While in theory the UK’s economic model is close to the Liberal Market Economies, in practice, it suffers from a number of debilitating ailments on institutional spheres pertaining to labour market and product market regulation. Andreas Kornelakis and Sotirios Zartaloudis diagnose these ills and argue that the first priority of the next British government must be to address these failings.
The recent polls show that the Labour Party is on course for a landslide victory against the Tories in the next elections. What’s at stake is the future of British capitalism in the post-Brexit era. For more than two decades, academics have categorised Britain as an example of a Liberal Market Economy (LME) on this side of the Atlantic, in spite of significant disjuncture in some parts of the system and, historically, a more generous social model than the United States. Even very recently, reputable newspapers such as The Economist subscribed to the notion that Britain is invariably an LME, based on the country’s response to the COVID-19 pandemic. However, we argue that a closer look at how the British institutional context has evolved after years of Conservative Party rule reveals the grave dysfunctionalities of British capitalism, placing it in a state of hybridity that is a far cry from a textbook LME model.
A closer look at how the British institutional context has evolved after years of Conservative Party rule reveals the grave dysfunctionalities of British capitalism
Got a staff shortage? Give Britain a pay rise
Liberal Market Economies are notorious for their flexible labour markets. Britain is no exception, at least on paper, for instance when it comes to Employment Protection Legislation (EPL) as measured by the OECD. Still, there remains a question mark over wage flexibility. The labour market has suffered post-Brexit from staff shortages in a wide range of sectors such as construction, transport, food and accommodation, and social care. In a truly flexible labour market, wages would go up in response to staff shortages. Yet the pay rises have concentrated in higher-paid sectors, such as finance and business services, while those working in hospitality or retail saw much lower rises. Analysis from the Resolution Foundation showed that pay growth has flatlined despite 15 years of “almost completely unprecedented” wage stagnation. One therefore wonders whether the UK productivity puzzle is simply answered by the trap in a low-wage, low productivity equilibrium.
If the labour market is not flexible enough to give workers a pay rise, then this begs the question: what kind of flexibility does the UK have? British employers seem to favour particular types of flexibility that are prone to exploitation and precarity, or what academics call a “numerical flexibility”, encompassing forms of non-standard and contingent work (eg, zero-hours contracts), switching between them to game the regulations around taxes, insurance contributions and employment law. The combination of wage stagnation and rampant profit-inflation driven by corporate greed has led to an explosive mix. The historically weakened British union movement, after years of blows from the Thatcher era, has made an impressive turnaround responding with extraordinary waves of strike action over the last year in many different sectors of the private and public sector.
Competitive markets or monopoly capitalism?
But if there is one thing that Liberal Market Economies are supposed to get right it is the organisation of product markets, in which relationships between actors are driven by competition. Nonetheless, there are many examples of sectors in the British economy that do not fit this picture and suffer from oligopolistic and monopolistic practices. The unjustifiable price hikes of mobile telecom and broadband firms have been dubbed “greedflation” and the government is accused of being “asleep at the wheel”. More generally, Britain has been a laggard in regulating Big Tech monopolies, in comparison to its counterparts in other jurisdictions. The European Commission has started a crackdown on Big Tech, imposing record fines to Google for abuse of its dominant position. Even China imposed fines and restrictions on Alibaba’s payment arm, Alipay. But the UK watchdogs have been very slow to respond, doing too little and too late.
Britain has been a laggard in regulating Big Tech monopolies, in comparison to its counterparts in other jurisdictions.
Other network industries experience similar problems. The water supply sector was part of the neoliberal Thatcherite programme but it ended up replacing public monopolies with private monopolies – such as Thames Water in London and Severn Trent in West and East Midlands. The market is overseen by an independent watchdog, the Water Services Regulation Authority (Ofwat) but the criticism against the firms’ pricing, lack of investment, and environmental practices place them with their back against the wall. The railways sector is yet another example with inexistent competition, rising ticket prices and regional monopolies up and down the country. The situation has pushed the Labour party to commit to public ownership, while the Tory government still insists that that private companies can run the railways.
The real estate market is no different. After years of housing shortages and a rally in the prices of properties, assisted by historically low interest rates, the Competition and Markets Authority (CMA) only recently sought to probe housebuilders for their anti-competitive practices. Yet, the elephant in the room is the planning system with its Byzantine restrictions that specify in meticulous detail even the type of sash windows that house-owners are permitted to install. The distortions in the market are exacerbated by the English and Welsh peculiarity of the “outdated feudal” leasehold system, in which buyers often get entrapped in exorbitant costs and ground rents – paid to aristocratic or opaque offshore freeholders. This regulatory mix leads to the perpetuation of gross inter-generational inequalities with 50 per cent of the land owned by 1 per cent of the population and an epidemic of homelessness amid a cost-of-living crisis.
What’s at stake: how to fix British capitalism?
In the run-up to the next elections, the political contenders will have to come up with their vision of how to fix the broken model of British capitalism. The pathway towards fixing those problems includes a careful recalibration of the institutional setup geared towards a high-productivity equilibrium. Furthermore, it is required to address the catastrophic disjuncture that enabled cut-throat competition at the bottom end of the labour market, while shielding from competition those areas where monopoly capital and entrenched rentier interests have become powerful veto players. Setting out clear solutions to these problems will be crucial to the parties campaigning in the next general election, and certainly, fixing the flaws of British capitalism will be a key challenge for the winner but a necessary one if one takes “levelling up” seriously.
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.
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