Stewart Lansley tells how fat cats have made money while they sleep.
Writing in The Times, Keir Starmer called wealth creation Labour’s “Number one mission”. Real wealth creation that boosts entrepreneurship, builds infrastructure and brings more productive business methods is vital for rising prosperity. But “creating wealth” is a slippery concept. Despite Britain’s recent dismal economic record, personal wealth holdings have surged. National wealth – a mix of property, physical and financial assets – stands at almost seven times the size of the economy, up from three times in the 1970s. Most of this expansion has been captured by the few, with little spread across society.
The escalating rate of personal enrichment has coincided with the collapse of Britain’s growth and productivity rate.
It also has little to do with a leap forward in wealth creation. It is not the product of greater entrepreneurialism and record levels of investment and productivity. Indeed the escalating rate of personal enrichment has coincided with the collapse of Britain’s growth and productivity rate. While individual fortunes are reaching new heights, social institutions have been weakened while typical living standards have been close to static.
Much of today’s towering wealth mountain has been unearned, the product of the mass sell-off of former public assets, the exploitation of corporate power, and state-driven asset inflation. The nineteenth century philosopher, John Stuart Mill, dubbed such windfall gains “getting rich while asleep”.
The founding economists drew an important distinction between new wealth creation that contributes to the common good, and extraction or appropriation of existing wealth that serves the interests of a powerful few. Such “appropriation” was widespread in the Victorian age, but less prevalent in the post-war era.
But today’s political licence to get rich has seen the return of corporate extraction. Many large companies have been turned into cash cows for executives and shareholders through anti-competitive devices, the manipulation of corporate balance sheets, and the rigging of financial markets. The rising profit share of recent times has disproportionately gone in payments to shareholders and executives. It is this that explains Britain’s low-investment, low-productivity and low-wage economy.
At the end of 2023, the volume of “dry powder” – what the finance sector calls capital available for investment – held by the world’s asset managers had reached an all-time high of $4 trillion. That’s a sum a third larger than the annual output of the UK economy. A large part of this sum represents the proceeds of economic activity that has become disassociated from high-value, productive and social activity that might have served wider social and economic interests.
Successive governments have ignored this distinction between wealth creation and extraction and turned a blind eye to the predatory tactics of modern capitalism.
In recent years, over 60% of such cash has been invested in private equity deal-making. through the takeover of public, share-issuing companies. This is because the buying and selling of existing companies, and the plundering of their assets, can deliver heightened returns for investors – higher than the longer-term activity associated with traditional entrepreneurialism that delivers a stronger and more dynamic economy.
At immense cost – to living standards, economic stability and public finances – successive governments have ignored this distinction between wealth creation and extraction and turned a blind eye to the predatory tactics of modern capitalism. Starmer is right to be serious about raising the rate of prosperity, but this requires a strategy that cuts appropriation and boosts the volume of high-value, productive activity which secures long-term social gain.
The combination of extreme inequality and the over-empowerment of markets has proved a toxic mix. This is the source of the stark paradox of contemporary capitalism where, as societies get richer, rising numbers are unable to afford the most basic of needs. This has nothing to do with a lack of resources. The pro-rich, pro-market and pro-private ownership politics of recent decades has passed too many decisions over how resources are used from democratic and social control to markets. The result should be no surprise. National resources that could have been used to build social housing, better services for children and social care have instead been syphoned off into low-social value activity, from super-luxury property developments to the burgeoning private jet and luxury yacht industries.
The pro-rich, pro-market and pro-private ownership politics of recent decades has passed too many decisions over how resources are used from democratic and social control to markets.
Britain’s resource base should be targeted to social reconstruction. Tougher regulation could tackle the extractive mechanisms of private capital. Greater democratic control over resource use can be achieved through a boost to social ownership and greater state management of the allocation of finance capital currently determined by corporate elites. A higher proportion of existing wealth pools should be harnessed through a gradual shift from highly taxed income (over 30%) to currently lowly taxed capital (current rate 2%).
There have been multiple historic warnings of the destructive impact of economies heavily geared to markets and the hedonistic demands of the super-rich. “The test of our progress is not whether we add more to the abundance of those who have much,” declared the American President, Franklin D Roosevelt in 1936, “it is whether we provide enough for those who have too little.”
This piece was originally published in the Yorkshire Post on the 13th June 2024.
