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The hands-on economy

The Coalition began to rethink Thatcherite orthodoxies on industrial policy. Theresa May’s government has a chance to go much further—which it must seize

The Brexit majority comprised an alliance of two groups. First, there were those who felt they had lost out from globalisation and blamed migration for stagnant wages. Then there were the older generation enjoying greater financial security, for whom the performance of the economy just did not matter. It was an alliance of the excluded and the insulated.

I personally believe it would have been far better if we had voted to stay in the European Union, and—with what happens next still far from clear—hope that the coming negotiations produce a result that leaves us positively engaged with Europe. But, just possibly, we can use the shock of the aftermath of the Brexit vote to tackle the deep problems that it revealed.

The troubling truth, revealed by the Brexit vote is that even when the British economy did grow, and even where productivity did improve, very little of that benefit has been feeding through into median wages—many people have simply ceased to gain from growth. Instead, it was all being captured by the most affluent who often also tend to be older. In particular, economic gains were captured by pensioners as extra resources were put into plugging deficits in pension schemes from which young people were excluded.

More recently, this problem has been exacerbated by our terrible productivity performance—making it much harder to boost living standards for anyone. Britain, then, has a pressing need to get better at generating more wealth and better too at giving more people a stake in it, especially the younger generation. Both halves of that are ambitious, and Theresa May’s “One Nation” agenda promises to do something about both. But how? The formidable challenges here are easier to define than to answer. The prime minister has suggested that a bold “industrial strategy” can help her deliver, which is a good place to start, but what exactly is it?

For a generation, the theory that Whitehall purported to follow towards industry could be traced back to Nigel Lawson’s seminal Mais lecture of 1984, delivered almost exactly a year after his appointment as Chancellor of the Exchequer under Margaret Thatcher. He was very conscious of the need to respond to the economic failures of the UK’s recent past. He argued that over the course of the 1960s and 70s, detailed microeconomic interventions in labour and other markets, with price and income policies being the obvious example, had been used to control inflation; meanwhile the big macro-economic tools of fiscal and monetary policy were used to stimulate growth. This allocation of instruments needed to be reversed. Macro-policy should now be devoted to controlling inflation, which could free micro-policy to raise the growth rate. But how could it effectively do so?

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About Prospect Magazine

In Prospect’s October issue: Nobel-winning economist Joseph Stiglitz tells our new Editor Tom Clark why globalisation has made him more radical. Rachel Holmes asks whether more women leaders really help women. Five hundred years on, what does Thomas More’s “Utopia” tells us about political idealism. And Tristram Hunt on why Labour needs another Clement Attlee. Also in this issue: David Runciman on why more members isn’t always a good thing for a political party. Will Self on why we’re all turning into robots. Your handy graphic guide to Brexit. Plus: David Willetts on what Theresa May’s industrial strategy should look like. And Kenneth S Rogoff argues we should abolish cash.