The State We're In: The political economy of the new middle class / FRFI 124 Apr / May 1995

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FRFI 124 April / May 1995

'The starting point of the English revolution...the nearest we will get to a Keynes for our time', said Labour MP Denis Macshane in the New Statesman and Society, 'Heady, dangerous stuff...provides powerful ammunition for Labour spokesmen with no new ideas of their own' warned the Daily Telegraph, a 'ferocious polemic...too bleak to please or persuade' cautioned the London Evening Standard. All are speaking of The State We're In* by the Guardian's economic editor Will Hutton.

The book's success is of political significance. Some call it a manifesto for a future Labour government. Hutton denies this but states: 'if a Labour government is to be as serious about raising investment levels and reinventing British democracy as it says, both it and the book are pulling in the same direction.' (The Guardian 2 17 February 1995)

The book's appeal lies in its passionate criticism of Tory Britain and the urgency of its call to transform Britain into a high investment, high growth economy which could sustain social welfare. It goes much further than any Labour spokesperson would consider wise. Yet for all this the book is fundamentally reactionary. His position is driven by fear of social breakdown, of, what he calls, 'desperate authoritarian attempts' of the right or left to repair it (p26). It is a plea for one nation conservatism, for the social consensus of the 1950s and 1960s without the policies of that period. He wants to institutionalise inequality and bring it into the state sector. The middle classes must be given, he says, 'a vested interest in the entire system' by 'incorporating inequality into the public domain' by 'nationalising inequality' in health and education (p309-311). In short his book is a forceful defence of the narrow concerns of the professional middle classes. It is the political economy of the new middle class.

The state we're in
In describing contemporary Britain Hutton pulls no punches. Britain's great industrial cities are decaying and in new industries and technologies Britain is barely represented. The state has developed a rentier culture. Footloose institutional shareholders and company boards demand business strategies which boost short-term share prices. Britain's unique economic asset, the City of London, is a by-word for speculation, inefficiency and cheating. Some of the most famous names in British insurance have been shown to be 'shysters and tricksters'. Privatised utilities make massive profits by laying off thousands of workers and exploiting their monopoly position. Personal enrichment at any price appears the aim of financial and corporate life. Inequality is rampant and growing. The gap between low and high wages is the highest since records began.

A privileged class at one pole is favoured with education, jobs, housing and pensions while at the other pole millions have become the new working poor or live off the state in semi-poverty. In the middle are those with insecure 'contract' work, temporary and part-time jobs, always facing the threat of unemployment. A quarter of men of working age are either officially unemployed or idle. A third of the nation's children live in poverty. Life expectancy for those at the bottom of the income scale has fallen.

The National Health Service is rapidly turning into a two-tier structure with a third tier for those who can pay for private treatment. Education has become a creator of class division having opted-out schools in the state sector and public (private) schools offering privileged access to qualifications, prestigious universities and lucrative careers.

Easy access to mortgages in the 1980s has meant repossessions and 'negative equity' in the 1990s as recession and high interest rates forced tens of thousands to default. Sales of 20 per cent of the best council houses at substantial discounts have left estates of the least desirable housing in public hands. Privatisation of housing has intensified the breakdown of urban life.

The concentration and centralisation of power in Britain resembles that of a one-party state. Having no constitution, monarchical power has passed to the majority party of the House of Commons. Parliament is a charade. There is no formal independence of the judiciary. Honours and contracts are awarded to government supporters in industry and the City. By 1996, 7,700 quangos run by an oligarchy of conservative placemen will spend some œ54bn of public money with little or no accountability. Press partisanship at election times and lack of journalistic integrity and independence is rewarded with knighthoods.

Order is breaking down in the towns and cities. Britain's national affairs are reaching explosive levels of stress. Hutton articulates the fear of the middle classes at what might occur. If the New Right agenda succeeds: 'if there are no real economic and political choices...the way is open for the return of totalitarian parties of right and left.' It has fallen to Will Hutton to provide the middle classes with a sustained theoretical and political standpoint which, he argues, offers the possibility of escaping such a 'baleful prospect' - 'a call to arms in a world in which time is running short'. (See pp1-9, p23, p26, p34, p172, pp202-3, pp207-10, p223, p318.)

How we got there
Hutton sees the appalling state of Britain as the result of an entrenched 'conservative hegemony' whose roots go back to the late seventeenth century.

'From the late-seventeenth century a unique political, social and economic constellation has held together, and it remains the foundation of contemporary Conservatism. Court, land and finance -- extending towards the military -- have become the apex of the social and political pyramid and the focus of economic endeavour.' (p113-4).

What binds it together is a 'gentlemanly capitalism' - which places high social status on the less risky, invisible sources of income from commercial and financial activity rather than industrial production.

Britain's commercial and financial interests were global, driven by the search for the highest rate of return to bond holders and merchants. Industrialisation was a byproduct of this development and not central to it. When recession struck industry in the late 1870s, the Bank of England refused to supply cash to the City of Glasgow Bank against the security of loans made to Glasgow shipbuilders and it collapsed in 1878. From that period on banks would no longer become willingly involved in the long term financing of industry. Faced with the need for institutional reform and state initiative to allow industry to respond to the growing competition from US and German industry in the latter part of the nineteenth century, no action was taken.

'By the First World War a pattern was clearly established: a national banking system disengaged from production: a risk-averse London stock market based on international investment; equity finance made available on the most onerous terms, heaping large dividend demands on British producers; a Bank of England concerned to preserve price stability and the international value of sterling; and an industrial base losing ground to foreign manufacturers with higher productivity - and having to respond by bidding down wages to maximise retained profits, the only reliable and cheap form of finance.' (p123).

Britain's 'quasi-feudal state' has developed a rentier culture that complements 'gentlemanly capitalism' (p22). Free trade and sound finance became the dual orthodoxies of the government and the City, with minimum state involvement and a free market ideology which Hutton claims 'lasted from 1870s through to the 1930s and then re-emerged in the 1980s' with Thatcherism (p124).

A less degenerate capitalism
Hutton's solution follows from his diagnosis. If the dominant role of financial and commercial capital and the rentier culture of the British state results from the entrenched interests of the dominant 'conservative hegemony' or 'gentlemanly class', then what is required is clearly a political revolution to remove it from power. And that is what Hutton proposes.

'The urgent necessity is to construct an independent institutional structure in Britain that will permit commitment and co-operation in the context of the competitive market. And that ...implies nothing less than a British revolution.' (p256).

His intention, however, is not to start a social revolution to overthrow capitalism. On the contrary:

'The great challenge of the twentieth century, after the experience of state socialism and of unfettered free markets, is to create a new financial architecture in which private decisions produce a less degenerate capitalism.' (p298).

Or put in a more positive way:

'As well as the flexibilty and competition that the market provides, successful capitalism needs careful economic management and institutions that foster cooperation and commitment.' (p163).

Yes, this is a return to Keynes, but not the 'bastardised Keynesian corporatism of the 1960s and 1970s', of public ownership and of corporatist trade unionism. That, as we all know, was the bad old days when 'higher inflation and unemployment accompanied each economic cycle.' This is the real Keynes 'who offered the world an unparalleled period of prosperity' in the 1930s, who saw investment as a volatile motor of the economy and whose programme today 'would entail a transformation of the way the financial system worked' (pxiii, p51, p239-245).

Transforming the way the financial system works requires taking power away from the 'entrenched conservative hegemony'. This is Hutton's so called British revolution. It will require the democratisation of the British state -- a written constitution and the democratisation of civil society; and the republicanisation of the financial system -- the broadening of the area of stake-holding in companies and institutions, and creating a republican-style central bank by replacing the current court of the Bank of England (which is staffed with placemen of the rentier state) with one having a democratic federal structure. Finally none of this will be possible without the construction of a stable international financial order beyond the nation state (p298ff, p286ff, p326).

For Hutton to transform British capitalism into something less degenerate and threatening requires altering the way the financial system works - essentially from seeking high, liquid, short-term gains, irrespective of location, to giving a long-term commitment to regenerating the productive base of the British economy. To carry out 'what the Conservative government promised in 1979' (p10). To do this requires revolutionising British institutional structures. What is wrong is not the capitalist system but the way it is being run.

However if the degeneration of capitalism into a parasitic and rentier form is part of a necessary trend of capitalism as it matures and stagnates, then Hutton's position is an idealist and reactionary position, reflecting only the unrealisable hopes and aspirations of a part of the British middle class which wants to remove the ruling class without a social revolution. It is to this we now turn.

Capitalism and imperialism
Hutton's failure to understand capitalism underlies both his incorrect reading of history and his idealist programme.

Hutton's use of basic concepts is very imprecise. The basic actor in the market economy, he says, is the firm (p111). Here there are two confusions. There is no such thing as a market economy.

The economy we are dealing with is a capitalist economy and the market reflects the social relations of capitalism through the movement of the price of commodities and the exchange of commodities for money. To talk of markets working well or badly (p218) is nonsense. They reflect and reproduce the social inequalities inherent in capitalist production.

The basic actor in a capitalist economy is capital. Capital is a social relation. It is the exploitation of the working class by the ruling capitalist class to reproduce and expand capital -- to return the existing money capital together with additional capital or profit -- and in so doing sustain the capitalist social relation. Capital has to expand to survive. Hutton rejects the view that profits arise from the exploitation of labour -- he thinks this a primitive view, but never tells us how profits arise (p111). In fact he does not understand the nature of capital, so his understanding of the capitalist system is flawed.

Financial capital makes a claim to part of the profits produced by productive capital by investing in securities etc and other financial and commercial operations. By putting money capital into British and overseas government debt, and into domestic and foreign shares, it is seeking both secure and flexible high returns. The more distant it is from the operation of productive capital in Britain, from the need to invest long-term and be subject to the volatility of the economic cycle and class conflict, the more certain it is of receiving secure, liquid, and high returns. This appears amoral to Will Hutton because it will, in the long-run, undermine the wealth-generating process in the form of productive capital (p24). But capital is not concerned to produce wealth as such, but wealth in the form of capital, and as long as the returns are high and secure, how this is achieved is of little concern. A fact that Hutton is well aware of, but whose rationale he cannot accept.

Hutton's characterisation of the dominant ruling bloc in the middle of the nineteenth century is not in dispute.

In the nineteenth century, British capitalism had already expanded into new developing areas outside its formal control, in particular Latin America, as protectionism in US and Germany restricted access to major markets. The profits this generated reinforced by colonial acquisitions helped to service the national debt and contribute to employment and political stability at home. In the mid-nineteenth century the main area of growth was the service sector and the most rapidly developing region in Britain was the South-East. The City was at the centre of both.

When British industry was challenged in the latter part of the nineteenth century by the growing industrial powers of US and Germany with larger domestic markets and newer stocks of fixed capital, British capitalism responded to the challenge where it was strongest - through the international expansion of the financial and commercial activities of the City, with British industry drawing on the assets of and exporting to the Empire. Exports to Europe and US fell while those to Empire rose by an equal amount. 'Invisible' earnings from trade in services and returns on overseas investment rapidly grew and compensated for the fall in visible exports - a fall which was inevitable as a result of the increased international competition in the staple industries such as iron and steel.

Contrary to Hutton's protestations, it was quite rational for the British ruling class to respond in the way it did. Capital is concerned not with production as such but with making the highest possible profits, and the highest returns were to be made from capital expanding overseas because of Britain's still dominant position globally. The fall in the profits of industry were compensated by the the invisible earnings and rising profits from Britain's overseas investments and commercial activities, which in turn allowed the ruling class to buy social peace, and contain class conflict in the turbulent years before the First World War.

Hutton took the term 'gentlemanly capitalism' from Cain and Hopkin's two volume history of British imperialism (See review in FRFI 14 August/September 1993), yet the term imperialism does not figure in Hutton's vocabulary. It is easy to see why. If capitalist nations as they develop are forced to expand overseas, to conquer new markets and to secure ever higher returns, as the rate of profit declines at home, then Britain, as the first imperialist power, is showing other mature capitalist nations the path they too must take. And, as Cain and Hopkins, argue, grudgingly admitting the relevance of the classical Marxist tradition, it was the growing economic conflicts between the major capitalist powers as they fought to 'redivide the world' that led to the first imperialist war.

'However hesitant Britain was to enter the war it offered the opportunity to destroy Germany's burgeoning overseas power, at least temporarily, and to preserve Britain's economic dominance overseas - a dominance without which she was of little account in the world.' (Vol 1 p456-465).

This conflict between the major capitalist powers was not finally resolved until the end of the Second World War, when the US emerged as the dominant imperialist power with Britain as the junior partner.

Hutton's position that somehow this imperialist culture was put in abeyance in Britain in the 1930s to reemerge with Thatcher in the 1980s does not survive the most cursory examination. Is it because Hutton sees a modernised Labour Party as a potential vehicle for his programme that he covers up Labour's appalling historical role in defending Britain's imperialist interests and the City as the dominant world financial centre? Indeed, in a section called 'The weakness of labour' he talks of the 'political innocence of Labour Party and the poverty of its strategic thinking' in allowing the entire (imperialist) structure to remain in place. It was anything but innocence. It was after all Bevin, Labour's Foreign Secretary after the World War II, who said:

'I am not prepared to sacrifice the British Empire because I know if the British Empire would mean the standard of life of our constituents would fall considerably' (House of Commons 21 February 1946).

Britain's strategic position under Labour was the same as under the Tories -- to maintain Britain as a major imperialist power and sterling as an international currency.

Finally to treat the development of German and Japanese capitalism after the war, as Hutton does, as some kind of example for Britain to follow now is ahistorical (pp262-267). The German and Japanese economies were destroyed during the war and rebuilt with capital and new technology supplied by the United States. Their working class movements had been defeated by fascism and war and capital had the most favorable conditions in which to expand profitability. Japan has very little state social security and Germany's high social spending is now regarded as a major problem by the Bundesbank. What is, however, significant is that since the end of the 1970s there has been a massive increase in the export of capital from both these countries, with Japanese and German banks and multinational companies becoming major players on the global markets. Even Hutton is forced to admit that in present day conditions German banks 'are, allegedly (sic) becoming more short-term in their time horizons' and 'that the international system is finding it difficult to accommodate the instabilities caused by the relative strength and weakness of rival capitalisms' (p267, p280). As globalisation proceeds apace Japanese and German capitalism will follow the same path to rentier capitalism as Britain and the US did before them.

The political economy of the new middle class
After 1945 Britain was still a major industrial power with a strong manufacturing base, its European competitors weakened by the effects of the war. It was a major imperialist power with access to the protected markets of the British Empire and the flow of super-profits from its overseas investments. The world economy was relatively stable under the hegemony of US imperialism. The latter became the international banker for the rest of the capitalist world. Its loans and investments became the driving force behind the post-war boom. The post-war boom was caused by a unique set of circumstances which ended in the mid-1970s with the re-emergence of the challenge from German and Japanese capitalism.

The relative prosperity in Britain during the post-war boom gave rise to new privileged sections of the working class - a new middle class. This layer of predominantly educated, salaried white collar workers grew with the expansion of the state and services sector and, in the more recent period, with the information technology revolution.

As long as sufficient profits were produced to return an adequate rate of profit on capital invested and to finance state welfare then the social democratic consensus of the post war years could be maintained. It was possible to guarantee the relatively privileged conditions of higher paid workers and the middle classes while sustaining adequate living standards for the mass of the working class. However as soon as the rate of profit began to fall - an inevitable consequence of the process of capital accumulation - then the consensus began to break apart. Unemployment and poverty started to grow. And at the very moment when increased state spending was needed, state spending was blamed for the crisis. The myths of Keynesianism were exposed. In the mid-1970s the Labour Party set monetary targets and cut state spending. The low paid workers fought back and the 'winter of discontent' drove the higher paid skilled workers and the middle classes into the arms of the Tory Party.

Thatcher embraced this new constituency and as Hutton says 'the liberal professions, affluent council house tenants and homeowners all benefited from her tax cuts, credit boom and privatisation programme' (p28). The price was growing inequality as state welfare was cut and millions of working class people were driven into poverty to pay for Thatcher's programme.

With the failure of Thatcher's economic policies at the end of the 1980s, and with inequality accelerating, the crisis started to make inroads into the standard of living of sections of the middle class. It is the explosive social consequences of this development which worries Hutton.

It is to the middle classes that he turns in seeking a solution, and it is their interests and prejudices that his programme addresses. This will not be easy. The years of prosperity have taken a toll on their moral fibre.

'Rising prosperity was bound to make a growing proportion of the electorate attempt to express themselves like the gentleman class, to try to attend similar schools, live similar lifestyles and...adopt the same disdainful attitude to those beneath them' (p49).

Britain, he says, had poor laws and means tested benefits before and could easily revert to type unless the coalition supporting social welfare is rebuilt. To rebuild this we must win back the allegiance of the middle class. The middle class must opt in, rather than opt-out into the privatised provision of the New Right agenda.

'There is on the one hand, the hard, political requirement that the middle classes and the top third of the income parade must have good reason for accepting the progressive taxation upon which a welfare system depends. They need to to get enough out of the system directly in terms of provision and indirectly in terms of social cohesion to make them support the principle of universal benefit to which they are disproportionately heavy contributors. That requires well-designed and high quality welfare services that meet their needs as well.'

The implication here is that second best is good enough for the majority of the working class. Quality and choice are the preserve of the middle classes.

In health this might mean a 'tiered system of contributions above the core contribution, assuring enhanced care for non life threatening treatment.' (p310). In education 'grammar schools and grammar school streams in comprehensives need to be revived to attract members of the middle class back to the state system.'

Public schools should be allowed to keep charitable status as long as they take in a high (not specified) proportion of non-fee-paying children (p311). In short Hutton wants to 'nationalise inequality' within the state system.

This, then, is the British revolution that Hutton proposes. A revolution, led by the middle classes, with a middle class programme which aims to remove from power an entrenched ruling class that has governed Britain since the late seventeenth century and at the same time preserve its own privileged position over the working class. Such are the reactionary, utopian ideas which inform the political economy of the new middle class. And this is Hutton's manifesto for the new Labour Party.

David Yaffe

* Published by Jonathan Cape 1995 price £16.99 hbk