CHAPTER FOUR THATCHER’S GREATEST ACHIEVEMENT: THE FINANCIALISATION OF THE STATE
The Establishment decided Thatcher’s ideas were safer with a strong Blair government than with a weak Major government. — Tony Benn.
On 26 June 2002, Gordon Brown delivered a speech to City dignitaries assembled at Mansion House. “Mr Lord Mayor, Mr Governor, my Lords, Aldermen, Mr Recorder, Sheriffs”, he pronounced, “let me at the outset pay tribute to the contribution you and your companies make to the prosperity of Britain”.1 These might sound like strange remarks from the party that had, just over two decades previously, pledged to nationalise the banking system. But in many ways, its close relationship to the City was one of the defining characteristics of New Labour, which consistently deregulated the finance sector. Blair attempted to woo ordinarily hostile investors and executives in the City through his famous “prawn cocktail offensive”. Financiers have always been, and would continue to be, natural supporters of the Conservative Party. But Blair and Brown made significant inroads with the sector during their tenure. The consequences of this offensive were, as later noted by the FSA, a total failure to properly regulate financial institutions, which ultimately contributed to the financial crisis.2
Given the power that the City of London Corporation holds within British politics, it is perhaps unsurprising that Blair felt the need to get the institution on side. Some have referred to the City as a state within a state: a shady, arcane institution designed to corrupt British politics and promote the interest of reclusive financiers.3 The City is the only space in the UK over which Parliament has no authority, and its representative in the House of Commons is the only unelected member allowed to enter the chamber.4 Its political architecture continues to be based on the Medieval guild system, under which businesses have votes, with larger businesses having greater weight than smaller ones. In 2011, the Bureau of Investigative Journalism revealed that the City had spent more than £92m lobbying politicians and regulators in the wake of the financial crisis to limit new regulation.5 The Bureau was able to link these lobbying efforts with a series of legislative changes, including reductions in bank taxation and regulation.
But whilst the relationship between the political parties and the City may occasionally veer into outright corruption, the influence of the City on British politics is less of an aberration than a reflection of the UK’s political economy.6 In other words, it’s not so much that a small set of financial interests centred in the City of London have “captured” policymaking (though they undoubtedly have); it’s more that the individuals making policy conflate the interests of the City with those of the British state as a whole. Politicians like Blair and Brown weren’t simply vying for access to the City’s lobbying budget, they genuinely believed that deregulating financial markets would help to boost economic growth and tax revenues that could be spent on making society more equal. By taxing the revenues of the big banks, and the salaries of their employees, the British state would be able to provide public services and welfare for those in parts of the country where traditional industries had been destroyed. Globalisation may have harmed British manufacturing, but it could help to provide support for those “left behind” by bolstering the City as a global financial centre.
Whilst finance has always played a central role in British politics, in the 1980s and 1990s the City’s dominance was taken to a whole new level. This was initially catalysed by Thatcher’s policies — from bank deregulation, to right-to-buy, to the Big Bang. But Blair and Brown took this process one step further. They developed a complex and arcane regulatory architecture for the City that was easy for insiders to manipulate. These organisations were given a mandate to implement “light touch” regulation on the finance sector, to encourage “innovation” and promote investment.7 Meanwhile, billions of pounds were pumped into the UK’s real estate market, inflating a bubble that would eventually burst in the biggest financial crisis since 1929. The revenues from this model were then used to expand the provision of welfare and public services for those left out of the boom, under the auspices of the private sector, which was given responsibility for delivering public services. In other words, Blair maintained Thatcherite political economy, but sought to make the grossly stratified society that resulted slightly less unfair. However, in expanding the size of the state without challenging the dominance of finance, Blair managed to do something that no other government had achieved: financialise the state itself.
Thatcher’s Greatest Achievement
By the 1990s, high and rising levels of inequality were a defining feature of the British economy. The Conservatives had attempted to naturalise this inequality by claiming that it was the result of market forces in a globalised world.8 Over the long term, they claimed, the efficiency gains from trade would make everyone better off. Of course, the kind of globalisation taking place in the 1990s was not primarily based on trade. Instead, the 1980s marked the start of the era of financial globalisation, which was only ever meant to serve the interests of the 1%.9 Financiers had been pushing behind the scenes for the removal of restrictions on capital mobility for decades, and when their wish was finally granted, it precipitated a global financial boom. With the political foundations of the new world order firmly hidden from sight politicians were free to claim that rising inequality was a natural state of affairs. A focus on redistribution replaced the Labour Party’s previous “obsession” with ownership — the gains from growth didn’t have to be equally distributed if the state could tax the wealthy and redistribute their income. In other words, rather than attempting to challenge a fundamentally unfair and unstable system, Blair accepted finance-led growth and aimed to make it slightly less unjust.10
And in many ways, he succeeded. As John Hills argues in his survey of inequality in Britain during the Blair years, New Labour’s policies did marginally reduce the large inequities that had resulted from the advent of finance-led growth.11 On average, in the middle of the distribution, income differences narrowed. Child and pensioner poverty fell and there were notable improvements in geographical inequality in some areas as Blair attempted to keep voters in traditional Labour seats on side. His hallmark focus on education meant that there was a marked reduction in attainment gaps between the wealthiest and the poorest children.
But Hills also points out that, despite the then widespread view that New Labour reduced inequality throughout society, the picture is actually much more complex. Incomes for the top 1% grew extremely quickly — far outpacing income growth for the rest of the population. Meanwhile, the incomes of the very poorest in society grew more slowly than the average, for reasons highlighted in the previous two chapters. The combination of these two trends meant that the incomes of the richest and the poorest in society diverged substantially over Blair’s tenure. Wealth inequality also continued to grow — unsurprising given that rising asset prices are a defining feature of finance-led growth. Hills’ assessment is that New Labour managed to make slight improvements to the highly unequal income distribution handed to them by Thatcher, but that the problem of inequality was much more deeply rooted than Blair and others had assumed, and “less amenable to a one-off fix”.
In fact, rising inequality is an inherent part of finance-led growth. The growth of shareholder value ideology during the 1980s meant that companies were more focused on increasing their profits and distributing the returns to shareholders than paying and retaining their workforce. The rapid growth of the finance sector and related “professional services” industries in the City also meant rising salaries for those at the top. But perhaps the greatest driver of inequality under New Labour was rising asset prices, driven by the billions of pounds worth of new money being pumped into property and stock markets every year.
Blair and Brown had to be seen to be doing something about these issues. For a start, a commitment to making British society fairer was the one thing that differentiated Labour from the Conservatives. But more generally, voters were starting to express real concern with rising inequality. As a result, Blair and Brown had to undertake a balancing act between alleviating the most obvious signs of inequality without undermining the incentives that made Thatcherism work.12
Out of this quagmire emerged a threefold strategy. Firstly, New Labour would adopt Thatcher’s language about welfare — the responsibility for unemployment would be placed firmly on the shoulders of the unemployed.13 The only difference was that workers’ laziness and irresponsibility would be met with a “compassionate” response from the state. The emphasis would be placed on skills acquisition — hence Blair’s famous focus on education as the route out of poverty. Welfare-to-work programmes were introduced, and tax credits were brought in to subsidise low pay and “encourage” people back to work. None of these measures, of course, tackled the structural causes of low pay or unemployment, but served instead to consolidate the division between the deserving and undeserving poor that underlaid the Thatcherite ideology. Those who took advantage of these welfare programmes would be seen as deserving, whilst those who did not would be punished.
Secondly, the state would learn to behave more like a private organisation itself, based on the emerging ideology of “new public management” (NPM).14 NPM advocates argued that the best way to run an economy was to subject all areas of economic activity — including state spending — to the discipline of the market. If markets didn’t naturally exist, then they should be created. After all, the lazy, corrupt, and inefficient bureaucrats who staffed the public sector had to be incentivised to behave in the best interests of the taxpayer. Introducing private-sector management techniques would promote public sector “efficiency” and improve “customer service”.15 Middle and upper management were empowered to introduce and police a set of rigid targets to hold civil servants and public sector workers to account. Mirroring the process that had taken place in the private sector after the famous “it’s not what you pay them but how” paper, senior civil servants started to be remunerated based on performance.
On the one hand, new public management ideology forced the civil service to operate much more like a private business.16 New policies were ruthlessly subjected to techniques like cost–benefit analysis to determine whether or not they would be “profitable” for the state to undertake. Such a process is, of course, meaningless, because states are not businesses. The vast majority of a state’s citizens do not behave like “customers” that will pick another, cheaper state if they don’t like the quality of service they receive. But treating the state like a business ended up benefitting those that do — the international capitalist class who can threaten to move if they are taxed too much. On the other hand, new public management also had what might be considered an unintended consequence — an increase in public sector bureaucracy. Middle management in the sector has grown substantially, and employees are continuously assessed against useless metrics that serve to create more work for all involved.
The third, and perhaps the most important, element of New Labour’s strategy for tax and spend would be to encourage the private sector to undertake public spending on the state’s behalf. The logic behind the outsourcing agenda and private financing initiatives was a natural extension of new public management thinking — what better way to introduce market discipline into the public sector than to have private companies undertake spending for the state themselves? This would be justified on the basis of “efficiency”, but its true purpose would be to allow private corporations to profit from the necessary redistribution created by the finance-led growth model. New Labour’s promise to the electorate centred on alleviating inequality without killing the goose that laid the golden eggs — finance. The genius of the privatisation agenda was using this expansion in state spending to make the goose even fatter.
Proposals for a tunnel linking the UK and France date back to the nineteenth century.17 In 1802 the French engineer Albert Mathieu-Favier put together a blueprint to dig a tunnel under the English Channel, illuminated by oil lamps to light a path for horse-drawn carriages. A desire to seal off the cliffs of Dover from any European invasion prevented the project from being taken up until 1980, when Thatcher’s newly elected Conservative government agreed to work with the socialist French President François Mitterrand to take forward the proposition. Thatcher had one condition: the project would be financed privately. This was no small ask. At the time, the £5bn Channel Tunnel was the largest infrastructure project ever proposed. Whilst state-owned and well-regulated private French investors eagerly stepped forward to provide their half of the funding, the City was less keen on the idea. This was something of an embarrassment for a British government intent on proving that it was host to the most powerful financial centre on the planet, and it took interventions by the Bank of England and the government to finally ensure that adequate capital was raised.
But this wasn’t enough to please the banks, which were worried about being exposed to what looked like a hare-brained politically-motivated white elephant. They demanded that a new body, which became known as Eurotunnel, be created to place some distance between the banks and the construction firms. At this point, the project was becoming incredibly expensive and complicated. Channel Tunnel Group in the UK and France Marche group in France would invest in Eurotunnel, which would be floated as a public company, before itself financing Trans-Marche Link, which would undertake the actual construction. Eurotunnel would, in turn, gain the concession to run services that ran through the tunnel in coordination with SNCF and British Rail and would recoup its costs over the long-term through “usage charges” paid to it by the train operators.
Almost as soon as construction began, costs began to mount. The engineering problems were almost enough to derail the project on their own, but the real trouble lay with figuring out who amongst the plethora of different actors involved would pick up the extra costs. Adding to the trouble, high interest rates meant that the financing costs of the project were 140% higher than expected — a year-long delay cost an extra £700m in interest charges. By 1995, Eurotunnel was up and running, a year late, and 80% over budget. The company lost £900m in its first year of operation. Three years later, it had undergone three state rescues. In 2003, its interest payments of £320m were almost double its operating profits of £170m.
And yet, when the government decided that it needed to upgrade the rail network that went through the tunnel, it concluded that the project should, once again, be privately financed. HS1 — otherwise known as the Channel Tunnel Rail Link — also turned out to be a disaster. Yet again, a consortium was created to raise the finance needed for the project. Yet again, overoptimistic assumptions about future revenues meant that it was unable to find the funding it needed. And yet again, the government stepped in to bail out the private consortium and save the project. The Public Accounts Committee found that the project has left taxpayers “saddled with £4.8bn worth of debt”.18
As private financing has been extended into ever more areas of public spending, public investment has collapsed, falling to just 2.6% of GDP in 2018 — well below the OECD average of 3.2%.19 A recent report on private financing initiatives from the National Audit Office revealed that most of these projects have been entirely unsuitable for private financing, and that some projects are costing the public 40% more than would have been the case had public money been used directly.20 Public borrowing is always, other than in extreme cases in which states are deemed uncreditworthy, cheaper than private borrowing because it is incredibly difficult for states to default. Even when they do, it is either because they have borrowed in a foreign currency, like Argentina today, or because they don’t have control over their monetary policy, like Greece.
So why did successive governments continue to press ahead with PFI? Supporters argued that PFI transferred risk from the taxpayer onto the private sector.21 If the contractors delivered on time and on budget they would get paid — if they didn’t, they would lose out and their shareholders would suffer. This was supposed to introduce market discipline into the provision of public contracts. Again, the ideological justification fell far short of the reality. The private sector prefers to operate in the absence of competition. So, in exchange for entertaining the government’s new publicity stunt, the companies involved made sure that the contracts were written in such a way as to ensure that, whatever happened, they would get their money. This meant that private companies were undertaking spending on the state’s behalf without incurring any risk whatsoever.
The second justification was even more spurious. Having inherited the idea that the state functioned like a household — and that the role of the prime minister was similar to that of a good housewife — New Labour had an incentive to ensure that public spending did not reach what looked like unsustainable levels.22 This analogy was always ridiculous, especially when it comes to investment spending. If the government borrows to invest in infrastructure projects that expand the productive potential of the economy, GDP will rise, tax revenues will follow and, over the long term, the project will pay for itself. Whilst the New Labour government undoubtedly knew this, they also knew that the returns wouldn’t be recouped for many years, whilst the impact on government debt would be immediately obvious. New Labour had to avoid looking like it was going back to the bad old days of socialism, and this is where PFI came in. Private financing allowed New Labour to shift the immediate cost of borrowing off the government’s books and onto those of the private sector, even though the cost would ultimately fall on the state itself.
Private financing is another avenue through which the British state has attempted to implement a regime of privatised Keynesianism.23 Combined with the increases in household debt described in the last chapter, PFI and other outsourcing initiatives would allow for the further displacement of public spending with private debt. Except under this scheme, the private debt would be held by wealthy shareholders rather than households, and it would be backed up by an implicit government guarantee. Private corporations would be able to borrow on financial markets without taking any risk, as the state would always be there to step in and pay back the debt. This meant implementing the logic of Keynesianism — that states should borrow to invest to mute the ups and downs of the business cycle — whilst skimming some cash off the top for the private sector. In other words, state-sponsored rentierism.
State-guaranteed private borrowing creates the problem of moral hazard, a situation in which economic actors are shielded from the negative consequences of their actions. Before 2007, the banks knew that if they ran into trouble the government would always be there to bail them out — they could take huge risks today, without having to face the consequences tomorrow. This problem of moral hazard is what underlay the collapse of PFI giant Carillion.24 The firm was accepting government contracts at very low prices — less than the amount they needed to deliver the work — and eventually found itself unable to deliver its contracts and pay its shareholders. Rather than admitting it was in trouble, the company increased the amount it was paying out to shareholders and started to take on new government contracts to cover the costs of the old ones — effectively throwing good money after bad. They did so betting, no doubt, that the state would step in to rescue the company were it to encounter financial difficulties. But when Carillion collapsed in 2017, the government did not step in to help — perhaps because of the public outrage at the incredible irresponsibility of the firm.
When the auditors came in to manage Carillion’s bankruptcy, they found that the company had just £29m in cash and owed £1.2bn to the banks, meaning that it didn’t even have enough money to pass through administration before entering liquidation. Carillion had become a giant, state-sponsored Ponzi scheme, siphoning off money from the taxpayer and channelling it into the pockets of wealthy shareholders. Whilst many of those shareholders who did not sell on the first signs of trouble have now lost out, the real losers have been the contractors and workers hired by Carillion, many of whom have found themselves out of pocket. Today, billions of pounds worth of taxpayers’ money is being funnelled into inefficient, financialised outsourcing giants like Carillion, only to enrich executives and shareholders, whilst leaving taxpayers to foot the bill.
The demise of Carillion epitomised the failure of New Labour’s experiments with private financing. But PFI wasn’t the only route through which public spending has become financialised — the rise of outsourcing more broadly was also to blame. Government spending can be divided into investment spending, which requires a big outlay up front to construct a potentially revenue-generating asset, and current spending, which pays for day-to-day public services provision. Upgrading the UK’s rail network might, for example, require billions of pounds to be spent today for improvements that will be felt tomorrow, whilst paying the salaries of NHS staff requires a continuous payment every year. PFI was meant to keep investment spending off the government’s books by requiring a private company to raise a lot of money up front, which the government could repay over a period of decades, with interest. But New Labour also wanted to bring the private sector into the delivery of day-to-day spending. So, it turned to outsourcing — paying a private company directly for the delivery of a public service. Many of the same firms that were brought in to deliver big infrastructure projects were also used to deliver public services.
Outsourcing has an ambiguous record.25 There are examples of relative success, where public procurement has been used wisely, as well as examples of dramatic failures, with low-quality services being delivered by unscrupulous contractors at a huge cost to the taxpayer. There are arguments for outsourcing government projects when procurement is done well and includes, for example, commitments to use companies with unionised workforces and with high environmental standards. But today, outsourcing is mostly dominated by a few big firms delivering low-quality services whilst skimming money off the top for shareholders and executives. G4S managed the security for the London Olympic Games so badly that the government was forced to bring in the army to support them.26 Serco operates some of the UK’s most brutal detention centres and has even been accused of using inmates as cheap labour.27 Capita is known for gouging many of the UK’s local authorities by delivering low-quality services at eye-watering prices.28 These outsourcing oligopolies have their tentacles spread all over the spending of the British state, from schools and hospitals, to prisons and detention centres.
The steady privatisation of public spending around the world was recently identified by the UN as the source of pervasive human rights abuses.29 The UN’s expert panel claimed that “[g]overnments trade short-term deficits for windfall profits and push financial liabilities on future generations”. Neoliberal governments have relied on privatised public spending in order to alleviate some of the inequality created by the finance-led growth regime, and to mute the ups and downs of the business cycle. They have, however, shied away from returning to the old Keynesian model of promoting full employment, given the implications this would have for power relations between workers and owners. Instead, they have sought to create a model of privatised Keynesianism, which allows executives and shareholders to profit from public spending through monopolistic corporations that pay executives huge sums whilst hiring workers on poorly-paid, precarious and insecure contracts. In other words, privatisation attempts to deal with some of the many contradictions of finance-led growth, whilst maintaining the power relations upon which it rests.
But private financing and outsourcing did not just allow private investors to extract large sums of money from the taxpayer. These innovations were also designed to insulate the private sector from democratic accountability.30 When the public sector provides a poor service, citizens can lobby, campaign, and vote against the politicians in charge. The more democratic and decentralised the state, the more this pressure is felt. But if a private organisation is providing a poor-quality service, to whom does the service user complain? She could try to complain to the organisation itself, but why would senior executives listen to a disgruntled service user when their profits are guaranteed by the state? She might try to influence politicians, but they would just tell her to take it up with the company. Without a real market, in which consumers can respond to poor outcomes by changing providers, private provision of public services insulates the providers from democratic accountability.
Today, our public services provide lower-quality services to a smaller number of people at a higher cost, and at much lower levels of efficiency. They are bureaucratic monoliths, managed according to the profit-maximising logic of the free market, without the countervailing competitive pressure that would require them to raise standards. The deterioration in the quality of public services has often been part of a deliberate strategy to encourage middle earners to take up private forms of social insurance, meaning that they are immune from the ongoing deterioration of the public sphere. The state is consigned to offering low-quality services to the poor, who are rendered voiceless in the face of the giant bureaucracies in control of many of our public services.
How did neoliberal states get away with such obvious disregard for such a large portion of their citizens? They did what they always do: they claimed that they didn’t have a choice.
In 1983, Edward Yardeni, an economist at a major US brokerage house, coined the term “bond vigilantes”.31 These vigilantes, Yardeni claimed, would “watch over” domestic governments’ policies to determine “whether they were good or bad for bond investors”. In other words, in the era of capital mobility, it was up to states to prove to investors that their country was worth investing in. If states were found wanting, the vigilantes would flee, pockets stuffed full of cash. Yardeni’s bond vigilantes are a personification of the logic of market discipline. States that fail to safeguard the value of foreign investors’ capital would face capital flight as investors sold these states’ assets, including their governments’ bonds.
This capital flight would send the value of the country’s currency tumbling, which in import-dependent countries would lead to a rise in inflation and increase the cost of servicing foreign debt. For those countries with fixed exchange rates, it would necessitate cuts to public spending or a humiliating devaluation. The bond vigilantes could also more directly impact a government’s credibility by selling government debt. The higher the demand for a particular states’ government bonds, the lower the yield — the greater investors’ confidence in a country’s ability to pay its debts, the lower that country’s borrowing costs. If investors lost confidence, disaster could ensue: a mass sell-off of a country’s debt could trigger a sharp rise in the cost of debt servicing, potentially catalysing a solvency crisis.
Prior to the liberalisation of international capital markets, most developed countries didn’t have to worry too much about international financial markets’ views on their domestic policy decisions. Investors were constrained in their ability to move their money around the world, for the very reason that large volumes of capital flowing into or out of a country would have made it all but impossible for governments to maintain the exchange rate pegs at the heart of Bretton Woods. But with the removal of restrictions on capital mobility and the rise of the institutional investor, this all changed. Suddenly, a decision on the part of a few big investors to divest from a particular country could spark a crisis. This gave the vigilantes a great deal of power. International investors found themselves able to undermine — and sometimes even bring down — democratically-elected governments that they judged to be unsound economic managers.
Perhaps the best example of this kind of market discipline is the capital flight that befell French President Mitterrand’s government in 1983.32 Mitterrand had been elected in 1981 on a socialist platform that was essentially an extension of the post-war consensus. His 110 propositions for France included commitments to revive growth through a large Keynesian programme of investment, to nationalise key industries, to increase the country’s wealth taxes and to democratise the institutions of the European Union. This, Mitterrand hoped, would lay the groundwork for the “French road to socialism”. He could not have picked a more inopportune moment to advance such an agenda. International finance had been emboldened by the death of Bretton Woods and the birth of neoliberalism in the US and the UK — investors were not about to allow one of the world’s largest economies to fall to the scourge of a renewed socialism.
France — like much of the rest of the global North at the time — was also in the midst of its own economic crisis. International competition was eroding corporate profitability under French social democracy, and, when the oil price spike hit, rising inflation and unemployment brought the economy grinding to a halt. Just as it is today, the French state’s ability to use monetary policy to counteract these pressures was limited due to the country’s participation in the European Monetary System (EMS), which required it to peg its currency to the Deutsche Mark. France was also then enduring the effects of the Volker shock — the interest rate hike pursued by the US Federal Reserve that saw billions of dollars’ worth of capital flow into the US — which placed a strain on economies all over the world. Mitterrand’s nationalisations of French banks were not exactly encouraging international investors to keep their money in the country, and France was also running a trade deficit. These factors all contributed to a mass exodus out of French assets — from bank deposits, to property, to government bonds — and France lost around $5bn in capital flight between February and May 1981. Mitterrand faced a choice between implementing capital controls or giving in to the demands of international finance by implementing a harsh austerity agenda, reneging on his promises of a French road to socialism. In the end, he chose the latter.
This story seems to suggest that, by the 1980s, investors had become powerful enough to force democratically-elected governments to promote their interests — or, as the latter would argue, to abide by the logic of the market. This is what explains the rise of neoliberalism: states had no choice other than to implement “investor-friendly” policies, like reducing taxes, deregulating financial markets, and making credible commitments to respect private property rights and to keep inflation low. But the story is more nuanced. The increasing power of the bond vigilantes benefitted neoliberal states just as much as investors — Thatcher, Reagan, and others who sought to implement their radical economic agenda in the face of popular opposition could credibly claim that there was no alternative to cutting public spending, shrinking the state and deregulating markets. The idea that governments must compete for international investment has now become a central plank of economic discourse, reproduced by the financial and popular press.
The rise of finance came to shape the way the modern state functions, just as it has shaped the functioning of the modern corporation or household. But just as it is unwise to view the financialisation of the corporation as a battle between “good” capitalists and parasitic financial elites, it would be mistaken to view the financialisation of the state as something driven from the outside. Neoliberal politicians were not terrified into submission by the bond vigilantes, they worked with these investors to rebuild the global economy in the interests of global capital, just as they had rebuilt their domestic economies along the same lines.33 The bond vigilantes provided cover. States would deregulate financial markets, making investors more powerful, thereby allowing governments to invoke the logic of market competition to justify their imposition of neoliberal policies on an unwilling populace. By the 1980s, the bond vigilantes had made it possible for politicians like Thatcher and Reagan to claim that there was no alternative to neoliberalism — any attempt at socialist experimentation would be severely punished by the markets, just look at Mitterrand’s France.
The bond vigilantes supported a project that aimed to place fiscal policy outside of the realm of political debate. In the era of capital mobility, states would have no choice other than to do as the markets wished. But whilst it contained an element of truth, states that had control over their own monetary policy still retained much more power than this discourse suggests. The bond vigilantes knew that much more had to be done to place economics outside of the realm of politics. Developments in academic economics would provide the perfect justification.
In the 1970s, neoclassical economists took Hickes’ version of Keynesianism and incorporated it into the theoretical framework established by classical economics to create what economist Joan Robinson described as “bastard Keynesianism”.34 This was an innovation, they claimed, permitted by advancements in mathematics that allowed economists to undertake complex modelling exercises that would reveal the fundamental “laws” of economic activity, based on simplifying assumptions about human behaviour. Human beings were perfectly rational, utility-maximising computational machines who interacted with one another in orderly, predictable ways producing clear, linear patterns at the macroeconomic level. The best neoclassical economists will tell you that these assumptions are not meant to accurately reflect reality, and that their outcomes cannot easily be translated into policy solutions. The worst will tell you that the assumptions don’t matter if the results are right, and that it isn’t their business what policymakers do with the findings of academics. As is so often the case in the economics profession, the worst won out, and the findings of neoclassical economics seeped into political discourse. The end result was the dissemination of the view that economics could be reduced to a set of neutral economic facts, which could be innocently handed over to policymakers, who would then be able to implement the “optimal” set of policies to maximise growth.
From this point on, the economic success of a particular government would be judged objectively based on technocratic measures such as GDP growth, inflation, and unemployment. These metrics came to dominate the discourse of economics — particularly the almighty metric of GDP. The combination of technocratic neoclassical economics discourse and the hegemony of GDP were the nails in the coffin of political contestation over the economy — from this point forward, economics would be a self-contained, academic subject best left to the “experts”. Of course, what the rise of the expert really meant was the capture of policy-making by the powerful.35 In the absence of any accountability to voters, decisions about macroeconomic policy could be based on the returns such policies would provide to the wealthy.
Perhaps the best example of how rule-by-experts facilitates policy capture has been the move towards central bank independence. Neoclassical economists argued that politicians exhibited an “inflationary bias”, which made them poor economic managers. Failing to consider the long-term implications of their actions, politicians would reduce interest rates and increase spending today in order to boost growth and secure re-election. Ultimately, however, this would damage the economy in the long-run by raising inflation, which would erode consumers’ incomes. The solution was clear: this powerful tool had to be placed on the top shelf, away from the prying hands of the political toddlers focused only on their own electoral prospects.
Some argued that central bank independence was supposed to bring about high interest rates, which would damage industrial capital and promote the interests of finance capital — but under the conditions of financialisation, the situation is much more nuanced. Histori- cally, there has been an assumed dichotomy between the interests of finance capital and those of industrial capital.36 The former has been assumed to prefer high interest rates to maximise the returns on lending, whilst the latter are assumed to prefer low interest rates to allow them to borrow cheaply. But as firms have become financialised, the interests of these two groups have merged.37 Amongst businesses committed to shareholder value, high profits mean high returns for investors, eroding investors’ commitment to high interest rates. Bankers themselves also tend to rely less on high interest rates to make their profits in modern financial systems. As interest rates fell, banks came to rely on the fees derived from processes like securitisation rather than interest rates themselves.
Equally, however, it is not in the interests of asset holders for interest rates to be kept low for too long as high interest rates are also a guarantee against inflation. Inflation can harm long-term asset-holders because it erodes the value of their assets. If inflation is running at 5% per year and my investments are delivering a nominal return of 4%, my returns are negative in real terms. This might have made financiers conflicted about interest rates — they want high profits, but they don’t want inflation. The triumph of Thatcherism was to ensure that British capitalists could have their cake and eat it. Profits soared with deregulation, privatisation, and tax reductions, but little of this accrued to workers in the form of rising wages. Thatcher’s attack on the unions placed them in a much weaker position, preventing from demanding pay increases in line with inflation. This meant that any increase in costs would be absorbed by the workforce in the form of shrinking pay packets.
The guarantee that inflation would be kept relatively low meant that monetary policy could be directed towards inflating asset prices.38 With central bank policy effectively captured by the finance sector, interest rates remained low throughout the 1990s, supporting an expansion in lending and an increase in asset prices. Most commentators agree that low interest rates were a central cause of the dot-com bubble that emerged towards the end of the 1990s, culminating in the crash in the early Noughties. Under financialisation, independent central banks have been able to provide the two macroeconomic conditions that benefitted investors most: low consumer price inflation, and high asset price inflation. Absent any democratic accountability, they could not be blamed for the financial instability this would inevitably cause. In fact, politicians encouraged the financial boom of the 1990s. Regulation was eased and “light touch” organisations like the FSA were set up to supervise the finance sector, often staffed by ex-financiers.39
In many ways, by the 1990s, global capital needed New Labour more than it needed another Thatcher. New Labour succeeded in hiding the stark class divisions that marked British society by the late 1990s, whereas Thatcher’s Conservative Party had made them more obvious. Blair showed himself capable of naturalising the finance-led growth model in a way that Thatcher never could. Class, we were told, no longer mattered. A rising tide would lift all boats. All that was needed was for educated policymakers to pick the “right” policies to maximise economic growth. Whilst the British state continued to pursue economic policies that were in the interests of elites, the battle lines between the elite and everyone else were no longer visible — they had been blurred by rising home ownership and consumer debt. Some argued that the battle lines had ceased to exist. The end stage of capitalism was to produce a classless utopia. It would take the largest financial crisis since 1929 for the class foundations of finance-led growth to be revealed once again.