New Labour's knowledge economy folly

The significance of the knowledge economy to the New Labour agenda should not be underestimated. If we rewind back to the moment Blair was elected as Labour leader in 1994, the lack of a coherent economic strategy for New Labour is, in retrospect, striking. Old style socialism was symbolically banished with the amendment of Clause IV, but early candidates for an alternative such as stakeholder capitalism failed to gather momentum.

The search for a big idea that could at once justify radical welfare reform, appeal to aspirational middle class voters and present a progressive alternative to free market neo-liberalism was never going to be an easy task. For Clinton, the defining message of the New Democrats was ‘it’s the economy, stupid’.

Constrained by the history of Old Labour, Blair needed a bolder social vision than Clinton. For New Labour, it became ‘it’s the knowledge economy, stupid’. Blair was undoubtedly brilliant in using his annual Labour conference speech to sell his vision to both the party faithful and the voting public. The theme of his 1996 speech was pithily summed up with a classic sound‐bite: ‘ask me my three main priorities for government, and I will tell you: education, education, education’.

As New Labour’s strategy began to cohere under the ‘Third Way’ label, the global knowledge economy came to the fore of their thinking. In face of global economic competition, it was argued, there was no future for the UK in competing for low-wage, low-skill jobs. Indeed, Blair was explicit in his view that the assumptions underpinning the old Keynesian welfare state had ‘completely broken down [because] globalisation has placed a premium on workers with the skills and knowledge to adapt to advancing technology’. The UK, he argued, must embrace the new knowledge economy.

Sociologist Anthony Giddens, the key architect of the Third Way, said of the philosophy that it ‘seeks to reconcile economic growth mechanisms with structural reform of the welfare state [because] in the information economy, human (and social) capital becomes central to economic success’. Blair, writing in a Fabian pamphlet on the Third Way, similarly argued ‘the main source of value and competitive advantage in the modern economy is human and intellectual capital. Hence the overriding priority New Labour is giving to education and training’. And Brown’s infamous invocation of ‘post‐neoclassical endogenous growth theory’ was, in essence, an argument that New Labour must focus on investment in human capital and exploitation of the latest technology if Britain’s economy was to grow.

Significantly, this emphasis on education also had a strong social message: greater public investment in education, it was promised, would also help address social inequalities. The New Labour approach was one of ‘e‐galitarianism’ – a new social democracy that placed its faith in technology and the knowledge economy as a motor for positive social and economic change. A decade on, what have been the key social and economic impacts of the e‐galitarian approach?

Firstly, we should note the continued decline of manufacturing in the UK. The figures here are dramatic (see Figure 1). In 1971, manufacturing was around twice as important to the economy as financial and business services (FBS); by the early 1990s the two were of roughly equal weight; and, in 2007, FBS was twice as important as manufacturing. Of course, London’s prominent position in the global economy is a key asset and it would be foolish for any government to suggest otherwise. However, there is a growing feeling that Labour allowed too many eggs to be placed in one basket. With the finance sector centrally implicated in the implosion of the economy, fresh questions about the role of manufacturing in the economy are being asked again. Indeed, with the Treasury suggesting that five per cent of GDP once generated by the finance sector now permanently lost, the need to explore other avenues for wealth generation is an urgent priority.

Whether there is now an alternative option to the service economy for the UK is, however, a moot point. The UK is regarded as an exemplar of the post‐industrial society and British capitalism is very different from the German model that has sustained a large manufacturing sector despite fierce global competition.

Crucially, the New Labour policy agenda has reinforced these differences over the past decade. The low numbers of apprenticeships, modest amounts spent on vocational training and the relative paucity of science and engineering graduates in the UK all point towards a nation lacking the tools needed for a vibrant manufacturing sector. One of the biggest lost opportunities has come in the recent expansion of universities: around eight per cent of those graduating in 2006 did so in an engineering subject compared with over 13 per cent in 1998. In Finland meanwhile, a leading example of a high‐tech knowledge economy, almost 21 per cent of the class of 2006 graduated in an engineering subject. While New Labour rhetoric emphasised the significance of technology, in practice its model of the knowledge economy has centred on finance and business services. It is unsurprising then that high‐ and medium‐technology manufacturing stand at around half the share of employment and economic output they did twenty years ago.

Worryingly for e‐galitarians, recent research suggests the move towards a knowledge economy may widen income inequality. Labour markets in knowledge economies appear more polarised than in industrial economies. A recent study by academics at Erasmus University and the London School of Economics talk of a division between ‘lousy and lovely jobs’ for the low and high skilled respectively. As Figure 2 shows, the regions of the UK that have the most intensive knowledge economies also have the highest levels of income inequality. It may well be, then, that in encouraging the development of the UK’s knowledge economy, New Labour have made it harder to meet their egalitarian objectives. Indeed, despite one of the most sustained efforts to redistribute income, particularly through the tax credits system, the story of New Labour’s period in power has been one of a government running to stand still: their increased social policy interventions have failed to stem a growth in underlying income inequality.

Indeed, income inequality is now at record levels. The challenges of keeping a check on inequality while encouraging the growth of the post‐industrial economy are not unique to the UK: all high‐income nations have faced the same pressures. But, there are suggestions in recent research that the New Labour model has fallen between the US model of high investment in human capital combined with weak social protection and the continental European model where the reverse is broadly true. The UK has not been alone in trying to achieve a balance between the productive and protective dimensions of social policy, but whereas high spending Scandinavian nations have pulled this off with some degree of success through major welfare modernization programmes, the UK and Australia have tried to achieve this balance on the cheap. It’s never been easy to have your cake and eat it, but New Labour have tried to do so without even paying for their seat in the restaurant. The failure to make bold and early decisions on spending and taxation mean its welfare modernisation programme has fallen short of the radical reconfiguration of social policy the Third Way once promised.

But more needed – and needs — to be done to address the technology and talent side of the equation. New Labour allowed their policy agenda to be heavily steered by the needs of London’s finance driven economy, believing that a booming financial services sector would generate continued economic growth that, in turn, would allow them to incrementally expand social programmes that would address social inequalities. But, just as the global credit market was a precarious juggling act, so too was New Labour’s e‐galitarian agenda. Now that the balancing act seems to have come to crashing halt, Labour will most likely look back with regret on their failure to pursue the deep structural reform of economic and social policy for the knowledge economy era the Third Way once promised.