How Starmer forgot the failures of old Labour

There is no shortage of contenders when it comes to quotable sayings on the propensity of history to repeat itself. Mark Twain reputedly said that there was no such repetition, but conceded that history does sometimes rhyme. Karl Marx was more assertive: history repeats itself once as tragedy, and second as farce.

But the remark that should perhaps guide us most on Labour's plans for the economy is the one sometimes attributed to Albert Einstein: the definition of madness, he said, is to keep doing the same thing and expecting different outcomes.

After four decades in which UK economic policy was broadly instructed by a "let the markets decide" approach, industrial strategy or state interventionism – call it what you will – is back, this time energised by Labour's ambitions for net zero.

Sadly, interventionism 2.0 is no more likely to succeed today than it did last time around.

For many, Einstein's observation would have been brought to mind during the opening remarks of Rachel Reeves's maiden Budget a couple of weeks back.

"This is not the first time it has fallen to the Labour Party to rebuild Britain," the Chancellor said. "In 1945, it was the Labour Party that rebuilt our country from the rubble of the Second World War.

"In 1964, it was the Labour Party that rebuilt Britain with the white heat of technology, and in 1997, it was the Labour Party that rebuilt our schools and hospitals. Today, it falls to the Labour Party and to this Government to rebuild Britain again."

That's quite a claim – suggesting anything worthwhile in Britain since the war is all down to Labour. Her words were presumably a play on the old Tory complaint, that it is the job of any incoming Conservative government to clear up the mess left by its Labour predecessor.

Reeves's recent speech was a deliberate attempt to frame the narrative the other way around. It's also pretty much nonsense, a disingenuous distortion of what actually happened in the past; Labour governments almost invariably end in economic chaos.

Admittedly, that's not entirely true of Clement Attlee's period in office, which just petered out. The Tories wrested power from him not only on a smaller share of the popular vote, but also by accepting the main elements of Labour's recently created welfare state, including the National Health Service.

However, Attlee was very much the exception. Both other periods of extended Labour rule culminated in massive economic failure.

With favourable demographics and rapid technological advancement, the 1960s and 1970s ought to have been periods of unparalleled economic progress.

But as time went on they were marred by paralysing industrial strife, double-digit inflation, a currency crisis and fiscal trauma that saw Britain fall badly behind its European and American peers.

Underpinning this relative decline was an unerring belief in the idea that governments, not markets, create growth. The evidence for this is slim, though it is admittedly true that government programmes can sometimes energise private sector activity.

In any case, Labour's experiment in interventionist industrial policy during the 1960s and 1970s ended disastrously in Jim Callaghan's "winter of discontent" and a humiliating International Monetary Fund bailout.

Having accepted many of the key reforms of the Thatcher era, the Blair years of the 1990s and Noughties were somewhat better, and indeed saw a degree of catchup with the major economies of Europe.

But many of the same "big state" mistakes were repeated.

Though not originally a "made in Britain" catastrophe, Labour rule ended in a devastating financial crisis from which the nation has yet to properly recover.

As is now obvious, Labour spent and borrowed too much, and by relying unduly on an actively encouraged credit bubble to keep the show on the road, exposed the country to massive financial risks, resulting in the worst banking crisis since the 1930s.

Repeating past mistakes Yet there was one element of the inherited Thatcherite legacy that Tony Blair and his Labour successor, Gordon Brown, did broadly take on board: belief in Adam Smith's "invisible hand".

Their approach to the economy was essentially market-driven and in many respects a repudiation of traditional Labour ideas on the central role of the state in directing the economy and allocating resources.

The worm has now turned again. Today's Labour leadership takes its inspiration not from Blair, but looks further back in history to the interventionist policies of the 1960s and 1970s under Harold Wilson and Callaghan.

Sir Keir Starmer, the Prime Minister, is a known admirer of Wilson, and so too is his Chancellor, Reeves. To them, it doesn't seem to matter that Wilson's industrial interventionism failed; they are more than willing to give it another whirl.

Wilson swept to power on a platform of change and modernisation. He wasn't wrong about the white heat of technology and its potentially transformational powers. This was the swinging Sixties, and Wilson was determined to capitalise on its feel-good vibes.

Many of the "progressive" social and cultural reforms we today take for granted – the abolition of capital punishment, decriminalisation of homosexuality, liberalisation of divorce, abortion and censorship laws, freely available contraception – all stem from Wilson's time in office.

Against the stale greyness of the 1950s, Wilson's government seemed like a breath of fresh air. When England won the World Cup in 1966, his star rose off the scale. Wilson could seemingly do no wrong and, initially at least, voters flocked to his higher-tax, interventionist approach to economic management.

Yet beneath the surface all was not well. That diagnosis is admittedly not immediately apparent in the raw data. GDP growth in the 1960s averaged what was by today's standards a positively stellar 3.5pc per annum; unemployment was a lowly 2.7pc, and real household disposable income was 25pc higher by the end of the decade than the beginning.

Contrast that with the 0.5pc rate of annual growth in living standards that the Office for Budget Responsibility projects for the rest of the current parliament.

The big picture wasn't quite so flattering in the 1970s, but compared to today, was still pretty good. Annual GDP growth averaged 2.7pc, and real household disposable income, after a long hiatus mid-decade, was 30pc higher at the end of the 1970s than at the beginning.

It certainly didn't feel like it at the time but the 1970s were in fact a period of rising prosperity and falling income inequality, with car ownership increasing from 45pc of households at the start of the decade to 70pc by the end. Homeownership also rose significantly.

So where's the complaint? All things are relative, and the grim truth is that beneath the surface British industry was fast losing out to foreign competition throughout those two decades.

Britons seemed to be doing OK, at least in terms of living standards. But their Continental peers, particularly in France and Germany, were doing even better.

Moreover, rising prosperity in the UK was achieved more on the back of expanded credit and a steadily depreciating pound, including Wilson's famous "pound in your pocket" devaluation, than any industrial success.

Repeated balance of payments crises, sometimes brought on by strike action, became a feature of the times as the economy struggled to come to terms with endemic loss of competitiveness in export markets.

Economic policy was characterised by crude "stop-go" demand management which made long-term business planning virtually impossible.

By the end of the 1960s, inflation was also becoming a problem and was to remain so throughout the subsequent decade.

Decade of decline People could look across the Channel and see that things over there were noticeably better than back here.

Wilson's solution was to seek a partnership between business, government and unions, mimicking the more successful economies on the Continent, and to make state-directed industrial strategy and planning the cornerstone of his economic policy.

The "white heat" of technology would be pursued by picking winners and providing them with state support and subsidies to succeed on the global scene.

None of it worked.

Most British governments since the war have in practice been more of an evolution of the previous one than a decisive break with the past. Thatcher is the exception – but despite the modernising rhetoric, Wilson was not. His economic policies had more in common with those of his Tory predecessor, Harold Macmillan, than he cared to admit.

Macmillan was similarly fixated on the idea of state planning as a solution to Britain's economic problems, and it was he, not Wilson, who first established the National Economic Development Council (usually referred to as Neddy) to bring together management, trade unions and government to address the relative economic decline.

Neddy was modelled on the apparent success of the French Economic and Social Council and was to spawn a whole army of Economic Development Committees ("Little Neddies") to represent particular industries.

At best, they proved a waste of space. Industrial relations continued to deteriorate throughout the 1960s, such that meetings of Neddy became virtual war zones rather than a grand meeting of minds on how to deliver economic progress.

Apologists for Wilson claim he had some of the right ideas but was thwarted by overmighty unions.

Barbara Castle's "In Place of Strife" white paper in 1969 was an early attempt to stamp out the wildcat strikes that were increasingly blighting the economy. But it was predictably buried after a union-inspired cabinet rebellion led by the future prime minister Callaghan.

Then at the height of their power, union leaders effectively scuppered all hope of reform, and thereby laid the groundwork for their own destruction when the Thatcher government stepped in and took a sledgehammer to the nature of the problem.

Another example of failure was the Industrial Reorganisation Corporation, which was intended to create national champions capable of competing on the world stage by merging smaller companies together.

Notable interventions included the three-way merger of GEC, AEI and English Electric to create a behemoth supposedly capable of standing alongside Siemens and other more successful European electrical engineering giants.

Under the parsimonious hand of Arnold Weinstock, the new company at least had the merit of financial soundness. But industrially it was merely an exercise in managed decline, and was eventually broken up in the backlash against conglomeration in the mid-1990s.

Even less successful was the amalgamation of British Motor Corporation and Leyland Motors in 1968 in an attempt to match the likes of Volkswagen, Renault and Peugeot Citroen.

With car production nearing a post-war high, the merger marked the zenith of the UK motor industry, and coincided with the release of Peter Collinson's The Italian Job, a film that showcased British automobile design at its best, including the star of the show, the Mini Cooper S.

Yet the film's famous concluding line – "hang on a minute lads, I think I've got an idea", as the coachload of stolen gold teeters on the brink – seemed in its delusional self-belief and amateurism to characterise all that was wrong with an industry that was already slipping over the edge.

There followed more than a decade of decline that, like shipbuilding and steelmaking, consumed billions of pounds of public money for zero eventual return.

Its lasting memory was not the Austin Metro, a car long in the planning that was meant to save British Leyland (BL) from ruin, but Derek "Red Robbo" Robinson, an avowed communist who led production workers at BL's Longbridge plant in Birmingham on repeated walkouts.

The final coup de grace was joining the European Economic Community, as the EU was then known. Part of the intention was to force change by opening British industry up to international competition. For the homegrown car industry, it was a death blow that saw its virtual monopoly of the domestic market torn to shreds.

It was also a turning point for industrial policy. As noted by Duncan Weldon in his economic history of modern Britain, aptly called "Two Hundred Years of Muddling Through", policy switched from attempting to create "brave new technological wonders" to bailing out losers.

One of the main institutions through which the state attempted to exercise industrial control was the National Enterprise Board (NEB), the brainchild of the economist Stuart Holland and the Left-wing firebrand Tony Benn.

Modelled on the Italian Istituto per la Ricostruzione Industriale – credited with the successful restructuring of the Italian economy after the war – the NEB was to take controlling stakes in a number of Britain's leading companies of the day, many of them in financial distress when the state stepped in.

Its primary job thus became not that of galvanising winners but of propping up lame ducks.

Few of them survive in recognisable form today, the exception being Rolls-Royce , which unusually for a one-time UK industrial powerhouse, has maintained its world-class position in jet propulsion.

As for the white heat of technology, virtually all the computer companies that the National Enterprise Board invested in have long since gone, or been merged into larger foreign-owned entities.

Huge sums of public money were funnelled into the nascent British microchip industry, all to no or little avail.

What was left of International Computers Ltd, another of Benn's initiatives as Minister of Technology, eventually ended up as part of Fujitsu, the Japanese IT outsourcing company behind the Post Office's disastrous Horizon accounting system.

Similar mistakes were made with the already-nationalised industries and utilities. Having been the first country to successfully generate nuclear power at scale, the UK then proceeded down the technological cul de sac of its own gas-cooled reactor design.

Justified on the basis of unparalleled export opportunity, the new generation of reactors ran tens of billions of pounds over budget and failed to sell a single plant overseas. Another Bennite triumph, and that's before we even get on to Concorde, magnificent in design and cost, but tragic in commercial viability.

History as farce By the mid-1970s, the penny had begun to drop even for old Labour stalwarts such as Callaghan.

"We used to think that you could spend your way out of a recession, and increase employ­ment by cutting taxes and boosting government spending" he told the Labour Party annual conference in 1976 in a speech substantially written for him by the economist Peter Jay.

"I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of infla­tion into the economy, followed by a higher level of unemployment as the next step".

But he never lost any of his faith in industrial intervention, and even in that same speech, he was still promoting the NEB as key to economic regeneration. Three years later, he and the failed industrial policies of the previous two decades went down with the ship; there was no space for such foibles in Thatcher's Britain.

What goes around comes around, and more than 40 years on, climate change has given Labour all the excuse it needs to once more dabble in the fantasies of a planned economy. What's so uncanny about it is that even the rhetoric bears a striking similarity to that of 1960s and 70s Britain.

"Britain stands at the precipice of immense change," said Jonathan Reynolds, the Business Secretary, in launching Labour's new industrial strategy, echoing Wilson and Callaghan.

"That change presents an incredible opportunity ... Economic strength needs partnership. State and market. Business and worker. Bringing together the everyday economy and the technological frontier to transform challenges into opportunities."

Never mind the lessons of the past, when it comes to what's good for the economy, it seems the Government knows best. Already, some of the institutions needed to channel ministerial decision-making are up and running, notably Great British Energy and the National Wealth Fund.

Admittedly, they have so far been endowed with relatively small – though by no means insignificant – amounts of money to pour down the drain, such as £8.3bn over the course of the parliament for GB Energy .

But it is a beginning, and a change in the measure of debt targeted under the Government's fiscal rules means that potentially the sky's the limit.

The newly targeted measure – public sector net financial liabilities (PSNFL) – allows the Government to net off the value of certain assets, including equity, against borrowing, assuming the investment falls short of a controlling interest. If the Government invests, say, £100m in company X, it won't show up as extra borrowing since it will be offset by the value of the asset acquired.

Theoretically, the Government could invest in virtually every company in the land, and despite the monumental cost, it could be netted off against the extra borrowing needed. Clever, or what?

More like totally disastrous; as any financial adviser will tell you, the value of shares can go down as well as up, and since the Government's priorities are not shareholder value but wider economic and net zero goals, it is more likely to go down.

Either way, the Government would be gambling with public money.

The Chancellor's proposed reforms of the pensions industry – intended to unleash a flood of pension fund infrastructure investment – also need to be viewed with deep suspicion. Any suggestion of compulsion, or even just gentle arm-twisting to invest in UK assets, would be a disaster in the making for millions of pension pots.

Conveniently, net zero has provided Labour's "planned economy" 2.0 ambitions with a whole new lease of life. Britain's green energy transition can't and won't happen without a very high degree of government coercion. Nor will it happen on the accelerated timescale announced last week by Sir Keir Starmer at the Cop29 climate change jamboree without a heavy dose of state direction and subsidy.

Ministers come over all misty-eyed in extolling the potential for new industries, jobs, exports, energy security and clean air. But right now, it looks as if the only way they will get there is by frogmarching the economy towards a future of higher prices and energy rationing.

At the same time, the unions are being re-empowered. And they say history doesn't repeat itself.

Labour's high command back in the 1960s and 1970s were creatures of their time who had only recently emerged from the state-run economy of the Second World War. They at least had that by way of excuse. They may have been misguided, but they were also men of considerable political stature and intellect – not just Wilson, but Denis Healey, Roy Jenkins, Anthony Crosland and, for all his faults, even Tony Benn.

Without wishing to be unkind, you'd struggle to say that about the present cohort of Labour politicians. Marx may have been correct; history may indeed be about to repeat itself, this time as farce.