Only a new wave of socialism can end the great squeeze on us all We must break with the free market consensus established by Thatcher


Sunday 8 September 2013

Britain is now suffering the longest fall in living standards since Queen Victoria sat on the throne. If this Great Squeeze isn’t the key issue of the day, the entire political system might as well dissolve itself on grounds of irrelevance and moral bankruptcy. It would be easy – but wrong – to lay all the blame at the feet of the wicked Tories, however wicked they may be. The truth is the Great Squeeze began six years before David Cameron and Nick Clegg hooked up in the Rose Garden, and four years before Lehman Brothers toppled. From 2004 onwards, the incomes of the bottom half began to flatline; for the bottom third, they actually started to drop.
But the Great Squeeze has been given renewed intensity and prolonged duration by the Tories’ hijacking of the financial crisis. As the Resolution Foundation has uncovered, one in five workers now toils for below the living wage: since 2009, the numbers have rocketed from 3.4 million to 4.8 million. On the eve of Cameron’s assumption of power, 18 per cent of women worked for less than the living wage; it’s now a quarter. Nearly four out of five jobs created under this government pay less than £7.95 an hour. These jobs are often precarious, too: there is now a million-strong army of zero-hour contract workers, a return to a supposedly bygone era when dockers would trek to the yard, sticking their hands in the air in the hope they might get some work that day. Real wages are, on average, £1,500 a year lower than when the Tory-Lib Dem cabal bedded into power, and inflation is higher for essential items, punishing the poorest most. More than a million children are set to be plunged into poverty by government policies, according to the Child Poverty Action Group. And for the first time since Berlin fell to the Allies, the next generation faces being poorer than their parents.

The symptoms of the Great Squeeze are everywhere. We can only speculate as to how Wonga executives chose to celebrate their 36 per cent surge in profit. Vultures have rich pickings in Cameron’s Britain: a million families a month now depend on legal loan sharks – allowed to charge extortionate rates – often to pay for food, heating, mortgages and rents. Half a million people depend on food banks, while the Energy Bill Revolution campaign earlier this year found nearly a quarter of families having to choose between buying food and heating their homes. Here’s to the seventh richest country in the world, whose poorest people struggle to feed themselves. Politicians of all stripes constantly preach work as the route out of hardship, but most of Britain’s poor have to work for their poverty. And although the Great Squeeze hits those at the bottom hardest, the pandemic of sleepless nights over bills, rents and mortgages is consuming the lives of millions of Britons.

If Labour had a set of courageous policies to tackle this Great Squeeze, it wouldn’t have left a whopping big vacuum filled with personality-driven tittle-tattle. Indeed, the absence of answers has had even more disastrous consequences: the devious, reprehensible redirecting of anger at immigrants, public sector workers, unemployed people – anyone except those responsible. But such is the scale of the crisis that it needs radical solutions, breaking with the free market consensus established by Margaret Thatcher: a new wave of bread-and-butter socialism.

To begin with, the case has to be made for trade unions, including changing a law that automatically presumes against them. They may be Britain’s biggest democratic movement – representing, as they do, more than six million call-centre workers, supermarket shelf-stackers, nurses and other workers – but they are routinely demonised by the media, portrayed as all but illegitimate pariahs. The past few months have seen yet another attempt to drive them from political life, on the now demonstrably false pretext of alleged vote-rigging in Falkirk. But trade unions are the most effective means for workers to collectively organise for better wages and conditions: it is their weakness that allowed wages to drop even in boom time. In another economic crisis, President Franklin D Roosevelt – no socialist – trumpeted trade unions for these reasons. If a party established by the labour movement fails to do so, it might as well book an appointment at Dignitas.

The need for a living wage is painfully obvious. There has to be a reckoning, at some point, when it is seen as unacceptable to pay wages that do not allow individuals to live a decent life. The establishment of a living wage would reduce the billions currently spent subsidising low pay through tax credits and other in-work benefits. It is an economic stimulus, too: the rich celebrate tax cuts by topping up bank accounts in the Cayman Islands; the poor are likely to spend whatever extra money ends up in their pockets.

Then there’s the housing crisis. Five million are trapped on social housing waiting lists; millions are left at the mercy of unregulated private landlords, many of whom are hiking rents as wages fall. According to the Yes to Homes campaign, rents will soar by 46 per cent by the end of the decade without radical action. Allowing councils to build homes – creating jobs and reducing housing benefit in the process – would prevent living in an affordable home being a far-fetched ambition.

British parents spend a third of their income on childcare: no wonder, then, that the average child now costs £148,000 to raise. Compare this with Sweden where costs are capped at 3 per cent of income, and all can enjoy an excellent standard of state-funded childcare. A similar system would pay for itself by raising the number of women in work and increasing the tax revenues flowing to the Exchequer.

The disastrously privatised railways are an unaffordable luxury for large swathes of the population, and rail fares are set to soar 9.1 per cent on some routes. That’s why Labour should bow to popular opinion and take each franchise back into public ownership as it expires, allowing revenues to be used to reduce ticket prices rather than topping up executives’ bank accounts. Similarly, energy bills have gone up £100 a year since 2010, and a quarter of the population put up with “unacceptably cold” homes in the winter because of financial woes. No wonder 69 per cent want energy renationalised: time for Labour to champion a new, democratic form of social ownership with consumers in charge.

More radicalism is needed, too. Why not learn from Germany with an interventionist industrial policy, creating hundreds of thousands of renewable-energy jobs to fill in the “missing middle” of properly paid, secure jobs? Why not cap the interest rates of legal loan sharks? Why not turn bailed-out banks into a public investment bank to rebuild the economy?

Labour will not win the next election by simply pointing out that the Tories have emptied the pockets of the electorate. Mourning its plight will convince no one. Voters must believe that Labour can finally end this Great Squeeze. And without bread-and-butter socialism, the remorseless turning of neighbour against neighbour will only escalate – and, against the odds, it will be Cameron who emerges victorious.


1. Future Shock examines the powerful forces of political opposition that a Labour government could face after the next General Election as it grapples with slow growth, the legacy of austerity and tensions over the E.U. It argues that Labour has to foster a powerful social movement if it is to successfully drive radical reforms.

Britain’s austerity is indefensible

Britain’s austerity is indefensible

Martin WolfBy Martin Wolf

Cameron’s arguments against fiscal policy flexibility are wrong
Ingram Pinn illustration©Ingram Pinn

David Cameron’s “there is no alternative” speech last week on the UK economy has aroused much criticism. This is justified. The British prime minister’s arguments for sticking to the government’s programme of fiscal austerity were overwhelmingly wrong-headed.

It is easy to understand why he had to defend the government’s failing flagship policy. The incoming coalition embarked on a programme of austerity with the emergency Budget of June 2010. The economy, then showing signs of recovery, has since stagnated. Even the fiscal outcomes are poor. Indeed, according to the latestGreen Budget, from the authoritative Institute for Fiscal Studies this fiscal year’s borrowing requirement may be bigger than last year’s. Only a productivity collapse saved the day – by keeping unemployment surprisingly low, ameliorating the social impact of the output disaster.

How does one defend this record? Simon Wren-Lewisof the University of Oxford and Jonathan Portes of the National Institute of Economic and Social Research, among others, have demolished the prime minister’s views. Here are the key points.

Mr Cameron argues that those who think the government can borrow more “think there’s some magic money tree. Well, let me tell you a plain truth: there isn’t.” This is quite wrong. First, there is a money tree, called the Bank of England, which has created £375bn to finance its asset purchases. Second, like other solvent institutions, governments can borrow. Third, markets deem the government solvent, since they are willing to lend to it at the lowest rates in UK history. And, finally, markets are doing this because of the structural financial surpluses in the private and foreign sectors.

Again, Mr Cameron notes that “last month’s downgrade was the starkest possible reminder of the debt problem we face”. No, it is not, for three reasons. First, Moody’s stressed that the big problem for the UK was the sluggish economic growth in the medium term, which austerity has made worse. Second, the rating of a sovereign that cannot default on debt in its own currency means little. Third, the reason for believing long-term interest rates will rise is expectations of high inflation and so higher short-term rates. But such a shift is going to follow a recovery, which would make austerity effective and timely.

Mr Cameron also argued: “As the independent Office for Budget Responsibility has made clear … growth has been depressed by the financial crisis … and the problems in the eurozone … and a 60 per cent rise in oil prices between August 2010 and April 2011. They are absolutely clear that the deficit reduction plan is not responsible.” This brought a rejoinder from Robert Chote, OBR director, who noted that: “Every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term.”

Serious researchers, including at international organisations, argue that the multiplier effect of fiscal austerity may be far bigger than the OBR has hitherto assumed, at least in today’s depressed circumstances. Moreover, even if the OBR believes the outcome turned out worse than forecast because of adverse shocks, rather than its underestimation of multipliers, this is an argument for active policy, not against it.

The prime minister also stated: “[Labour] think that by borrowing more they would miraculously end up borrowing less … Yes, it really is as incredible as that.” What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started. Bradford DeLong of Berkeley and Larry Summers, the former US Treasury secretary, have shown that, in a depressed economy, what Mr Cameron deems incredible is likely to be true. A recent International Monetary Fundpaper argues that “fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output”. Mr Portes adds that, even if this is not true for the UK on its own, it is likely to be true for Europe since almost everybody is retrenching simultaneously.

Mr Cameron argues that “this deficit didn’t suddenly appear purely as a result of the global financial crisis. It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years.” In a way, this is the most worrying error – not because the fiscal policy of the Labour party, then in power, was perfect. Far from it. Fiscal policy should have been tighter. But that is not the main reason the UK has a huge structural deficit.

It is the economy, stupid. In 2007, according to the IMF, UK net debt – at 38 per cent of GDP – was the second-lowest in the Group of Seven leading economies. These levels were also exceptionally low by UK historical standards. In the March 2008 Budget, the Treasury estimated the structural cyclically adjusted deficit on the current budget at minus 0.7 per cent in 2007-08 and minus 0.5 per cent in 2008-09. The collapse in output has caused the explosion in deficits and debt. Almost everybody underestimated the vulnerability, the Conservative leadership among them: pre-crisis, it committed itself to continuing the plans that Mr Cameron now calls “reckless and unaffordable”.

Some think reckless spending explains the jump in government spending from 40.7 per cent of GDP in 2007-08 to 47.4 per cent two years later. Yet, between 1996-97 (the year before Labour came into office) and 2007-08 (the year before the crisis), the share of spending in GDP rose by only 1.2 per cent. No: the collapse in GDP, relative to expectations, caused the jump in spending and decline in receipts, relative to GDP. The Green Budget compares the forecasts for 2012-13 made in the 2008 Budget and the 2012 Autumn Statement: nominal GDP is down 13.6 per cent, receipts are down 17.6 per cent, spending is down 5.6 per cent and borrowing is up 372 per cent. It is because the OBR (and others) believe most of this lost GDP is permanent that the position seems so grim. (See charts.)

Mr Cameron’s argument against fiscal policy flexibility is wrong. But, beyond this, we have to consider why the economy has proved so fragile and rebalancing so difficult. That is for next week.

Copyright The Financial Times Limited 2013. You may share using our article tools.

Cameron’s coalition: a government with ominous intent

David Cameron is halfway through his term as prime minister and despite the ‘omnishambles’ of his austerity cuts his steely ideological core will not allow him to change course now

Polly Toynbee and David Walker
The Guardian, Wednesday 19 September 2012 17.00 BST

Geographically, socially, financially, educationally and electorally, Cameron has favoured his own people. Photograph: Murdo MacLeod for the Guardian
How should we separate dogma from disarray, in this half-time report on David Cameron’s occupation of No 10? Dogma is the strength of Cameron’s determination to dismantle the state, while disarray is his confusion and incompetence in carrying it out. People assume political leaders know what they are doing, when in fact they are often deeply confused. Cameron, like all modern politicians, gets swept up by one day’s headlines. He is also in thrall to Tory beliefs that are often confused and contradictory. He has been a navigator without maps, usually oblivious and indifferent to the unintended consequences of his policies. In health, criminal justice and welfare the Cameron era has to be characterised by the 2012 catchphrase “omnishambles”. Yet if his programme has been less grand design than instinct, the urge to cut back the state was strong and has given the Tories identity and impetus. This has been and remains a government with ominous intent.

By half-time, though, spectators round the Westminster stadium expected the worst to be over. The announced tactic was to frontload spending cuts, get past the necessary pain of tax increases and give Team Tory a run-in to the next election, with time for a few electoral Mobots. Growth would be well established and George Osborne would scatter feelgood tax give-aways ahead of the polls.

That’s not going to happen. The timetable has slipped badly, so that the structural deficit in the public finances cannot be eliminated until 2016–17, and that’s optimistic. Tax handouts now can only be purchased by yet more searing cuts to public services and welfare spending.

Blaming Europe for failure came naturally, but was triply unconvincing. First of all, as a matter of fact, UK exports to the EU had been growing, at least until early 2012. Secondly, the deepening Eurozone crisis was in large measure a result of the same austerity policies Osborne and Cameron insisted were the remedy for the UK. And thirdly, if the Eurozone crisis was as bad for Britain as Osborne claimed, wasn’t that the best reason to temper austerity and revive demand?

But thinking again is for pragmatists. Cameron’s stiff-necked insistence on sticking with his cuts shows that despite the haplessness and chaos, his inner ideological core is steely. State shrinkage was and remains his government’s guiding light. Cameron’s cuts will permanently damage and diminish government and collective endeavour, and in that sense he may still leave the field a winner.

He still has fully to deliver. The Institute for Fiscal Studies reckoned that, at April 2012, four-fifths of planned reductions in spending remained to be realised. Departments and public bodies had lopped the easiest to reach branches, cancelling investment, freezing pay. The body count must now rise. In 2011, 270,000 public sector staff were sacked, cutting the payroll by 7%. By March 2012, according to Unison estimates, 625 public employees were losing their jobs every day, and decimation must go on indefinitely. Osborne’s targets depend on chopping cash support for the disabled, further cuts in tax credits – which will make low paid work even less attractive – and paying less housing benefit, which forces population movements that make no economic or social sense.

Can Cameron stay the course? There is evidence to hand, for his second-act script was written into the little-read business plans Whitehall departments were required to publish in June 2012, even if within weeks, ambitions were being abandoned. Take the Treasury’s aim of greater variation in public sector pay, so those who work for councils, the Department of Work and Pensions or the NHS in poorer parts of the country would see their salaries cut, as a means of allowing private sector employers to cut their pay too. Tory MPs grew alarmed at the disruption and loss of local income; the business people supposed to benefit disputed the Treasury’s understanding of labour markets. Cameron backtracked: in the civil service reform white paper regional pay variation was nowhere to be found. It hangs in the air uncertainly, with a fraught attempt in the South West NHS.

No wonder Osborne rounded on business for failing to speak out in favour of tax cuts. The unwillingness of the private sector to be as Thatcherite as the government would like is proving a problem, as well as an ideological paradox. Companies have even been reluctant to strip employees of rights, which may make it hard to implement the Cameron-backed plan to allow managers to fire at will. The introduction of universal credit depends on bringing vast IT systems on line. Iain Duncan Smith struggled to keep his job at DWP, so may stay there long enough finally to learn a lesson that has been staring him in the face for months: in trying to help poor households into work there’s a permanent trade-off between simplicity and fairness. His work programme will look even more perilous if contractors demand to be paid despite failing to find clients jobs that aren’t there.

A union protest against the cuts … the IFS estimates four-fifths of the coalition’s spending reductions remain to be realised. Photograph: Ben Stansall/AFP/Getty Images
And so on, round the departments. Despite the Tories’ pre-election pledge of a bigger army, 25,000 are to be cut from the services together with 29,000 civilian staff as the Ministry of Defence budget is to shrink by 7.5% by 2015. But that is not matched by any slimming in UK pretension. If the state must be urgently reduced, why go on spending twice as large a proportion of GDP on defence as Germany, a higher proportion than the Chinese (officially) spend, clinging to the top table, the UK’s permanent seat on the UN security council seat and a role as rear gunner in any passing war?

The government, according to the MoD business plan, will “succeed in Afghanistan” (whatever that means); “continue to fulfil its standing commitments” (tautology); promote defence exports (while cutting its own purchases); “succeed in other operations it is required to undertake” (obeying prime ministerial whim). The MoD started buying elements of the renewed Trident system, for which the lowest total estimate is £20bn, an unexplained, luxury survivor in these years of austerity.

From the Department for Communities and Local Government business plan springs the extraordinary interventionist proposal to identify 120,000 troubled families – a suspiciously specific figure – and sort them out. Evidence for the existence of a permanent core of disadvantaged households is shaky; ministers talk about families in trouble, families causing trouble and troubled families, though the categories and numbers are all different. Whitehall wants councils to seek them out and earn £4,000 if they get mothers and fathers into jobs and sons and daughters into school, stop them offending, or causing neighbours trouble – all this while benefits are cut and in-work rewards falling for those who are in work.

The government hopes to bask in an Olympic afterglow, but Jeremy Hunt’s successor Maria Miller faces the unappetising task of selling a policy for culture and sports that critically depends on government while cutting playing fields and arts support. Despite Hunt’s departure, the DCMS business plans still ominously promise to make room for Murdoch and his surrogates by deregulating broadcasting and communications and to keep up pressure on the BBC to “ensure it is more accountable”.

In education, Michael Gove makes no secret of his aim to bring more private money into schools through sponsorship. The business plan for the Department for Education confirms Gove’s stated intention to fracture the “1944 settlement” beyond repair. A vision of educational anarchy beckons as he compels more primaries to become academies, free schools expand and revamped versions of the old city technology colleges are established, moving further and further away from the possibilities of comprehensive secondary schooling, as the OECD reports the UK as one of the most class-segregated systems in the developed world.

In justice, the departure of Ken Clarke makes no difference to a plan to bring more private contractors into prisons, probation and community sentences. Private companies will not, of course, have an incentive to stop the growth in prison numbers that, on the face of things, would bring them extra income.

The Department for Environment business plan is to try to cope with the negative consequences of privatisation under a previous Tory government, but not to admit the lack of a national water grid, excessive leakage and inadequate sewerage in London. The government also needs to reform energy: a dearth of bidders to build new nuclear power and nimby Tory MPs blocking wind farms combine to show the limits of a privatised market.

Read the Cameron business plans and nothing is joined up. Transport Department plans for charging heavy goods vehicles to use the roads would make sense if they were married to a programme of shifting freight to rail and radically cutting the number of journeys made by delivery companies. Yet the point of the privatisations of rail and buses under previous Tory governments was to break them up. The plan’s stated aim of “making public transport more attractive” is unlikely to be implemented when fares are rising faster than inflation.

In health the Tories face daunting political risks, entirely of Cameron’s creation, not one of them mitigated by the ejection of Andrew Lansley. Voters may not absorb the administrative detail of a “reform” the chief executive of the NHS said was visible from Mars, but one thing they know: Cameron promised during the 2010 election not to cut or privatise the NHS. Those will be principal – and perilous – themes into the next election.

At the 2010 Tory party conference, Francis Maude said the government was relaxed about creating a postcode lottery for healthcare and other services, and that is precisely what results from the “reforms” now in place: as the state is rolled back, there can be no national standards. The public always strongly resents any suggestion they can get a drug or treatment in one place, but not another. New evidence emerges of the centrality of mental health, and how switching resources to psychological services could save large sums from physical healthcare budgets. But that would mean a central initiative, with the capacity to steer and reallocate. In opposition Cameron derided Labour’s targets but has sought to reimpose the same 18-week maximum wait for surgery – demonstrating how often he finds centralism essential when faced with the consequences of the anarchy that characterises his competition policy.

When you have provoked thousands of police constables to give up off-duty time to march through Whitehall in vocal opposition to your plans for their pay and pensions, as the government did in May 2012, you might take care not to rile them further. They are, after all, the people you are going to depend on to police the other demos, to put down riots and reassure the public on crime. But no, the Cameron recipe for policing is in turmoil. He is simultaneously cutting police numbers, overhauling recruitment and promotion, appointing a detested hatchetman as chief inspector of constabulary, reorganising the national detective agencies and, to crown it all, creating elected commissioners who will have a built-in incentive to slug it out with chief constables, interfere with police operations – and harry the government for more crime-fighting resources and, as ever, “bobbies on the beat”.

Police officers oppose changes to their pay and pensions … Cameron’s recipe for policing is in turmoil. Photograph: Dan Kitwood/Getty Images
But again, don’t let the disarray obscure the dogma. The three-word badge for Cameron’s first half is “any qualified provider”. A key document is the Open Public Services white paper published in July 2011: however cack-handed its delivery, this paper proves Cameron’s radicalism. Even the paper’s publication showed bravado. It was to have been published in February that year but a scandal at Winterbourne View, a long-term private residential hospital, provoked alarm at private profiteering. Undeterred, Oliver Letwin and Francis Maude, Cameron’s ideological commissars, went ahead and published the masterplan a few months later.

It’s there to read for anyone who doubts Cameron’s purpose, and anyone who thinks the Liberal Democrats have watered down Tory ideology. The default position for all public services is private provision, and not even the military or policing is exempt. The abject failure of G4S at the Olympics has not blunted the intention. Most departments, agencies and local authorities are obliged to drum up at least three rivals, preferably commercial, to bid to provide services. As Cameron wrote in the Daily Telegraph, this creates “a new presumption against the dead hand of the state”. Woe betide any civil servant obstructing it: “If I have to pull those people into my office and get them off the backs of business, then believe me I’ll do it.”

It’s working. “The UK’s austerity programme is entering a fruitful phrase for outsourcing,” said an analyst in June 2012, noting £4bn worth of government work out to tender in the first six months of the year alone. The Tories intend irreversible change, believing that once they excavate the foundations, this edifice can’t be rebuilt.

Of course there are countervailing tendencies. Philosophically, Conservatism was and remains all over the place. Shrink-the-state zeal conflicts with a Tory desire to keep Britain great, leading to over-the-odds defence spending. Love of the little platoons of localism vies with the constant urge to command, witness Gove and communities secretary Eric Pickles. Market freedom is at odds with social order exemplified in Cameron’s half-baked National Citizens Service for the young. Ministers rubbish professionalism, abuse the civil service, slander GPs and teachers, then bemoan loss of respect and authority. Even a shrunken state needs disinterested, enthusiastic public servants.

In the second half, governing will get harder. Lib Dems facing electoral annihilation will have to consider early exit from the coalition. Peevish and disappointed at the loss of both electoral and House of Lords reform, they must surely now veto the Tories’ bid to shrink the House of Commons by cutting constituencies in their favour.

Another question presses. Osborne dared not repeat his line about all being in this together when he cut tax for the rich in his 2012 budget. As benefit cuts bite and real incomes fall, the unjust distribution of pain gets plainer for all to see. For all his speeches on social justice and social mobility, the thrust of Cameron policy is to make the country more unequal at an accelerating pace. By 2015, the IFS estimates, at least 500,000 more children will fall below the official poverty threshold: this compares badly with Labour who took a million out of poverty. Duncan Smith’s thinktank is working overtime on trying to show poverty is only a socialist construct, and that official measures based on income are worthless. They won’t succeed, as the accumulating data show the young, women and the poorest households have taken a disproportionate share of the cuts.

Geographically, socially, financially, educationally and electorally, Cameron has favoured his own people. For example, the National Commissioning Board for health is no longer obliged to share out money according to the indices of deprivation; resources are being “equalised”, which means redirecting funds from poorer areas in the north of England to richer southern districts.

In the end, electors will judge on the economy. Eurocataclysm may precipitate a wider collapse and Osborne will try hard to blame it for the added economic damage caused by his austerity. Economists warn of a decade or even two of depression, stagnation and socially unsustainable unemployment. Cameron could still change course, responding to unfolding events with imagination and humility. But that would mean abandoning the project that his Tory generation picked up from Thatcher, their vendetta against government and their unshakeable trust in markets, despite all the evidence of failure and all the perverse consequences. Such a volte-face is unlikely, so Cameron’s second half looks set to offer more of the same dogma and disarray.

• Dogma and Disarray: Cameron at half-time by Polly Toynbee and David Walker

Ralph Miliband and sons

For Ralph Miliband governments could never tame capitalism. New Labour thought otherwise – and then came the financial crisis. But what will David or Ed do if they gain the leadership?

John Gray
The Guardian, Saturday 4 September 2010

Viewed from one angle Ralph Miliband was a theorist of revolution who failed to notice the radical transformations going on around him. A lifelong Marxist, he never doubted that the future would be shaped by the struggle against capitalism. In fact it was capitalism that proved to be the revolutionary force in the late 20th century, consigning socialism to the memory hole. By the time Miliband died in May 1994, the Soviet system had been replaced by a type of resource-based authoritarian capitalism, while China’s Communist party was overseeing the development of an unbridled market of a kind that Milton Friedman could only dream about.

In Britain in the 1980s Miliband managed to convince himself that Labour, which he had always bitterly attacked, might, under the influence of Tony Benn, turn into a genuinely socialist party. In fact Labour split, which more than any other single factor enabled the continuing dominance of Thatcher. Probably only the battles fought by Neil Kinnock prevented Labour disintegrating altogether. When John Smith became leader, the party began the “prawn cocktail offensive”, a rapprochement with the financial sector pursued through private lunches with leading City figures, which formed the prelude to New Labour. Only weeks after Smith died (in the same month as Miliband) the party would start burying any trace of its socialist past.

When he gave the Bennite wing his intellectual support, Miliband was colluding in the politics of make-believe. Yet in one vital respect this intractably oppositional Jewish refugee from nazism had a firmer grip on reality than the social democrats who eventually prevailed in Labour’s internecine conflicts, and when he ridiculed Anthony Crosland’s vision of a domesticated and pacified capitalism, he left the party with a dilemma it has not been able to resolve. Like Marx, Miliband understood that states and governments are never autonomous actors; their options are shaped, and often foreclosed, by the distribution of power and resources. This was the central theme of Miliband’s The State in Capitalist Society (1969), a penetrating assault on social-democratic thinking in which he developed and extended the argument against revisionism of his earlier Parliamentary Socialism: A Study of the Politics of Labour (1961).

In The Future of Socialism (1956), Crosland had argued that Labour must distinguish between means and ends (a theme pursued later by Blair). Capitalism had changed fundamentally, and rather than opposing it Labour should use the market to advance socialist values. Properly managed to ensure steady economic growth, free markets could be used to promote an egalitarian society in which everyone could live the good life. Against this rosy vision, Miliband urged – rightly, I’ve always thought – that the world had not changed as much as Crosland and his fellow-revisionists imagined. Capitalism remained an unruly beast, and the idea that governments had learnt how to tame it was just an illusion.

The oil shocks of the 70s were an early warning of the fragility of the postwar order. The shocks were not fatal, and capitalism survived the crisis (as it will survive the present crisis, in one form or another). But it was already becoming apparent that while governments could withstand upheavals in the global economy, the state was not the directing agency social democrats imagined it to be. As Miliband saw it, the state was a servant of these forces rather than their potential master. Of course he exaggerated. The interests of capitalists are often at odds, and in any case politics is driven by far more than class conflict. Even so, Miliband’s view that the state is constrained, reactive and hemmed in by market forces has become increasingly plausible with the passage of time. But if this is so, what role can there be for a party that aims to make capitalism a force for the collective good? Can a future Labour government succeed where past governments have failed and harness capitalism to a vision of social improvement? Or should Labour accept that it is capitalism itself that must be changed?

These are precisely the questions that face Miliband’s sons as they contend for the Labour leadership. The clash between the two has an undeniable drama, and it is not just a matter of sibling rivalry. It occurs at a time when the world economy is in a crisis the founders of New Labour believed to be impossible. Lacking the Marxian insight that capitalism is inherently volatile and constantly mutating, they never doubted that the deregulated finance-capitalism that developed in the US towards the end of the past century would last. The left had to overcome its suspicion of the free market, and accept that only by exploiting its productivity could government improve society: social democracy and neo-liberal economics were actually complementary.

Just like Crosland, though without his Keynesian grasp of the dangers of recurring boom and bust, New Labour believed capitalism had been tamed. But as Ralph Miliband suspected and events have confirmed, the anarchic energy of the free market is not so easily controlled. The fall of communism was celebrated as a triumph of capitalism, which now became practically world-wide; but the effect was to make capitalism more unstable, as disturbances in one part of the system were rapidly transmitted to all the rest. The fragmented world of the cold war was more resilient to shocks, and also more hospitable to social democracy, than the world that ensued. Governments found that few of the levers they used to control the economy worked as they had before. New Labour did not want to control the market. A feature of the understanding it reached with the City was that financial markets would continue to be deregulated. In part this was accepted as the price for power, but it also reflected New Labour’s Fukuyama-like faith that market capitalism was the final stage of economic development; the future lay with the self-regulating market.

As could be foreseen, things turned out rather differently. With regulatory controls relaxed or scrapped the financial institutions whose support Labour had wooed became predatory, raking in vast profits from strategies whose risks they did not understand. Inevitably this hubris led to their downfall, and the financial system imploded. The market millennium lasted hardly more than a decade, leaving a legacy of unsustainable debt.

The happy conjunction of neo-liberal economics with social democracy on which New Labour was founded is now history. This is the truth evaded in Tony Blair’s autohagiography. If New Labour is obsolete it is not because of the personal defects of Gordon Brown, Blair’s delusional moral certainty and incessant war-mongering or even the dysfunctional relationship between the two leaders. It is because American finance-capitalism, the model for virtually everything that New Labour ever did, has blown itself up.

The problem with the debate between the Milibands is not that it risks turning into a public family feud. It is that neither of the two contenders has come to terms with the bankruptcy of the New Labour project in which each of them was involved. Neither has acknowledged, or perhaps fully understood, the implications of the financial crisis for a future Labour government. It can only mean an erosion of the very foundations of Britain’s social democratic inheritance. Yet in different ways, each of the Miliband brothers still sees government as capable of controlling market forces – the illusion their father presciently exposed.

In his Keir Hardie lecture in July, David Miliband spoke eloquently of moving away from state paternalism and reviving Labour traditions of mutualism. The state can no longer be the centre of knowledge and initiative – its function is rather that of empowering society. Top-down Fabian control must be replaced by open democratic relationships. No doubt these are desirable goals, if very much in the spirit of the prevailing conventional wisdom and perhaps not so different from Cameron’s fluffy “big society”. The larger difficulty is that Miliband is harking back to Crosland (whom he recently cited as his political hero) at a time when Crosland’s thinking is no longer applicable.

Crosland’s vision was based above all on economic growth – steady, continuing and robust. Following Keynes, he believed that wise economic management could create a society of abundance. But the effect of the financial crisis has been to curtail growth, at least in developed economies. Even if the economy recovers, governments will not have the largesse he assumed would be available. Bailing out the banks has passed the burden of debt on to the state, and no British government can expect to avoid large-scale cut-backs in borrowing and spending. Instead of the market generating wealth that could be used by governments for collective purposes, the resources of government have been pre-empted for the repayment of debts incurred by the market’s excesses. Against this background, the post-paternalist state is likely to mean higher unemployment and cash-starved public services.

Unlike his brother, Ed Miliband has chosen to define his candidacy explicitly in terms of New Labour’s failings and argues forcefully for the need to remodel capitalism. “Britain’s big question of the next decade,” he has written, “is whether we head towards an increasingly US-style capitalism – more unequal, more brutish, more unjust – or whether we can build a different model, a capitalism that works for people and not the other way around”. Once again these are noble aspirations but far removed from reality. Globalisation is an idea that has been greatly over-hyped, yet governments’ freedom of action has without question been reduced as capital has become more mobile. Even the US may soon find it difficult to fund its ballooning federal debt. But if American capitalism is entering a crisis zone, Britain will not have the luxury of forging a new economic model; it will have trouble just staying afloat. Ralph Miliband’s pessimistic assessment of the future of social democracy could well be vindicated.

If one of the Miliband brothers wins the Labour leadership and becomes prime minister he will confront in an acute form the constraints on the power of the state his father astutely identified. Rather than controlling or reshaping capitalism, a Miliband government would find itself struggling to preserve Britain’s social democratic inheritance in the face of capitalism’s renewed disorder. Ralph Miliband seems never to have lost the Marxist faith that history would eventually open the way to a truly socialist society. He would surely have appreciated the curious dialectic through which it has fallen to his sons to defend the social democracy he so fiercely attacked.