(BERR) Lord Mandelson\'s speech to Google Zeitgeist Conference - 18th May, Grove Hotel, Hertfordshire

What kind of new era?

There seems to be a general agreement that the credit crunch and this recession mark the end of an era. My question would be: The end of what exactly? And what will replace it?

In some respects, the credit crunch probably will define the end of an era. The end of thinking about financial markets and regulation as chiefly national as opposed to European or global. The end of any remaining complacency about the risks of global imbalances or the problems that can go with complex derivatives, cross border banking or the muddying of the line between retail and investment banks. The end of G8 as the exclusive steering committee of the global economy. This has been a crisis of and for globalisation, and I strongly suspect globalisation will emerge from it changed.

If this turns out to be the case then we are indeed at an important turning point for market economies. My argument today is that this carries two big risks for progressive politics - and one huge opportunity.

The risks concern attitudes towards markets in general; and how we understand the implications of globalisation and the credit crunch for the role of government in the economy.

The opportunity lies simply in the fact that we have the chance over the next few years to have an open debate about the way we govern globalised, capitalist social democracies, and to do a better job of governing the global economy. For thirty years, the debate about markets and governments has been ideological when it should have been pragmatic. A bit more pragmatism - which should not be confused with a lack of values - would do us good.

We need to re-establish the case for market capitalism from first principles, for a responsible value-based capitalism, as a tool for progressive social ends, rather than an end in itself.

Remaking the case for markets

The first challenge is to rebuild confidence in markets. We do that by being clearer about what markets are for. The idea that markets are always rational and efficient has taken a real knock, a fatal one. For me this certainly does not discredit markets themselves, so much as those who didn't understand them and made exaggerated claims for them.

We have to treat markets as tools. Ways of allocating investment or resources. Or linking demand to supply or driving innovation and efficiency.

Valuable because they reflect the exercise of individual choices. Irreplaceable in many ways. But often volatile and not possessed of unique wisdom. Just like us, because we, in the end, are the market.

It doesn't mean much to say there was a 'failure in financial markets' in some abstract, authoritarian way. This, again, shows a lack of understanding of markets. What went wrong and how we should approach fixing it only really starts to be clear when we start talking about how we failed to create the necessary conditions for market dynamics to operate soundly.

'We' means government and regulators, of course. But also the men and women who make up the market, whose judgments underwrote trades and transactions, whose attitude to risk was clearly flawed or skewed by incentives.

The risk at the moment is that the critique of markets goes too far. That we rush into re-regulating markets as a point of principle, as a political attempt to demonstrate control. Rather than recognising that the choice is between good and bad regulation, not regulation and no regulation.

I've been troubled to find the credit crunch being invoked as a kind of trump card in any debate about markets - especially any debate about the role of the market in delivering public services like the Royal Mail. Which is batty.

So the real warning of the credit crunch is that we can't be ideological about markets or regulation. The extent to which a market is effective is precisely defined by the extent to which it is appropriately regulated or its limitation observed and its shortcomings offset. Not heavy or light touch, but right touch.

Defining the role of the government

This relates directly to how we see the role of government. The classic metaphor for the state's relationship to the market has always been that of the umpire: policing the rules but leaving players to stand and fall on their strengths and weaknesses.
Even post-credit crunch, I still think that's right as far as it goes. Markets can't function without impartial regulation and enforcement of contracts, effective competition policy and the rule of law.

However, the metaphor misses a huge part of what government is actually there to do, especially, I would argue, in a globalised economy. Yes, umpire, but a democratic government also has a role 'off the field' - so to speak.

What do I mean by that? Well, globalisation creates big new opportunities for Britain: Huge new consumer demand benefits from specialisation and the exercise of comparative advantage. But it also will require us to compete overwhelmingly on high levels of knowledge and sophistication to keep our slots at the top of global value chains.

Those things put massive demands on our education and skills, our science base, our development of technology, our ability to innovate, both as individuals and in institutions. They rely on world class infrastructure for transport and logistics, but also for digital communications.

And the banking crisis has reminded us that we are heavily dependent on something else that operates very much like basic infrastructure in the economy: Credit.

Markets will not provide all of these things, we know that. They will do only what we can create the profit motive or commercial incentive to do, and even then, there may be a difference between the short and longer term and how you bridge between the two. There will always be a role for government in filling the gaps.

As I know very well from my time as an international trade negotiator it is taken for granted in development economics that comparative advantages emerge not from out of the air but over time from the combination of existing strengths, access to credit, skills, infrastructure, and private enterprise. Also from the conditions and environment for business that government creates, and the way that private enterprise builds on them. Part and parcel of this environment needs to be a rejection of protectionism, a positive embrace of competition as an essential stimulus to producing more things, better, and selling them more successfully.

But I have always argued that free trade and openness to globalisation need to come with active government policies to help us manage lives of greater economic opportunity, but also greater uncertainty. Unemployment insurance, education, training, flexibility in leaving and re-entering the workforce, help at crucial stages of change in life.

But also policies that actively equip our companies and workers to compete: skills, innovation, research, development.

You can actually see this across the OECD: The better governments are at equipping people this way, the more positive people are about globalisation: The more they see it as an opportunity rather than a threat, the more confidence and less fear they have. The difficult policy call is where protecting people stops, and plain protectionism takes over.

Again, the risk is that this argument is understood as the case for a bigger or more interventionist state, which it is not. What it is an argument for is a state that knows how markets work and can help make them work better, and that is capable of equipping the people and business it serves to succeed in these markets.

It is about preserving the huge benefits of private enterprise and competition in open markets by equipping our people to be entrepreneurial and resilient and innovative.

Last month the government published a policy framework paper called 'New Industry New Jobs' which set out how we would use the role of government to strengthen the resources on which British businesses and workers can draw, especially in equipping themselves to compete in global markets or in growing markets like low carbon goods and services. How Government can help reduce the barriers that hold business back.

This can mean support for innovation, skills training, technology demonstration and export promotion. It can mean committing to upgrade the UK's digital infrastructure. It can mean using public-private partnerships to ensure that viable and innovative firms have access to early life or growth capital.

The policy framework is about joining up thinking in Government and aligning government policies and action to help secure identifiable outcomes. It consciously rejects 1970s intervention and tries, instead, to fashion a more intelligent 21st century industry policy. This is definitely an iterative process.

The way forward: progressive capitalism

There has always been a tendency in people to 'interpret' a crisis: To see it as a judgement on 'how we live now'. You can see that with the credit crunch. And while that process is often useful and cathartic, it can also misdiagnose the problems.

We are entering a dangerous time for politics: The perception that the credit crunch was globalisation out of control; the issue of trust in politics raised by the current problems with politicians' expenses, the general anxiety that comes with recession. We have to do everything we can to ensure that this does not create a corrosive cynicism or disengagement. Because cynicism will deflect us from change, a defeatism that reduces risk taking.

The credit crunch is a wake-up call for governments, regulators and for the financial services and banking industries to do things better, not fundamentally to re-initiate market capitalism. It's a wake-up call for anyone who ever took on a debt they couldn't handle or bought a financial product they didn't understand. It's a warning about the costs of bubble-thinking and short-termism in markets.

But these arguments don't trump the case for open economies or market capitalism. They don't trump the case for globalisation, which is still the biggest driver of global prosperity and opportunity of our lifetimes.

But they do require us to be pragmatic now in defining the boundaries between the market and the state: To recognise the role and limits of both.

I think this should actually inspire us. I feel we live in a progressive age, as well as a global one. The age where value and responsibility have a premium. We have a chance to move past some of the ideological positions of the last twenty or thirty years and produce a model of progressive capitalism that is built on private enterprise, an open global economy and an enabling welfare state. One that taps the dynamism of markets but understands their volatility and shortcomings.

It is going to challenge politicians, because I think that it will mean thinking increasingly in European and global terms. But I also think it will increasingly focus on the local - because in a globalised world, that is where people will look to engage in their community and politics, and from where they want to derive a sense of belonging and identity.

People are used to making choices as consumers - they will demand the same choices as citizens, and politics will have to provide for that, creating greater empowerment and control by individuals over their lives; and what is done for them and provided to them. This is where politics is going, and incidentally, where my party, New Labour, needs to go in order to remain successful. No heavy-handed centralised state will ever be able to do that.

The reality is that for the next decade government will be constrained by the need to pay down the borrowing that is required to get us through the credit crunch and the recession. We will have to make choices carefully: So thinking about the role and priorities of government will be critical. This will result in a broader mix of public and private action and sectors.

Politicians are right to make the case for the benefits of globalisation. But we have to recognise that the reality is that globalisation can too easily leave people feeling disempowered. The credit crunch exemplifies that feeling. We have to help re-empower them.

That means making sure they have control over the decisions that affect their lives in their community. Making sure that they can trust the financial institutions they invest or bank with. Making sure they have access to the training and education that will give them confidence. Making sure that they have an outlet for initiative and brilliant ideas and the chance to turn them into commercial products. And to make sure that the economic benefits of globalisation are shared.

This might seem like political idealism at a time when all our efforts should be focused on economic recovery, restoring macroeconomic stability, paying down crisis borrowing. I disagree: I think this kind of politics is actually part of the process of recovery. We will not, and should not try to be the same again as in the past. It's about how we change, how we take control of our economic and political future at an incredibly uncertain time, and in taking control, make it happen, and make it better.

COI ref 174050P