The Conservative party under your leadership has moved a long way - in both rhetoric and stated ends - and last Friday's speech in Davos, where you outlined your concept of capitalism with a conscience, is another landmark. I know you will say that Lady Thatcher was operating in different times with different needs, but I still don't think she would ever have wanted to say that markets must not trample over values that society holds dear, or to question the need for the profit motive always to triumph. You said: "If markets, and capitalism, and the activities of individual businesses, conflict with our vision of the good society and the good life ... you must speak out." Amen to that.
But "speaking out" is not enough. 2009 is going to be the toughest economic year since the war, and if Britain's GDP falls by more than 5% from its peak in 2007 by 2010 - now virtually certain - we move from the realms of recession to near depression. I recall Tony Blair when in opposition calling for stakeholder capitalism, in rather the same vein as you are calling for capitalism with a conscience, but in practice very little happened. The financial markets were allowed their freedoms, executive pay became more grotesque, society grew more unfair and the dynamics that have created the current mess were unleashed. Actions have to accompany words.
Obviously in the current crash actions are being forced on everybody that, as you acknowledge, would have been inconceivable 12 months ago. But although some of your suggestions - such as the £50bn National Loan Guarantee Scheme - have been innovative and ahead of the curve in addressing the vital necessity of getting credit moving again, I feel that you lack an organising theory to explain what happened and how it underpins your aim to put society before markets and repopularise capitalism. If you don't offer a coherent framework for reform, complete with some robust sticks and carrots, what you say sounds little more than opportunistic warm words.
I fear that, like Tony Blair, you shrink from the truth of the matter; that free and lightly regulated financial markets, upon which so much of our business elite's prosperity is dependent, have delinquent propensities for speculation and short-termism that profoundly damage the real economy. The crash of 2008-09, like 1929, is because once again we did not keep finance on a tight rein. You need to say this.
I consider this the heart of Keynesian economics, and adopting this root and branch would give you more bite and coherence. For example, Keynes was certainly a radical monetary activist, a believer that, in economic extremis, you might have to print money, as much as he was a deficit spender, so in one sense you are already moving in his direction. But he was also passionate about insulating as far as possible the real economy from the casino of finance, which he felt de-legitimised capitalism. He had no qualms about the state doing what the market could and would not. Confronted by today's acute shortfall of lending capacity because of the flight of foreign banks, he would simply have created - like Roosevelt - a network of state banks to make good the gap. Britain could launch, say, national infrastructure, housing and long-term investment banks. This massive new leverage, along with a new framework of company law, could kick-start " capitalism with a conscience".
It is this link between analysis and action that you need to give your position some spine. Keynesianism is an economic philosophy open to all parts of the political spectrum. Are you ready to go all the way?
I understand why you want us to back up words with action, and to avoid repeating Tony Blair's mistake of raising expectations in opposition only to do little in office. I also agree with you when you say we need to "offer a coherent framework for reform". Let me try and reassure you on both points.
I'll start with the "organising theory", as you put it. You suggest we should go the whole way and embrace Keynesianism. As a Conservative, I'm naturally sceptical of embracing anyone's theory or ideology, although I agree that Keynes had many good ideas, in particular his emphasis on the dangers of the contraction of credit. Here in Davos you see this clearly right now: for example, a representative from the African Development Bank told me how the lack of credit is holding up the construction of roads, bridges and other infrastructure. So I think our plan for a National Loan Guarantee Scheme would actually achieve many of the long-term outcomes people associate with "Keynesianism".
But if by Keynesianism you mean a big fiscal stimulus regardless of the level of government borrowing, I don't agree. The reason is simple: because the government is already planning to borrow so much, if we borrowed a lot more now we'd actually make the recession worse. Why? Because we'd have to show how the extra borrowing was going to be paid back through tax rises. That would damage business and consumer confidence, which is in the end what will get the recovery going.
So if it's not full-blown Keynesianism, what is it? The way I explain it is progressive conservatism - that is, we think the best way to achieve progressive goals such as a fairer, greener society is through conservative methods, such as making sure that government lives within its means and decentralising responsibility and power. That brings me to your important challenge about backing up words with action.
I think a proper conservative approach to regulating capitalism is to understand that it's not about heavy regulation or light regulation, but about right regulation - appropriate for what you're trying to do. So in the most important regulatory failure before us - the failure to regulate financial services properly - the problem wasn't that the regulation was too light, it was that it was all wrong. There was no regulation at all of the things that really matter: the overall level of debt in the economy, and the financial risks that banks and other financial services companies were taking, linked to pay and bonuses.
So we've said we'll change that by giving the Bank of England back the power to regulate the level of debt in the economy, by requiring banks to keep more capital on their books in the good years, and by requiring financial services companies to be transparent about pay and bonuses, so investors and regulators can see what's going on. We will also levy a fee on City firms to pay for a beefed-up FSA that can afford to pay salaries that will attract people who are as smart as the firms being regulated.
In other areas, too, I think we're showing that we don't allow commercial interests to override our aims for society and the environment - and it's not just "warm words".
So, for example, on making the country more family-friendly, we have a number of specific policies to regulate corporate behaviour: giving all parents the right to request flexible working; shared parental leave, and compulsory equal pay audits for all companies that lose a discrimination tribunal. And, of course, on the environment we were the first to campaign for a climate change bill with legally binding carbon limits, and stood up to massive corporate lobbying to oppose a third runway for Heathrow.
I completely take your point that we won't succeed in putting society's needs above capitalism's needs with words alone, but what we've got to do is make sure the actions actually achieve the aims we want, and that's why I think that progressive Conservatism is the right formula.
You pushed the boat out with an interesting and significant speech, but in the face of some challenges I feel you have retreated to your comfort zone - a litany of pre-announced policies.
Just to drive the point home. There is a massive simultaneous economic contraction going on across the industrialised west, which is particularly acute in Britain; the decline in GDP we confront is on a similar scale to the early 1930s. British public debt levels are relatively low. We know businesses and individuals do not make careful calculations about future liabilities such as future tax burdens, as you argue; if they did, there would not be a debt and credit crisis. The evidence is overwhelming that fiscal boosts work in highly depressed economic environments, which is why Dominique Strauss-Kahn, managing director of the IMF, urges them. Our resulting public debt would not be high. I think you are ill-advised to set yourself against fiscal expansion in what rapidly looks closer to a depression than a recession.
But we have to fix the financial system as well. The global financial crisis has deeper origins than merely a failure of regulation, important though that was. Shareholders did not hold managements to account for wild behaviour and even wilder pay. Financiers knowingly misled investors about the risk in their products. Even now many bankers do not accept their excess and their mistakes. On top, there was an avalanche of cash from the emerging economies which passed the contagion of hot money to the west. The market system as it stands failed and needs to be fixed.
I understand and sympathise with your call for a capitalism with a conscience. But there have to be deep reforms of the system to deliver it. Unless progressive conservatism persuasively addresses the heart of this crisis, it will be seen as nice but peripheral.
I don't think you are right about the IMF and fiscal expansion - its position is actually the same as mine: fiscal expansion is great if you can afford it, counter-productive if you can't. Just what exactly did the VAT cut achieve except adding another £12.5bn to our ballooning national debt? But we'll probably just have to agree to disagree on that.
What concerns me more is that you think my response to the challenges you laid out was just retreating to a comfort zone of policies we've announced. It seems to me you're missing the big picture: that all those policies (and many more) add up to a vision for the country that connects the economy, society and the environment, and which aims to bring a new sense of responsibility to all three.
That's a change from the past decade or so, where we had booster capitalism tacked on to a failing welfare model. And it's a change from the 1980s, where we rightly had the spirit of enterprise, but on which we now need to build the sense of responsibility.
That word responsibility is really crucial for me: it's the golden thread that connects all our policies and positions. On issues such as executive pay and corporate greed, I agree we want business leaders to behave more responsibly. But I don't think that more statism is the best way to fix the excesses of the market.
Why? Because clever people will always find their way around rules; there will be unintended consequences, and you can too easily end up doing more harm than good.
There is an alternative. The sustainable way to achieve change is through people choosing to behave more responsibly. Now, that's not just a question of sitting back and hoping for the best, as some like to caricature it. We can lead change by changing the culture and, yes, the legal and regulatory frameworks within which people and businesses operate. That's what connects what we're saying about welfare reform, City regulation, carbon emissions, and our other reform plans. They're all about creating a more responsible society.
But I do know we can go further, and I especially want to apply our thinking on social reform - which is all about decentralising responsibility and power - to economic reform. I think that will provide us with a better balanced account of what progressive conservatism means.
I'm no statist - I am a committed and passionate pluralist. That is what stakeholder capitalism, which I champion, is all about. So I like your "big picture" view of embedding responsibility; in cricket, batsmen should walk when they know they are out, rather than wait for the umpire's ruling, and the same spirit should imbue economic and social life. What is elusive is how you propose to get there, and whether you are going to use the philosophy as cover not to use state power when it is plainly vital.
Take fiscal policy. The IMF is warning that the world confronts a contraction in demand greater that at any time since the 1930s - a crisis of "historic proportions". To avoid a Great Depression scenario it has called on governments to organise timely and temporary fiscal boosts equivalent to 2% of GDP, together with aggressive monetary policy and actions to stabilise the banking system. All three policies are needed. Three IFS researchers (http:/www.ifs.org.uk/wps/wp0902.pdf) recently assessed the VAT cut and show it will raise real consumption by a powerful 1.2% this year - significantly more than even the Treasury predicted in the pre-budget report. This is a temporary fiscal boost from a country with a low public debt ratio to GDP - the " space" that Strauss-Kahn has urged governments to exploit.
Your distaste for the state is leading you into ideological opposition to a necessary economic policy. The strikes and walk-outs in Lincolnshire by energy workers over the use of foreign workers show how angry and fearful people are - and potentially highly protectionist. If you become prime minister, you will have to offer very anxious people security, confidence and optimism, otherwise we will be unable to keep our capitalist system free and open.
You will have to use the state constructively, and not just over fiscal policy. It can only be the state that can reconstruct the financial system shattered by its own weaknesses, and I would use the opportunity to make it more long-termist and more supportive of genuine wealth generation. Do you agree? This country will need to grow many more companies like Rolls Royce and Vodafone to rebalance the economy; it will be the state that needs continually to attend to our innovation and skills systems to support them. Do you agree? The state will also need to avert a potential environmental catastrophe. We certainly need better constitutional protections against state intrusion into our liberties. But the constitutionally constrained state is the guarantor of pluralism, stimulator of prosperity and agent of more responsibility. You are mistaken to characterise it ideologically as our enemy.
It is not a hostility to the state that makes me oppose excessive deficits in the UK, but a dislike of irresponsible borrowing and the building up of debt that will threaten recovery and mean higher taxes.
A clear view, even if it is not a popular view, is what people should expect from me. On the issue of foreign workers, we also need straight talking. I told the prime minister not to borrow that inflammatory slogan from the BNP. It was cheap populism of the worst kind, and now he has been found out.
But let me conclude by taking on what you say about the role of the state. I think we are in danger of misrepresenting each other. I have said that being clear about the limitations of government should not mean being limited about the aspirations of what I would like a government to achieve. A more balanced economy between north and south needs high-speed rail and we will get the private sector to build it. A more green economy needs an interactive smart grid and we will ensure it is created. A better balance between saving and borrowing and more assets for the poorest need long-term incentives to save, and we will provide them. Progressive ends delivered by conservative means.
But none of this will be possible unless we also make the state and state spending smarter and more efficient. Living within our means is an important conservative insight and will be essential if we are to succeed as a country. Any minister in any government I lead would always have to ask: how do we do this and save money? How can we involve the private and voluntary sectors rather than just sanction more top-down state action? And above all will this encourage responsibility and a more responsible society? Now that would make a real difference.
I've enjoyed this frank exchange of views on what I think is the key issue ahead of us. I passionately believe that, before we can move forward with confidence, political leaders must be honest about the mess we are in. The truth of how we got here has to be properly confronted. Then only through strong public finances and strong and honest leadership will we find our way out.
Tory Economics: The buzz words
Major battleground of economic policy in the 19th and early 20th centuries. In 1846 Robert Peel fought a marathon parliamentary battle to repeal the Corn Laws - the tariffs on imports of corn that had driven up bread prices. Helped position Britain as a prime mover in the "first globalisation" that persisted until the first world war, but split Conservatives.
The gold standard
Winston Churchill's stint as Conservative chancellor was best remembered for his ill-fated decision to return to the gold standard that linked the value of money to government gold reserves in 1925, at the prewar exchange rate. Conventional wisdom said Britain had to prove its economic strength by rejoining; John Maynard Keynes argued against. Already struggling export industries crippled by overvalued exchange rate.
"Butskellism", the phrase coined for Conservative chancellor Rab Butler and Labour counterpart Hugh Gaitskell, who alternated in power in the early 1950s, was a cross-party postwar economic consensus. After Labour's landslide victory in 1945, both major parties moved towards a centre-left position, including acceptance of a welfare state, a strong role for unions and national ownership of many industries.
Margaret Thatcher took economic policy-making in a radical new direction. She embraced the "monetarism" of Milton Friedman and others, who argued that the key to battling inflation was to keep a firm grip on the supply of money. Thatchers's chancellors targeted size of money supply itself, and later value of pound, in an effort to beat inflation. Mass unemployment was regarded as "a price worth paying" to bring low inflation and economic stability.
Rolling back the state
Conservative economics in the 1980s and early 1990s also meant "rolling back" the state. Thatcher sought to cut public spending, privatise nationalised industries and liberate the City from capital controls.
Copyright Speakers Corner 2017