Labour is taking Britain’s economy back to the post-war era

“A play wouldn’t be enough. It needs to be a 12-part Netflix series,” said James Graham, the writer behind the Gareth Southgate biopic Dear England , in 2020 when asked whether he was considering penning a play about John Maynard Keynes . He surely had a point. Keynes is remembered as the most influential economist of the 20th century. His most famous argument was that increased public spending was key to growth, an idea that shaped economic policy in Britain and across the West for a generation after 1945.

He was also a delegate at the 1919 Paris Peace Conference and one of the architects of the World Bank. A quintessential establishment man – Eton, Cambridge, the Civil Service, the Lords – he was also the founding father of the Arts Council and a central member of the avant-garde Bloomsbury Group alongside Virginia Woolf and EM Forster, challenging Victorian moral norms in both theory and practice. Had he lived a few decades later, tabloid headline writers might have dubbed him a bed-hopping bohemian bisexual boffin.

Now, Graham has written his play (having given up on the dream of the 12-part Netflix series). The Standard of Living , starring Rory Kinnear, a double-Olivier-award-winner, as Keynes , opened in the West End at the end of September. It has received rave reviews for its acting and staging, and a script that brings potentially dry economic ideas to life. Dominic Cavendish, The Telegraph ’s chief theatre critic, described it as “masterful”.

It is also a hot ticket among Labour Party supporters, activists and MPs. That’s no surprise, for Keynes’s mistrust of markets and the belief that, at least in some cases, the government knows best, is very much back in vogue in the new Andy Burnham administration and its champions. Listen carefully to the Prime Minister’s tear-stained Labour conference speech last month and its pledge of “public control” over key markets, and you can hear an echo of Keynes’s argument that markets alone cannot be trusted.

Echoes of this argument are also likely to appear in the Chancellor’s Budget speech on Wednesday. One letter published by the LabourList website last week described Keynes as “probably the greatest economist of our time” and someone who “understood full well how an economy works”, in contrast to his “weirdo” contemporaries who championed free markets, leaving “all the wealth [ending] up [at] the far end of society”. But it is another of Keynes’s ideas that makes him part of today’s political conversation – his argument for the “somewhat comprehensive socialisation of investment”.

This notion is attracting the interest of Labour thinkers who have shaped the Burnham agenda. Work by Mathew Lawrence of the Common Wealth think tank informed Burnham policies, such as the creation of a state-owned electricity grid operator (dubbed the “Great British Grid” ). Lawrence’s essay, “The Productive State”, is a core text for the Prime Minister, and cites Keynes with approval. “The socialisation of investment is not primarily about smoothing cyclical fluctuations.

It is about controlling the future,” writes Lawrence. His argument is that private investment is governed by the short-termism of financial markets and does not value long-term returns, meaning the private sector will never invest enough in the things society needs most. Lawrence’s is a quintessentially Keynesian analysis – markets will not alone make the “right” choices about where money and resources should go. It is therefore necessary for the state to make at least some allocative decisions.

For Lawrence – and thus Burnham – that means the private sector alone cannot be trusted to invest in, own and operate sectors such as transport, social care, energy and housing. Better, in Burnham’s phrase, to have “public control” than to let short-term investors hold sway. That was a principle embedded in Burnham’s reign as Manchester mayor, during which he took over the running of buses from the private sector. Now it’s reached No 10, where the Prime Minister has paved the way for an expanded state role in whole sectors of the economy, having complained about homes, water, energy, transport and social care all being “broken up and sold off”.

The notion of a government trying to control key economic sectors and seeking the “socialisation of investment” might well sound alarming to Telegraph readers, sensibly suspicious of progressive intellectuals forever coming up with ways to spend taxpayers’ money. As Margaret Thatcher famously said, the problem with expanding the state is that eventually, “they run out of other people’s money”. However, as Thatcher also pointed out, Keynes himself was not a socialist and didn’t advocate state control of the economy.

She fiercely rejected the post-war Keynesian consensus of state intervention. But her dispute was not with the economist himself, but with the way in which his theories had been interpreted by his self-professed disciples, who had corrupted his work to justify reckless state spending and state expansion. In fact, Keynes was a Liberal whose motive for reforming capitalism was to save it from communism. He embraced wealth. He supported his writing career in the 1920s and 1930s by working as a financial consultant.

He made himself a millionaire by investing astutely in financial markets, and he consented to “all manner of compromises” when promoting his “socialisation of investment”. Lawrence also doesn’t believe in “blunt” state control. Instead, he says, it is about shifting the line where the state’s role in investment stops in favour of deploying more public money partly to fund things such as roads, houses and power networks. There is still a market where investment decisions are made, but the state becomes a participant in that market.

The Prime Minister called his new Great British Grid “a publicly owned company that will challenge the private sector operators” because those operators haven’t invested enough in the grid. That idea can be traced directly back to The General Theory of Employment, Interest and Money , in which Keynes wrote: “The duty of ordering the current volume of investment cannot safely be left in private hands.” Burnham will also make greater use of the National Wealth Fund (NWF), a Whitehall vehicle for investing taxpayers’ money in big projects.

With around £27bn to invest by the end of this Parliament, the NWF has the scope to be a player in infrastructure programmes, providing early-stage funding for risky projects, and thus giving private investors the confidence to lend, too. Such a system is common in countries with state banks, from Germany to China. But sometimes, state banks fund projects that the private sector would happily have supported, which ties up scarce public money for no net benefit.

There are concerns that the NWF can sometimes err on the ineffective side of the Keynesian line. Last year, for example, the NWF committed to lend billions to support the new Sizewell C nuclear power station (exposing the taxpayer to a massive financial risk), when there were plenty of private sector investors keen to back the project. Elsewhere, investors complain that the NWF is funding solar panels on school and hospital roofs, something the private sector would happily fund.

The Labour-majority Treasury select committee later scolded the NWF for taking too crude a view of its role, telling the fund to “take on riskier investments which open the door for the private sector to get involved”. The NWF’s £27bn is, however, small beer when it comes to a £3tn economy’s need for investment in infrastructure. The National Infrastructure and Service Transformation Authority reckons the UK needs to invest upwards of £80bn a year for at least 20 years to bring our power, transport and other essential networks up to scratch.

The Government alone cannot hope to do this. The UK national debt is already £3tn, and government borrowing costs are rising as bond markets doubt Britain’s ability to honour its IOU notes . For the foreseeable future, the Government will not have truly large sums to invest on its own account. That constraint has turned the sharper minds on the Left towards other sources of capital to deploy. Enter Torsten Bell , the pensions minister and the most accomplished economic thinker in the Government.

Bell, a former think tank director, has convincingly argued that Britain’s fundamental economic problem is underinvestment, both private and public. Bell has never framed his thinking in Keynesian terms, but one of his big ideas for boosting investment brings that “socialisation of investment” to mind. He is driving pension funds to consolidate and invest in the UK, putting Britain on course for having funds that, between them, could be managing as much as £400bn of savings by the end of the decade.

Such large “mega funds” are the perfect investors in big, long-term assets, and the hope is that they will become key sources of capital for British infrastructure and businesses trying to grow and innovate. While the Government won’t be directing the individual investment decisions of these megafunds, it will have a legal “reserve power” to compel them to invest 10 per cent of their money into private assets, with at least 5 per cent specifically earmarked for high-growth businesses in the UK.

Bell insists this would be a last resort, but for sceptics, a Rubicon has still been crossed – the Government now has the power to decide where private capital is invested. Bell’s case for his reserve power to direct pension investment rests on a very Keynesian analysis that sometimes the single controlling mind of the state should decide where money goes because the many uncoordinated minds of the market cannot reach the correct conclusion.

Keynes was friends with people who disagreed with him. Friedrich Hayek, the forefather of Thatcherite economics, described Keynes as “the only great man I ever knew”. Hayek, who is presented as his great intellectual adversary in Graham’s play, was an Austro-Hungarian artillery officer who fought in the First World War. As an economist, he watched a great European civilisation destroy itself, then spent the rest of his life at the London School of Economics, challenging Keynes’s argument that sometimes the state knows best.

At one point in the play, Keynes and Hayek fall into an elegant pas-de-deux , as they debate their differing views on interest rates. For Hayek, the dispersal of decision-making between countless firms makes markets more efficient than any government. “To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that, in complex conditions, order and adaptation to the unknown can be achieved more effectively by decentralising decisions, and that a division of authority will actually extend the possibility of overall order.

Yet that decentralisation actually leads to more information being taken into account,” he said. Graham is an enthusiast for his main subject, telling The Observer that Keynes’s “thinking comes from a place of morality”. He said that while he liked writing Hayek’s speeches in defence of market forces, his “heart was with Keynes and the idea that, in dark, difficult times, you intervene. You don’t let the universe pass you by without getting involved”.

Hayek lost the argument with Keynes about the post-war economic order, but still found fame. Reader’s Digest serialised his great work, The Road to Serfdom . He won the Nobel Prize in 1974 and then became the decisive influence on Thatcher’s free-market agenda, which shaped Western economic policy from 1979 until the 2007 financial crisis, much as Keynes held sway for the three decades after 1945. Keynes died in 1946, aged 62, but Hayek lived into his 90s, long enough to see the free market triumph and Soviet state control collapse.

He became a Companion of Honour in 1984 and described meeting Queen Elizabeth II to receive the honour as “the happiest day of my life”. Graham’s play on Keynes should be a hit, because he was a great man with great impact, who would always enjoy great admiration, especially from the metropolitan tastes he amicably deplored. But a look at the British state today, both more expensive and