Election Watch #3: Wealth Creation and Economic Stability
A just and inclusive economy requires deeper thinking and an acknowledgement that structural change is essential
During the New Labour years, Tony Blair repeatedly said he had no problem with people amassing huge fortunes. The architect of Blair’s electoral success, Peter Mandelson, was so comfortable with the super-rich that he was regularly to be found enjoying the hospitality of such characters as Rupert Murdoch on their yachts in the Mediterranean. Gordon Brown, by contrast, kept his own counsel when it came to extreme wealth. He knew the flip side of a world in which the most notable economic statistic is the growth in the number of billionaires.
Take a moment to consider the numbers: In 1997, when Blair came to power, there were 259 billionaires in the world. By 2022, the number had grown to 3,194 and it’s still rising. The fact that half the world’s wealth is today owned by one per cent of the global population is endlessly quoted in the media, yet no politician dares publicly to make the connection between extreme wealth at the top, growing economic insecurity in the middle and deepening destitution at the bottom.
It’s in this context that we must consider the main focus of Labour’s election manifesto, which was launched today promising that the next government will focus on wealth creation and economic stability. These are, of course, noble and essential aims: By citing economic stability Labour are talking about avoiding a repeat of the 2008 financial crisis, an event from which the UK economy has never fully recovered, to some extent because it seems to have permanently restricted the country’s ability to create wealth. Clearly if we are going to reboot our wealth creating capacity we need a new economic strategy, and the Labour manifesto does show signs of acknowledging this.
Gordon Brown was determined to end the cycle of boom and bust when he became Chancellor of the Exchequer. Three weeks after Labour won the 1997 election he told the CBI:
Stability is necessary for our future economic success. The British economy of the future must be built not on the shifting sands of boom and bust, but on the bedrock of prudent and wise economic management for the long term. It is only these firm foundations that we can raise Britain's underlying economic performance.
Three years later he was claiming boom and bust is at an end, a boast that would come to haunt him a few years later as the global financial system went belly up. We now know that the period of decent growth and reasonable stability enjoyed by Britain and other western countries in the decade following 1997 was only made possible by a massive and unprecedented credit boom, in which every western government colluded. Brown’s greatest moment may have come when, as Prime Minister, he was able to lead the global escape plan and avoid a total economic meltdown, but like all of his fellow finance ministers, he was blind to the inevitable consequences of the giant global Ponzi scheme which enabled this period of economic stability and ‘wealth creation’.
The Conservative opposition fully supported this crazy credit boom experiment. But once they came to power in 2010, they set about re-writing history to suit their own agenda of austerity, by arguing (with great success) that it was profligate public spending under Labour and consequent levels of public debt that brought the economy crashing down. This is completely wrong: it was out-of-control private debt, and the increasing complexities intentionally built into the global finance system, that triggered the crash. The cash Labour was able to spend on schools, the NHS, Sure Start and myriad other schemes that made Britain a better place to live, was financed not by government borrowing, but by the increased tax revenues resulting from from credit fuelled ‘wealth creation’.
If the option of another credit boom is not available to Starmer, how is he going to kick start the process of wealth creation Britain so badly needs? I don’t think he can, not by conventional means anyway. If he is going to succeed, he and his advisors need to start thinking about the difference between money and wealth. The reason the great early 21st century Ponzi scheme collapsed was because it was essentially a mountain of money (credit) not backed by genuine wealth.
Let’s take a step back:
Wealth creation, as measured by the ability of an economy to produce more of the things that people need and want in order to live a comfortable and rewarding life, is an essential element of the social contract - the tacit understating between individuals and the state whereby we all agree to rein in our competitive and acquisitive impulses in exchange for the protection of a secure and stable society.
No society has succeeded in fulfilling its obligations under the social contract to all of its citizens, though many nations have, since 1945, made immense strides in that direction. But when the process of wealth creation is hijacked in the interests of a small minority who are allowed to take effective control of the factors of economic production - land, labour and capital - the social contract can quickly break down.
Before considering the process of wealth creation and how it buttresses the social contract, a word about how we define wealth. It helps to differentiate between wealth and money. As I mentioned above, wealth is stuff that people either need to survive, or which enhances their experience of life. Money is simply the means to acquiring that wealth. Money becomes very important in a complex advanced economy where few of us are directly involved in creating the wealth we consume, but it isn’t the same as wealth.
We humans have a hierarchy of basic material needs, which begins with drinkable water and nutritious food, works it’s way up through suitable clothing and secure housing, stops off at affordable access to education and health care, before landing up at the things that don’t just make life survivable, but also enjoyable; things that aren’t essential but make life worth living. In a just society, not only would essential material needs be produced in sufficient quantity, but a system of distribution would be in place which enabled everyone to afford them. That system consists of a labour market in which the money people earn is sufficient to cover the cost of their basic needs.
In a modern economy, as well as the social contract, we all sign up to an economic contract whereby we agree to exchange our labour for money as the means to acquire the wealth we need: essential material needs first and foremost, but hopefully some luxuries on top.
But if insufficient goods are produced, or if the distribution system fails, some people are not able to access these essentials. This is the situation that most people in poor countries have long found themselves in. It is a situation that many in the rich world are also now having to confront, often for the first time.
It’s worth mentioning a third contract that has been stretched to breaking point, in the UK especially: a generational contract under which politicians encourage the expectation that each new generation will have a better experience of life than their parents’ generation.
It is the ongoing breach of the economic and generational contracts which is currently putting so much pressure on the social contract. No wonder the British Social Attitudes Survey announced yesterday that 79 per cent of Britons are dissatisfied with the way Britain is governed. And with people everywhere feeling let down by the promises of their leaders, we shouldn’t be surprised by the electoral gains made across Europe last week by parties of the populist, often racist, nationalist far right.
It’s impossible to prove a casual link between economic failings and the rise in support for the far right, but there is evidence for the opposite: History suggests that when societies are more equal, when most people believe that the spoils of economic activity are divided fairly, and when people have a sense that their generation enjoys better opportunities than their parents’ generation, populist authoritarians don’t get anywhere near power. It’s not rocket science: the best way to ensure that reasonable, trustworthy, capable and truthful people are elected to power is to create a society that most people feel to be just in its allocation of the fruits of economic activity.
As we have seen, this requires three things:
we need to create enough of the right kind of wealth: the basic needs listed above that are essential for a reasonably comfortable life,
people need to be able to earn enough to acquire that wealth. There has to be a balance between earnings and the cost of living: people need effective purchasing power
the total purchasing power available in a country needs to be distributed among the population not equally but equitably, such that the poorest person is at least able to acquire for themselves the bare minimum of essential needs
Nearly all of the rich countries are failing in respect of all three. Why is it so difficult? The fact that it’s been beyond the capacity of any centre-left or centre-right government for decades now, with inevitable electoral consequences, can lead to only one conclusion: politicians are either in cahoots with minority interests, or they simply don’t have the power.
And most politicians will tell you that it’s difficult because they no longer have much power over the way the economy is configured. The more honest ones will admit it was their predecessors who gave that power away. But none of them will accept that a just and inclusive economy, one that is able to fulfil the three criteria above, is impossible while the configuration of the economy is determined by market forces and other economic institutions that prioritise the interests of a super-rich elite. Remember, 3000+ billionaires and rising.
At the manifesto launch this morning, Keir Starmer said ‘wealth creation is our number one priority’. I believe he is sincere in this, but if he is to succceed he also needs to start thinking about why and how the process of wealth creation has become so skewed in the interests of less than one per cent of the population. As I have written here before, his first year in government should be devoted to carrying out a full review of why and how the wealth creating capacity of the economy has been so compromised, and how it can be re-configured to once again serve the interests of the majority.
He is right to talk about supporting individual aspirations, but those aspirations will be frustrated without structural changes to the economy. Economists on the right talk about the ‘crowding out’ of private investment when public spending is to high. In today’s economy, it’s the aspirations of the great majority of people that are crowded out by a handful of undeserving megalomanics at the top, not only extracting value created by others, but by wielding monopoly power that intentionally suppresses the ability of others to make a properly rewarded contribution to the economy.
Of course Labour must support the aspirations of ordinary people to better themselves. But it will fail unless it can create an economy in which entrepreneurship and hard work brings just rewards to all those who strive, not just a handful at the top who currently dictate the terms under which the economy is run.
If Starmer can’t articulate this now for fear of frightening the electoral horses, he needs to start as soon as he enters No 10. We desperately need a new narrative: one that puts everyone who wants to work at the heart of the process of wealth creation. If he fails, the social contract will soon break down.