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Good capitalism does exist. And it’s more crucial now than ever | Will Hutton

Some may have sneered at Ed Miliband’s key idea, but the Labour leader is right to challenge the old order

Britain is in the gravest economic position in modern times. It will be a full five years before output recovers to the peak levels of 2008. But today there is no empire on which to build a system of imperial preference, as in the 1930s; no North Sea oil as in the early 1980s; no booming City and readily available credit as in the 1990s and 2000s to drive a consumption-led recovery. Instead, we have huge levels of personal debt; the weakest recovery in demand in any economic upturn since the 1830s; diminishing oil; and a detached and loveless relationship with the only trade bloc, the EU, that might give us succour.

Moreover, what is left of our economy is gravely underperforming in structural terms. Business investment has been modest for years; productivity remains weak; rates of innovation are at best moderate. There is a stunningly large trade deficit despite an enormous devaluation. Many parts of the country are dependent on the public sector and welfare transfer payments for their survival. In short, the brand of capitalism we have practised for the last 30 years has unambiguously failed.

It is against this background that Ed Miliband’s speech to the Labour party conference needs to be judged. He was variously congratulated for joining battle with “neoliberalism”, attacked for kicking business in the teeth, patronised for lacking the “X factor” that meant he could never be an electoral success, and castigated for lack of specifics.

All missed the bigger point – a stage-army of pundits and so-called spokesmen for business rehearsing what they would have said anyway. Tony Blair gave a sequence of dazzling, well-crafted speeches at Labour conferences and, apart from a couple of good lines, I can’t remember one. They were all excuses for leaving the essential dysfunctions of the British economy in place. Mr Miliband’s speech, despite its weaknesses, at least represented an argument that needs to be made.

Here is a leader of the Labour party proclaiming he is pro-capitalist and pro-business – but condemning the capitalism we have. He wants a better capitalism informed by a sense of responsibility and a commitment to productive enterprise. At its core there should be the principle of something for something. Successive British governments have not distinguished between good and bad capitalism in informing how they regulate, tax and procure goods and services. Miliband would, he declared, be drawing a sharp distinction between the “producer” and the “predator” and “asset-stripper”.

But good and bad capitalism are difficult categories. Miliband’s definition was sketchy, resorting to RBS’s Sir Fred Goodwin and private equity-backed Southern Cross as lurid examples of bad capitalism –and Rolls-Royce as good. Although useful examples, the question is inevitably invited: but are there others?

Andrew Neil taunted poor shadow education secretary Andy Burnham in a TV interview, asking if Boots was an example of bad capitalism because it was owned by another private equity firm. Burnham blustered defensively – with neither interviewer nor interviewee aware that Boots, laden with £7.5bn of unnecessary debt, moved its domicile from Nottingham to Zug. One consequence of the takeover by KKR is that the UK exchequer is some hundreds of millions short of tax revenue: and half a dozen private equity partners are similarly enriched. It is a perfect example of a large something for nothing – or at least for a very little, paid for by the taxpayer.

However, not every private equity firm is necessarily a predator and even much vaunted producers can fall from grace: the former CEO of the properly lauded Rolls-Royce, Sir John Rose, now works for Rothschild. Miliband could have added Unilever, Logica, GSK, BT, M&S, John Lewis, Tata Jaguar Land Rover to his list to make a more rounded group of good companies – even though none would pretend to be holier than thou. Nor is every bank only preoccupied with financial engineering to create dynastic personal fortunes; a surprisingly large number of modestly paid commercial bankers genuinely want to lend and support their clients. The issue is not name-calling: it is rather how the architecture and incentives of the system creates welcome and unwelcome biases. The architecture of British capitalism creates some pretty unwelcome biases, as business secretary Vince Cable also acknowledged in his speech to the Lib Dem conference. He and Miliband are after the same quarry.

A good capitalism starts with how companies are owned. A takeover is too easy in Britain because shareholders only have entitlements to maximise the share price and no responsibilities for the assets they own. But all corporate Britain is infected by the same bias – runaway executive pay, under-investment and lack of innovation. A new companies act could reframe shareholder responsibilities. Banks supply too little credit to business, as chair of the FSA Adair Turner argued in an important speech recently: financial regulation should be reframed to allow banks to be more hungry to take risks that are economically and socially useful. There needs to be new avenues to direct long-term finance into small and medium-sized enterprise and infrastructure. The business growth fund should be turned into a specialist bank, and an infrastructure bank created. Tax relief on debt-interest, pivotal in so many destructive private equity deals, should be withdrawn.

A national network of technology and innovation centres must be built and the Technology Strategy Board should be equipped with serious cash – 10 times its current size. Investment in universities should be stepped up. Companies should be taxed for hoarding unused patents. A system of comprehensive lifelong learning, building on a proper apprenticeships, should be launched now.

It is societies that innovate and take risks: Britain cannot afford to have one in five households without work nor millions of children whose life-chances are predetermined at birth. We need working-class kids to be able to invest in their futures and take chances like their middle-class peers – otherwise we lose millions of potentially risk-taking workers and risk-taking consumers. We need a welfare system which allows disadvantaged children to build assets, built on the principle that what you get out is linked to what you pay in.

Economic and social performance designed to create a better stakeholder capitalism are indissolubly linked in a virtuous circle, an argument I made both in The State We’re In and in Them and Us. While the business lobbyists were fulminating about Miliband’s anti-business crusade, I received a number of texts from leading businessmen who while intensely disliking the language of “predators” and ” asset-stripping”, were sympathetic to the larger arguments he is making.

Miliband himself says he feels energized by taking the risk of challenging a 30-year consensus that there is no alternative to the capitalism we have. There is and always was. And now at last we have the leader of one of our two main political parties making the case. In democracies, arguments count – the consensus will shift, to everyone’s benefit. It may even bring electoral success. Substance does matter. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds