Some say it all began with the late Jim Callaghan. “Sunny Jim” was British Prime Minister between 1976-1979. At the height of the UK’s mid 70s’ strike prone, crisis-ridden stagflation infested economy (thats’ a stagnant economy simultaneously coupled with an inflated one; something that was thought impossible by economists prior to the 70s’) the then Labour Government had to go famously cap in hand to the IMF in Washington to bail out the collapsing pound: the quid pro quo from the IMF was stringent public expenditure cuts including cuts in those cherished totems of an erstwhile ‘socialist’ government: health, education and welfare.

Faced with strenuous criticism from within his own party, not least from the left, Callaghan addressed the Labour Party Conference in autumn 1976 and made the famous statement:

“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 tell you in all candour that that option no longer exists, and 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 as the next step”.

Effectively, Callaghan’s speech was a repudiation of the Butskillite post-war consensus that when the going became arduous governments of both hues, Labour and Conservative, would buckle under the pressure and resort to the supplicatory levers of demand management to buy time and placate opponents. Callaghan’s speech was a marker, a watershed that was revealing in its candour. For some it paved the way for the free market policies of Margaret Thathcher.

Throughout the 1980s in Britain, Conservative governments under Margaret Thatcher transformed the political landscape, turning the country markedly rightwards and ushering in a period when the market was king, in the process dismantling the post-war consensus that had prevailed throughout most of the period since 1945 and reaping a dividend by winning four elections in a row. Her successor, John Major, continued her policies into the 1990s, allowing the Conservatives, against expectations to win the general election in 1992.

In response, the opposition Labour Party embarked on fundamental reforms and renewal which culminated in New Labour and Tony Blair. This provided the platform for Labour to win a decisive election victory in 1997, but did so by crucially committing to maintain the framework of the Thatcherite economic legacy. This highlighted the convergence which had occurred in British politics, so much so that Blair and his policies were referred to as “Blathcherism” (a combination of Blair and Thatcher) even before he became Prime Minister. Another sardonic reference to Blair in this vein after he took office was: “To Thatcher a son!” To be sure, Labour did embark on a substantial increase in public expenditure, but at the cost of no inroads into the private sector and utilising methods of raising private finance to pay for public sector projects such as the Private Finance Initiative (PFI) that the Tories had only timidly resorted to.

In retrospect, and at the cost of considerable simplification, there were three stages on the road to this political convergence. The first was Thatcher’s dismantling of the post-war consensus and substituting a new one. The second was Major’s continuation and consolidation of this new consensus and, via increased privatisation and commercialisation of the public sector, widening the scope and depth of it. At the same time the emphasis on individualism emanating from the shift in the new consensus resulted in a focus on individual rights and entitlements reinforced by human rights legislation and European law in the form of directives and regulations. The third stage was Labour’s acceptance of stages One and Two, principally in the economic sphere but with a whole-hearted commitment to social justice including enshrining individual rights and encapsulating robust support for social equality, multi-culturalism and anti-discrimination, which at best the Tories were half-hearted in their support of and largely did so as a by-product of their responsibilities and obligations under international and (especially) European law. This combination marked a decisive shift away from collectivist politics and policies to that premised on individualism, which now pervades all aspects of both public and private life, not only in the UK but in most western nations and is a continuing trend worldwide.

The first major challenge to this co-habitation of free market capitalism and left/liberal social democracy has emerged with the international economic crisis from 2007, stimulated initially by the credit crunch, plunging the global economy into freefall and signified by Labour’s decision to raise taxes in the autumn of 2008 in the UK and for governments across western Europe, the US and throughout the world to revert to Keynesian policies of pump-priming and demand management in order to attempt to reflate their economies and spend their way of out of recession, precisely what Jim Callaghan said it was no longer right to do.. Accordingly, the assumptions behind the political convergence that has prevailed since the mid 1990s and the economic orthodoxy from the 1980s are now being subject to question.

The dominant political thrust over the past forty years has been the ascendancy of the free market and international free trade. State control of the economy has been largely superseded and all fetters on the unbridled operation of the market have been cast aside. The result, internationally, has been a free market revolution, which makes today’s global political economy unrecognizable from that of just thirty years ago. Communism (with the exception of some isolated redoubts such as Cuba and Vietnam, it would be difficult to call modern-day China ‘communist’) and total state control of the economy has been ended. The mixed economy has been radically paired back and entities such as utilities (gas, electricity, water, telecoms etc) which it was once economic orthodoxy to consider should best be left in public hands have been privatised. There are very few economies now that have not opened up to international free trade and thus become subject to the vicissitudes of the downturns and upswings of the global marketplace. The result has been an unprecedented era of worldwide economic growth and increases in living standards. And although the benefits of this economic opening and expansion have been differentially distributed, with levels of inequality and differences between rich and poor as marked as ever, the overall prosperity it has brought in its train has acted to stymie any residual criticism of the dominance of the free market. Until now…

Like the confident assertions of the End of History School in the early to mid 1990s that liberal values have come to triumph, which has been irrevocably torn asunder throughout the first decade of the twenty-first century by a combination of terrorism, the resurgence of nationalism and the relative decline of the United States’ status as the one unchallengeable global super-power, so faith in the supremacy of the market has been shattered by the international economic downturn from the middle of 2007 onwards heralded by the sub-prime crisis, but indicative of a global financial system left unchecked and to its own devices.

It will be commented upon by future observers of the period from the late 1980s to the late 2000s that politicians and policymakers during that period were obsessed with regulating every possible aspect of the public and private life of their societies except what is probably the most important: the financial and economic health and well-being of their economies which were left virtually unregulated and to the mercy of the free-market. Our governors from all political hues have sought to effectively micro-manage and risk minimise in all walks of life against small or vanishingly small probabilities of harm or danger, but have almost cavalierly left financial management, which includes the livelihoods and wellbeing of hundreds of millions of people, to a motley collection of banks, private equity trusts and a succession of financial swashbucklers whose acumen and conduct in this vital area have only so recently, as we hurtle into the worst international recession since the 1930s, been found wanting to say the least.

Effectively, by embracing this new consensus, Labour in government thought it had squared a circle and ended ‘boom and bust’. It patently hadn’t. But one positive offshoot from the economic debacle which has ensued is that the economic ‘wisdom’ that has prevalied, namely the manichean world view that untramelled free markets are unconditionally good and anything to do with the state is bad, is now discredited.

This doesn’t mean that we all do a flip and endorse state control of the economy and wholesale nationalisation accompanied by centralised planning a la the pre 1991 USSR. Indeed the triumph of the free marketeers in the 80s’ came about because of the massive and eventually fatal flaws inherent in state controlled economies. The events of the past two years have revealed the serious cracks in the other extreme: virtually unregulated free markets.

The failures of both highlight the need to reinvent the ‘mixed economy’ i.e. finding the best balance between what the state can do best and what should be left to the market. The future, in other words, is neither free market or state control.

Next week we will look at where it is best, in terms of the economy and society, for the state to intervene and when to leave it to the market