Will Hutton's The State We're In
Eatwell, John
THE STATE WE'RE IN, by Will Hutton. Jonathan Cape, 1995. 352 pp. £6.99. Books on economic affairs don't sell well in Britain. I should know. In 1982 I presented an eight-part television series...
...Both nations seem unable to recapture the economic dynamism and secure employment that characterized the first twenty-five years of the postwar era...
...With that system's collapse, foreign exchange risk was privatized...
...This in turn has led to growing unemployment— despite more than twenty revisions to the official method of calculating unemployment statistics (all of which reduced the count), average unemployment has more than doubled...
...The United States announced the elimination of all capital controls in January 1974...
...The United States has enjoyed a low unemployment rate compared to that of many European countries with high benefits and strong workers' rights...
...But if all investors switch to the short-term, then the performance of the economy as a whole will deteriorate...
...The defense of the nation required a mobilization of economic resources that the market was obviously incapable of performing...
...Lack of long-term commitment, the absence of dialogue or the search for consensus, define both the political and the economic culture of Britain...
...Only about twentysix thousand bought the book...
...His argument that British capitalism has been deformed by the persistent obeisance of economic policy to the interests of the financial sector was anticipated inAndrew Shonfield's brilliant 1965 study, Modern Capitalism...
...As might be expected from the structure of his argument, Hutton praises the achievements of the German and Japanese economies, and suggests that their "stakeholder" approach to economic relationships (a system that recognizes the "stake" that consumers, workers, owners, and the community have in corporate action) is likely to prove more productive, and indeed more competitive in the medium term...
...a constitution that, being"unwritten," can be amended and reinterpreted at will by the government of the day...
...Labor costs and the firm's assets must be continually squeezed to satisfy the ever-pressing demand for dividends...
...Like Shonfield, Hutton argues that "successful capitalism needs careful economic management and institutions which foster cooperation and commitment...
...Despite its emphasis on the British case, Will Hutton's argument has far wider significance, and deserves a far wider audience...
...Hutton has captured the atmosphere of social disintegration and economic decline that pervades Tory Britain...
...The collapse of the fixed-exchange rate Bretton Woods system was the final straw...
...There was a book of the show, and every evening that the program was broadcast (the series was repeated three times in three years) the BBC urged viewers to go out and buy the book...
...Nationalization in Britain focused on declining industries and public utilities...
...And, not surprisingly, the growth of manufacturing has been the slowest among the major industrial countries...
...The U.S...
...Even in the United States, the prominence of local financial institutions tends to sustain a mutual interest between local industry and local finance, something totally lacking in Britain...
...The trade union movement's role was to oppose the depredations of capitalism, not to take part in the development of more consensual, participatory economic institutions...
...All these, in varying forms, provided the infrastructure of the postwar Golden Age, in which all the major industrial countries sustained full employment and grew faster than they have at any time before or since...
...Domestic restrictions on cross-market access for financial institutions were scrapped...
...People are forced to scrape by somehow, by taking very low-productivity, low-paid work...
...Financial liberalization is spreading the pressures for liquidity and for substantial returns...
...Yet in one year, without the benefit of free television advertising, Will Hutton's The State We're In has sold a hundred thousand copies, and at this writing (January 1996) it is at the top of the paperback best-seller lists...
...Britain is clearly peculiarly susceptible to the lure of financial short-termism...
...That is why the intervention of the state is necessary for successful capitalist growth...
...Even before the oil price shock, the relative decline of the United States, together with the progressive liberalization of international finance, had weakened the stable postwar framework...
...This has been justified by the argument that equity and efficiency are incompatible, and that the incentives of inequality are necessary to elicit effort...
...The sheer bravado of Hutton's sweeping analysis has captured the imagination and fueled the hopes of many members of that constituency...
...Fourth, and this is cause for some optimism, the reception for Hutton's book suggests a growing constituency for real change in Britain...
...Regulatory structures that inhibited flows of capital were challenged as "inefficient" and "against the national interest," and the infrastructure of speculation was constructed...
...Keynesian macroeconomics was never buttressed by the industrial strategies sustained by committed financial institutions as in France or Germany, or even by a government department so committed to maintaining national competitiveness in cutting-edge industries as is the U.S...
...This identification of the relationship between Britain's constitution and British economic failure is the distinctive element in Hutton's argument...
...It was not just the opening of markets, but the structuring of market and financial relationships that provided the vital support for accumulation in nineteenthcentury Germany and twentieth-century Japan and South Korea...
...In Germany and Japan the banking systems are under considerable pressure to emulate their Anglo-Saxon competitors, and are now experiencing the instability that has been a feature of financial markets over the past decade...
...This raises an important question: if a committed, long-termist, stakeholder capitalism is more efficient, why is there a tendency for it to * Legislation passed in the 1930s that prevented banks from engaging in business ventures...
...This phenomenon is almost entirely absent in Germany, where very low-productivity casual employment is extremely rare...
...Britain's institutions have always been biased toward a finance-driven free market...
...Labour governments implicitly accepted this model, never attempting to diffuse either political or economic power...
...High profits and dividends, far from stimulating investment, have been associated with the lowest investment rate since the war...
...British shorttermism is becoming an American phenomenon too...
...The Golden Age was undermined from within...
...and from the social and institutional power that the class system confers on a selfperpetuating elite...
...But the same pressures build everywhere as particular firms or countries break ranks and seek to enjoy the short-term advantage of breaking the rules of the game...
...The Second World War provided a massive sense of failure to the entire economic and political infrastructure of the West...
...Inequality is inefficient...
...Third, with the Labour party sustaining opinion poll leads of thirty points or so, people are eager to know what a new Labour government might do, and Hutton's book has undoubtedly had a significant impact on Labour thinking...
...In 1982 I presented an eight-part television series for the BBC entitled Whatever Happened to Britain...
...Second, the book has caught the mood of the times...
...British democracy suffers from the elected dictatorship of the party with a House of Commons majority...
...SPRING • 1996 • 119 Books This book is very much about Britain, but it has a far wider significance for American readers...
...Dialogue and participation are not the British way at the level of the state and trying to encourage them at company level without any buttressing structures or cultural support is doomed to failure...
...Like the United Kingdom, the United States is suffering from increasing social disintegration, increasing inequality, and real poverty and malnutrition on a scale that no one ever expected to see again...
...If most financial institutions are willing to invest long-term, then any one investor who seeks to acquire an advantage by switching funds from one company to another in the search for short-term gain will indeed profit from the exercise, and so will gain a competitive edge so long as other investors do not change their strategy...
...The incentive to deregulate international capital flows, which was created by the abandonment of fixed rates, was decisively reinforced by the need to hedge against the costs that fluctuating exchange rates imposed upon the private sector...
...For if this international extension of Hutton's argument is correct, then the divisive, destabilizing pressures of unregulated markets, in which the short-term demands of finance dictate terms to industry, will continue to depress all the major industrial economies—until such time as a political revolt again forces the na122 • DISSENT Books tion-state, or states, to intervene once again to create a stable long-term financial framework...
...The state was never an effective agent for industrial modernization as was the state in France...
...Hutton's analysis of the economic weakness of Britain is not particularly new...
...A global market in monetary instruments was created...
...Consistent as this individualistic culture may be with the institutions of the idealized free market, it stands in sharp contrast to the organization of state and economy in Germany...
...q SPRING • 1996 123...
...The priorities of the financial sector dominate economic activity...
...It is equally difficult to imagine the achievement of the necessary degree of international cooperation, other than under the most extreme circumstances...
...The British experience confirms empirical evidence from around the world...
...Most important of all, argues Hutton, British social democracy was never secured by the constitutional reform necessary to replace the country's "semi-modern" state...
...Defense Department...
...The increased inequality of incomes and growth of temporary unemployment have led to greater ill-health, lower investment in the development of skills, more crime, and a growing malaise of social division and insecurity...
...Liquidity has become a fetish and attempts to counter this desire for instant gratification have become minimal . . . . There is a permanent bias in the British system to lack of commitment—and from this all else flows," says Hutton...
...The Conservative response has been to appeal to the power of the market by reducing benefits and workers' rights...
...British notions of sovereign and autonomous action for shareholders as much as for workers are borrowed from the Westminster 120 • DISSENT Books model of the state...
...The measured unemployment rate in Mexico is one of the lowest in the OECD...
...The resultant regulated capitalism survived the war in various forms: in the Bretton Woods structure of controls that permitted countries to pursue national economic goals relatively free from the fear of international financial crises, in national systems of financial mobilization that overcame the inherent shorttermism of financial markets, in welfare states that solidified the identity of the working class with national goals...
...The intervention of the state was, in each case, motivated by an economic and political crisis, typically in the form of a perception of backwardness and failure...
...dividend ratios are twice those in the United States...
...If one company fails to invest and poaches skilled workers from others, it will thrive...
...Why has Hutton's book done so well...
...So by 1979, argues Hutton, "The shortcomings of Britain's constitutional arrangements derailed the attempt at establishing a Keynesian social democracy and divided the Labour Party...
...And as the United States today faces Newt Gingrich's version of virulent right-wing Toryism, the lessons of the damage done to Britain by the governments of Margaret Thatcher and John Major make salutary reading Finally, as Hutton makes clear, there is an important international dimension to Britain's economic problems that is shared by the United States and, indeed, by all major industrial countries...
...The Bretton Woods system was finally abandoned in 1973...
...The degree to which individual countries have responded to the financial pressures to deregulate, and the industrial pressures that follow close behind, depends upon their particular circumstances, institutions and history...
...The reinforcement of the short-term market culture by Margaret Thatcher's economic reforms has had a devastating effect on British industry...
...In the 1980s, the world's top two hundred companies spent three times as much on research and development as they did on dividends, but in Britain dividends were 50 percent higher than R&D investment...
...It is certainly true that if there are no unemployment benefits there will be virtually no unemployment...
...Those priorities are liquidity and high and secure dividends, reinforced by an active takeover market that disciplines managements who might wish to pursue other priorities—long-term investment and growth, for example...
...SPRING • 1996 • 121 Books break down when exposed to the rigors of the international capital market...
...It is difficult today to imagine the creation of such a framework in one country...
...Under the Bretton Woods system this risk was borne by the public sector...
...Even during the convulsions of the 1970s, investment by British manufacturing industry amounted to 2 percent of the value of output...
...He should be persuaded to find anAmerican co-author to produce a similarly incisive work entitled, perhaps, The State America's In...
...Japan's financial system is similarly committed to providing long-term support to industry, a commitment reflected in industry's long-term relationship with its labor force...
...These pressures not only force management to pledge ever greater proportions of profits to dividends, but also militate against a constructive partnership between management and labor...
...The same is true of an economy in which companies are committed to investing in the skills of their workers...
...The answer lies in the very notion of commitment...
...But if all fail to invest then all will suffer...
...Nearly five million people watched the program...
...experience is often cited in support of the policy of inequality...
...Even in the postwar heyday of Keynesian macroeconomic management, that bias was always present...
...In the United States this has led to the collapse of the Glass-Steagall rules,* which limited market pressures on medium term investment...
...So perhaps Hutton's emphasis on the peculiar character of the British state is overstated...
...It is not a happy prospect...
...All the majesty of Conservative hegemony in the unreformed state was deployed to increase the role of markets, disengage the state and fight for price stability...
...Controls on the growth of credit were eliminated, and monetary policy was now conducted predominantly through management of short-term interest rates...
...The problem with this argument is that the financial systems of major industrial economies are today far less autonomous than they have ever been before...
...Exchange controls were abolished...
...Inequality has increased sharply as the poor have become significantly poorer and the rich have enjoyed tax cuts and higher dividends...
...Since 1979, investment has been running at 0.6 percent of the value of output...
...The mutual commitment of finance and industry (there have been four contested takeovers in Germany since 1945) and the search for consensus in labor relations is mirrored in the German political system by the dispersion of power thoughout the federal state...
...First, it's a brilliant book (far better than mine), a remarkable synthesis of insights into contemporary British economics and politics written with stylish verve and not a little passion...
Vol. 43 • April 1996 • No. 2
