Tories must let AI be unleashed, not regulated out of existence

With careful investment in training and education, we can avoid the bloodshed of the last Industrial Revolution

For devotees of Karl Marx, this year marks a number of important anniversaries; it is the 200th anniversary of his birth, and it is the 170th anniversary of publication in London of the Communist Manifesto, co-written with Friedrich Engels, a man so steeped in the hardships of revolution that he rode to hounds and luxuriated in all the other accoutrements of the English landed gentry of the time.

Catastrophically influential as many of Marx’s ideas were, and correct as he was in thinking capitalism vulnerable to repeated socio-economic crisis, there were two fundamentals he got hopelessly wrong. One was a simple misunderstanding of the human condition, or of people’s unquenchable desire to accumulate, an instinct as deeply rooted in the human psyche as appetite and procreation. However noble the idea of communism, this characteristic – call it the selfish gene if you like – was never likely to be tamed. All such attempts have carried a heavy cost to life, living standards and progress.

The other was to underestimate capitalism’s ability to adapt to survive. So we have our welfare states and social safety nets to see people through the tough times, our deposit insurance schemes to limit the worst excesses of finance and our labour laws to safeguard against exploitation. Capitalism learnt to regulate itself, a process of adjustment that is a more or less constant work in progress.

If capitalism has proved supremely adaptable, so too has the Conservative Party, part of whose durability as a political force is explained by its ability to evolve, to take on the best ideas of its opponents and to make them its own. Pragmatism, rather than idealism, has instructed its development, helping to endow the UK with a degree of stability that is the envy of others.

It is presumably with this in mind that the Chancellor, Philip Hammond, is reportedly planning a speech – probably to the party conference this autumn – in which he will say that the free-market liberalism of the Thatcher years has failed to keep pace with a rapidly changing economy. In particular, he appears minded to argue, it is no longer fit to deal with the challenges of Artificial Intelligence (AI) and the transformational power of the wider so-called Second Machine Age; we must adapt, he says, or we risk permanent alienation of the youth vote.

Before judging his analysis, we need first to know exactly what he means and what he proposes by way of remedy. But two criticisms immediately occur. One is that Thatcherism was never the red in tooth and claw caricature of unfettered free-market capitalism sometimes portrayed.

What Margaret Thatcher and her US counterpart, Ronald Reagan, certainly did do was push back on and partially reverse the stifling corporatism, state interventionism and unionism of the previous two decades. The oncecommanding role of markets in the economy was somewhat restored.

There was also a certain amount of deregulation, particularly of finance. Outcomes here are more arguable, given the subsequent financial crisis. But even on that front, it was as much the desire of subsequent governments to bend financial markets to their own purpose as deregulation that caused the mischief. In the US, public policy deliberately encouraged the reckless proliferation of Ninja loans, while in Britain, “light touch” regulation was shamelessly championed by New Labour as a way of turbo-charging the City so that it would deliver more tax revenue to fund the party’s social programmes. Widely forgotten at the time was that international finance, once unleashed, is an extraordinarily dangerous animal.

In any case, the idea that Mrs Thatcher took us back to a kind of early 19th century free-for-all version of laissez faire is largely a myth. She chose her battles and, until the final fall, generally knew when to back off. Her achievement was not so much to tear up the roots of the old, post-war settlement as to train the economy to grow in a different direction.

What is more, the amount of regulation has since spiralled out of control, promoting a risk-averse approach in business that has been just as damaging to investment, innovation and productivity growth as unconstrained finance. The economy today bears very little resemblance to Mrs Thatcher’s vision. To describe it as not fit for purpose given the challenges of “machine learning” and robotics is correct, but not because it is too lightly regulated; rather it is because too much regulation is strangling the life out of it.

This brings us to the second potential fault in the Chancellor’s analysis. Mr Hammond is obviously to be commended for taking the time to think deeply about these issues; if the fourth industrial revolution lives up to the hype, it will be far more important in determining Britain’s long-term future than Brexit.

He is also correct in thinking the challenge for public policy is not just to facilitate the transformation, but to do it in a way that enhances labour’s share of the value added. But he is in danger of reaching the wrong conclusions. The right approach here is to let the market establish itself first, and if there are adverse consequences, then to react to them. To seek to tax and regulate things before they have even got going risks strangling them at birth and leaving the territory wide open to less socially sensitive rivals.

Machine learning implies capital substitution for labour on a scale not seen since the Industrial Revolution. That experience is instructive. For the first 40 to 50 years, there was no reward for the common man, whose living standards stagnated or collapsed as the dark satanic mills mushroomed across the land. The spoils went almost entirely to capital. Lack of democracy gave few avenues of redress. All protest was ruthlessly suppressed down the barrel of a musket. Given the uncompromising nature of what had happened, it is easy to see why by 1848 Marx and Engels should have thought capitalism doomed. But realising its peril, capitalism retreated and reformed. It has been doing the same ever since.

The march of the machine must similarly be embraced today, but in a way that mitigates the social pain and disruption of the transition. Heavy investment in infrastructure, training and education, where the Government’s record has been abysmal, is far more likely to deliver results than prescriptive regulation and taxation.