The approach to regulation and business policy that Ed Miliband and his shadow business secretary Chuka Umunna have begun to sketch out has attracted its share of criticism from the business sector’s less thoughtful partisans. But Miliband’s approach to ‘building a new economy’, while standing in need of further development, embodies an extremely fruitful approach to constructing a better capitalism. To see how and why, it is useful to take a step back, and consider the foundations of the relationship between business and the state.

It will be a matter of utmost importance during the next few years for the Labour party come to a clear and credible new view about what a better approach to creating a stable, prosperous and equitable economy might look like. After the 2008 crash, the deregulatory approach stands discredited. So, what’s the alternative?

In his conference speech Ed Miliband started to talk about ways in which values of fairness and social justice could be better embedded in the ways in which the government sets the rules within which business and finance operate. A change in corporate governance could see worker representation on remuneration committees, in keeping with the recent recommendations of the High Pay Commission, thereby creating internal pressures to drive down ultra-high executive pay. Changes in government procurement rules could see lucrative government contracts restricted to firms that take on and train significant numbers of apprentices, thereby contributing towards the country’s long-term skills-base and helping to arrest the hollowing-out of high-skill, high-quality industrial job opportunities. Rather than simply getting out of the way of business, this rival model sees government’s role as being much more active in setting the terms in which business activity takes place, with the aim of ensuring that the broad social goal of achieving prosperity with social justice can be achieved.

This approach to ‘good capitalism’ recognises the residual power of government to set the rules under which the market and its participants operate. Governments have three significant levers, all of which need to be used in unison:

• control over the structure of the tax system, which can be used to incentivise particular forms of corporate behaviour while penalising others
• changes in direct regulation, which can forbid certain activities, mandate others, or raise or lower the costs of particular business strategies
• the purchasing power of government procurement, which can be deployed with an eye not just on narrow issues of immediate price, but with a broader eye on economic, environmental and social sustainability.

Ed Miliband could use his IPPR speech today to hone the details of this approach.

First, he will have to tackle his critics. Digby Jones, an enthusiastic advocate of the old, discredited picture of quiescent deregulation, described Miliband’s nascent proposals to use the levers of government to reshape the economy as 'a kick in the teeth' for business.  But it is myopic to think that the interests of value-creating businesses and entrepreneurs are served by the creation of an unbalanced, unstable deregulated economy; on the contrary, smart regulation rewards good business practices, and creates opportunities for real value-creators. Food hygiene rules are a form of regulation, but they create enormous social benefit, and allow high-quality food-producers to avoid being outcompeted by corner-cutting and health-endangering  producers. The right kinds of regulation create incentives that push markets in directions that chime with our collective social values and goals. This is not to claim that identifying the right policies is an easy matter, but it is to say that pursuing the challenge of doing so should be one of the central aims of politics.

Other critics of the pursuit of 'good capitalism' complain that all interferences in 'the free market' lead to ruin. But what such critics conveniently forget is that even the most familiar 'free-market' institutions are not facts of nature or features of our primordial environment. The limited liability joint-stock corporation as an organisational form did not spring fully-formed from the ground like a mushroom, but is a creature of legislative design, dating back to the Companies Act of 1862. Markets are created by the rules of property, and structured by a formation of regulatory instruments and legal rules. The questions that face us regard how governments should structure markets, not whether they should do so, for doing so is unavoidable. Even the decision to 'deregulate' is just one political choice among others.

Still other objectors decry Ed Miliband’s talk of rewarding socially valuable economic activity and punishing socially useless business as a return to a sort of moralised version of 1970s industrial policy, but this time with the government picking ethical rather than purely economic winners. But this misunderstands the idea that government’s role in the economy, even when extremely active, need not and should not be about endless micro-level interventions, or the promotion of the interests of particular companies or businesses. Instead, it is about optimising the rules of the game, given a set of goals that encompass both social and economic objectives.

Lastly, objectors to a 'good capitalism' agenda might see it as inappropriately moralistic. Markets are machines for producing economic value, and economic agents act to pursue their self-interest, not to bring about a fairer, more equal or more stable society. But if we take seriously the role of politics to embed our social values – such as values of fairness and social justice – in the rules of the economic game, then we have no need for individual market agents to make implausibly heroic efforts to bring morality into the forefront of their own motivations. As the German political philosopher Jürgen Habermas put it in a 2009 interview: 'Politics turns itself into a laughing stock when it resorts to moralising instead of relying upon the enforceable law of the democratic legislator. Politics, and not capitalism, is responsible for promoting the common good.'

Ed Miliband’s approach to good capitalism understands this, and so looks to ways in which government may be able to change the rules of economic life in ways that will promote the common good. The alternative approach, which sees government’s approach to business as a value-free zone, places the burden of moral leadership on individual agents within the market. But, given the pressures the economic pressures faced by individuals and firms, these burdens are simply impossible to carry.

This brings me to my final point, which is that the ‘structural’ approach to good capitalism that is beginning to emerge chimes powerfully with the political thought of the 20th century’s leading political philosopher, John Rawls. On Rawls’s view, social justice is a requirement that falls not on individual agents in their daily economic lives, but on the macro-level formation of what he called the 'basic structure' of society – that is, 'the way in which the main political and social institutions of society fit together into one system of social cooperation, and the way they assign basic rights and duties and regulate the division of advantages that arises from social cooperation over time.'

This approach creates what we might call an 'institutional division of moral labour', according to which we can make sense of the conflicting demands that we all face as citizens and as people. This 'division of labour' gives to politics the central role of delineating a just basic structure, thereby allowing individual citizens to 'advance their ends within the framework of the basic structure, secure in the knowledge that elsewhere in the social system the regulations necessary to preserve background justice are in force.' This structural approach puts values at the centre of politics, and at the centre of how we structure the economy, but does so in a way that avoids a moralising and unrealistic emphasis on individual agency.

The new emerging Labour agenda on business, regulation, and the relationship between governments and markets shares this central Rawlsian insight as to the central importance of 'background justice'. In seeing the central problem of economic policy as the way in which we can set the rules of the game in a way that is true to our values of fairness and social justice, it moves beyond the discredited strictures of the neoliberal past. There is more to be done to flesh out of the detail, but Ed Miliband’s broad vision is the right one in terms of how we might construct a realistic progressive alternative to the dead dogmas of deregulation.