Throughout a long period of Opposition the Labour Party strove to regain a reputation for economic credibility that was lost in the ‘Winter of Discontent’ in 1978–79. Ironically, Labour was returned to power when the economy under John Major and Kenneth Clarke was improving but when the Party had lost trust among the public for the forced and costly withdrawal from the European Exchange Rate Mechanism in September 1992. Throughout the ten years of Tony Blair’s Premiership and with Gordon Brown at the Treasury the economy continued to expand. The succession of Brown as Prime Minister was assured as a result of his reputation as an economic manager but was immediately undermined by the banking crisis of 2007. The most effective piece of political rhetoric since then has been that the Conservatives are sorting out ‘Labour’s economic mess’ and even by 2015 Labour still lagged behind on ‘economic competence’, a key factor which explains the Party’s defeat at the last general election.

The point of this very brief history is that economic performance, as in the policies of the government of the day, and economic competence, as in the way in which the policies of governments are judged by the public, very often differ. Although there are those on the right who continue to believe that Mrs Thatcher saved Britain, this can only be maintained by neglecting the fact that there were two deep recessions under the Conservatives between 1979 and 1997, that unemployment increased and remained high throughout the 1980s and that growth was slower than in the postwar era which she denounced as a period of decline. Similarly, the idea that the economic crisis of 2007 was the fault of too much government – and particularly too much government spending – can only be sustained by ignoring the overwhelming body of evidence. Nevertheless, these myths are maintained and any social democratic political economy needs to deal both with economic reality and economic perception.

The task of this chapter – vital if Labour is to regain power – is to set out what an alternative political economy would look like.