Heresthetic

Iain McLean, Rational Choice and British Politics, p. 556

Heresthetic is the art of political manipulation. It is about ‘structuring the world so you can win’.Footnote 62 This concept is used in electoral politics to describe the strategy of bringing about a new alternative to divide an existing majority, upsetting the prevailing equilibrium. As a case in point, Abraham Lincoln famously split and then defeated a solid Democratic majority by introducing a new dimension of political competition, that is, slavery. Political scientists mainly focus on the way electoral equilibria are broken by increasing or fixing dimensionality. But Riker's lessons are more general. Skilful herestheticians outmanœuvred political adversaries by redefining political situations, reframing policy alternatives, manipulating agendas, voting strategically and changing the process by which collective decisions are taken.Footnote 63 Indeed, heresthetic is essentially ‘the art of constructing choice situations so as to be able to manipulate outcomes’.Footnote 64 In Riker's words, it is about: ‘Setting up situations .. in such a way that even those who do not wish to do so are compelled by the structure of the situation to support the heresthestician's purpose’.Footnote 65

One of the key arguments of this article is that heresthetic is also about the strategic manipulation of institutions. Social decisions are made by aggregating the opinions of relevant people. New institutionalism contends that social outcomes depend as much on the procedure of aggregation as on the tastes of participants. If institutions mediate the relationship between preferences and outcomes, it is always possible to manipulate outcomes by redesigning institutions. In this context, the logic of heresthetic can inform the politics of institutional change.Footnote 66 In certain moments of history, the introduction (or elimination) of dimensions involves the manipulation of institutional structures, as actors struggle to shape the mechanisms transforming preferences into outcomes in order to prevail in future political contests. Hence, heresthetical manœuvres are a source of institutional change. However, while some politicians are strong on heresthetic, others are not.Footnote 67 We will see that this issue played a key role in explaining the evolution of bank independence in Britain.

The concept of heresthetic is also a reminder that political agency matters in the process of institutional change. One way of incorporating agents into a model of institutional origins is to look at the behaviour of ‘political entrepreneurs’, who engage in institution building to make profits.Footnote 68 Transforming institutions is costly though. Political entrepreneurs must invest time and energy in the design of institutions from which they seek to secure political gains. In the remainder of this section, we will discuss two types of motivations: (1) the notion of binding others; and (2) the enabling functions of institutional pre-commitments.

From Self-Binding to Binding Others

Jon Elster, Ulysses Unbound

The idea of self-binding is omnipresent in the credibility-based narratives explaining the choice of monetary arrangements. Several scholars have employed the metaphors of tying one's hands and burning one's own ships to describe the pre-commitment options available for achieving credibility in strategic interaction.Footnote 69 These metaphors have been widely applied to account for the evolution of fiscal and monetary commitments.Footnote 70 Correspondingly, Ulysses’ self-binding logic is often used to explain the rise of independent central banking. As one expert put it:

The abusive use of the self-binding rhetoric induces misleading interpretations of the political logic of institutional solutions to problems of credible commitment. Moreover, scholars writing on monetary commitments seem to be unaware of Elster's important U-turn on the rationale of self-binding. In Ulysses Unbound, he explicitly revisits and reformulates some of the key arguments of his influential Ulysses and the Sirens. In particular, he argues that: ‘the transfer of concepts used to study individuals to the behaviour of collectivities, as if these were individuals writ large, can be very misleading’. For one thing, ‘constitutions may bind others rather than being acts of self-binding’.Footnote 72 By removing the assumption that governments are unitary actors, Elster now claims that pre-commitment devices, like granting central banks independence, are not self-binding in an intentional sense. On the contrary, many alleged cases of self-binding institutions turn out, on a closer inspection, to confirm the dictum that in politics ‘people want to bind others, not themselves’.Footnote 73

More formally, Elster shows that self-binding entails the following four analytical options: (1) An agent A binds the same agent A (of course, most of the times A needs assistance from B to bind himself); (2) An agent B imposes a constraint on an agent A because A has asked him to do so; (3) An agent B binds A because B believes that A would have asked to be bound had he known all the facts about the case and been capable of making an informed decision; and (4) A person binds himself merely for the purpose of creating a constraint that will also limit the freedom of others.Footnote 74 It is the last of these options that provides the most useful framework for understanding the Britain's path to independence. By strategically delegating power, Gordon Brown did not want to bind himself. Instead, the institutional choice was meant to constrain potential challengers while simultaneously increasing the capacity of the Treasury to control other departments’ plans, enabling Brown to play a more powerful role than any previous Chancellor.

Enabling Political Institutions

Jon Elster, Ulysses Unbound

By reading too much into the self-binding metaphor, most works on credibility overestimate the constraining dimension of institutional commitments. Institutional constraints are not only about limiting power. Indeed, the democratic paradox of constitutional pre-commitment is that constraints can be power-enhancing. As James Madison famously claimed, constraints can promote freedom. In this context, Stephen Holmes argues that ‘pre-commitments are not disabling, but enabling’.Footnote 75 In Douglass North's terms, institutions reduce the transaction costs of certain exchanges by increasing the costs of engaging in certain forms of (undesirable) behaviour.

This dialectic relationship between the constraining and enabling features of government commitments refers to Thomas Schelling's classic thesis: in strategic bargaining ‘weakness is often strength’.Footnote 76 This enabling function reinforces the benefit-side of a ruler's equation. Herestheticians are not seduced by discipline per se, but rather by the profits attached to the institutionalization of discipline.

Some classic works on political economy support the proposition that less is more in the creation of commitments through institutions. For example, North and Weingast show that a ‘fiscal boom’ was one of the outcomes of the constitutional reforms that took place during Britain's Glorious Revolution.Footnote 77 Hilton Root's research on France's historical political economy also emphasizes the enabling implications of tying one's hands. He wrote: ‘the King supported the expansion of corporate society because corporate institutions enabled him to obtain credit’.Footnote 78 We will see below that the logic of enabling political institutions can also inform the evolution of Gordon Brown's prudence. In a curious way, the strategy of constrained discretion ended up liberating rather than binding the Treasury. The government was able to exploit unprecedented political and financial opportunities, creating the conditions for significant increases in government spending.

The Context of Institutional Choice

The overriding aim of central bank independence is to induce low and stable levels of inflation. British inflationary history has been problematic. During the so-called post-war settlement, governments put the emphasis on demand management through fiscal means with monetary policy performing a subordinate, supporting role.Footnote 79 The stagflation of the mid-1970s dislocated this framework. Inflation reached record levels in 1975, as Britain was particularly hit by the dismantling of the Bretton Woods system and the oil crisis. The dramatic failure of traditional income policies to provide an adequate response to the new reality, epitomized in the International Monetary Fund (IMF) crisis of 1976 and the winter of discontent of 1978/79, brought about a ‘new politics’ and a ‘new policy paradigm’.Footnote 80 In the context of the Thatcher revolution, the conquest of inflation – rather than unemployment – became the government's new priority. Inflation was eventually controlled, helped by structural changes. However, endless disputes over monetary and exchange-rate policy (for example, the quarrel between fixers and floaters) were one of the dominant features of the Conservative years.Footnote 81 In the event, the ERM crisis of 1992 raised serious questions about both the consistency and appropriateness of Britain's monetary framework.

It is certainly tempting to explain the origins of central bank independence in Britain as the predictable outcome of its traumatic monetary history and the politics of economic decline. However, this conclusion would be misleading. The shock in relative prices of the mid-1970s critically challenged the core beliefs underpinning the post-war British model of political economy. This belief cascade in turn led to a radical change in the institutional foundations of economic policy. Actually, Britain experienced a ‘movement from a Keynesian mode of policymaking to one based on monetarist economic theory’.Footnote 82 It should be pointed out though that CBI was one among a range of monetary commitments that might have been consistent with monetarism and the rational-expectations revolution.Footnote 83 And indeed the Conservatives sought alternative mechanisms to anchor their anti-inflation strategy, including money supply limits, external commitments and inflation targets.Footnote 84 The founding fathers were also aware of the available options. In the words of Ed Balls, economic adviser to Gordon Brown: ‘Of course, there is more than one route to stability for countries and regions – and different successful models of central bank independence – depending on their history, institutions and track record’.Footnote 85

This argument also applies to the role of globalization. Many authors stress the importance of the processes of Europeanization and internationalization for explaining New Labour's policy formation.Footnote 86 It is probably true that globalization has created constrains on autonomous and discretionary economic policy,Footnote 87 on the one hand, and incentives for delegation in the name of credibility, on the other. It is also probably true that New Labour's leaders consciously sought to adapt to the pressures imposed by economic integration, financial liberalization and heightened capital mobility.Footnote 88 However, it should be noted again that alternative institutional configurations, other than central bank independence, might have been consistent with the imperatives of globalization.

Political economists largely focus on changes in economic relative prices to explain the emergence of fiscal and monetary rules. But political relative prices are important as well. New Labour faced powerful political incentives, both electoral and coalitional, to endorse the main tenets of the neo-liberal consensus in an attempt to recapture the political centre of British politics.Footnote 89 Colin Hay shows that economic policy in general, and monetary policy in particular, were key elements of New Labour's reckless ‘politics of accommodation’.Footnote 90 Labour had to overcome the problem of being seen as the party of devaluation, inflation and high taxation.Footnote 91 In a bid to signal that the party had learned the hard lessons of the past, its 1997 manifesto committed to macroeconomic stability, control of inflation and fiscal prudence. Critically, Labour proposed ‘a robust and stable framework of monetary and fiscal discipline’.Footnote 92

The adoption of central bank independence in Britain cannot be fully explained by looking only at the economic and political underpinnings of New Labour, as most analysts implicitly do. At most, the structure of incentives described above affected the rational-choice calculations of the institutional framers by providing the context of decision. Those factors might have made possible a range of feasible options. They are hardly the essence of decision. Important puzzles remain. Why did CBI, one of the flagship institutions of neo-liberalism, not emerge during the height of conservative hegemony? Why did this radical institutional change not coincide with the rise of financial interests and the monetarist paradigm? If Blair and Brown wanted to use CBI to signal competence through repositioning, why did they not announce this radical reform before the election? In order to answer these questions, we should focus on the beliefs and motivations of the founding fathers.

Evolution? No, Heresthetic!

Thomas Schelling, The Strategy of Conflict, p. 22

Gordon Brown, ‘Remit for the Monetary Policy Committee’

Actors maximize their goals by either changing their strategies under given rules or by changing the institutions that transform their strategies into outcomes. Most of the time they do the former, but they may occasionally do the latter. They attempt to shape political outcomes by manipulating the rules of the game. As the many examples included in Iain McLean's Rational Choice and British Politics show:

Institutional reform is always an outcome of both evolution and design, a complex interaction of continuity and change, a blend of the old and the new. The making of central bank independence in Britain was not an exception. For some, it was a bold and radical reformulation of the monetary constitution. For others, it was simply the consolidation of the monetary arrangements introduced by Lamont following the ERM fiasco of 1992. In a lecture given to mark the first ten years of the Bank of England's Monetary Policy Committee, Mervyn King, in his capacity of Governor of the Bank of England, played around the ambiguity between evolution and design as he claimed that ‘although the announcement in 1997 of independence for the Bank of England was a bolt from the blue, it was a long time in the making’.Footnote 94

However, in the very same paragraph King added that ‘granting independence to the Bank of England was the dramatic constitutional change that convinced financial markets of the United Kingdom's conversion to stability as the basis of macroeconomic policy’ and that the decision was ‘both unexpected and far-reaching’. In another lecture given in 1999, King argued that ‘the Monetary Policy Committee has broken new ground in British constitutional history. In its three hundred year history probably no change has been as significant as operational independence and the creation of the Monetary Policy Committee’.Footnote 95 According to Eddie George (the previous Governor), this sweeping reform transformed the old Bank of England into the ‘The New Lady of Threadneedle Street’.Footnote 96 Detailed analysis of yield curves on UK government bonds also showed that Brown's announcement on 6 May 1997 was ‘a complete surprise to the financial markets’.Footnote 97 It is evident that the key players perceived this reform as a turning point, a radical departure from existing practices and traditions.

Evolutionary accounts of the politics of central bank independence in Britain suggest that this was simply an idea whose time had come.Footnote 98 But Brown's largely unforeseen decision to move swiftly towards granting operational independence to the Bank of England was nevertheless hailed as ‘an audacious stroke’, ‘a political masterstroke’, a ‘revolutionary move’, ‘a pre-emptive and brilliantly orchestrated manoeuvre’.Footnote 99 The always well-informed Andrew Rawnsley argued that ‘expert and inexpert opinion agreed that Brown had pulled off an astonishing coup de théâtre and a strategic masterstroke’.Footnote 100 This pivotal decision, not mentioned explicitly in the party manifesto,Footnote 101 was announced only five days after the election. More tellingly, Brown deliberatively waited until the eve of polling day to discuss with Blair his intention to go for an early announcement of CBI. According to Rawnsley, this was partly tactics: ‘it would give Blair little time to consult others who might be cool about the idea’.Footnote 102 It was both striking and illuminating that this decision – for many the biggest change in economic policy making since the war – was not discussed in the Cabinet, let alone referred to a formal consultation process. As Brown thought that making the move quickly was essential, the project was presented to Eddie George on a take-it-or-leave-it basis.Footnote 103 This ‘great political coup’Footnote 104 had all the fingerprints of heresthetic.

Iain McLean argued that the decisions to cede control over interest rates and to establish the golden rule to borrow only for government's capital spending were indeed ‘heresthetic moves’.Footnote 105 He suggested that the key motive behind the move was to avoid the blame when the economy goes wrong. The depoliticization literature has also assumed that New Labour surrendered control over monetary policy to evade responsibility for unpopular decisions such as interest rate increases.Footnote 106 Indeed, this motivation of avoiding the blame loomed large in both media analyses and parliamentary debates. And as might be expected, it was one of the preferred lines of argument used by Conservative MPs in the House of Commons. As Peter Lilley put it: ‘the Bill is yet another example of the Government's desire to remove power from the House and from elected representatives and give it away to appointed officials. They want to escape the blame for difficult decisions’.Footnote 107

Blame avoidance might have been one of the motives of the group around Gordon Brown. However, the strategic implications of the decision to surrender key tools for managing the economy were much broader. Heresthetic is about restructuring games to achieve political ends. Brown sought to reconstruct the British political system by manipulating the institutions of economic decision making. By removing monetary policy from the realm of party competition (fixing dimensionality in Riker's analytics), Brown could achieve vital strategic aims. For one thing, he was able to consolidate his reputation for economic competence by sending the ultimate signal to the markets. For another, he bought a powerful institutional insurance for enforcing internal discipline and policy cohesiveness in the context of a coalition of groups within the Labour party that was moving towards the right.

It is widely accepted that Brown moved promptly towards independence in order to reassure markets about New Labour's modern and business-friendly economic framework. This idea was surely in the mind of the founding fathers, who certainly used independence to signal a decisive break with the ‘old dogmas of the past’.Footnote 108 But this strategic decision was not only about signalling change; it was mainly about enforcing change over time. Essentially, the institutional change aimed at reshaping the structure of the political economy game. The real objective was to enforce a new paradigm of economic policy. In his 2005 Mansion House speech, Brown said: ‘in the 1950s Britain managed decline, then in the 1960s we mismanaged decline and then in the 1970s we declined to manage. And our stop-go history is now legendary – so much part of our psychology that it was essential in 1997 to start a new chapter by making the Bank of England independent’.Footnote 109 In the same spirit, Balls admitted that the early move to independence provided ‘a unique opportunity to reshape the objectives, institutions and practice of British macroeconomic policy’.Footnote 110

William Keegan concluded his insightful chapter on the Bank of England reform with the following words: ‘the battleground simply moved’.Footnote 111 This is precisely what heresthetic is all about; it is about reframing the rules of decision making, and by implication, shifting the parameters of political competition. By changing dimensionality, the institutional framers sought to induce a more consensual approach to economic policy making, attacking the roots of the pervasive conflicts of the past. Constitutional change was not only concerned with credibility, but also with legitimacy. According to Balls, ‘the new framework had to be capable of rebuilding and entrenching public support and establishing a new cross-party political and parliamentary consensus for long-term stability – a new consensus about goals and a new consensus about the institutional arrangements needed to deliver those goals’.Footnote 112 Brown believed that institutionalizing a new consensus was needed for moving beyond the ‘endless and sterile divisions between capital and labour, between state and market and between public and private sectors’.Footnote 113

Gordon Brown is not a typical heresthetician, though. Political entrepreneurs, who are active in the game of framing institutions, are usually people who strongly believe in the political power and the mediating role of institutions. Brown's policies did not seem to be informed by the institutions-do-matter mantra. Actually, Brown's interest in heresthetic comes from a different source, namely his ability and propensity to ‘think and act strategically’.Footnote 114 As Keegan put it, ‘the MPC episode brought out Brown's strategic and long-term approach’.Footnote 115 Other commentators point out that the Chancellor was determined to make Labour's conversion irreversible. Stephen argues that ‘if a single, overriding, feature defined the economic policy of the first Blair government, it was the Chancellor's construction of permanent monetary and fiscal frameworks to keep it in the path of virtue’.Footnote 116 In Brown's own words: ‘Improving the institutional arrangements for economic policy will be accorded a high priority by the government in order to deliver long term economic stability and rising prosperity.’Footnote 117

In hindsight, it appears that Brown had clear incentives to alter the dimensionality of the economic policy game by shifting decision-making power from Whitehall to the Square Mile. But this begs the further question as to why this did not happen before. An article in the Financial Times nicely captured the reaction of the City. It stated: ‘Mr Gordon Brown's decision to give the Bank of England operational autonomy may have been unexpected. But it is welcome. It should have been taken by the Tories’.Footnote 118 And indeed this radical institutional change should have been championed by the Conservatives in the name of sound money, financial stability and wage restraint. The Tories could have also delivered a pre-emptive strike and moved strategically towards independence just before leaving office. This would have locked in the interests of the Conservative coalition, just as Pinochet did in order to constrain the Chilean democratic transition. Intriguingly, they failed to do so. Why?

Self-Binding? No, Binding Others!

Gordon Brown, The Sun, 7 May 1997

Economists tend to emphasize the welfare gains of institutional pre-commitments. However, they rarely discuss the political rationale of voluntary self-binding. Why, and under which conditions, does a self-interested politician willingly sacrifice freedom of action in favour of technocratic institutions? Politicians adopt pre-commitment strategies only if they can realize effective political profits.

Gordon Brown and his advisers claimed that the new institutional arrangements would enhance significantly the ‘credibility of UK monetary policy’.Footnote 146 Credibility is an elusive concept though. It is partly about promoting macroeconomic consistency by realigning inter-temporal incentives. But credibility also has important political dimensions. After all, the strategy of Ulysses applied to the design of monetary institutions is ‘to entrust economic policy to persons that will not be tempted by the Sirens of partisan politics’.Footnote 147 This means that the pressures undermining the credibility of economic policies stem from the dynamics of public opinion and the demands of intra-party coalition-building. Governments are not unitary actors. And they are constantly faced with severe common-pool resource problems.

There are two competing arguments about the political dimension of credibility. On the one hand, Bernhard suggests that bank independence sought to increase cabinet stability by removing intra-party conflicts over monetary policy.Footnote 148 On the other hand, King claims that the British case does not provide support to the coalitional hypothesis because ‘only a few leftists remained in the Labour party … [so] Blair and Brown did not fear a threat from Labour backbenchers against their policies’.Footnote 149 In the light of the empirical evidence, Bernhard's case carries greater weight. The heresthetic move was perceived by its proponents within the Labour party as a political weapon for enforcing policy changes and party discipline in a coalition moving right. King's position is not entirely consistent with the large scholarship on the cognitive and political underpinnings of New Labour. A consistent view emerges from this literature that Blair and Brown were obsessed with exorcizing the past and strengthening the grip of the core executive. As Philip Stephens clearly put it:

Since 1994, the architects of New Labour had promoted radical programmatic, organizational and symbolic changes aimed at signalling an unmistakable break with the past.Footnote 151 Moreover, they endorsed a reckless politics of accommodation, even at the risk of overshooting the position of the median voter.Footnote 152 Notwithstanding its large parliamentary majority, the newly elected leaders wanted to avoid the fate suffered by past Labour governments. Andrew Rawnsley's books show that Blair and Brown were obsessed with proving their competence by pleasing the markets and finding ways of enforcing internal discipline. This thinking shaped the politics of central bank independence. As Ed Balls confessed:

Self-binding is the dominant narrative in most accounts of bank independence in Britain. As an article put it, ‘by tying his hands to an independent monetary policy, Mr Brown should be able to avoid those perennial financial crises that have bedevilled previous Labour governments’.Footnote 154 Tying his hands? Actually this was not an act of self-binding in an intentional sense. Moreover, this self-binding rhetoric is at odds with conventional views regarding Gordon Brown's decision-making style. Brown had a determination to maximize his authority at the expense of others.Footnote 155 This apparent paradox regarding Brown's behaviour can be resolved by realizing that governments are not unitary actors, but coalitions of conflicting interests and ideas. Once we move from the logic of individual to collective choice, pre-commitment strategies are about binding others, rather than acts of self-binding. By formally tying his hands, Brown really intended to bind others.Footnote 156 Following Elster's logic, he formally bound himself merely for the purpose of creating a constraint that would also limit the freedom of action of others.

Then, whose hands? The markets and the media supported the move because they fully understood that the reform aimed at binding politicians, including sectors of Brown's own party. The Chancellor did not hide this intention. In several speeches, he argued that ‘interest rate decisions will be free from any political influence’ and that ‘we must remove the suspicion that short-term party political considerations are influencing the setting of interest rates’.Footnote 157 In a speech at the CBI national conference, Brown pleased the audience by saying that: ‘the perception that monetary policy decisions have been dominated by short-term political considerations has grown. I believe we are agreed it is right to take these decisions out of politics, and to free them from short-term political pressures’.Footnote 158 Stephens also highlights that ‘at the core of Brown's approach was the conviction that Britain's sad record of postwar economic mismanagement showed that politicians could not be trusted’.Footnote 159

Which politicians were targeted by the strategic move? The Sun pointed, maliciously, to Old Labour: ‘Brown's brilliant bid to defy Lefties’.Footnote 160 An article in The Guardian also argued that the reform ‘cuts the new government adrift of all the Old Labour expectations like public sector unions expecting favours. In future the chancellor will be able to say it's not within his power to make special cases: the Bank rules’.Footnote 161 In the same line, Peter Lilley claimed: ‘they want to remove any influence from Labour Back Benchers, whose demands for higher spending and laxer policy have wrecked every previous Labour Government’.Footnote 162 Another Conservative MP stated:

Stories about left-leaning Labour MPs’ discontent over the reform attracted some attention, mainly during the debate of the Bank of England Act. In the House of Commons, Diane Abbott complained that: ‘It was remarkable to see a Labour government elected in triumph with the biggest majority since the war, within days … hand over one of the most important levers of economic policy to an unelected quango’.Footnote 164 According to Austin Mitchell, the institutional choice implied that the ‘Government are now giving up power to an oligarchy whose interests point in the opposite direction of those of the people.’

The Old Labour issue has probably been overstated. The politics of interest rate setting in Britain is uniquely complex.Footnote 165 We should remember that even Thatcher and Major, concerned about the reaction of small businesses and people with mortgages, were too willing to accommodate demands for lower interest rates.Footnote 166 In the United States and even in pro-stability Germany, politicians and central bankers have also engaged in fierce arguments about monetary policy.Footnote 167 We should also remember that governments face pervasive collective action problems which compromise sound public finances. One journalist argued that ‘the chancellor has armed himself with a potent new reason to resist demands from spending ministers’.Footnote 168 The intellectual master of the reform was fully aware of the importance of protecting the Chancellor from civil servants and other ministers. In his now famous Euro-Monetarism, Balls argued: ‘No one has mastered the art of boom–bust economics better than the British Treasury … Power to set monetary policy remains in the hands of government ministers and unaccountable Treasury civil servants who seem to be able to live on despite their errors, while hapless Chancellors take the blame’.Footnote 169

Brown not only feared demands from party insiders and spending ministers, but also from interest groups. One of his biographers explained that ‘his study of the twentieth-century had convinced him that good policies and ideas were often derailed by interest groups and the pressures of the moment … This conclusion permeated his entire strategy’.Footnote 170 The group around Brown knew that pressures would not only be exerted by the unions, who tend to be the usual suspects. Business interests could also exert strong pressure on chancellors. Richard Lambert, the Director General of the Confederation of British Industry, repeatedly demanded that the Bank of England should keep interest rates as low as possible to support economic activity.Footnote 171 The Chancellor had strong reasons for trying to bind vested interests through political manipulation. In doing so, he was also constraining the Tories, which would find it more difficult to use their influence strategically over market actors to bully the Labour government.

Interest-group dynamics were also important because a commitment to increasing productivity was one of the pillars of New Labour's political economyFootnote 172 and CBI would be inextricably linked to the politics of wage bargaining.Footnote 173Euro-Monetarism provided an interesting discussion of Britain's poor record on wage restraint. Balls argued that wage restraint should be a central element of a non-monetarist economic policy. He stated: ‘the independent central bank should pay, and state that it is paying, particular attention to the rate of average earnings inflation in setting monetary policy. If employers and workers ignore the public interest and push settlements higher, then the Bank would have to raise interest rates’.Footnote 174 In his 1999 Mais Lecture, Brown outlined New Labour's approach to industrial relations:

The Bank of England [has] to meet an inflation target of 2.5 per cent. The target has to be met. Unacceptably high wage rises will not therefore lead to higher inflation but higher interest rates. It is in no one's interest if today's pay rise threatens to become tomorrow's mortgage rise. So wage responsibility – to rescue a useful phrase from a woeful context – is a price worth paying to achieve jobs now and prosperity in the long term. It is moderation for a purpose.Footnote 175

Constraining? No, Enabling!

Ed Balls, Delivering Economic Stability

Binding others was clearly a powerful incentive in the calculation of the founding fathers. But the institutionalization of discipline involved other political benefits. According to Elster, pre-commitment is justified ‘because, rather than merely foreclosing options, it makes available possibilities which would otherwise lie beyond reach’.Footnote 176 This is Schelling's old lesson: in bargaining, weakness is often strength. Robert Peston, in his authoritative Brown's Britain, brilliantly captured this strategic dimension of the institutional move. He argues: ‘Brown's eureka was to recognize that less is more, that to give up some responsibilities – notably the control of interest rates, but also important areas of financial regulation, such as oversight of insurance companies – would reinforce the powers that matter.’Footnote 177

Peston's remarks refer to the paradox of institutional pre-commitment. As Holmes argues, a voluntary abdication of power can be power-enhancing. Self-binding institutions are not only constraining: they are also enabling.Footnote 178 Brown was not necessarily persuaded by the constraining, but he was surely keen on the enabling. Ironically, he bought some real freedom by sacrificing some formal powers. One effect of the reform was ‘to give Brown and the Treasury greater independence from Downing Street and far greater authority over other departments’.Footnote 179 As Lee put it:

The empowerment of Brown's Treasury through ‘constrained discretion’ was not only rhetorical.Footnote 181 It had real effects. One government official argued:

Following the same line, Ed Balls observed that ‘far from weakening the ability of the Treasury to ensure public spending discipline, the risk that the Monetary Policy Committee might respond with a rate rise has proved a useful and effective deterrent to profligate departmental proposals on more than one occasion’.Footnote 183 One analyst put it this way: ‘previous Labour governments had felt captured by the Treasury, Brown captured the Treasury’.Footnote 184

In the same vein, Rawnsley argues that Gordon Brown:

Peston also shows that ‘there have been other examples of Brown and the Treasury being empowered by the imposition of rules or reforms that appeared to limit their own freedom’ – notably the golden rules and the five tests for the single currency.Footnote 186 Herestheticians know that binding commitments can play positive roles, ultimately enhancing policy capacity. Balls and O'Donnell clearly knew this too: ‘Central bank independence liberated the Treasury. Handing over the monthly process of decision-making on interest rates … created the time, space and long-term credibility for the Chancellor and senior Treasury management to concentrate on other levers of economic policy and the Government's wider economic objectives.’Footnote 187

We might risk falling into the functionalist trap, explaining the emergence of a given institution on the basis of its results. However, some evidence suggests that Team Brown fully understood ex ante the strategic benefits of delegation. In his 1992 Fabian pamphlet, Ed Balls defended independence by emphasizing that a more transparent, accountable and predictable monetary policy would enhance credibility, meaning that ‘a Labour chancellor would be free to concentrate on many other aspects of policy’.Footnote 188 According to one commentator, Ball's explicit message to Brown was: ‘You should make the Bank independent. You should lose control in order to gain control.’Footnote 189

Remarkably, the founding fathers did not try to hide this fundamental dimension of institutional reform. On the contrary, they were unusually candid about the enabling implications of ‘making Labour credible’.Footnote 190 It is often forgotten that Balls's earlier writings aimed at denouncing the perils of a rigid rules-based approach to monetary policy. His central argument was that both the domestic and European brands of monetarism, which sought to link inflation expectations to intermediate monetary targets and to a one-size-fits-all German monetary policy respectively, were economically and politically misconceived.Footnote 191 Both Brown and Balls rejected the simplistic idea that governments could achieve credibility by tying themselves to fixed monetary rules.Footnote 192 They also contended that ‘the answer is not no rules, but the right rules’.Footnote 193 Thus a post-monetarist path to stability should allow for both discretion and flexibility. As Brown repeatedly argued:

Many commentators have failed to understand the cognitive and motivational nuances of this institutional choice. The institutional designers were not seeking to buy credibility by tying themselves to the mast of strict binding commitments, as advocated by Giavazzi and Pagano. On the contrary, Balls was concerned with finding ways of ‘escaping the straitjacket of ERM and EMU’, including its deflationary effects.Footnote 195 Similarly, they were not uncritically embracing the central tenets of neoliberalism. They were rather interested in building flexibility into the system. In a lecture in which he denounced the ‘failures of monetarism’ and the rigidity of the Stability and Growth Pact, Balls declared that a clear pre-commitment to credible institutional arrangements should ‘allow the necessary flexibility so that policy can respond in the short term to surprise economic events’.Footnote 196 Brown's economic framework was less about constraining and more about enabling than is often assumed. Indeed, the constraining element of the much-discussed ‘constrained discretion’ concept was only incorporated by Balls following a suggestion made by Mervyn King.Footnote 197 This is hardly surprising. While the central banker was interested in constraining politicians, the economist political operator was keen on buying flexibility through pre-commitment.

The enabling features of institutional commitment may be the key to understanding some of the tensions associated with Brown's chancellorship. Earlier assessments of his policies put the emphasis on prudence.Footnote 198 In its first term in office, New Labour broadly honoured its pre-election budget pledges and introduced the so-called golden rules establishing that over the economic cycle the government would only borrow to invest and that public debt would be held at a stable level.Footnote 199 The enactment of CBI was also supposed to induce budget discipline. This new macroeconomic framework enforced tight budgets in the early years. However, over time the corset was loosened and then removed altogether. In History of Modern Britain, Andrew Marr remarks:

Fiscal policy was ‘tight in the first years of New Labour but loosened significantly in subsequent years’.Footnote 201 This fiscal cycle led to the prudence for a purpose narrative.Footnote 202 As one commentator put it: ‘Indeed, the early [fiscal and monetary] restraint was ‘to allow Brown, over time, to spend more than if he had splurged initially and then had been forced to tighten his belt, which had been the fate of his Labour predecessors at 11 Downing Street.’Footnote 203

As in many other historical experiences, the institutionalization of monetary discipline involved a critical fiscal dimension. Opening financial opportunities was one of the cornerstones of the strategy of constrained discretion. As Ben Clift and Jim Tomlinson have lucidly argued, New Labour's decisive pursuit of market credibility ‘was expressly concerned to create some space for fiscal activism’.Footnote 204 The mechanism was the following: as potential owners of government bonds thought inflation would be lower, they started paying more for government debt, freeing up the Chancellor to spend more while keeping taxes down.Footnote 205 This implies that, by strengthening monetary and fiscal governance, New Labour ended up creating conditions for a huge increase in education and health spending. Again, this is not a functionalist speculation. A Labour MP made the following point in the parliamentary debate:

Back in May 1997, most analysts assumed that an independent central bank implied a more prudent fiscal policy. As one newspaper remarked: ‘the chancellor is more likely to follow a sensible fiscal policy if he has good reason to expect monetary policy will not accommodate it than if he can make it do so’.Footnote 207 However, the Bank of England reform ended up giving Brown ‘more freedom to tax and spend’.Footnote 208 In the context of enhanced credibility, both public and private borrowing soared, compromising financial sustainability. Eventually, New Labour policies came full circle, from prudence to increasing public and private imprudence.Footnote 209 The paradox of constitutional commitments squares the prudence and the prudence-for-a-purpose narratives. It has been suggested that Brown was able to be a real socialist because he previously won the confidence of the financial markets.Footnote 210 In the logic of heresthetic, he could afford to do it because he previously reshaped the structure of the political game by manipulating the monetary constitution. But prudence for a purpose was not an unintended consequence of the institutional move. It was the natural implication of the successful implementation of an enabling pre-commitment strategy. As Brown once claimed: ‘this extra public spending comes not at the expense of prudence but because of our prudence’.Footnote 211 Gordon was not bound, but unbound!

To sum it up, the making of central bank independence in Britain was underpinned by typical New Labour strategic thinking. The attempt to institutionalize a ‘post-monetarist approach to economic policy’Footnote 212 was based on a peculiar reading of the evolution of economic ideas and changes in the world economy.Footnote 213 It was also based on an explicit attempt to move beyond ‘the old methods of old left or old right’,Footnote 214 squaring the circle between the seemingly irreconcilable Friedman and Keynes.Footnote 215 In this framework, achieving credibility and stability were not aims, but only means to an end. Gordon Brown repeatedly argued that central bank independence was not the government's main objective. Tellingly, he began his Mais Lecture by saying: ‘my first words from the Treasury, as I became Chancellor and announced the independence of the Bank of England, were to reaffirm, for this Government, our commitment to the goal first set out in 1944 of high and stable levels of growth and employment’:Footnote 216 in other words, traditional values in a modern setting.