Britain has long been a high poverty, high inequality nation. It’s time to change that, says Stewart Lansley.
One of the most important political questions of the time is whether we can finally overturn the four-decades-long experiment in pro-market, pro-rich, anti-poor capitalism. And if so, what might replace it? Liz Truss’s doomed attempt to take that experiment even further imploded so rapidly because even Conservative MPs felt that this was a step too far.
In fact the ideology of free-market Neoliberalism and its pro-rich bias has long been firmly discredited. The 2008 crash shattered the hubris of the pro-market school while it was further undermined by the destructive and over-applied post-2010 programme of austerity. Before his meeting with Truss in New York in October, US President, Joe Biden, lashed out at the past failure of Truss’s attempt to resuscitate “trickle-down economics”.
Over the past four decades, Britain has moved from being one of the most equal of rich nations to the second most unequal (after the US). As the gains from growth have been colonised at the top, the child poverty rate, in relative terms, has more than doubled compared with the late 1970s (see chart 1).
That these two key measures of social fragility have moved in line is no surprise. History cannot be clearer: poverty and inequality are critically linked. Poverty occurs when sections of society have insufficient resources to be able to afford a minimal acceptable contemporary living standard. Its scale is ultimately determined by how the gains from economic activity are shared. As demonstrated in my book, published last year, barring the short post-war period, Britain has been a high-inequality, high-poverty nation for most of the past 200 years, with significant consequences for life chances, social resilience and economic strength.
History cannot be clearer: poverty and inequality are critically linked.
Because of the impact of inequality, the poorest fifth of Britons are much poorer than their counterparts in other, more equal nations. Germany’s poorest, for example, are a third better off than those in Britain (see chart 2).
Poverty and inequality levels are ultimately rooted in the outcome of the political and economic power games that play out between big business, state and society. With the exception of the immediate post-war era, the struggles for share over the past 200 years have been won by the richest and most affluent sections of society, often with the compliance of the state.
For most of the nineteenth century, colossal and heavily concentrated wealth sat beside crushing poverty. The primary cause was a form of collective monopoly power exercised by a small landowning, industrial and financial elite through a system of “extractive capitalism”. This was aimed at securing a disproportionate share of the economic gains from industrialism, often by steering economic resources into unproductive use, with no or limited addition to economic value.
“The efforts of men are utilised 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.”
The long high-poverty/inequality cycle and the strength of extraction are interconnected. The cycle has only been broken once, when from 1945 the bitter ideological battle of ideas was finally won by pro-equality thinkers.
The achievement of peak economic equality and an historic low for poverty in the 1970s was a seminal moment in British history. Yet it was short lived, with the ideological baton passing to a group of New Right evangelists who proclaimed, falsely as it turned out, that a stiff dose of inequality would drive faster economic progress.
As a key adviser to Margaret Thatcher, Sir Keith Joseph, put it in 1976: “The pursuit of income equality will turn this country into a totalitarian slum.” From that point, egalitarianism was replaced by an entrenched bias to inequality. But far from creating the promised economic and entrepreneurial renaissance, the new licence to get super-rich simply triggered another era of extraction and of Pareto’s “appropriation” and a second prolonged wave of high poverty and inequality.
Forty years on we now have hard evidence of the inequality-driving-real-life experiment. The promise was that the political licence to get rich, along with the weakening of state social protection, would bring a more dynamic economy, with all getting richer, faster. Yet, the experiment has delivered low levels of private investment and productivity, and a more turbulent economy with more frequent and more damaging financial crises. This is because finance and corporate leaders have used their greater freedom to spawn a range of self-enriching business methods that have simultaneously contributed to Britain’s low-growth, low-productivity, low-wage economy.
Excessive inequality is, according to the International Monetary Fund, not just economically “corrosive”, it has also left a growing trail of social distress.
Examples of today’s complex and carefully hidden extractive devices have included the application of monopoly power through the ruthless destruction of rivals and the rigging of financial markets, the “skimming” of trading profits – a process City traders like to call “the croupier’s take” – and the engineering of company accounts. The boom in the private takeover of public companies since the millennium, from the AA to Boots and Morrisons, has enriched a generation of private equity barons, often at the expense of the survival of the targeted companies themselves.
The long list of companies destroyed by such financial manipulation include ICI, GEC, Bhs and Debenhams. Under extraction, economic activity becomes detached from new wealth creation, with the boost to profitability and rising corporate surpluses of recent times used to reward executives and investors rather than boost productivity. Over the past decade, for example, Britain’s largest corporations have used 80% of rising profits to fund dividend payments at the expense of private investment.
The richest tenth of the global population emitted 48% of all global emissions in 2019, with the top 1% putting out 17%. The poorest half, on the other hand, emitted 12%.
Excessive inequality is, according to the International Monetary Fund, not just economically “corrosive”, it has also left a growing trail of social distress. Much of this – from a diminished life expectancy to rising levels of destitution – has been documented in the Levelling Up White Paper published last year. Britain has, in turn, seen a rising gap between the electoral turnout of the richest and poorest groups, while the return of high global concentrations of income and wealth has driven global warming.
The richest tenth of the global population emitted 48% of all global emissions in 2019, with the top 1% putting out 17%. The poorest half, on the other hand, emitted 12%. Britain has engineered the return of a form of luxury capitalism last seen a century ago, with extreme affluence alongside severe social scarcity. The 1970s’ dictum from the influential economist Fred Hirsch that: “So long as material privation is widespread, conquest of material scarcity is the dominant concern,” has been discarded.
With the fifth Prime Minister in six years now in place, the question remains: What are the chances of a third – this time progressive – political turning point in post-war history? Rishi Sunak is planning a further round of crippling and growth-sapping austerity, leaving the pro-inequality bias of recent decades in place. If Labour forms the next government, as now looks increasingly likely, will Keir Starmer turn these crises into a return to Labour’s egalitarian roots, with the distribution question back at the centre of the political agenda? If not, the current long, high-poverty and high-inequality wave will continue unabated, imposing a further trail of self-destructive economic and social distress.