Voting Labour isn’t going to turn the UK into Venezuela

but mainstream economists should make sure they are getting a hearing

It is tempting to laugh at the rhetoric of Conservative politicians or journalists when contemplating a possible future Labour government. As John Elledge writes, it isn’t long before Stalin or Trotsky or Venezuela is mentioned. As he notes, this is not a terribly clever tactic, particularly as many of the measures proposed by Labour are (by design) pretty popular. As Stephen Bush points out, the problem for the Conservatives is not that ‘young people’ have not learnt about the evils of communist regimes, but that this group are not impressed by Brexit or their wages and for many buying a house is something their parents generation did.

Yet this kind of hyperbole is not confined to politicians or journalists on the right. When John McDonnell, Labour’s shadow Chancellor, said at their party conference that they were ‘war-gaming’ for eventualities if they gained office like a run on sterling, I thought this showed mild paranoia. I was wrong. After I wrote that sterling was far more likely to rise at the prospect of a Labour government (standard macro: more fiscal, higher rates imply stronger currency), Buttonwood of the Economist wrote that there were at least five reasons why sterling might collapse, most of which involve some form of capital flight.

Although Buttonwood was careful to base analysis on measures that Labour proposed in 2017, I’m sure I was not imagining a subtext about what else could hard left politicians do. You can read much the same from some on the centre or soft left, who have learnt through experience to be wary of the hard left. Nick Cohen knows better than to call Labour’s new mass membership all militant entryists, but instead he says they are innocent (but should know better) lambs flocking towards wolves.

With language like this flying around, it is best to look for solid ground. In parliament Labour is a centre left party led by the hard left, to use popular labels. For that reason it would be impossible for it to pursue a hard left programme, and the leadership knows that. Contrast this with the current governing party: half soft, half hard right, with the latter having the upper hand because of the membership. The Conservative party’s ethos is such that the hard right have imposed a ruinous policy on our country without challenge, which actually did produce a collapse in sterling. Fortunately many Labour MPs have less loyalty and perhaps stronger principles, and would not allow anything similar if they were in power. As a result, I find pandering myths about Venezuela dishonest to be frank. If you want to fret about deselection, I suggest you talk to Nadine Dorries.

As far as City scare stories are concerned, as I indicated earlier and Ben Chu confirms, you will always be able to find those predicting doom. One of the refreshing things about this Labour leadership is that they do not cower defensively at such attacks, but come out fighting. As Corbyn’s video could have added, it was City economists who told us that austerity was necessary because otherwise there would be a flight from UK government debt. They were horribly wrong then, as interest rates on debt fell, and they are likely to be wrong again with new stories about capital flight under Corbyn.

While talk of Venezuela is ludicrous, there is a more interesting question about where the influences on future Labour policy are coming from. To set the scene, there was a recent prank outside the LSE designed to suggest heterodox economists were the Luther to economic mainstream Catholicism, and this was followed by a column from Larry Elliott in the Guardian. Now there are plenty of things to criticise about economics, but these are not them. As Frances Coppola recounts, the ‘economics reformation’ document is embarrassingly bad. If you want to read a short but to the point and well written response, see here.

So, in case you thought otherwise, mainstream economists do not spend their time attacking any form of market intervention, but instead try to design efficient market intervention. As I have argued many times, most mainstream macroeconomists did not endorse austerity, for the simple reason that textbooks and state of the art models suggest it would be a very bad idea. But there are some (not all) heterodox economists who would like you to believe otherwise.

What has this got to do with a future Labour government? Christine Berry presents a comprehensive account of who is shaping future Labour policy. It contains the following paragraph.

“John McDonnell’s Council of Economic Advisors, set up during the first days of the leadership, was a valiant effort to give the party’s economic policy some heavyweight academic backing. But many of its members were not natural Corbyn supporters, and ran alarmed from the public ridicule heaped on the leadership in the early days – resulting in the Council being largely disbanded. Academic input now seems to be ad hoc rather than systematised.”

That is not how it happened. It is true that some of us had to suffer some public ridicule when we joined, but that just reflected badly on those doing the ridiculing. The breakup of the Council was inevitable after the EU referendum. It is hard for any group of serious economists to publicly advise in such a forum any political party that appears to support a Brexit policy that is doing (see Chris Giles here) so much damage and could do much more.

The understandable wish of many heterodox economists to have an influence on Labour policy does mean there is a potential competition for influence. Will Labour policy be based on policies derived from mainstream analysis, or those favoured by some heterodox economists? It would be wrong to exaggerate this competition: most mainstream economists agree with most heterodox economists about austerity, for example. But there are some clear differences. (In some ways you see something similar on the right, where City economists compete with mainstream economists for influence on Conservative party policy, which is one reason Conservative macroeconomic policy can produce major disasters.)

Ann Pettifor has an article about why business would do well under Labour, which invokes some of the points made in an earlier Financial Times piece. Once you discount the scare stories, I agree with Ann that the economy and therefore businesses will do much better under Labour than under the Conservatives. But her article contains an interesting remark which I think tells us something about the current leadership. Ann’s says

“Here I must acknowledge a disagreement with Professor Simon Wren-Lewis, of Oxford University, who advised Labour to adopt a fiscal rule that once again prioritises monetary policy …”

Ann follows the heterodox MMT school that favours using fiscal rather than monetary policy to stabilise output and inflation. Of course both Ann and I were on Labour’s Economic Advisory Council, and so it is obvious that there was a similar discussion in this group.

The fact that McDonnell chose a more conventional but still innovative approach (which happened to be the one I put forward), and has also stressed the importance of central bank independence, shows us two things: he has a distinctly conservative streak, and he wants Labour not only to win but to be successful in economic terms. But while McDonnell may have opted for a mainstream approach on monetary and fiscal policy, there is still plenty to play for in other areas. I am not suggesting that mainstream economists should always win when conflicts occur, but it is important for mainstream economists not to arrive late to these battlefields, or worse still wait for politicians to read their papers.