There is an historic opportunity for a progressive sea-change to reset today’s productivity sapping and inequality driving economic model, writes Stewart Lansley
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Britain faces a tricky combination of multiple social crises and weakened public finances. For some, it lacks the resources to rebuild its shattered society. Yet, despite its increasingly poor economic performance, Britain is asset rich.
Privately owned wealth – property, business and financial assets – stands at around £15 trillion, almost seven times the size of the economy, up from three times in the 1970s. A towering nine-tenths of all assets are privately owned. Britain is now one of the most heavily privately owned economies among rich nations.
But most of this ever-rising asset mountain has been captured by the already-wealthy – by-passing ordinary citizens and reversing the earlier long-term trend towards a narrowing wealth gap.
The top tenth hold more than half of private wealth. The share owned by the poorest half of Britons stands at a mere 7%, lower than half a century ago. One hundred years after the birth of full democracy, half the population has still never held more than a tenth of the national wealth pool.
This second ‘gilded age’ for the few – a return of the late Victorian wealth surge – is usually defended as a justifiable reward for value-creating economic activity that benefits wider society. ‘True’ Conservatives need “to make the case against egalitarianism” wrote leading Tory politician Keith Joseph in 1976. Joseph and other New Right evangelists claimed that heightened rewards at the top were a pre-condition for faster economic progress, and their strident anti-equality and pro-rich doctrines soon became the new orthodoxy.
Yet, today’s tearaway fortunes are less the product of a wealth-creating leap-forward, than of the accretion of economic power, monopolisation, and elite control over scarce resources.
Modern business practices, too often associated with unproductive activity geared to personal reward, are a far cry from the culture of entrepreneurialism promised by Margaret Thatcher and Tony Blair. Instead, corporate leaders have exploited the political license to get richer through activity which has contributed to Britain’s low-growth, low-productivity, low-wage economy.
Some of today’s burgeoning fortunes among financiers, takeover and property tycoons, and private equity partners are the result of the cut-price sell-off of state assets, from land to state- owned enterprises. As a result, the share of wealth held in common has fallen sharply from a third in the 1970s to less than a tenth today.
Another chunk has come from asset inflation in property and financial holdings, much of it from poorly constructed state policy – a process of passive accumulation that the 19th Century philosopher John Stuart Mill described as “getting rich in your sleep”.
Easy money has also been made through a process of corporate extraction. Many large companies have been turned into cash cows for executives and shareholders through anti-competitive devices, the rigging of financial markets, and the skimming of returns from financial transactions – dubbed by City traders ‘the croupier’s take’. FTSE 100 companies returned three-quarters of their net profits to shareholders in the four years from 2015, leaving little for private investment and improving wages.
The early economists drew an important contrast between new wealth creation that contributes to the common good and extraction that benefits a powerful few.
In 1896, the influential Italian economist Vilfredo Pareto distinguished between gains stemming from “the production or transformation of economic goods” and “the appropriation of goods produced by others”. “Appropriation” or “extraction” – which “crowds out” more productive activity that offers greater social value – was widespread in the Victorian era. It was contained in the post-war decades, but has bounced back in recent decades.
A fundamental contradiction of pro-market neoliberal theories is the way weak regulation has discouraged competition. As the heterodox American economist Thorstein Veblen warned a century ago, far from creating a haven for free and vibrant competition, late Victorian industrialists used their unbounded power to rig markets to yield excess profits through price and market manipulation. The same forces are at work today.
The national – and global – economy is dominated by giant, supranational companies in key markets from banking to pharmaceuticals. This consolidation of corporate power has been driven by a return of Veblen’s “market sabotage” and of what the Polish sociologist Ludwik Krzywicki called “industrial feudalism“.
It has been the ruthless destruction of rivals and the hoovering up of smaller competitors that has given the Big Tech founders membership of the multi-billionaire club. Google has bought more than 200 companies, while Facebook built what founder Mark Zuckerberg called a “moat around itself” through the acquisition of competitors.
The rush of private equity takeovers of publicly traded companies – from Bernard Matthews and Debenhams to Toys ‘R’ Us – has delivered outsized returns often at the expense of staff and local economies. As in a string of examples, such as Bhs and Debenhams, they have also brought eventual company failure.
Today, many key public services, such as adult social care, once delivered by public agencies, have been seized by private equity consortiums. These demand excessive returns that come from a squeeze on the quality of service provided, with significant sums of public funds being effectively siphoned-off by the new providers.
High levels of unearned wealth come with little moral or economic justification, yet the process of enrichment at the top continues its forward march.
Excessive inequality is not just economically “corrosive” – as Christine Lagarde, then head of the International Monetary Fund put it in 2012 – but has helped to reverse decades of hard-won social progress. After a century of improvement, life expectancy rates in the UK have been falling in deprived communities. Political alienation is widespread, with a rising gap between the electoral turnout of the richest and poorest groups since the 1980s.
Prioritising private over public wealth, and the erosion of the commonly owned asset base, has been among the most socially damaging state-driven trends of the last half century. Britain is an over-privatised, increasingly narrowly owned economy, with the returns from these once collectively owned assets accruing to a small minority rather than to society as a whole.
The same process has greatly weakened the public finances. Britain is one of only a handful of rich nations with a deficit on its public finance balance sheet, with net public wealth – public assets minus debt – now at -20% of the economy. The balance stood at +40% in 1970. This shift has greatly weakened the state’s capacity to handle issues like inequality and social reconstruction.
One of the most damaging effects of the process of wealth accumulation has been the diversion of resources from meeting essential needs to feeding the lifestyles and pet hobbies of the super-rich.
High-profile tycoons – from the once ‘king of the high street’ Philip Green to the tech multi-billionaires – have used their companies as private fiefdoms. While state investment in children’s services, young adult training and social care has been cut – in the name of encouraging more productive private activity – vast sums are spent on private airports along with luxury yachts, privately-owned islands, and even mini-submarines. At the annual World Economy Forum gathering of the world’s political and business leaders at Davos, the local airport has to cater for close to 2000 private jets.
Turning the provision of housing into an almost entirely private market has brought outsize profits for developers and housebuilders at the cost of a decline in the level of home-ownership, a lack of social housing and unaffordable private rents. Scarce land and building resources have been used to construct walls of multi-million-pound luxury flats and mansions, mostly bought for speculative purposes, and left empty for much of the year, by the mobile super-rich.
The return of high concentrations of income and wealth is also a key driver of global warming. The richest tenth of the world’s population emitted 48% (and the top 1%, 17%) of all emissions in 2019, while the poorest half emitted just 12%. The superyacht is one of the highest-polluting assets, while Jeff Bezos’ 11‐minute space flight was “responsible for more carbon per passenger than the lifetime emissions of any one of the world’s poorest billion people”.
For a while, post-war social democracy helped to soften the co-existence of extreme opulence and severe social scarcity of the past.
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At the turn of the 19th Century, Veblen warned of how an orgy of luxury spending of “elephantine proportions” depleted the ordinary, “non-luxury” demand necessary to sustain the economy and society. In the 1950s, American economist JK Galbraith set out the dangers of “private affluence and public squalor”. Twenty years later, the influential economist Fred Hirsch argued, persuasively, that “so long as material privation is widespread, conquest of material scarcity is the dominant concern”.
Britain has succumbed to the ‘iron law of oligarchy’, a 1911 theory by German sociologist Robert Michels, that mature democratic institutions would eventually capitulate to powerful elites. Each of us should be the custodians of a nation’s stock of physical, productive and social infrastructure, mostly the product of the efforts and skills of earlier generations. Yet, control of this precious inheritance has been seized by those topping the global rich lists.
Little of today’s surge in wealth has been conscripted for the social good. Assets in Britain are taxed at a rate of around 2%, yielding revenue of only a tiny fraction of the total tax take. The question of wealth has been edging up the political agenda. The IMF has called for “higher taxes on property, capital gains and inheritance”. Spain has introduced a temporary national wealth ‘solidarity’ tax on holdings over €3 million. Public opinion has been moving in favour of higher taxes on wealth.
There is a powerful case for following Spain with a temporary, solidarity ‘fortune’ tax. This would claw back some of the windfall gains of recent times and could deliver potentially large yields. A one-off tax of 1% on all individual wealth more than £2 million could raise upwards of £15 billion a year.
Existing capital taxes and tax perks and avoidance also need to be reviewed. The UK’s Office of Tax Simplification has shown that equalising the rate of tax on earned income and capital gains could raise up to an extra £14 billion annually. Galvanising part of the asset pool in this way would help pay for social reconstruction while taking the post-war model of social democracy to a higher level. Part could be used for a parallel system of asset redistribution to sit beside the existing system of income redistribution, so that all citizens share in the proceeds of economic activity.
One route to the revival of ‘common ownership’ and the rebalancing of individual and collective property rights would be through national and local ‘citizen’s wealth funds’. Such socially-owned pools of ‘people’s capital’ would give all citizens a direct and equal stake in the economy, with at least part of the gains from economic activity shared across society.
A decade of stagnant and falling living standards, and depleted public services, has created a rare historic opportunity for a progressive sea-change that resets today’s productivity-sapping and inequality driving economic model. A big shake-up in the way society works has happened before, notably in 1945. It’s time it happened again.
Stewart Lansley is the author of ‘The Richer, The Poorer: How Britain Enriched the Few and Failed the Poor, a 200-year History’, a visiting fellow at the University of Bristol, a Council member of the Progressive Economy Forum and an Elected Fellow of the Academy of Social Sciences
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