In their new book, “Civic Capitalism“, Colin Hay and Anthony Payne, co-directors of the Sheffield Political Economy Research Institute at the University of Sheffield, argue that the global financial crisis of 2007-08 and its aftermath has forced us to ask fundamental questions about “what capitalism can do for us, as citizens of a democratic society”. As an alternative to the “Anglo-liberal” economic model that blew up so spectacularly after the US “sub-prime” mortgage market went south, Hay and Payne propose something they call “civic capitalism”. They define it as follows: “The governance of the market, by the state, in the name of the people, to deliver collective public goods, equity and social justice.” 

 “Civic Capitalism” is an essay in political economy, an intellectual tradition dating back to Smith, Ricardo and Marx and central to which are questions of power and distribution of a sort that were set aside by the “marginalist” tradition that succeeded it in the second half of the 19th century. I spoke to Colin Hay recently and began by asking him if he thought political economy was making a comeback. It certainly seems that way. For instance, when I spoke last year to Thomas Piketty, he told me that “‘political economy’ best describes what I’m trying to do [in “Capital in the 21st Century].”

CH: Yes, it’s coming back. In one sense, it never went away, but there’s been a tendency over the past 30 or 40 years for the disciplinary divisions of labour to become starker, and for economics, particularly, to become professionalised—partly responding to a desire among political elites to put technocrats in charge of the economy. Economics as a discipline responded to that by becoming ever more technical in character. I think that produced more of a separation between the analysis of politics and the analysis of economics than was ever the case previously. But there has always been work that has transcended that distinction.

The point is that mainstream economics, which was a form of equilibrium economics, never really claimed to be able to deal very well with the circumstances in which we find ourselves today. Whereas political economy has always been more of a disequilibrium form of economic analysis. So it’s not surprising that it appeals more today. That said, even Piketty’s work can be criticised for being insufficiently political in its analysis. You might it say it’s more a work of economic history than it is a work of political economy.

JD: You and Anthony Payne begin by discussing what you call the “Anglo-liberal model”. You then have some interesting things to say about what you see as the inadequacy of the existing literature on competing models of capitalism. You refer to the way it traffics in what you describe as “crude ideal types”. I guess you’re referring there to the “varieties of capitalism” literature associated with David Soskice, Peter Hall and others?

I think the varieties of capitalism approach has been useful, but it’s a product of its time. The debate out of which it arose was a debate about whether there was more than one way to run contemporary capitalist economies. And the argument was, yes, there is another way to run a contemporary capitalist economy—the alternative [to a liberal market economy] is a “coordinated market economy”. That was a valuable intervention. It was valuable in suggesting that countries like Germany didn’t need to be neoliberal in an Anglo-American kind of way in order to succeed under conditions of globalisation and European integration.

The problem, however, with varieties of capitalism’s parsimonious account, which was elegant and simple, was that it focused very much on equilibrium. It said, effectively, that as long as some basic conditions are satisfied, we should expect these models to be stable and to endure over time. The approach didn’t look for sources of instability. It didn’t look for the potential disequilibrilating moment. It had no in-built account of crisis or of where crises were likely to come from. And the other thing it is clear it didn’t do, but which we need to do now, is that it didn’t look at the interdependence of those varieties of capitalism. Take Germany, for instance, with its export-led growth model which is reliant upon demand that is generated outside Germany. This means that if the economies you export to are in crisis, then you have a crisis too—you don’t have to get anything wrong yourself in order to import the crisis from outside. So, that literature was valuable at the time it was written, but it looks problematic today.

And, in any case, it probably doesn’t capture the changes in the German economy—the classic “coordinated market economy”—that have occurred over the past decade or so, especially changes in the labour market that followed the “Hartz IV” reforms and the expansion of the low-wage sector.

That’s exactly right. And one of the other things that’s missing from the varieties of capitalism literature is an account of the financial sector. There’s a classic tradition of writing about the German model as if Germany had a range of banks which supplied steady, stable investment capital to businesses allowing them to innovate. Actually, many German banks ceased doing that some time ago. And I think one of the first European banks to be bailed out was a regional investment bank in Germany. That shows that some of the practices that have been seen to be problematic in the Anglo-liberal model were present even in the core of the coordinated market economy model that the varieties of capitalism approach points to.

One of your criticisms, as you’ve just elaborated, of the Hall-Soskice account of the liberal market economy is that it doesn’t offer an account of the pathologies of that model. So the next stage in your argument is to go on to identify those pathologies. Two things strike me as particularly important in your analysis, one is the rootedness of the model in what you term an “unacknowledged ideology”. The other is an assumption about markets being essentially self-regulating.

The Anglo-liberal model builds on a particular understanding of the way in which markets operate which led us to insulate those markets from what would previously have been regarded as necessary and appropriate regulation. The view was that markets are both self-equilibrating and self-regulating. And that markets are inherently difficult for political authorities or political elites to regulate, and that we shouldn’t trust the motives of those authorities or elites in the process of regulation either.

We ended up with a belief system that leads to the proposition that in order to maximise our chances of growth, we need as much of a light-touch regulatory dispensation as is possible. And that’s very much what was put in place. The problem with that, as we now see, is that markets aren’t, as we should have known all along (and some people will claim that they did), self-adjusting and self-regulating in that way, and that asset bubbles, for instance, accumulate in these markets. And it’s the bursting of a series of those that led to the crisis that we’ve seen.

The intellectual upshot of the crisis was a reminder, as you’ve just said, that markets aren’t self-regulating. But that has political implications too, doesn’t it?

It has profoundly political implications. Our argument there is that if one acknowledges that markets are not self-regulating, then we need regulation if we are to have stable economic conditions. And once you acknowledge that, then you begin to think about regulation in a rather different way. We might ask ourselves: what is the purpose of regulation? What are we seeking to use these markets for? And instead of having a political economy which proceeds from the assumption that markets know best, we’re then thinking in a rather different vein. How might we regulate markets in order to achieve collective public purposes and also prevent the likelihood of the crises that would arise if our markets were inappropriately or inadequately regulated? Reflecting on the incapacity of markets to regulate themselves, or for light-touch regulation to produce stable conditions of economic growth over time, changes the scenario completely. Instead of having a kind of capitalism which runs democracy, we think of a democracy which runs or regulates capitalism.

As you put it, “Ask not what you can do for capitalism, but what capitalism can do for you.”

It’s a simple phrase, but if there’s a single mantra for the argument we’re presenting, that’s it. The argument, in part, is that we can no longer afford to think of it the other way round. Because what the crisis showed us is that the state has to bail out the market when the market fails. So how do we prevent a situation like that occurring again? Well, we set political parameters around the operation of the market and the capitalism we’re building. And then we think about what we wish to do with that capitalism and what we wish to do with those markets. That restores the [kind of] relationship between democracy and capitalism that developed in the postwar period.

There’s a version of this argument, which you find in the work of someone like Michael Sandel, which says that there are certain goods that the market just ought not to be in the business of providing; that there are certain areas of social life in which the writ of the market shouldn’t run. Are you sympathetic to that kind of argument?

I am very sympathetic to that argument. The way to think about markets is that they are a way of providing certain kinds of assets and good, and indeed, certain kinds of public goods under certain conditions. But they’re not the only means by which these public goods can be provided. Once we start thinking about the relationship between politics and economics, once we ask not what we can do for capitalism but what capitalism can do for us, then we’re not obliged to accept a market solution to every single problem. It may well be the case that market solutions are not appropriate for the provision of certain kinds of public good.

One of the historical and political conundrums thrown up by the crisis is that many on the left thought that it would (or should) have been the prelude to a social-democratic moment. It didn’t turn out that way did it?

No, it didn’t. And there are different kinds of explanation for why it didn’t. My own view is that crises are, to some extent, what we make of them. What was made of this crisis was that it came to be understood as predominantly a crisis of debt. And if it was a crisis of debt, then austerity was the solution. But austerity is not very conducive to the politics of social democracy. If, however, it’s understood as a crisis of growth, then austerity wouldn’t be the solution. As we’ve seen in the Greek context, you can engage in deficit reduction, you can even run budget surpluses, but you can still be increasing your accumulated debt as a share of GDP because your GDP is falling.

We have understood this crisis as a crisis of debt, to which austerity is a solution. That said, this hasn’t resolved the condition. It’s deferred a resolution. We’re not yet at the endgame. If you look at the crisis of the 1930s, for instance, it was quite a long time before Keynesianism was installed in the Treasury. And it’s an interesting question whether, in the absence of the Second World War, that transition [to Keynesianism] would have taken place more slowly. The point is that, judged against that kind of time frame, we’re still in the relatively early days of the crisis. And given the absence of a clear trajectory out of crisis, that would suggest to me that the political space is still open for a range of alternative responses.

Let’s stick with the question of austerity for a moment. You don’t dismiss deficit reduction as a policy goal, do you? But you think it shouldn’t be a goal in itself, but that it should be conditional on growth. Why do you think deficit reduction has become such a totem or fetish in political discourse?

The abandonment of deficit reduction in one country is a difficult thing to achieve. If Britain were to say, “Actually, we’re not in favour of this deficit reduction thing and a dose of Keynesianism would be helpful here,” there would be a grave danger of speculation against sterling. There’s a kind of collective action problem here. If we were to defer deficit reduction until growth was re-established, we would have to coordinate that in some way. So it’s easy to see how domestic policymakers in a domestic debate end up tying themselves to deficit reduction as the primary goal of economic policy. And that’s pretty much what has happened. And I think it’s linked to the way that the crisis has been understood, both in the British debate and in the European debate, too—as principally a crisis of debt.

You devote a chapter at the end of the book to the distinctive contours of the crisis in Britain. I’m interested in the extent to which you follow the analysis of someone like Andrew Gamble, who argues that the dysfunctions of the British economy are of long standing, and predate the neoliberal turn that the British political economy took at the end of the 1970s.

I think that analysis is absolutely right. And it’s a lot easier to see why politicians of the centre-left aren’t boldly advocating a new industrial strategy for the British economy when one considers that the transition from the kind of growth model we’ve had to a growth model of a kind that one might aspire to have—one more Germanic in content—is very difficult to achieve. Not least because the British state lacks the capacity that it might have in Germany or France to be engaged in the process of supporting and steering investment into certain sectors of the economy that are being targeted for their export-generating potential. That’s something that the British state has not been good at for a very long time. And people like Andrew Gamble show where that incapacity came from—it’s almost a disadvantage of being first [to industrialise], in a way. Britain got it right early on and, as a consequence, didn’t generate the capacity to adapt and change, and to lead that process politically.

“Civic Capitalism” by Colin Hay and Anthony Payne is published by Polity Press (£12.99)