Capitalism has little to do with a free market. It is about extraction, at the expense of the planet and its inhabitants.
Stewart Lansley is a visiting fellow at the University of Bristol, a Council member of the Progressive Economy Forum and the author of The Richer, The Poorer, How Britain Enriched the Few and Failed the Poor – a 200-year history, Bristol University Press, 2021
Cross-posted from Discover Society
Image Credit: Andrew Russell
There is a paradox at the heart of many wealthy societies. As they have got richer, their capacity to meet essential needs has faltered. While Britain is wealthier than ever before, many indicators of progress have gone into reverse. The long rise in life expectancy stalled even before the pandemic, and has been falling in deprived communities. The number of homeless has nearly doubled in the last decade while official poverty levels are double those of the 1970s, and for children significantly higher than in 2014. Britain is a society where social and material gains enjoyed by most are still denied to a significant and growing minority.
Why is this? The primary answer is to be found in Britain’s embedded income and wealth divide. Britain is one of the most unequal countries in the rich world. Inequality levels surged in the 1980s and have stayed close to those of the inter-war years. As in the late nineteenth and early twentieth century, a hands-off state and the expansion of markets has produced a mountain of private wealth on the one hand, but widespread poverty and social dislocation on the other.
The ‘great widening’ of the last four decades – with the gains from growth increasingly colonised by the few – has had severe economic and social consequences. Intense concentrations of wealth have brought the return of ‘luxury capitalism’, with – as in the nineteenth century – the pattern of economic activity skewed by an over-rich and over-powered class, and resources deflected to meeting their demands. The way resource allocation has become detached from the social goal of ensuring well-being for all has strong echoes with the economic model that prevailed before the First World War. More than one hundred years ago, the Italian-born radical journalist and future MP, Leo Chiozza Money, had warned, in his influential book Riches and Poverty, that ‘ill-distribution’ of property ownership encourages ‘non-productive occupations and trades of luxury, with a marked effect upon national productive powers.’
Through the building of a more managed and pro-welfare economic model, luxury capitalism was largely dismantled, if briefly, in the post-war years. There was a greater concentration on meeting essential social needs, while Britain achieved peak equality in the mid-1970s with most groups sharing, for a while, in the gains of an expanding economy. The rise from the 1980s of a new, super-wealthy elite, and the return of intense concentrations of income and wealth has brought an era of severe social scarcity alongside extreme affluence. The 1970s dictum of the economist Fred Hirsch – that ‘So long as material privation is widespread, conquest of material scarcity is the dominant concern’ – has long been discarded.
Instead of prioritising fundamental unmet needs, there has been an emphasis on ‘conspicuous consumption`: from fortress developments to private airports. Every English premier league club is now owned by a global billionaire or multi-millionaire, or a rich state. One in three new cars bought in inner London in 2020 were SUVs. Even during the post-2010 austerity decade, demand for the rarest trophy assets – the top mansion, the private jet, the luxury yacht, the privately-owned island, even the mini-submarine – boomed.
In contrast, Britain has cut investment in children’s services, in young adult training and in social care. Government funding for local authorities fell by 55 per cent between 2010/11 and 2019/20, resulting in a 29 per cent real-terms reduction in spending power. Over the same period the value of child benefit fell by a quarter. There is a chronic shortage of affordable social housing, yet the banks of the Thames and the centres of other large cities are today lined with mostly empty multi-million pound flats bought, often for speculative purposes, and left empty for much of the year, by the mobile super-rich.
A key consequence of the return of luxury capitalism – with its squeeze on the share of income and wealth received by the poorest – has been the growth of insecurity, the lowering of life chances and a weakening of social resilience. A continuing rise in affluence and opportunity for some has been accompanied by stagnant and falling living standards for others. By promoting a new competitive treadmill, Britain’s distorted set of priorities has fuelled expectations, driven ecological imbalance and undermined social and personal well-being.
Today’s model of pro-inequality capitalism is the enemy of progress for all. It has squeezed the share of resources needed for the vital welfare functions of modern societies, from improving health and education outcomes to fighting deprivation. Over the last 200 years, high levels of inequality have gone hand in hand with high levels of poverty, creating a long high inequality, high poverty cycle, one only briefly and partially broken in the post-war era. It is no coincidence that the redistributive power of the tax/benefit system has been weakened over the last four decades. Today we have a mean, patchy and coercive system of benefits and a regressive tax system pitched against a heightened risk of poverty. Tax bills – as a proportion of national income – are still high, but they buy fewer teachers, longer waiting lists for the NHS, and lower benefit levels.
The mechanisms used by financial and corporate barons to enrich themselves have little to do with traditional entrepreneurialism, creating decent jobs or building economic strength. It is no accident that economic performance has been poorer under luxury capitalism than under the more egalitarian, post-1945 model. With new ways of securing easy money, and boosting private rates of return, too much economic activity has been associated with the extraction of existing wealth, with a declining level of private investment and a weakened ability to withstand the impact of social and economic shocks. The world’s top one per cent emit twice the carbon emissions of the poorest half. If we are to beat the global climate crisis, it must be the globe’s wealthiest who bear the brunt of the necessary cuts in consumption by rich nations.
Who bears the cost of economic shocks?
In the last forty years, such shocks – deindustrialisation, the 2008 financial crisis, austerity, climate change, Brexit and now Covid-19 – have become more frequent and disruptive. Some of them have been at least partially self-inflicted, the product of ideologically driven change and inept government policy. History shows that the costs of such shocks – from, for example, industrialisation in the nineteenth century to rapid deindustrialisation in the 1980s – has been heavily born by the least powerful members of society. The great wealth booms accruing to the plutocracies of both periods came largely at the expense of the livelihoods and opportunities of the weakest sections of the workforce.
In highly unequal societies, social progress rarely follows a conventional linear theory of history. The idea of continuous upward progress may be true for some, but for many the wider improvement in living standards in recent times, as in the pre-War era, has been patchy and erratic, often accompanied by a diminished quality of life, the loss of a place in society and a deepening sense of powerlessness. That the poorest half of the UK population together hold a lower share of national wealth than their equivalents four decades earlier is surely at odds with the claim of universal progress. Unsurprisingly, political alienation has continued to grow. The 2010 general election saw a 23 percentage-point gap between the turnout of the richest and poorest income groups. The gap was 4 points in 1987.
The only solution is a strategy that reduces inequality. Just how divided Britain has become is shown by a simple measure of inequality –the Palma Ratio. This compares the income share of the richest tenth to that of the poorest 40 per cent. Only a handful of rich nations have achieved what might be seen as a modest target – a ratio of 1.0, with the shares held by the top tenth and bottom four tenths equalised. These include Norway, Denmark and Belgium. The US has a ratio of 1.85 and the UK one of 1.5. While reducing the ratio would be a significant political challenge, it would be far from utopian. The Palma ratio in Britain stood at around 1.0 in the peak equality late-1970s.
Private wealth holdings – which are worth around £15 trillion, some seven times the size of the economy – are much more heavily concentrated at the top than in the case of incomes. The Palma ratio for wealth stands at around 10, with the top tenth holding a remarkable ten times more wealth in aggregate than the bottom 40 per cent. As with incomes, it is difficult to see how this level of concentration can be justified, economically, ethically or socially. A large chunk of today’s personal wealth piles are unearned. Some three-quarters of the growth in UK wealth holdings since the 2008 financial Crash has been the product of asset inflation, or ‘passive accumulation`, a classic example of what the nineteenth century philosopher John Stuart Mill called, reproachfully, ‘getting rich while asleep.`
Ending Extractive Power
A strategy for greater equality would need to break the two long high inequality, high poverty waves of the last 200 years. Such a strategy would require levelling up by raising the income floor, levelling down by lowering the ceiling, a more even distribution of existing wealth and new built-in pro-equality mechanisms to ensure that the gains from progress are shared more evenly. All societies need to justify their inequalities, yet Britain’s political classes have raised excuse after excuse for allowing income and wealth gaps to widen. Just as the winners from economic change have employed multiple ways to justify their position at the top, governments over the last 200 years have adopted a long line of explanations for inaction: that poverty is the natural God-given order, or the product of individual failure; that inequality is necessary to encourage a work ethic; that welfare spending crowds out private spending; that wealth gaps merely reflect differences in effort; that too much redistribution drains the entrepreneurial spirit. As Lord Griffiths, a former adviser to Mrs Thatcher and the then vice-chair of Goldman Sachs International, explained in 2009, the public has to ‘tolerate inequality as the price to be paid for prosperity.’ As shown by Covid-19, Britain is a country where disparities in income and assets have long been weakly related to differences in social contributions.
The extractive power that has driven luxury capitalism over much of the last 200 years has allowed disproportionate rewards at the expense of others, from ordinary workers and local communities to small businesses and taxpayers, often by steering economic resources into unproductive use, with no or limited addition to economic value. ‘The efforts of men are utilized in two different ways’, declared the influential Italian economist Vilfredo Pareto in 1896. ‘They are directed to the production or transformation of economic goods, or else to the appropriation of goods produced by others.’ Such ‘appropriation’ benefits those who ‘have’ rather than ‘do’, and displaces activity that would yield more productive and social value and meet the common good. Today, as in the past, Britain is a comfortable society in which to be rich, but not one in which to be poor.
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