Thomas Piketty’s Capital in the Twenty-First Century has been lauded as a work of huge importance. I’m currently making my way through its nearly 700 pages, and so far it deserves its plaudits. A central argument is that the main driver of inequality is returns on capital exceeding economic growth.
Perhaps unsurprisingly Piketty and I did not collaborate on our books. Yet our conclusions are strikingly similar: that inequality was a key driver of the crisis; that political actions delivered the 2007-08 crisis; and political action can resolve the crisis.
While Piketty’s tome spans centuries and continents, I limited my focus to the last 35 years in the UK. That period includes a “revolution” – as a senior civil servant who survived the Wilson-Heath-Callaghan years described the onset of the Thatcher government. Her ideologues in Cabinet saw themselves in similar terms, “a conscious break …with the entire post-war political consensus,” as Nigel Lawson said.
That government set in train each of the main contributors to the crash that would hit the UK a generation later. That’s not to say it can all be blamed on Thatcher. New Labour had thirteen years in power in which Gordon Brown, mostly as Lawson to Blair’s Thatcher, continued along the same path and carried out Lawson’s long held aim of independence for the Bank of England. In doing so he privatised another lever of economic policy, and was a cheerleader for the finance sector.
Thirteen years of New Labour only slowed the growth of inequality. Today David Cameron claims the UK is more equal than at any time since 1986, but that masks what is really going on. By one measure he is right, but the real divide is no longer between the top 20% or even 10%, it’s between the top 1% and the rest.
One way in which inequality has been entrenched is through the reshaping of the tax system. In 1979 the richest 10% paid 37% of their income in taxes (direct and indirect), while the poorest 10% paid 35%. By the time Thatcher left office those at the top were paying just 32%, while the tenth with least were paying a colossal 47%.
At the same time the burden of taxation was shifting not only from the rich to the poor, but from the corporation to the individual. These trends continue, as Osborne slashes corporation tax and hikes VAT to 20%.
But this reshaping of the tax system is just part of the story. The finance capitalism unleashed by deregulation laid the ground for phenomenal returns on capital far exceeding growth, and far exceeding normal investment returns in the rest of the economy. This financialisation of the economy saw capital from around the world flood into the deregulated finance sector in the City of London for its high risk, but potentially lucrative, high returns. But this speculative casino economy sucked in more and more of the economy.
Politicians conspired in this takeover – giving finance capital a high profit margin to extract funds from hospitals and schools’ budgets through PFI.
Gordon Brown praised this – just weeks before it all collapsed – in a speech to the City, boasting how London was the finance capital of the world, outdoing New York and Tokyo, and lauding “your efforts, ingenuity and creativity”.
What’s shocking several years on is how no meaningful reform has occurred or is even on the horizon. Finance capital rules. The Tories are half funded by it and, for all Ed Miliband’s rhetoric about “predatory capitalism”, Labour is committed to capping poor people’s benefits, not rich landlords’ rents.
In the final chapter of my book I set out some ideas for an economy as if people mattered. To do so, I go back to fundamental principles and ask: ‘“What is the economy for?” I’d welcome your views.
» Andrew Fisher’s book The Failed Experiment is available from all good bookshops or