APPROPRIATELY enough for a New Year’s message, Ed Miliband uses his latest broadcast to trail a change-of-gear in 2014. Sitting before his Christmas tree, the Labour leader promises:



“We’re going to show to people in 2014 how—by standing up for the right people, being willing to take on the powerful interests, being willing to make big changes in our economy—we can deal with the cost-of-living crisis both now and in the future, and earn and grow our way to a higher standard of living for people. And I think that matters so much to people. It matters so much to people now, because they’re feeling they can’t afford to pay their gas bill or do the weekly shop. And it matters so much in the future, because so many people are thinking: what future is there in this country, for my kids; for my son or daughter, my nieces and nephews?”



The key words, says the New Statesman’s George Eaton, are “big changes in our economy”—proof, he argues, that Mr Miliband is “alive to the charge that Labour is too narrowly focused on short-term measures.” This is a reference to the party’s cost-of-living policies, which though politically influential, have shed relatively little light on what Labour proposes to do about the underlying problem: stagnant wages caused by a shortage of skilled, well-paid jobs. Opponents have taken this to mean that the Labour leader simply lacks serious solutions. That underestimates Mr Miliband, who has described the direction he wants the British economy to take. But his supporters—who hope that the Labour leader will unveil more detailed plans in the coming year—may be disappointed too. It is much easier and safer to make short-term “retail” offers than to set out long-term structural reforms.



Varieties of capitalism



Mr Miliband’s economic outlook is often ascribed to Professor Jacob Hacker of Yale University– and his 2011 Policy Network paper on “pre-distribution” (how to reduce inequality before tax)– but his interest in this agenda is much older. It is rooted in work of “Varieties of Capitalism” (VoC) theorists, a loose gathering of political economists mostly based in Harvard, Oxford or Berlin’s WZB. The group is named after a 2001 book of the same name; on the invitation of whose editor, Peter Hall, Mr Miliband lectured at Harvard in 2003. Stewart Wood, the Labour leader’s top wonk, wrote one of its chapters.



As the phrase suggests, the VoC approach identifies several different ways to run a capitalist economy. Most adherents concentrate on two models – “liberal” (eg Britain, Ireland, the United States) and “co-ordinated” (eg Germany, Sweden, South Korea) – which, they argue, are fundamentally different. Not unlike Microsoft and Apple, the two are both internationally competitive, but each has its own operating system, rules, institutions and comparative advantages. And each uses a different approach to solve collective action problems. As the labels suggest, the Anglo Saxons tend to rely on red-in-tooth-and-claw competition, whereas the Northern Europeans and East Asians use more collaborative methods: information-sharing, investment partnerships and the like.



Insofar as Mr Miliband has a long-term project, it is to jolt Britain off the “liberal” operating system and onto the “co-ordinated” one, which most VoC theorists claim is better at generating and distributing living-standards improvements to ordinary folk. Like changing computer operating models, this means overhauling the system’s components, signals and rules. Collaborative economies, VoC scholars avow, derive their comparative advantages from an institutional eco-system that is greater than the sum of its parts. It is not enough to have patient capital, vocational education systems, plentiful apprenticeships, active labour market policies, consultative workplace practices, long-termist corporate governance regimes. All of these need to be working in unison for the relevant comparative advantages—high-wage, labour-intensive export industries reliant on innovative, relatively autonomous work teams—to materialise (see page 28 of the book Varieties of Capitalism for a chart illustrating this).



Whether or not it is possible to shift a country from one VoC to another is a matter of debate between the school’s theorists. Those closest to Mr Miliband tend towards the view that it is. So when the Labour leader talks about “changing the rules of British capitalism”, and when those around him describe a “1979 moment”, this is what they are getting at.



But as in his New Year’s message, Mr Miliband’s has kept overall plan for “big changes in our economy” relatively vague. Perhaps this is for good reason: past oppositions have paid the price for setting out too much policy detail too early on. But some Labourites (particularly over the past summer) have grumbled that the agenda is too underdeveloped and thus too prone to portrayal as a return to old-school socialism. Milibandites fret that if he does not obtain a clear electoral mandate for sweeping institutional change, their man will struggle to implement it if he wins power (just like the current government, for example, which sought no mandate for its subsequently unsuccessful NHS reforms). Prominent supporters such as Marcus Roberts of the Fabian Society point to a “40%” electoral coalition—made up of former Labour voters, Lib Dems, young voters, former non-voters and a small number of former Tory voters— available to the party if it campaigns on such plans.



Ghosts of the past



Other supporters, such as Duncan Weldon of the TUC, tell the cautionary tale of “stakeholder capitalism”. This agenda—not so different to the one that Mr Miliband now supports (and an intellectual cousin of the VoC school)—was trendy in New Labour circles in the 1990s. Popularised by Will Hutton’s 1995 book “The State We’re In”, it caused a flurry of debate about economic institutions that intrigued shadow cabinet members but never made it into the party’s pre-election policies and thus was mostly abandoned once Labour was elected. In government, the party instead tried to remedy capitalism’s ills through a pricier but less ideologically ambitious method: tax credits, doled out by Mr Brown from the Treasury.



Indeed, Whitehall’s most powerful department—thanks to its prestige and the policy levers available to it—dominates both Britain’s government and opposition economic policies. The Treasury’s institutional instincts, tuned to the act of opening and closing government spending sluices, leave little room for overhauling economic institutions, business policies or regulation. Conventionally, responsibility for most of these has gone to its poorer cousin, the Department for Business, Innovation and Skills (BIS), or the Department of Trade and Industry (DTI) as it was during the Blair premiership.



During that period Mr Brown’s power (and determination to exercise it) yet further accentuated the Treasury’s dominance. The stakeholder capitalists, with their grand plans for reforming company law, regional economic development, science and innovation, watched as the Treasury turned on the redistributive taps, leaving the DTI, which policed the rules of the British economy, a relative backwater. Arguably this formula—hands-on spending and hands-off regulation—led to the deep recession and shaky public finances that followed.



To be fair, as prime minister Mr Brown added new responsibilities to the DTI portfolio, and (in 2008), put the new BIS department in the powerful hands of Peter Mandelson (who became deputy prime minister in all-but-name). Yet even then, the department remained many times less influential than the Treasury. The old “spending first, reform second” hierarchy persisted.



Treasury orthodoxy



The dominance of the Treasury works well for David Cameron, whose defining mission is to close the public spending taps. Thus the prime minister has near-merged his team with that of his chancellor of the exchequer. Since 2010, relations between 10 Downing Street and the Treasury have been exceptionally good. Treasury orthodoxy is government policy. For this reason (and, to a certain extent, thanks to coalition politics), BIS under Vince Cable has been marginalised. As Andrew Adonis noted in his recent review of the department, it is “not fit for purpose”, is “an indifferent champion of business, particularly small business” and “relates poorly to many key industrial sectors”.



At the moment, Labour's ministers near-precisely shadow their government counterparts. But if the party wants to convey different priorities, should it not reflect these in its top team? Surely, if Labour wants to substantiate its talk of economic reform (both in opposition and, if it is elected, in government), it needs to create a new ministerial portfolio—one hefty enough to redirect priorities away from the overall level of government spending and towards other forms of economic policy-making? As long as the BIS portfolio is subordinate to the Treasury one, it is hard to imagine such a shift occurring.



A second concern should guide Labour in this direction: although the party is ahead in the polls, a hung parliament is entirely conceivable. In those circumstances, Mr Miliband would have to form a coalition with the Liberal Democrats. Just as they have sought to be a counterweight to the Conservatives on issues like the environment and constitutional reform (and chose their cabinet jobs accordingly), under Labour the Lib Dems would undoubtedly seek to portray themselves as a bulwark against Labour profligacy. Senior Lib Dems also say that next time, the party will seek to control at least one big, powerful department rather than spreading its ministerial weight thinly, as it has done in the current government. This is common convention on continental Europe; in Germany, for example the smaller coalition partner tends to hold the Foreign Ministry. Offering the Lib Dems a rump Treasury purely tasked with public spending settlements (which will be tight, irrespective of which party is in control) could thus give Labour an edge in coalition negotiations.



A Department for Milibandism?



A shadow cabinet that accurately reflected Mr Miliband's agenda and circumstances would therefore have not one but two major economic portfolios. Precedents for this exist. Clement Attlee's post-war government created a short-lived Department for Economic Affairs (DEA). Harold Wilson revived it, giving it some of the Treasury's responsibilities. Tony Crosland, a celebrated Labour moderate, was one of the incumbent ministers. Yet both times, the department was tasked with “planning” the British economy: a task no modern British politician (even the most leftist Milibandite) wants to attempt.



Other governments, too, have shaped the cabinet and government departments according to their priorities. Tony Blair appointed a “minister for women”, and created the modern Culture, Media and Sport and International Development portfolios. In Germany’s new government Angela Merkel has merged the economy and energy departments into a “super-ministry” responsible for one of her coalition’s defining policies: the transition to non-nuclear, low-carbon energy. Indeed, in his last reshuffle Mr Miliband himself elevated the shadow housing minister to the shadow cabinet in a nod to the issue’s importance.



In a reformed Miliband (shadow) cabinet, the Treasury team would continue to concentrate on overall spending. Its job would be to pursue fiscal responsibility, and be seen to be doing so. But another team—just as powerful and prominent—would have ultimate responsibility for economic reform and the “Varieties of Capitalism” shift that the Labour leader wants to enact. It would have the weight to strong-arm the Treasury into redirecting existing spending towards business, innovation and skills. It would have the authority to set the non-fiscal economic agenda: institutional and regulatory reform.



This would mean creating a new (shadow) departmental portfolio for Economic Reform based on the existing BIS one. It might take responsibility for job centres and active labour market policies from the Department of Work and Pensions, post-16 education and training from the Department for Education, and cities and local growth from the Department for Communities and Local Government. From the Treasury it would take responsibility for financial services, infrastructure, enterprise, productivity and “growth sustainability” (as the current government puts it). It would combine all the interlocking elements of the Milibandite agenda—a “Department for Milibandism”, as it were.



Past experience suggests further requirements. Mr Miliband would need to clearly set out the dividing lines between “Treasury” and “Economic Reform” responsibilities—and what each team would be expected to achieve. This would sidestep the problems that faced Wilson’s DEA; the first incumbent, George Brown, later admitted that: “I think it is a pity that we didn't produce a blueprint setting out precisely what we wanted to achieve”. It would also avoid the DEA’s other problem: institutional inferiority (the DEA existed within the Treasury and was short-staffed).



Some might think such speculation a mere parlour game for Westminster nerds. They may be right. But at the very least, it surely illustrates the extent to which, for better or worse, Mr Miliband’s rhetoric implies drastic changes to the British state. British political history is littered with examples of leaders who talked vaguely yet grandly in opposition—be it of the white heat of technology, stakeholder capitalism or the Big Society—but never quite lived up to the language in government. As 2014 unfolds, the Labour leader’s supporters (not to mention journalists trying to grasp what he would do as prime minister) are watching closely for signs that their man and his plans will avoid this fate.