The free-market right has a strategy to revive Britain's economy. It's up to the left to show there is a different way

Bread and circuses. That was the approach favoured by Roman emperors for keeping the mob under control. Hapless Christians would be fed to the lions in the Colosseum while attempts were made to keep the price of basic foodstuffs cheap. The idea was simple: full bellies and entertainment would ensure that the plebs did not storm the villas of Rome's plutocrats.

Throughout history, kings and presidents have ignored the need for bread and circuses at their peril, particularly the bread part. Hungry people make for angry people.

All of which makes the current state of Britain a bit surprising. There are circuses a-plenty: indeed, the blanket coverage given to the royal baby falls squarely into that category. Bread-wise, though, things have not been going quite so well.

One of the other big stories of last week was the Archbishop of Canterbury having a go at payday lenders. The reason large parts of Britain are now Wongaland is that wages are being squeezed and living standards are falling, and have been almost without a break since the recession began in 2008. Individual years of falling living standards might be relatively common: whole decades are rare.

Indeed, Lord Turner, the former head of the old City watchdog, the Financial Services Authority, says that if living standards are lower in 2017 than they were in 2007 – as looks almost certain – it will be only the second full decade since the dawn of the industrial age in which people have become worse off. The other, incidentally, was from 1895 to 1905, when medical advances meant fewer children were dying in infancy, resulting in the population growing more quickly than national output. It is, perhaps, no coincidence that Edwardian Britain was marked by political, industrial and social unrest. It was the time of syndicalists and suffragettes.

Placid Britain



So why is the Britain of 2013 a much more placid place? One theory is that things are not really that bad. Living standards are now so high that a relatively small fall (in a long-term historical context) makes little or no difference to levels of contentment. A century of growth means that rich and poor alike live better, eat better, have more leisure time and enjoy far higher disposable incomes than did their forebears in the run-up to the outbreak of the first world war. The welfare state is now much more generous than the fledgling system set up by the Asquith government, while record-low interest rates mean cheap mortgages for owner-occupiers. A century ago, 10% of people owned or were buying their homes: today it is around 70%.

Theory number two is that while things might not be all that great here, they are a lot worse elsewhere in the world. People look at Spain or Greece and are thankful for small mercies.

A third theory is that the drop in living standards is accepted as the inevitable consequence of flying too close to the sun in the years before the crash. A period of personal austerity is seen as the necessary pre-condition for putting the economy back in decent shape, thus allowing the pattern of rising prosperity to resume, eventually.

There are doubtless other explanations but it is worth investigating the notion that what has been happening since the financial crisis is an aberration, albeit a fairly lengthy one.

Both the government and opposition believe this to be true. Politicians on the left, right and centre dream of a high-wage, high-productivity UK economy, forging ahead in new industrial sectors, wiping the floor with the international competition and generating the resources to fund a gleaming new NHS and top-quality care for an ageing population.

That's the dream. The reality is that in the summer of 2013 we have a low-investment, low-wage, low-productivity and low-growth economy. And there's little to suggest the outlook will change any time soon. Almost four-fifths of the jobs created in the UK over the past three years have been in industries where the wage is below £7.95 an hour. Over the same period, business investment as a share of national output has fallen from 8% to 5%, one of the lowest in the industrialised world.

Cheap labour



Eminent economists have been struggling to explain why output per worker is now lower than it was before the start of the recession. Dick Sargent, in a piece for the journal Economic Affairs, comes up with one simple explanation: labour is cheap and capital is expensive. The financial crisis made the banks much more cautious about lending and this, combined with a lack of demand from firms in want of "animal spirits", has led to the decline in business investment. At the same time, workers have been taking cuts in real (inflation-adjusted) wages so employers have been able to generate the same level of output by using less capital and more labour. There was a slowdown in the growth rate of capital per employee, which led to a slowdown in the rate of output per employee.

"A process of labour being substituted for capital is rare in the historical record of economic growth," Sargent said. "In the long run the opposite is the norm; labour is provided with increasing amounts of capital to work with, and that provides an important stimulus for the productivity of labour to be on a rising secular trend."

Britain has not turned into a low-wage, low-investment economy overnight. It has taken considerable effort – years of complacency, neglect and mismanagement. The recent woeful performance of the economy may be explained by demand deficiency. But the longer-term problems have been on the supply side: what Terry Scouler, the chief executive of the manufacturing body the EEF, calls "the make do and mend culture" among firms, the lack of skilled labour, and the need for the system of relationship banks that exist in countries with more impressive records for investment.

Margaret Thatcher and Tony Benn both argued in the 1970s that the UK was suffering from deep structural problems impervious to Keynesian remedies. Each came up with their own alternative economic strategy (AES). In Benn's case, this involved planning agreements, nationalisation and protection; in Thatcher's case, privatisation, trade union reform and tax cuts.

Thatcher certainly made one part of the economy – the City – more dynamic and internationally competitive. For the rest of the economy, the results have been disappointing. Indeed, the smashing of the unions has probably entrenched Britain's low-investment culture by making labour relatively cheap in comparison to capital.

Where do we go from here? Option one is the free-market right's new AES: lower taxes, a smaller state, less red tape, liberalisation of planning. Option two is a new AES for the left: national investment bank, Green New Deal, activist industrial and regional policy. Option three is to accept that this is as good as it gets.