In 1994 Dan Corry wrote an article in Renewal on the shape of Labour's macroeconomic policy (Corry, 1994). After almost twenty years it is striking how relevant much of the article still feels. The original piece was entitled 'Living with capitalism' but today's Labour economic policy appears to have moved beyond simply living with capitalism and is setting out an active agenda of how to change and shape it.
Labour's macroeconomic policy has moved through several distinct stages over the past two decades and the very definition of what exactly constitutes a 'macroeconomic policy' has been contested. In the early 1990s traditional macroeconomic policy (defined as the use of fiscal and monetary policy to impact upon macroeconomic variables such as growth, inflation and unemployment) was downplayed in favour of an agenda of supply-side reforms. In the mid-1990s a brief flirtation occurred with a more rounded approach to 'political economy', as opposed to simple macroeconomics, focused on the concept of a stakeholder economy. But this eventually gave way to a macroeconomic framework of 'constrained discretion' for policy-makers (Bank of England independence and fiscal rules) and a renewed focus on straightforward supply-side reforms. The notion of fundamentally changing the UK's national business model was quietly dropped.
From the late 1990s until the crisis of 2008 macroeconomics seemed oddly absent from British politics, in as much as when it entered political discourse it was usually reduced to seemingly endless lists of achievements (the longest period of consecutive growth since the 1800s, etc.). The crisis of 2008 saw both the return of macroeconomic policy to political debate and the return of active demand-side policies to prevent a slide into depression. In the years since the last general election a new economic agenda has been fleshed out. Labour retains a strong macroeconomic focus but is now going well beyond what are thought of as the traditional levers of macroeconomic policy and into the realm of political economy. This new agenda does not take the shape of the British economy as a given but as something which active government can influence.
Dan Corry wrote his original article at a time when Labour's macroeconomic policy, and indeed its entire approach to questions of political economy, was in flux. Labour had failed to win the general election of 1992, to the great surprise of many, and had committed itself to supporting the European Exchange Rate Mechanism (ERM) which the UK had been forced from in September 1992, just months after that election. By 1994, though, the UK economy was on the road to recovery.
Corry identified four broad schools of macroeconomic thought. 'Supply Siders' essentially thought that no macro could have a major beneficial impact on the economy and the proper role of macro policy was simply to ensure stability in variables such the exchange rate, public spending and interest rates to minimise uncertainty. 'Active Macro' proponents agreed that stability was essential but saw a role for macro policy in achieving this by fine-tuning the business cycle. 'Strong Keynesians' went a step further and argued that active macro policies had significant and lasting impacts on the real economy. This often led to a focus on managing aggregate demand in the economy and a frustration with the seeming over-emphasis sometimes placed on the supply side of the economy. Finally, 'Supportive Keynesians' took a more nuanced view. They thought that active macro policy should be the servant of supply-side policies, but this meant more than simply ensuring stability. In particular, they often emphasised the need for a low exchange rate and low interest rates as preconditions for growth (Corry, 1994).
As Corry noted, by 1987 Labour was still arguing for a broadly Keynesian position, with the manifesto pledging [pounds sterling]3 billion of borrowing for capital investment to drive down unemployment. …