8: Neo-liberalism, Keynesianism and the current crisis

Neo-liberalism, Keynesianism and the current crisis Geoffrey Hosking

When the Soviet Union fell, most of us in the West assumed that liberal democracy had proved itself the most successful form of political theory and practice. Yet, a quarter of a century later, we face a crisis which threatens to destroy liberal democracy. The established parties of government and opposition are being overshadowed by populist parties that preach an exclusive nationalism and exalt leaders claiming to represent the mass of ordinary, uncorrupt people against the corrupt elites. What has gone wrong?

In his recent book Why Liberalism Failed, Patrick Deneen asserts that liberalism has failed because it succeeded too well. As he variously puts it, 'Liberalism has failed because liberalism has succeeded.' 'As liberalism has become more fully itself, its inner logic has become more evident and its self-contradictions manifest.'¹ The book is in many ways an interesting one, and makes a number of good points. But I do not accept Deneen's basic premise. To my mind what has failed is not liberalism itself, but only one form of liberalism - one might call it a perversion of liberalism - that is, neo-liberalism. For as Deneen admits, the essence of liberalism is contained in certain fundamental and universal human values, to which he does subscribe: freedom, self-realisation, certain basic rights such as free speech, freedom of association and of religious belief, and so forth. Neoliberalism has failed us by actually limiting these rights in the name of economic growth achieved by a free market economy within balanced state budgets. This is certainly an ideology, as Deneen asserts, but one which betrays the inner logic of liberalism, not manifests it. In fact, it begins to remind me of Soviet communism in its rigidity and in the way governments pursued it to its logical end, regardless of its effect on human suffering.

It is ironic, then, that it was the Soviet Union's collapse which convinced so many theorists and policymakers that there really was 'no alternative' (to use Margaret Thatcher's term) to neo-liberalism. It was widely believed in the 1990s that the state-dominated planned economy had utterly failed and had doomed the Soviet Union. Actually, other no less salient factors were involved - notably the fractious relationships between the nationalities and the radical reforms pursued by the Soviet leader, Mikhail Gorbachev.²

There was another modern form of liberalism - in Britain that of Lloyd George, Keynes and Beveridge, all of them Liberals both with a capital and a small letter - but represented in most European countries by Social Democrats or Christian Democrats. In Britain, in fact, their ideas were most fully implemented by a Labour government, that of 1945-51 under Attlee. Personal economic freedom was to be reconciled with social justice and strong government through a tacit or explicit socio-economic contract which aimed at 'full employment' (meaning minimum unemployment) and guaranteed all citizens against absolute indigence by means of what I call the 'fiscal covenant' - the tacit agreement that, provided you pay your taxes, the state will look after you, or at least prevent you slipping into utter destitution if you suffer unemployment, a serious accident or illness, or when you reach old age. The fiscal covenant created a way of making social solidarity real: the sharing of national wealth through progressive taxation proved a powerful factor in consolidating the sense of nationhood engendered by war. The national treasury became the clearinghouse through which the whole nation shared the cost of providing mutual security and well-being: defence, communications, education, health services, pensions, welfare benefits and other forms of social good. The fiscal covenant became a major component of national identity.³ Taken together with the rule of law, it underpinned the basic trust which, in spite of individual crises, the population in general felt towards elites in general and governments in particular.

The fiscal covenant generated three decades of successful economic development, in which most of the British population became markedly wealthier, healthier, better housed and educated. This was effected by deliberate state policy to counteract the processes which during the 1930s had led to economic instability, unemployment and depression. Keynes had pointed out that classical free-market theory ignored crucial features of the economy and became especially misleading in times of depression. The defects he pointed out all turned on questions of trust and confidence. Theory posited that in investing and concluding contracts, all economic actors had good information about the state of the economy as a whole, they could assess the risks with reasonable accuracy, and could therefore take decisions with confidence. But in the real world, information was often imperfect or worse, especially in the fast-changing circumstances of a serious market downturn; hence, most economic actors had little confidence in the future. Risk was replaced by uncertainty, which in Keynes's view was a very different thing.

Classical theory supposed that in a depression prices would fall; money would then flow to where goods were available at favourable prices, or where investment held out good prospects, and in that way market equilibrium would be restored. Keynes countered that in uncertainty or unfavourable conditions, people would lose overall confidence and hoard money as the best hedge against future risk. Thus, by providing individually against possible disaster, they would bring about real disaster in the economy as a whole. The individually rational would precipitate the socially ruinous: a market collapse.

Finally, theory prescribed that states should balance budgets in all circumstances, whereas Keynes recommended that, on the contrary, in an economic depression they should override short-term concerns about the budget and spend more heavily to inject both money and confidence into the economy. It is often forgotten that Keynes also believed that in good times governments should run a budget surplus and save up funds to inject into the economy in a downturn. In short, he favoured balanced budgets as a means of sustaining confidence, but only over long-term cycles. He knew capitalism was liable to cyclical crises, which at their height led to wasteful overproduction and at their depth to mass un employment and poverty. He therefore recommended that as an economy turned towards recession, the state should break normal budgetary rules by injecting extra spending, even at the cost of budget deficits. It would thus explicitly become the public risk manager, the upholder of generalised economic trust. In particular, it should keep up welfare payments, since they helped to preserve social peace and enabled the poor to make their contribution to the economy, at least as consumers. He did consider it important, though, that the surplus thus financed was spent on projects which would genuinely increase future wealth, since otherwise the result would eventually be uncontrolled inflation.⁴

During the 1970s, a serious economic crisis hit the UK and many countries of the European Economic Community (as it was then). It was caused partly by the end of the Bretton Woods currency system from 1971 and partly by the steep rise in oil prices precipitated by OPEC. But it was also generated partly by inherent tensions in Keynesianism itself. His theory recommended aiming at full employment (in practice, minimum unemployment), and when put into practice, gave workers and their trade unions a permanent institutional position in the state-guided economy, which in circumstances of full or high employment, plus the price rises caused by higher oil prices, empowered them to seek a greater share of the national 'cake'. That in turn provoked employers to seek higher levels of profit. Unless productivity also improved, the combined effect of those pressures was inflation. That is how in the 1970s the British economy moved into 'stagflation': a malign mixture of rising unemployment and rising prices. Keynes had imagined his economic recommendations being implemented by dispassionate and public-spirited bureaucrats, who would steer the economy according to the needs of the nation as a whole. He had not foreseen that they would become the tool of ambitious party politicians always tempted to expand the economy, however recklessly, in the approach to a general election in order to win the votes of a somewhat wealthier electorate. Nor had he anticipated that the decisive role he envisaged for the state would motivate public sector trade unions to make constant demands for their members, which were difficult to resist without plunging the country into chaos. In effect, Keynes had not linked his economics to the state practice which that economics required.⁵

The result of these developments was inflation - and Keynesianism offers little to an economy in an inflationary crisis. That is not to say that it could not be very helpful during a deflationary crisis, such as we have been experiencing since 2008: indeed, I shall argue that it could and should be.

In dealing with the 1970s crisis, Western governments, in different ways and at different tempos, have broken away from the ideals and practices of post-1945 liberalism. More and more the mainstream parties have gravitated towards an ideology which gives priority to the globalised and only lightly regulated capitalist market economy. According to this ideology, economic growth is to be stimulated by competition and the privatisation (or de-statisation) of economic resources, transferring them to companies which are structured to direct a large share of their profits to shareholders and directors. The role of the trade unions in the economy should be sharply reduced. To lubricate the finances of growth, clusters of international banks, finance companies and shadow banks have proliferated, poised to extract their own generous revenues from the operations necessitated by these economic processes. The theoretical justification of these policies has been that financial markets were rational and self-correcting and therefore trustworthy, that they brokered actors' self-interest to work for the benefit of all and that state intervention was therefore unnecessary and indeed harmful.⁶ Keynes had long ago pointed out the deficiencies of this theory, but from the 1970s he had become so deeply unfashionable, especially after the Soviet collapse, that his objections were well off policymakers' radar.

As a corollary, the ideal of personal freedom has won out over that of social solidarity. A misreading of Adam Smith's 'doctrine' (actually an offhand remark) of the 'invisible hand' has one-sidedly reinterpreted personal freedom to mean above all the freedom to make money, where necessary at others' expense. The watchword is that 'greed is right' and that it will lead to the good of society as a whole.⁷

In the 1980s, many of the long-established industrial areas of Europe, including the UK, started to lose their industries, outbid by competition from abroad, mainly from Asia. State planning having become unfashionable, under Thatcher and subsequent prime ministers, the British government made little or no provision for the establishment of new industries or for the research and development plus the massive retraining programmes which would have been required to make them viable. Instead the 'market' was left to provide, with mixed results: many workers were in effect thrown on the rubbish heap, their skills gradually atrophying and their contribution to family and community devalued. Many of them were driven back on temporary or insecure service jobs in what became known as the 'gig economy', without sickness and holiday pay or pension entitlements. Deindustrialised communities soon had high concentrations of people on social security benefits and suffering mental or physical illness. The consequent degradation of many former workers' lives was sharply further aggravated by the financial crisis of 2007-8, which left the UK, like many European states, with much higher deficits - deficits which they dealt with in a panicked reversion to Keynesianism by bailing out huge banks. To start tackling the resulting deficits, they applied 'austerity' to state budgets, cutting back on welfare benefits and curtailing or closing many public institutions.

At the roots of the crisis was the massively untrustworthy behaviour of banks, financial institutions and building societies. During the 1980s and 1990s, most of the legal restrictions which had previously kept them cautious and undynamic but trustworthy had been weakened or eliminated by governments anxious to promote rapid economic growth. Britain experienced the 'big bang' of 1986, which weakened the regulation of British banks and opened them to full-scale international competition.

In pursuit of the break from Keynesian policy, both governments and local authorities began in the 1980s to privatise public functions or to outsource them to private corporations. In some cases, this process produced more efficient services, at least for a time; but in others it simply replaced a state monopoly with a private monopoly. Hedge funds and private equity funds, largely unregulated, swelled rapidly to acquire such enterprises, usually by amassing huge (lightly taxed) debts to do so. They then devoted a handsome share of the enterprises' profits to paying off those debts and passed most of the rest to their investors and directors. Meanwhile the risks were borne by the taxpayer.

One example of the results must suffice. Carillion, a company to which numerous public functions had been outsourced, including the building of hospitals and schools, the provision of school meals and the maintenance of prisons, went bankrupt in January 2018. The collapse made more than 2,000 employees and subcontractors redundant or bankrupt, left its pension fund £800 million short, and abandoned public projects, including the construction of major hospitals in Birmingham and Liverpool. The parliamentary Committee on Work and Pensions later reported that Carillion's business model was unsustainable, a 'dash for cash...with scant regard for the long-term sustainability or the impact on employers, pensioners or suppliers'. Its directors had been content to let the state and the Pension Protection Fund pick up the bill. In its final years, 'The directors rewarded themselves and other shareholders by choosing to pay out more in dividends than the company generated in cash.' The remuneration committee 'paid substantially higher salaries and bonuses to senior staff while financial performance declined'. The committee concluded that Carillion was 'not just the failure of a company, but a failure of a system of corporate accountability which too often leaves those responsible at the top - and the ever-present firms that surround them - as winners while everyone else loses out'. The committee criticised successive governments too, asserting that they 'have nurtured a business environment and pursued a model of service delivery which made such a collapse, if not inevitable, then at least a distinct possibility'.⁸

A major reason for the mounting power and reach of financial services was that the British public was increasingly having recourse to finance to cope with the ordinary risks of life. For the last 50 to 60 years, the middle class has been contributing enthusiastically to the financialisation of society. Whereas previously people usually relied on family, friends, local community, charities, friendly societies or religious institutions to help with facing risks, nowadays most put their trust at least to some extent in savings banks, insurance policies and pension funds. Those who were able to do so also purchased real estate, both as a reliable roof over one's head and as a hedge against inflation. Many of us have, then, made our contribution to the financialisation of the economy, providing ample funds for financial institutions to use or misuse. In 1963, pension and insurance funds owned 19 per cent of UK shares; by 1998 that was 65 per cent.⁹ In the USA, total pension fund assets rose astronomically, from $0.2 trillion in 1975, to $3 trillion in 1990, $8 trillion in 1998, and $16 trillion in 2006 - growth by a factor of 80!¹⁰ With the deregulation of capital markets, between 1980 and 1995 investments from mutual funds, insurance funds and pension funds grew some tenfold. This growth played a major role in the globalisation of finance, since much of this investment was in foreign markets.¹¹ This expansion, however, did not fully include those who have never had enough money to invest extensively in insurance, pensions or real estate. Hence its tendency was to polarise society economically.

One of the results of this policy was a soaring increase in real estate prices, especially in the United States, where they grew by 105 per cent between 1997 and 2007; and in the UK, where they grew by 190 per cent in the same period. This abrupt growth was largely fuelled by the reckless provision of mortgage debt. Banks would offer incautious loans - known as 'sub-prime mortgages' - to customers in the knowledge that they could reduce the risk involved by chopping up and reconfiguring the loans into 'securitised' packages which they then sold on to other banks. The idea was that the spreading of risk would dilute its impact. During 2007-8 it suddenly became apparent that the mathematical risk models underpinning these packages were based on insufficient historical data: they did not, for example, take account of the 1930s economic crisis. Once one bank defaulted, then debts, like a cancer, rapidly metastasised, till in September 2008 they climaxed with the collapse of three of the top five US investment banks, including that of Lehman Brothers - the greatest corporate bankruptcy in history - and of the two institutions that provided 80 per cent of US mortgages. In Britain two major banks, Royal Bank of Scotland and Halifax Bank of Scotland, went bankrupt, as did all building societies which had demutualised - that is, had ceased to rely on depositors for their revenue, but allowed themselves to be quoted on the stock exchange.¹²

Stock markets around the world plunged, losing $600 billion in just 36 hours. The immediate cause of the financial crisis was the collapse of the mutual trust without which banks can scarcely limp on from day to day. In some cases, they stopped even making each other overnight loans which normally smooth out the ups and downs of everyday financial business. They also could not realise the assets in their portfolios, since the price of those assets plunged if they tried to sell them. This collapse was totally contrary to the theory of self-regulating markets. Alan Greenspan, former (and once much admired) chairman of the US Federal Reserve, confessed to a congressional committee, 'Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief.'¹³

In the United States, the UK and other western countries, governments rightly overrode decades of free-market dogma, and bailed out the bankrupt institutions, at the cost of enormously increasing the national debt. In the UK, the operation nearly doubled the debt, bringing it up to a level of 76 per cent of annual GDP in 2010-11.¹⁴

One might have thought that such a sensational collapse would have led to a profound reassessment of the way the market was operating and to radical changes in policy. On the contrary, the British government on the whole returned to slightly corrected versions of its pre-2008 policies. In the following decade, the annual deficit was gradually reduced, but the effect was too slow to affect state debt, which continued to grow inexorably, until at the end of 2017 it reached 87.7 per cent. Meanwhile, to counteract the effects of austerity, household debt also started rising again, until by 2017 it was approaching the dangerous levels of 2008: 133 per cent of household annual income, as against 148 per cent in 2008.¹⁵ Such a level leaves households vulnerable to a deterioration of their own economic position, and also to either an improvement in the national economy (which would bring about higher interest rates) or a downturn in it (which could mean lower income).

The government did not reform economic and financial institutions; but instead, acting in the name of free-market ideology, they made serious cuts in welfare provision, debasing life for the poor, disabled and the disadvantaged generally, including many women in particular. As a result, liberalism has become degraded and detached from social democracy. Today, it no longer aims to secure the maximum personal freedom of all members of the population. Instead it has become an ideology of the establishment, offering support to the well-connected and wealthy, while reducing the resources, legal status and life chances available to the rest of the population. It is scarcely surprising that those whose lives have been blighted by the consequences have lost trust in established political parties and have turned to 'populists' instead.

'Austerity', the policy pursued by the British government in the 2010s, aimed to pay off state debt through balancing the budget year-by-year. Such a policy may have been necessary in the 1970s, but its effects have been slow and inconclusive. There is no reason why we should cling to it in a completely different kind of crisis. If generals fight the last war over again, it seems the same is true of politicians. Most of the politicians in Britain's two major parties are stuck in the 1970s.

The brunt of austerity was borne by the already disadvantaged - that is, by those who rent rather than own their dwellings, and who depend on welfare and social security systems. In the UK, for example, the costs have included funding cuts to hospitals and schools; the closure of numerous public libraries; extreme strain on the facilities of the National Health Service; repeated crises in the prison service caused at least partly by a shortage of prison officers; families forced out of their homes and communities because their housing benefit has been cut, or because the local council or housing association has sold their home to a developer; reductions in invalidity benefits and tax credits, which have left many claimants with anxiety-creating forms to fill in and intimidating tests to undergo; the withdrawal of many youth services and careers advice centres; and reductions in legal aid which exclude many people from access to the law, especially women, recent immigrants and people newly dismissed from employment. One could go on. Cumulatively, these cuts impaired the fiscal covenant and undermined the rule of law. They deprived many people, especially the poor and disadvantaged, of their confidence in the future, of their feeling of being citizens and belonging to a community. That is what has made them willing prey to populist parties which have pledged to restore welfare benefits and recreate the sense of community.

Globalised markets had other effects too: many people from poorer and/or strife-torn countries migrated to European countries, most of which were still relatively prosperous. Many indigenous Europeans were left with the feeling that they had become surrounded by alien inhabitants whom they did not know and could not trust, and that they could no longer have confidence in the safety nets supplied by the state in case of disaster. Islamist terrorism then added extra impetus to their fears. The result was widespread exaggerated distrust of all immigrants and of international institutions generally.

National populations were rejecting the consequences of free-market economic globalisation, which had curtailed the political power of nation-states and their parliaments, and placed it in the hands of EU bureaucrats and unelected international business tycoons who could transfer resources across frontiers at the click of a mouse, regardless of the needs and wishes of local communities.

There is, though, another reason for the government's stubborn adherence to inappropriate remedies: that is because the neo-liberal market doctrines are overwhelmingly in the interest of the already wealthy and powerful. This factor has given those doctrines a powerful grip on our national media and an almost invincible hold on the practices of government officials, corporations and financial institutions all over the country. The result is an ideological syndrome which operates like Soviet Communist ideology, regardless of the implications for the welfare of ordinary human beings.

A lurid symptom of the consequences was the Grenfell Tower fire of the night of 14-15 June 2017, in which 72 people died and a further 70 were injured. Only five years earlier, during a refit, the Royal Borough of Kensington and Chelsea, practising financial rectitude, had deliberately rejected fireproof external cladding in favour of a somewhat cheaper non-fireproof version, something they were enabled to do by recent relaxations in building regulations. The risks of this decision were exacerbated by the fact that the tower's only evacuation route was down a single central staircase. The tenants of the tower, mostly poorer and minority-ethnic people, had reacted by raising concerns about the fire dangers. They had considered taking legal action against the council, but reportedly were prevented from doing so by recent cuts in legal aid. It later transpired that some 600 high-rise blocks in the UK had similar cladding - 57 in Glasgow alone. In some of them residents, rather than the government, the local council or the construction firms, were asked to pay the considerable cost of refurbishment.

After the fire, the government promised that funds would be provided for those who had lost their homes in it, and that all would be rehoused as close as possible to Grenfell Tower within three weeks. In actual fact, nearly a year later only 74 out of 210 households had been permanently rehoused. The rest were still living in temporary accommodation or in hotel rooms, mostly whole families to one room. Kensington and Chelsea, the richest borough in the UK, had not even taken the step of compulsorily purchasing premises that were unoccupied in order to rehouse families.¹⁶ The whole episode suggested that the government and the local authority had mentally assigned Grenfell tenants to the category of second-class citizens, with inferior financial and legal status compared to the more affluent property owners living in some cases only a few yards away from them. The effect was especially dramatic in Kensington, where some of London's poorest people lived in high-rise blocks of flats, almost around the corner from fabulously wealthy Russian oligarchs and the sumptuous embassies around Kensington Palace.

Even without such apocalyptic scenarios, the disruption to stable routines and to household budgets, the restriction of access to the law, the impoverishment of collectively provided facilities - all these deprivations loosened the bonds of attachment and routine confidence in the future which most of us take for granted most of the time, and which are the underpinning of democracy and civil society. Not many families follow politics closely, but most have become aware of the gradually increasing disentitlements imposed on them by a national government yielding to the demands of global finance. They also notice that the already wealthy are actually augmenting their wealth at the same time, apparently at everyone else's expense. By 2017, figures showed that FTSE chief executive officers were earning 386 times the national living wage, or more specifically 132 times more than the average police officer, 140 times more than a schoolteacher, 165 times more than a nurse, and 312 times more than a care worker.¹⁷ Moreover, inherited wealth had become a far better determinant of social and economic status than either exceptional talent or hard work.¹⁸ Those with inherited wealth could expect to have it protected and enhanced by dedicated, discreet and extremely confidential wealth managers, handpicked for their trustworthy qualities.¹⁹ Much of it would be placed in minimally regulated private equity funds, hedge funds or in tax havens (many of them in Switzerland or in British dependencies), where it would be concealed from the tax authorities.²⁰

The victims of this process feel that the government has violated the tacit social contract that holds democracies together. The result has been summarised by a former staunch supporter of neo-liberal globalisation, the Financial Times columnist Martin Wolf. In recent years he has modified his views and now diagnoses a serious mismatch between the current mode of free market capitalism and democracy:

In democratic societies, a tacit bargain exists between elites and the rest of society. The latter say to the former: we will accept your power, prestige and prosperity, but only if we prosper too. A huge crisis dissolves that bargain. The elites come to be seen as incompetent, rapacious or, in this case, both.

He adds that globalised elites have

become ever more detached from the countries that produced them. In the process, the glue that binds democracy - the notion of citizenship - has weakened....T he loss of confidence in the competence and probity of elites inevitably reduces trust in democratic legitimacy. People feel even more than before that the country is not being governed for them, but for a narrow segment of well- connected insiders who reap most of the gains and, when things go wrong, are not just shielded from loss but impose massive costs on everybody else.²¹

This is a pretty good description of what has been happening to Western societies for several decades, and of what has propelled populist parties into the foreground of politics. Why in an era of increasing economic globalisation and increased mobility around the world should so many people react by demanding the reassertion of national distinctiveness? At the heart of the explanation for this apparent anomaly lies social trust.²² I shall concentrate here on two forms of social trust in particular: trust in money and economic institutions, and trust derived from the norms of national culture and national institutions. I shall argue that the symbolic attraction of the nation is far stronger than that of the economy - which is why people will often vote in ways detrimental to their economic interests.

The divisions in society resulting from 'austerity' have been summed up by the German political economist, Wolfgang Streeck, who believes globalised free markets are incompatible with liberal democracy. He labels the two categories Staatsvolk and Marktvolk. The former are the democratic electorate who choose between the main parties' manifestos and leaders and who depend on the safety nets provided by the state; the latter are the financial markets, who guarantee investors' financial security by demanding from governments that they prove their reliability as borrowers. Streeck lays out the main features, demands and expectations of the two categories as follows:

Staatsvolk	Marktvolk
national	international
citizens	investors
civil rights	contractual claims
voters	creditors
elections (periodic)	auctions (continual)
loyalty	'confidence'
public opinion	interest rates
public services	debt service^23

It is evident that the ongoing development and separation of these two categories will tend to generate increasing inequality, since the Staatsvolk, more dependent on public services and welfare benefits provided by the state or local government, will tend from the outset to be poorer and more disadvantaged than the Marktvolk, and will become progressively more so.

The financial crash of 2007-8 intensified resentments which had been mounting for a decade or two already. The unjustifiable inequalities it exacerbated severely undermined confidence in the political and economic system as a whole and provided a perfect setting for the rise of populist parties. They stood both for the traditionally right-wing ideals of national greatness, restriction of immigration and resistance to international institutions, yet also for the traditionally left-wing cause of generous welfare benefits.

In the UK, the leading populist role was taken by the UK Independence Party. In a futile attempt to prevent them eating into the Conservative vote, Prime Minister Cameron called a referendum for June 2016 on Britain's membership in the European Union. A majority of the electorate voted to leave it. This was the first time that any nation (with the partial exception of Greenland, a Danish federal territory) had opted to quit what had hitherto seemed an inexorably expanding supranational organisation. The margin of the Brexiteers' victory was not huge (51.9 per cent against 48.1 per cent), but it was definite. Examination of the voting patterns revealed that the vote for Remain was highest (57 per cent) in the two top social strata (As and Bs), lower (49 per cent) in the middle (C1s) and at its minimum (36 per cent) in the lowest strata (C2s, Ds and Es). The main fault lines, however, were not social class, but education and age. Sixty-eight per cent of voters with completed higher education voted Remain, while 70 per cent of those who never advanced beyond GCSE (basic secondary school graduation) voted Leave. Of people over 65 years of age, 64 per cent voted Leave, and 36 per cent Remain; while of those aged 18-24, 71 per cent voted Remain and only 29 per cent Leave.²⁴ The greatest contrasts thus depended on level of education and on stage of life rather than on social class as such, though of course those with better education tend anyway to belong to a higher social class; furthermore, older people will tend to have been less well educated. It is noteworthy too that, while the Remain campaign concentrated on economic arguments, the Leave campaign put questions of identity, national sovereignty and immigration at the forefront, claiming that Britain was losing control of its own frontiers, its nationhood and its political system. 'Give us back our nation!' summed up their campaign in a few words.²⁵

Streeck's Marktvolk/Staatsvolk dichotomy roughly corresponds to the dichotomy expounded by another thinker concerned with the condition of contemporary British democracy: in a recent book, David Goodhart distinguishes between 'Anywhere' people and 'Somewhere' people.²⁶

The people Goodhart classifies as Anywheres are animated by what he calls 'progressive individualism' - that is, they value individual freedom very highly and are prepared to accept its social corollaries. Their worldview 'places a high value on autonomy, mobility and novelty, and a much lower value on group identity, tradition and national social contracts (faith, flag and family)'. They 'are comfortable with immigration, European integration and the spread of human rights legislation, all of which tend to dilute the claims of national citizenship'. By contrast, the Somewheres hold a worldview which Goodhart calls 'decent populism' (though he notes that a small minority of 'hard authoritarians' among them do not qualify as 'decent'). They 'are more socially conservative and communitarian by instinct....T hey feel uncomfortable about many aspects of cultural and economic change - such as mass immigration, an achievement society in which they struggle to achieve, the reduced status of non-graduate employment and more fluid gender roles.'²⁷ They react against both forms of 'double liberalism'.

Drawing on recent opinion polls, Goodhart observes that in recent years more than half of the British people have agreed with the statement 'Britain has changed in recent times beyond recognition. It sometimes feels like a foreign country, and this makes me feel uncomfortable.'²⁸ One cause of this feeling has been the recent steep growth in immigration: there were approximately 1 million immigrants from EU countries living in Britain in the late 1990s, whereas by 2016 there were 3.3 million.²⁹ Somewheres are not totally opposed to immigration, but feel there are too many immigrants in the country, that their ubiquity has changed the country beyond recognition, and that their presence has put unacceptable strains on the NHS, the education system, the social welfare budget and the stock of housing, especially in certain localities. Moreo ver, successive governments have failed to identify the locations under particular strain and help them with extra resources. The perception takes root that immigrants have come to Britain only to claim welfare benefits without having paid their share into the system first. Their dress, their food, their music, their customs and their religion (often Islam) feel alien and even threatening to native Brits, especially in certain towns (usually economically disadvantaged ones) in which immigrants have clustered in large numbers, and in some cases have recreated Pakistani, Bangladeshi or Somali communities as distinct ghetto-like areas. Islamist terrorism has naturally exacerbated this hostile perception.³⁰

The term 'nation-state' has two halves. The state underpins the fiscal covenant, while the nation offers a sense of community and the symbolic links which promote generalised social trust. Consider for a moment what the nation symbolises. It is the largest collective - typically many millions of people - with which the individual can feel a sense of community solidarity. A nation is a huge aggregation, each of whose members can know personally only a tiny proportion of its other members. Imagining the unknown members as people to whom one can extend at least a preliminary presumption of trust and with whom one can engage more readily than with those outside the nation's borders requires a symbolic repertoire capable of summing up the nation's identity and projecting it to all its members. A shared language greatly eases mutual understanding and can facilitate the settling of conflicts. A nation can be symbolically evoked through its various emblems: the national flag, the national anthem, a portrait of the head of state. Its ceremonies - connected with anniversaries or occasions of rejoicing or mourning - give people an opportunity to mingle with each other in a heightened emotional setting, in some cases enhanced by the liturgy of a distinctive religion. A shared history or folklore provides points of reference for conversation or public discourse. A common culture in literature, music or the visual arts, communicates feelings connected with the shared experience of homeland.³¹

Symbols are more powerful and more motivating than self-interest. That is one reason why many people in the Brexit referendum voted against their own economic interest (though of course it is also true that calculating one's own long-term economic interest is difficult). Moreover, symbols are especially suited to communication through social media, which as a result have provided further impetus to populist politics. The prevalence of social media in recent years has greatly reduced the incidence of public meetings as well as of membership of collective organisations such as political parties. While it is possible to organise collective activities such as strikes and demonstrations through Twitter and Facebook, the prior communication of the individuals involved is minimal. For these reasons, nowadays class identity has totally lost its connection with political party voting.³²

Social media also tend to act as an 'echo chamber'. That is, individuals receive the kind of news they want to hear, usually amplified for good measure, and the kind of political commentary whose lines of argument they already find congenial. Extremist content - chauvinist, racist, misogynist - is disseminated with minimal restriction, while moderate, nuanced or complex comments are drowned out. In a parody of Habermas's 'public sphere', public discussion tends to proceed in closed boxes of strongly held and often exaggerated opinions without differentiated mutual debate. This is the milieu in which 'fake news' and 'post-truth' assertions become apparently valid currency. These are all symptoms of fragmented social trust.³³

What then is to be done? We have seen that the application of Keynesian theory can cause serious problems: it can provide impetus for an inflationary situation that it cannot deal with. However, the remedies launched in the 1970s and stubbornly adhered to up to the present generate even more serious problems - indeed, threaten to destroy liberal democracy itself.

At the heart of any recovery must be massive investment in the existing strengths of our economy, to ensure its future place in the world, and in the facilities that the British people need - above all, housing (applying new environment-friendly technology), infrastructure and green industry. This investment should be handled not directly by the Treasury, but by a National Investment Bank, probably bolstered by Treasury guarantees of some kind. The bank would have no difficulty in attracting investment: there is a lot of money sloshing around in the British economy, some of it going to tax havens, and some into the overblown real estate market. Insurance companies and pension funds are desperate for investment opportunities offering a reliable and reasonably good return. But if yet more investment is needed, there is no reason why governments should not print new money, provided it goes into producing genuine new wealth, not simply increasing the price of existing assets - as was the main result of existing 'quantitative easing' programmes.

Such investment would need to be informed by a well-designed industrial policy, since misplaced investment would lead only to inflation. Since the 1970s, state industrial policy has been more or less taboo, but there is no inherent reason why that should be so. There are many areas in which innovation offers prospects: artificial intelligence, biotechnology, nanotechnology, 3D printing, materials science, and so on. They will all require a serious research and development input which universities and leading companies should be well placed to provide. As far as possible, these new ventures should be sited outside the 'golden triangle' of London and south-east England, in the regions which have suffered worst in what for them has been a very long recession. The rail line HS2 (if it is ultimately built) should be quickly succeeded - or better still replaced - by HS3 from Liverpool via Manchester to Sheffield and Leeds, with eventual extensions to Hull and York. This would link great cities at present plagued by poor communications with everywhere except London.

This kind of revival should be accompanied by a reform of the structure of British corporations. The history of corporations shows that limited liability was necessitated in order to encourage investment in innovative, high-risk enterprises, since investors could not be expected to chance their entire property in such investments. In the nineteenth century, railways would never have been built without limited liability.³⁴ But much economic activity does not entail such risks. Health centres, public utilities, public transport, educational institutions and housing do not need daring innovation and seldom incur serious risks, so they do not need to be run as profit-maximising, share-value-driven companies. Rather, they need to be steady, reliable performers offering good service to the public. At the moment even corporations conducting such public functions are structured so as to maximise 'shareholder value' - that is, the products of their successes go to their directors and shareholders, while the costs of their failures are borne mainly by unsecured creditors, employees, customers, those who live in the surrounding areas and, when necessary, by the taxpayer. Corporations have a public purpose: that is why, when they entail risk, they are allowed the privilege of joint-stock ownership and limited liability. They should not abuse that privilege for rewards which go to the very few. They should be reformed to reflect their multifaceted public role. There are many proposals for doing this currently being discussed by communitarian associations, and they should be taken seriously.³⁵

The restoration of social security benefits cannot be accomplished overnight but must be a declared aim of parliament from the outset. Investment will create new jobs, with the result that the unemployed and poorly paid will come off benefits and begin to pay taxes. Their product will also have its own value. This is the 'multiplier' of which Keynes spoke, and it tends to promote economic growth. Gradually, moreover, employees will begin to feel that they have a real place in the community and in the productive economy.

In addition, there is no reason other than unimaginative and selfish dogma why taxes should not be raised. The most productive tax would probably be a land value tax. This would be complex to set up, but it would bring enormous benefits. Land cannot be transferred to the Virgin Islands. Moreover, its equitable taxation would encourage better use of land, especially vacant land with planning permission for housing. Britain should cooperate with other countries, including those in the EU, in discovering the true beneficiary ownership of opaquely managed companies registered in tax havens and in requiring them to register their profits on territories where they operate. They could then be taxed in the same way that indigenous companies are (and other countries would enjoy the same benefit). This is something that a single country cannot do on its own: targeted companies would simply smartly transfer their profits to a more compliant jurisdiction.

In short, the situation is extremely serious, but it is not hopeless. Keynesianism has its problems, but those generated by the globalised and financialised free market are much more dangerous to liberal democracy. Intelligent and determined reform of our economic structures would enable the British state and society to deliver the kind of economic and community benefits which are promised by populist parties but cannot possibly be achieved by the methods they propose. One of the principal strengths of democracy, compared to authoritarianism, is its flexibility and its capacity to respond - albeit often belatedly - to unforeseen challenges and dangers.³⁶ It certainly needs that strength now.

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¹Patrick Deneen, Why Liberalism Failed (New Haven, CT: Yale University Press, 2018), 3, 179.

²For a convincing argument that Gorbachev's reforms were the decisive precipitant, see Archie Brown, The Gorbachev Factor (Oxford: Oxford University Press, 1997). Myself, I believe the final precipitant was the clash between the Russian Republic and the Soviet Union. For a full statement of this argument, see Geoffrey Hosking, Rulers and Victims: The Russians in the Soviet Union (Cambridge, MA: The Belknap Press of Harvard University Press, 2006).

³The passing of this system was lamented by Tony Judt in his Ill Fares the Land: A Treatise on our Present Discontents (London: Allen Lane, 2010).

⁴The best concise summary of Keynesian theory is Robert Skidelsky, Keynes: The Return of the Master (London: Allen Lane, 2009).

⁵Simon Clarke, Keynesianism, Monetarism and the Crisis of the State (Aldershot, UK: Edward Elgar, 1988), chapter 11; David Marquand, Mammon's Kingdom: An Essay on Britain, Now (London: Allen Lane, 2014), 33, 43-5.

⁶Sue Jaffer, Susanna Knaudt, and Nicholas Morris, 'Failures of Regulation and Governance', in Capital Failure: Rebuilding Trust in Financial Services, ed. Nicholas Morris and David Vines (Oxford: Oxford University Press, 2014), 121.

⁷Emma Rothschild, Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment (Cambridge, MA: Harvard University Press, 2001).

⁸Report of the Parliamentary Committee on Work and Pensions, London, 16 May 2018, summary, paragraphs 1, 2, 10, 39, 50.

⁹Jonathan Ford, 'A Greedy Giant out of Control', Prospect, November 2008, 22-8.

¹⁰Michael J. Clowes, The Money Flood: How Pension Funds Revolutionized Investing (New York: John Wiley & Sons, 2000), 277; OECD statistics, accessed 11 May 2017, stats.oecd.org/wbos/Index.aspx ? usercontext=​ ​sourceoecd.

¹¹Robert Gilpin, The Challenge of Global Capitalism: The World Economy in the 21st Century (Princeton, NJ: Princeton University Press, 2000), 140-1.

¹²Graham Turner, The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis (London: Pluto Press, 2008); Gillian Tett, Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe (London: Abacus, 2010), especially chapter 15.

¹³Andrew Clark, 'Greenspan - I Was Wrong About the Economy. Sort of', The Guardian, 23 October 2008, accessed 12 May 2018, http://www.theguardian.com/business/2008/oct/24/economics-creditcrunch-federal-reserve-greenspan.

¹⁴Office for National Statistics, UK Government Debt and Deficit: September 2018, Figure 1, accessed 11 June 2017, http://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/september2017.

¹⁵Office for National Statistics, Report on UK Government Debt and Deficits, December 2017; House of Commons Briefing Paper 7584, 10 May 2018.

¹⁶Chris Johnston, 'Grenfell: Council Seeks New Powers to Acquire Unused Properties', The Guardian, 22 May 2018, accessed 11 June 2017, http://www.theguardian.com/uk-news/2018/oct/06/grenfell-kensington-chelsea-council-unused-properties.

¹⁷Equality Trust report, March 2017, accessed 4 December 2017, http://www.equalitytrust.org.uk/paytracker.

¹⁸With a few specialised exceptions such as pop singers and international footballers. For a detailed presentation of the thesis that inherited wealth offers better returns than exceptional talent or hard work, see Thomas Piketty, Capital in the Twenty-First Century, trans. Arthur Goldhammer (Cambridge, MA: Belknap Press of Harvard University Press, 2014).

¹⁹Brooke Harrington, Capital without Borders: Wealth Managers and the One Percent (Cambridge, MA: Harvard University Press, 2016).

²⁰Philip Coggan, Paper Promises: Money, Debt and the New World Order (London: Penguin Books, 2012), 153-4, 189-91; Coggan, The Money Machine: How the City Works, rev. ed. (London: Penguin Books, 2009), 82-90; Nicholas Shaxson, Treasure Islands: Tax Havens and the Men Who Stole the World (London: Bodley Head, 2011).

²¹Martin Wolf, The Shifts and the Shocks: What We've Learned - and Have Still to Learn - from the Financial Crisis (London: Allen Lane, 2014), 351-2.

²²On social trust, see my Trust: A History (Oxford: Oxford University Press, 2014), especially chapter 2.

²³Wolfgang Streeck, How Will Capitalism End? Essays on a Failing System (London: Verso, 2016), 124.

²⁴'How Britain Voted', accessed 11 August 2017, yougov.co.uk/news/2016/06/27/how-britain-voted/.

²⁵David Goodhart, The Road to Somewhere: The Populist Revolt and the Future of Politics (London: Hurst, 2017), 19-26.

²⁶Goodhart, Road.

²⁷Goodhart, Road, 5-6.

²⁸Goodhart, Road, 2-3.

²⁹ONS dataset, 'Population of the United Kingdom by country of birth and nationality', August 2016, quoted in Goodhart, Road, 122-5.

³⁰Goodhart, Road, 129-31.

³¹The power of national symbols is well summed up in Benedict Anderson, Imagined Communities: Reflections on the Origin and Spread of Nationalism, rev. ed. (London: Verso, 1991), and Anthony D. Smith, National Identity (London: Penguin Books, 1991).

³²Lecture by David Sanders, 'The UK's changing party landscape', British Academy, 4 July 2017.

³³'I can haz all your votes', Economist, 4 November 2017, 21-6.

³⁴James Taylor, Creating Capitalism: Joint-Stock Enterprise in British Politics and Culture, 1800-1870 (Woodbridge, UK: The Boydell Press, 2006).

³⁵Colin Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford: Oxford University Press, 2013), especially 32-4, 63-4. Mayer recommends the creation of 'trust firms', of which the cooperative enterprise is an example: see 199-205.

³⁶David Runciman, The Confidence Trap: A History of Democracy in Crisis from World War One to the Present (Princeton, NJ: Princeton University Press, 2013), especially 106.

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