New Labour's Faustian Pact?

Abstract

While there has been much discussion, within the discipline, of New Labour's political economy, a notable omission has been its policy on the City, despite its critical importance. This article is an attempt to fill this gap. It argues that the Blair government's policy of light-touch financial regulation both rested on and reflected its commitment to a financial growth model inherited from the Conservatives in which the key driver of UK economic expansion was a dynamic, fast-expanding and lightly regulated financial sector. The policy can also be seen as a ‘Faustian Pact’ with the City whose earnings, it was calculated, would be a major source of the tax revenues needed to rebuild Britain's fading welfare state. The article examines the principles and precepts which underpinned the policy of light-touch financial regulation and then investigates the reasons for its adoption. It contends that these were as much ideological – a genuine commitment to key tenets of the liberal market variant of capitalism – as structural and institutional. After a decade of sustained economic expansion that appeared to validate it the intellectual foundations of light-tough financial regulation were demolished by the financial crisis of 2007–2008 thereby severely denting the credibility of New Labour's political economy.