is on all this. Being found to have lied to parliament should be a resigning matter in any democracy, and the same goes for being discovered to have engaged (however unwittingly) in a course of action that might have ended in criminal convictions of innocent people. But we didn't need the Scott inquiry to tell us that Tory ministers were guilty of such behaviour over arms-to-Iraq: the evidence was incontrovertible before the inquiry was set up, and the guilty men should have gone long ago. Resignations now would, of course, be welcome, but it would be more in character for the Tories shamelessly to tough it out.

In the longer term, what is most important about Scott is the spotlight he has turned on the deep assumptions of British foreign and industrial policy in recent years. In particular, he has exposed the central role of the arms trade in Britain's relations with the outside world. If it was not clear before that the British government is prepared to do just about anything to secure overseas sales for British arms manufacturers, it is now.

So too is the short-sightedness of this whole approach and its corrupting effects on our political life. The arms-to-Iraq policy played a crucial role in encouraging Saddam Hussein to believe that there would be little resistance to an Iraqi invasion of Kuwait. Itwas all paidfor by British taxpayers, through the Export Credit Guarantee Department. And all the decisions pertaining to it were taken in secret, without the knowledge of parliament.

The lesson is simple: nothing short of a transformation of the whole culture of British foreign policy is now warranted, and it has to start with tackling the arms trade. The first step is clearer and firmer rules governing the export of arms, with a ban on sales of military and military-related equipment to countries with poor human-rights records (which includes Saudi Arabia and Indonesia, currently two of Britain's biggest customers) and a much more effective licensing regime (not least to prevent the export of arms to blacklisted countries via others). Butthis is just a start. It needs to be accompanied by radical measures to destroy the culture of secrecy surrounding foreign affairs, and by a long-term industrial strategy to wean British manufacturers off their addiction to military markets.

This was just the sort of package that Labour promised during its "wilderness years". These days, it's more cautious. Although shadow foreign secretary Robin Cook has promised tougher guidelines on military exports, the idea of a policy to reduce British reliance on the arms business is just a little too dangerous for new Labour in the run-up to an election: too many jobs are at stake. Once it is in power, however, as British arms manufacturers are squeezed out of the shrinking world arms market by US competitors, silence will not be an option.

A PEOPLE'S EUROPE?

New Statesman & Society, 9 February 1996

Shadow foreign secretary Robin Cook didn't really want his job and is now rumoured to be about to quit politics altogether. But Paul Anderson finds him as keen on taking on a ridiculous workload as he ever has been

For a man reported last week by the Daily Express to be so fed up with being snubbed by Tony Blair that he wanted to quit politics, shadow foreign secretary Robin Cook seems remarkably happy with his lot.

He is sitting in his Westminster office overlooking Whitehall, answering questions as confidently as ever. The phone rings three times as we talk, and twice it's the leader's office asking for help. Whatever the tensions in the Labour leadership as the election comes up, Cook is definitely in the loop. Blair knows that he needs Cook to keep the party's soft left on board – and also for his remarkable skills in presenting arguments. Cook will have an exceptionally high-profile role in the next couple of months, simultaneously leading Labour's response to the Scott report on arms sales to Iraq and pushing his party's position in the run-up to the intergovernmental conference on European union. And he appears to relish the prospect.

Cook's most pressing priority is Scott. He has been Labour's leading protagonist on the arms-to-Iraq scandal since 1992, when as trade spokesperson his devastating parliamentary performances played a decisive role in forcing Prime Minister John Major to set up the inquiry under Lord Justice Sir Richard Scott, whose report will finally be published next week. Cook kept the Scott brief when he was shifted – against his preference – to the shadow foreign secretary's job in 1994.

The report, which runs to four volumes and 2,000 pages, will be released at 3.30pm on 15 February – and the government has decreed that it will not be made available to the opposition (let alone the press) in advance of publication, even though ministers received copies this week.

"It's a blatant attempt to manipulate media coverage in the government's favour," says Cook. "The Conservatives are desperate to limit the damage done by Scott, which is why Geoffrey Howe and others have been trying so hard to rubbish the inquiry. But they simply cannot get away from the fact that the scandal Scott has investigated took place under a Conservative government and involved Conservative ministers."

Labour is sparing no effort to get the government to allow it to see the report before publication – and in the meantime is making as much as it can of leaks of early drafts that have already appeared in the media. Cook is particularly scathing about the extracts published by the Sunday Times last weekend, in which Chief Secretary to the Treasury William Waldegrave was excoriated by Scott for misleading parliament and the public about defence-related exports to Iraq when he was a junior Foreign Office minister. "If the final report includes anything like that sort of criticism, Waldegrave should resign," he says.

The parliamentary debate on Scott, likely within a week of publication, will be a crucial set-piece, comparable to the Westland debate ten years ago, and Cook knows he cannot blow it. But the Tories are on the defensive, and they know that the best they can hope for is to weather the storm.

By contrast, on Europe, his other big brief, there is a surprising optimism on the Tory benches. John Major's strategy since last summer's leadership election, of marginalising the hardcore Eurosceptic right in the cabinet while getting the government to adopt a populist nationalist anti-European rhetoric, has served its cynical purpose better than most commentators expected. Although the most Europhile Tories, including Chancellor Kenneth Clarke, deplore it – and there remains a massive split even in the cabinet on economic and monetary union – there is growing confidence among the rest that they now have a good chance to make political capital out of Labour's supposed "federalism" and willingness to kow-tow to Brussels.

Cook is unworried. He spent his first year as shadow foreign secretary repositioning Labour on Europe, and believes that the party policy he forged is more than robust and popular enough to withstand any Tory assault. "For a start," he says, "it is simply absurd to describe us as federalists. Labour's vision of Europe is of independent member-states voluntarily coming together to cooperate. We do not want to surrender our independence to some kind of super-state. At the same time, however, Britain will never get the best deal from Europe by remaining isolated. Being constantly the odd one out is a very difficult position to bargain from." The new Labour line is a skilfully negotiated compromise between the party's Eurosceptic and Euroenthusiast wings – and it looks a lot more likely to hold until the election than the Tories' fragile peace. Labour's Euro-rebels have been notable by their silence in the past year. But what does the Labour consensus mean in practice? To start with the most controversial issue for both parties,

Labour is in favour of economic and monetary union (EMU) – but not on any terms. It would back it only with the explicit consent of the British people (not necessarily a referendum: a general election "in which the public had a clear choice and the result was clear-cut" might settle it) and only at a reasonable price.

"I don't think that anyone should underrate the very strong political will behind the creation of a single currency on the part of French president Jacques Chirac and German chancellor Helmut Kohl," says Cook." But there are undoubtedly problems with the Maastricht timetable for EMU. We can see the benefits of a single currency, but it can only work if there is real economic convergence among the participating countries – in terms of productivity, innovation and output, as well as public-sector deficits and inflation. Unless we get that, there has to be a question-mark over whether we will be able to give up for all time the right to devalue. Devaluation has been the way that Britain has compensated for its failure to compete over the past 30 years. It is not a strategy, but it does enable you to compensate for the failure of strategy."

If there are echoes here of Bryan Gould and Peter Shore, the anti-European Labour Keynesians who were the most trenchant devaluationist opponents inside the party of its pro-Europe turn in the late 19805, they are faint. For Cook, the goal is not a go-it-alone economic policy, but a coordinated European attempt at reflation along the lines advocated by former European Commission president Jacques Delors in his (now-abandoned) programme to compensate for the Maastricht treaty's deflationary consequences.

"For me the most important challenge facing Europe is how we reconnect with the peoples of Europe," says Cook. "The problem with Maastricht is that the political elites became uncoupled from the concerns and aspirations of their peoples. We have got to get Europe back on to a people's agenda, and the first priority is jobs."

Sadly, he goes on, the Delors package has been lost – "largely because of sabotage and obstruction by the British Conservative government" – and there can be no return to its proposals: "They're now four years old and Europe's economies have moved on since then." But "coordinated action to stimulate the economies of Europe and get them moving again" remains imperative.

"Maastricht committed every country to get its deficit down to 3 per cent, in other words to deflate. Delors rightly recognised that we needed to take compensatory measures if this was not to affect demand. In the past three years, Europe has been straining to meet the deficit criteria, but without any means to maintain demand. We have got to get that kind of reflationary package in place again to tackle unemployment."

Not that some sort of Euro-Keynesian demand management is the whole story: there's also the question of the quality of the jobs that Europe creates. Here, says Cook, "the specific issue for us is the government's refusal to sign up for the social chapter. I am greatly entertained by the Tories' intention to fight the next election promising that people in Britain will have fewer rights and worse working conditions than people on the continent."

The social chapter, he continues, fits perfectly with Labour's commitment to a "stakeholder society", the "big idea" embraced by Tony Blair last month as Labour's over-arching theme. "The Tories are barking up the wrong tree if they claim that the social chapter will compromise competitiveness. Its key commitment is to more consultation of workers. A workforce that knows the strategy of a company and is involved in drawing it up will be more committed to it and therefore more competitive. Continental companies with a culture of consensus and consultation have been able to implement long-term investment strategies – unlike most companies in Britain, where we have a culture of confrontation between management and the workforce and a tradition of keeping the workforce in the dark."

If EMU and the social chapter are likely to be the European issues that figure most prominently in the election campaign, the most pressing question now is the forthcoming intergovernmental conference, the "follow-up-to-Maastricht" negotiations that will attempt to reach agreement on reform of the European Union's political institutions and enlargement of the EU to include eastern Europe.

On the institutions, Cook says that the principle of Labour policy, set out in a document passed by its annual conference last year, is that "the European Commission should be accountable to the European Parliament, while the Council of Ministers should be more accountable to national parliaments". Both national parliaments and the European Parliament should therefore be given more powers. Labour rejects the idea of a "two-tier" or "a la carte" Europe; wants majority voting in the Council of Ministers extended to cover social affairs, the environment and industrial policy, but not home affairs, taxation or security policy; and backs a simplification all round of the EU's decision-making procedures.

But it is enlargement to the east, initially to Poland, Hungary, the Czech Republic, Slovakia and possibly Slovenia, that Cook thinks is the most important task of the IGC. "We need to ensure that the countries of central Europe go down the road of postwar western Europe, not that of the post-communist Balkans," he says, although he is a realist about the problems of enlargement, both for existing members and for the central European countries. There is no way the existing EU could cope with enlargement without reform, he says: in particular, and the Common Agricultural Policy has to be radically changed if the demands of eastern-central Europe upon it are not to prove intolerable. On the other side, the east-central European countries will find the shock of opening up their inefficient economies to western European competition too much to bear if it is not carefully managed.

"Both sides need a period of adjustment," says Cook. "One possible way forward is to put some more rungs on the ladder, to allow the countries of eastern-central Europe more gradual entry to the EU – so they could join a political union that is not a free-trade area, for example, and could then join a free-trade area without signing up for some aspects of economic and monetary union. Enlargement also means looking seriously at the EU's institutions, which are still to a large degree those of a European Community of six and are not going to work with an EU of 26. We have to make sure that the institutions work more effectively and efficiently, and we need to improve democratic accountability."

All of which amounts to a position as comprehensive as anyone would want, and there are few Labour dissidents who are prepared to break ranks on it this side of a general election. In the longer run, however, the tensions inherent in Labour's Euro-policy could provoke real controversy. Even now, Labour's Europhiles talk sotto voce of the incompatibility of EU enlargement and a Europe-wide strategy for jobs, while its Eurosceptics are uneasy about how far a Labour government would insist on its tough line on convergence conditions for EMU.

In other words, Cook has done the business in opposition – which is no mean feat given the depth of Labour feeling on Europe in recent years. In power, however, the story could be very different.

CONSENSUS FAILURE

New Statesman & Society, 2 February 1996

The political philosopher John Gray has just published a pamphlet arguing that social democracy is obsolete. Paul Anderson finds out why

It isn't easy in Britain to succeed both as an academic political philosopher and as apublic intellectual. But Oxford don John Gray has managed it with apparent ease for more than a decade.

He made his name in his thirties as the most urbane and sophisticated intellectual adherent in Britain of the early-1980s new right – but it was as a critic of its nostrums that he gained his current prominence. In a series of essays in the late 1980s and early 1990s, he moved further and further away from the neo-liberalism he had once embraced. Since he published his book Beyond the New Right in 1993, he has been a regular on the Guardian's op-ed pages and a willing participant in all sorts of left-leaning conferences and seminars.

Now, though, the new right's most articulate renegade has sprung a new surprise. Just when his lazier admirers thought he was safe for Blairism, he has written a tract that consigns social democracy – a term he uses to cover everyone in British politics from Tory wets like Ian Gilmour to Labour left-wingers like Peter Hain – to the proverbial dustbin of history. "The postwar social-democratic settlement in Britain, and indeed in most other west European countries, has ceased to exist," he says, "and it is now irrecoverable."

It's not that he has returned to his new-right past. The argument of After Social Democracy, published this week by the think-tank Demos, is anything but sympathetic to the neo-liberal project: indeed, Gray's starting-point is the exhaustion of the free-market ideology that gripped Britain in the 19803. His case, however, is that the mainstream left alternative to that free-market ideology is just as worn out.

"The new realities that spell ruin for the social-democratic project are the billions of industrious and skilled workers released on to the global market by the communist collapse and the disappearance of any effective barriers to the global mobility of capital," he writes. "In this changed historical circumstance, the central economic programme of social democracy is unworkable and social democracy itself a bankrupt project."

Part of this position is, of course, accepted wisdom even on the mainstream left. Ever since the failure of Francois Mitterrand's attempt at a radical Keynesian reflationary programme in France in the early 19805, the majority of thinking social democrats have recognised that the mobility of capital now makes it impossible for medium-sized nation-states to go it alone on macro-economic policy. And in the past five years, there has been a growing consensus, on the left as on the right, that western Europe already faces a serious challenge from the "tiger" economies of east Asia and will soon have more competition from high-skill, low-wage former-communist countries.

What makes Gray's perspective different, however, is his insistence that there is no social-democratic way out. For a start, he dismisses the idea that a federal Europe could act as a counter to the forces of globalisation – the basis upon which most west European social democrats, including the British Labour Party, have backed "ever-closer union" – as "hopelessly Utopian". "Social-democratic politics cannot be recovered at the level of European institutions," he says. "Since the Maastricht treaty, Europe has taken a neo-liberal turn. Maastricht's deflationary consequences make the whole federalist project difficult if not impossible to legitimate democratically – and I can't see that changing. The idea that social-democratic institutions that have gone into decline at national level can be revived at the level of Europe seems to me to be a mirage."

He is equally scathing about the idea, common in Labour circles these days, at least partly because of the influence of Will Hutton's The State We're In, that western Europe provides the British left with a model of capitalism that it can import wholesale. The "Rhine model of capitalism" is in trouble, says Gray, and in any case it is not really social-democratic. Most important, "it relies on cultural traditions of consensual managerial politics that are absent in the individualist Anglo-Saxon model," he says.

So what is the alternative? Gray favours an approach he calls "communitarian liberalism", an idea rooted in the anti-rationalist thinking spelt out in his philosophical work, most recently in the book Enlightenment's Wake. Like all communitarians, he rejects the abstract individualism of most liberal political theory (which is also assumed by most social-democratic perspectives on social justice): people cannot be understood as atomised individuals but are essentially social beings, rooted in families and communities. At the same time, however, he also rejects the view of more extreme communitarians that individual autonomy is no more than a myth.

"Communitarian liberalism departs from individualist liberalisms in that it conceives of choosing individuals as themselves creations of forms of common life," he writes in the pamphlet. "It rejects the libertarian view that individual choice must always be paramount over every other human need and interest. It differs from conservative and neo-traditionalist communitarianisms by acknowledging the strength and urgency of the need for individual autonomy. Few of us are defined by membership of a single, all-embracing community, and there is no going back to any simpler, 'organic' way of life. It differs from social democracy by rejecting the egalitarian imposition of a single conception of justice in all contexts of economic and social life."

Gray says that what is most important about communitarian liberalism in public policy terms is its insistence that market freedoms have a purely instrumental value, as a means to individual and community well-being. Where the impact of markets on individual autonomy or community life is disabling, competition must be limited. And where the popular consensus is that fairness demands the exclusion of the market – for example in health-care and education – the market should be excluded.

All of which is fine where there is a popular consensus on what is fair, but what if there isn't – as with selection in schooling (which Gray favours) or welfare reform, where there is both a growing consensus that the social exclusion created by mass unemployment must be ended and also radical conflict over the best means of doing it? For Gray, there's no point in appealing to some overarching notion of what is just: it's a matter of conflicting ideas of fairness battling it out politically, appealing to common sense, negotiating compromises if necessary and resolving issues where compromise is impossible (and there will inevitably be many) through majoritarian decision-making.

On the future of the welfare state, for example, Gray argues that common-sense notions of "just deserts" rule out the idea of a citizen's income as a means of ensuring social inclusion – it would be generally seen as giving people "something for nothing" – but make attractive the other much-touted welfare innovation, a compulsory savings scheme to fund pensions and other benefits. But he accepts that advocates of citizen's income can appeal to different common-sense notions of fairness, and that, in the end, the only way of resolving the conflict is through collective political choice.

" I think it is crucial that we give greater weight to the political sphere than much recent political thought does," he says. "Squeezing down the democratic domain to a very narrow space by trying to hive off political decisions to market forces or legal arbitration simply does not work. And to give greater weight to the political sphere, we need to make our political institutions, particularly political parties, more representative. I am strongly in favour of electoral reform, not as some subordinate element in a programme of constitutional reform, other parts of which would have the effect of stripping the political realm of its significance, but as the necessary condition of a new political settlement. The Charter 88 view of constitutional reform, valuable as it was under Thatcherism, is animated in part by a legalist conception of government in which the most important thing is to protect rights-holders from collective decision-making. The idea that these important areas of human well-being should be removed from the political process is a fundamental error."

So does Gray see any sign that British political discourse is taking on board his perspective? He points to the output of Demos and the writing of Anthony Gid-dens, and says that the current debate over the lessons to be learned from the east Asian "tigers", however crude it has been, "has at least displaced the parochialism of British political culture". But, he goes on: "There's a notable cultural lag in British political life, partly accounted for by the stubborn strength of fixed positions in our major parties. Most people are still tracking a world we have lost."



WHAT'S IN A WORD?

The British left is uneasy with the idea of "social democracy" – but it needs to take it, and reports of its demise, deadly seriously, writes Paul Anderson

"Social democracy" is not an easy term to throw around in British politics. In most of continental Europe, outside Leninist circles, it has long been more-or-less synonymous with "socialism"-and it used to be in Britain too. For most of the past 40 years, however, it has meant something quite different here.

No matter that, in continental European terms, Labour has always been a social democratic party, with its left as deserving of the label as its right-from the late 1950s until what became the Social Democratic Party split from Labour in 1981, the tag "social democracy” functioned in Britain as a means of distinguishing left and right in the Labour Party.

The right, who called themselves social democrats, believed in a mixed economy, Keynesianism and the Atlantic alliance; the left, who called themselves democratic socialists, wanted more nationalisation and tended to be sceptical about Atlanticism. (The other great foreign policy question, Europe, was not a defining feature at first: both camps were split.)

In practice, the differences were of degree rather than of kind: as the experience of the 1964-70 and 1974-79 Labour governments went to show, what "social democrats" and "democratic socialists" did when they got into government and confronted the real constraints on their freedom of action was pretty much the same. But at least the nomenclature served as shorthand for real political divergences. After the SDP left Labour, "social democracy" became little more than a term of Labour Party abuse.

For several years, Labour loyalists, regardless of their views, described themselves as "democratic socialists": not even the most right-wing Labourites dared describe themselves associal democrats. Meanwhile, the SDP under David Owen abandoned most of the policies that had once beenthedefiningfeaturesofLabour'sself-styledsocialdemocratsinfavourofanout-and-out neo-liberalism.

Recently, however, linguistic sanity has made a comeback. Although Neil Kinnock and John Smith were reticent about calling themselves social democrats, Tony Blair is not. Increasingly, "social democracy" stands in British political discourse not for the views of a faction of the Labour Party (let alone those of a small centrist splinter party) but for the broad approach to economic and social policy .adopted by Labour and its sister parties in western Europe and the rest of the industrial world since 1945.

But that's just the beginning of the problem. If it's now more acceptable than at any time in 40 years to describe Labour as a social democratic party, what social democracy means in practice has changed a great deal in the past 20 years.

Until the mid-1970s, if you stripped away the British left's difficulties with the words, what it meant to be a social democrat was simple. You backed broadly Keynesian economic policies to maintain full employment, egalitarian taxation, expansion of the welfare state, corporatist management of industrial relations and a substantial state sector in the economy.

But then something started to go badly wrong. In the wake of the first oil shock, social democratic governments throughout Europe found themselves facing crises of inflation and unemployment simultaneously-just what was not supposed to happen with Keynesian economics. One by one, they were forced to adopt austerity policies that owed more to the new right than to orthodox social-democratic thinking. The final straw was the collapse of the French socialists' Keynesian expansionist experiment in 1983 after the revolt of the financial markets. Since then, there have been few social democratic governments in the west European heartland of social democracy-and not one anywhere in the world has dared to mess with the imperatives of global capital. Most have adopted prudent, privatising economic policies barely distinguishable from those of the right.

So is social democracy dead, as John Gray and others claim? Certainly, 1960s-style "Keynesianism in one country" has few advocates anywhere. Nor are there many enthusiasts for corporatism these days outside those countries – notably Germany – where it is culturally entrenched.

But the notion that Europe, with its extra weight in the world economy, could take over from the medium-sized nation-state as Keynesian manager is still just-about alive. Despite the EU's effective abandonment of the Delors plan to compensate for the deflationary effects of monetary union under the Maastricht treaty, there is still some hope in European social democratic circles that the Eurokeynesian dream can be revived.

There are also signs of life in social-democratic redistributive taxation, despite the now-general fears of "taxpayer revolt" that have been stoked by the scale of welfare payments in the context of mass unemployment and an ageing population. In an insecure era, the argument goes, taxation fo rwelfare spending will regain popularity.

Is all this clutching at straws? Gray is not alone in thinking that it is – but we won't really know until a social democratic party wins an election in one of Europe's bigger countries. As things stand, the most likely place for that to happen is Britain. It's not just here that Tony Blair's progress will be noted with interest.