Labour is about to learn a hard lesson in GCSE economics – and so are we

Sir Keir Starmer and Ed Miliband
Sir Keir Starmer and Ed Miliband have called time on further North Sea oil exploration - Christopher Furlong/Getty Images

Taxes will inevitably rise. The public sector will remain as unproductive as ever. The prisons will be emptied, crime will go unpunished, there will be endless lectures from Yvette Cooper about how we “have to do the right thing” and constant reminders from Rachel Reeves that “she knows how to run the economy”. There is not much to look forward to in the next five years of a Labour Government. But there is perhaps this. We are all about to be given a crash course in GCSE economics. The only trouble is that it will be a very expensive one.

At the higher levels, economics is a complex subject involving a deep understanding of equations and maths. At a basic level, however, it is pretty simple. Resources are scarce. Prices are signals. Incentives matter. Markets are efficient, and supply and demand always find a way of matching in the end – even if it involves some painful adjustments along the way. Those are the fundamental lessons drilled into students on any introductory course.

And yet the Government does not seem to be aware of any of them. Instead, it appears that the whole country has to relearn all those principles, and, even worse, it will have to do it the hard way.

Such as? Let’s start with a few obvious examples. In the legislation set out in the King’s Speech this week, the Government said it plans to equalise the minimum wage for young and older staff. Sounds fair, right? After all, why should a teenager not be paid the same as a 40-year-old colleague doing the same job? The problem is, if you were running a warehouse would you rather hire a forklift truck operator with 20 years of experience, or someone who left school last week, if the wages are the same? That’s right. You would prefer the guy with experience. Young people will find it very hard to get that crucial first job. Prices matter, as it turns out, and that includes the price of labour.

Or let’s take GB Energy, the new state-owned conglomerate that looks set to be given a few billion pounds of taxpayers’ money to “invest” in climate neutral technologies to help us meet our net zero targets.

Of course, the people running it won’t have anything at stake personally, and given that they will be working in the public sector they won’t be paid anything like as much as their rivals in the investment funds of the City, Wall Street or Dubai. Despite that, apparently they will be able to spot lots of great opportunities that the private sector has mysteriously missed out on. Because, it seems, markets are so inefficient that it is easy to beat them.

Rachel Reeves, the Chancellor of the Exchequer
Rachel Reeves, the Chancellor of the Exchequer, is fond of telling us she knows what she's doing - Jose Sarmento Matos/Bloomberg

Then there’s Ed Miliband’s ban on new licences to develop offshore oil and gas. Never mind that we will still be burning lots of fossil fuels, it is just that we will have to import the stuff from abroad. Supply doesn’t matter, it seems.

Then there are the new targets for housebuilding. Apparently, councils and builders are to be mandated to hit a target of 300,000 new homes a year, with any failing to meet their quota shipped off to a re-education camp in the Outer Hebrides for 10 years (OK, I might have exaggerated a little there, but you get the general idea). We can only assume that no one around the Cabinet table ever got to the chapter in the economics textbook on the unfortunate economy of the Soviet Union, and why centrally planned targets don’t work.

Everybody just games the system. In one famous example, hospital managers in Moscow met their target to reduce the numbers of old people dying in their beds by kicking them all out into the streets in the middle of the Russian winter. Sure, they all died, but the target was met. If we really wanted to build more houses, we would liberalise the planning rules so it is easier and more profitable. Because, hey, incentives work. But it seems no one in the Starmer administration is aware of that.

And while we are on the subject of property, there will be tough new rules for landlords, with a ban on “no fault” evictions, and lots of extra regulations on what is a “fair” rent. All that will do is restrict the supply, since at the margins a few will sell up instead, and when the supply falls and the demand keeps rising then the price has to go up to balance it out. That is something else that you would have learned in the first few weeks of a GCSE course as well.

The list goes on. Across a whole range of issues, Labour is acting as if the dismal science did not exist.

It is going to be painful to watch. These are not difficult concepts, and they have been around for a couple of hundred years now. They are in all the textbooks, and have been proved correct time and time again. Neither is it a Right and Left issue. It is perfectly possible to respect the fundamental principles of economics, allow markets to work efficiently, and then use lots of the wealth generated to redistribute income. Sweden is a good example of that, and so is Switzerland.

In reality, we are about to be taught all over again that prices matter, that incentives influence decisions, and that supply is as important as demand. There is one consolation. After Labour’s free lesson, in about four years the voters will have relearned the basics of economics and will be ready to elect into office someone willing to apply those principles. It is just a shame that the process has to be so expensive for all of us.