In an article in the Times on 19 October, Anatole Kaletsky, the Economics editor, made the striking pronouncement that Osborne has renounced old-style capitalism

Britain’s economy may be in desperate straits but, he writes, things are going rather well for the Tories.

Absence of a coherent Labour narrative

There are several reasons why dire economic conditions are not proving nearly as bad for the Government as might h
ave been expected. First and foremost, there has been the absence of a coherent Labour narrative about the past and future. As a result, the Tories have been free to blame all of the country’s ills on the Labour Party and Gordon Brown.

Lib Dems support for the cuts lacks conviction

Second, the Lib Dems have continued to fulfil their principal coalition role as human shields for David Cameron.. From the standpoint of Liberal Democrat voters, who broadly support public spending, the economic terms of the coalition agreement could only be justified by a recovery or a successful deficit reduction plan. If the deficit targets are missed and the economy slides into recession, the Lib Dems do not have a leg to stand on when they face the voters and will be wiped out.

Tories are in a win-win situation

Most Tories, on the other hand, believe in public spending reduction as an end in itself, almost regardless of what it may do to the economy or the fiscal outlook. The Tories, therefore, can be forgiven for quiet gloating as they watch the Lib Dems self-destruct, leaving dozens of seats in middle-class constituencies as easy pickings for Tory candidates in 2015.

Eurozone problems have provided an excuse for the cuts

Third, the deteriorating state of the world economy — and particularly the crisis in Europe — has provided a new excuse for the hardships in Britain. Even better, it has allowed Tory Eurosceptics to present themselves as the nation’s saviours, an accolade that Mr Brown could easily have claimed for himself had he been a more skilful politician.

Tories have quietly abandoned belief that spending cuts will stimulate growth

Finally, and most importantly in the long run, Tory policies have actually become more sensible as the economy has got worse. After the collapse of growth precipitated by last year’s Budget, the Treasury no longer talks much about the theory of “expansionary contraction” — the Depression Era, pre-Keynesian idea that rapidly reducing government deficits will inspire such confidence in the business community that public spending cuts will stimulate rather than retard growth. As this idea has turned out to be wishful thinking, the Treasury has quietly edged towards a more sensible strategy based on concepts that were until recently taboo.

Osborne now claims to be a monetary activist

Mr Osborne boasted in his speech on Monday of being a “monetary activist” — in other words of using monetary policy as the primary tool for managing growth and employment and not just for inflation control. For Tory devotees of the monetary gospel according to Milton Friedman and Nigel Lawson, this was the ultimate apostasy.

Osborne is now an interventionist

More remarkably still, Mr Osborne went on to acknowledge that industrial interventionism and fine-tuning would be an indispensable component of policy in the post-Lehman world. “I’ve never believed the Government should just stand on the sidelines, that it has no role in fostering enterprise and creating jobs. I will intervene when the market doesn’t work, and set it free when it does.”

Osborne has yet to find a coherent narrative

The main element still missing from this increasingly pragmatic approach has been a coherent narrative that would tie together all the disparate elements — aggressive use of monetary policy to overcome unemployment, intervention in industry, channelling credit directly into small businesses, directing investment into green energy and allowing deficits to overshoot in the short term without losing sight of the long-term strategic goals.

But he seems to have a vision of mixed-economy capitalism

Even in this respect, however, the Tories seem to be making more progress than either the Lib Dems or Labour in articulating a new vision of mixed-economy capitalism after the financial crisis. Mr Osborne’s speech represented a genuine attempt to move beyond both the “market is always right” anti-government fundamentalism of the Thatcher period and the “Whitehall knows best” philosophy that dominated Britain in the Keynesian 1960s and 1970s. But Mr Osborne’s speech suggested a government genuinely interested in creating a new kind of complementary, rather than adversarial, relationship between politics and economics.

This is a big change.

As recently as the March Budget, the Tories were still proclaiming that the most important economic role of the Government was to pay back its debts as fast as possible and keep bureaucrats off the back of wealth-creating entrepreneurs. They were still insisting that market forces alone would solve the problems of energy security and global warming, that government investment in infrastructure was inherently wasteful and that Keynesian economics was all bunk.

 

Obsborne now says State should play a role in the economy

Now the Chancellor boasts about industrial interventionism and acknowledges the key insights of Keynesian economics — that a modern capitalist economy requires active demand management by government and activist central banking if full employment is to be achieved. Whether demand management is conducted through monetary policy or fiscal deficits has always been a secondary issue, as is the precise form that industrial interventionism may take.

What really matters is that the State should be willing to play an appropriate role in the economy, a role that is neither too large nor too small. This is, of course, a difficult balance and no government will ever get it completely right. But the Tories have at least begun to try.

Do you think that the cuts are justified?

Do you think that the poor are paying for the greed of the rich?

Do you think that the state should play a role in the economy?