by Guest

contribution by Stewart Lansley (speaking at Fabian conference)

The pursuit of a more equal society has long been one of the fundamental principles of social democracy. For 40 years from the mid-1930s – the period of the ‘great leveling`- the wealth and income gap narrowed sharply in the UK and across the rich world.

This long-term trend came to a halt at the height of the global crisis of the mid-1970s and then went into reverse, driven by a new economic philosophy, one that argued that egalitarianism had gone too far.



But between 1980 and 2007, average real wages in the UK rose by only a little over half the rate of growth. So have the architects of market capitalism been proved right?

History shows a clear link from inequality to instability. The main outcome of the post-1980 experiment has been an economy that is both much more polarised and much more fragile and prone to crisis, and the two most damaging recessions of the last century – the Great Depression of the 1930s and the Great Crash of 2008 – were both preceded by sharp rises in inequality.

So what are the mechanisms through which excessive concentrations of income trigger economic malfunction?

The first stems from changes in the relationship between wages and productivity, a key link in the way economies function. If they get out of line in either direction, they create imbalances that lead to economic failure.

The significance of a growing ‘wage-productivity gap’ is that it upsets the natural mechanisms necessary to achieve economic balance. This is because de-linking earnings and output sucks demand out of the economy and imposes deflation. In most rich economies, wage-enabled consumption accounts for around two-thirds of economic demand. Consumer societies suddenly find they lack the capacity to consume.

The second mechanism occurs because concentrating the proceeds of growth in the hands of a small global financial elite eventually leads to asset bubbles. From the early 1990s, rising corporate surpluses, uncontrolled bank lending and burgeoning personal wealth led to a giant mountain of global footloose capital. By 2008, the assets – loans, credit advances and derivatives – held by the ten largest UK banks had grown to nearly five times the size of the UK economy.

Only a tiny proportion of this sum ended up in productive investment. Far from creating new wealth, a tsunami of hot money raced around the world at speed in search of faster and faster returns, creating the bubbles – in property, commodities and business – that eventually brought the British and global economies to their knees.

The third factor at work has been an increasing divorce between the process of enrichment and economic dynamism. It became easier to make big money through business strategies that were essentially unproductive. This enriched a generation of financiers but only by the expansion of activity which stifled the ‘real economy’.

The central lesson of the last thirty years is that a widening income gap and a more productive economy do not go hand in hand.

What has been built is an increasingly wealth-diverting model of capitalism – Ed Miliband’s ‘predatory capitalism`. The great experiment in unequal market capitalism has failed on its own terms.

The lesson – for the right as well as the left – is that capitalism that shares its output proportionately between profits and wages, and fairly amongst all citizens, is not just likely to be politically more stable, it will also deliver a more productive economy, faster growth and less turbulence.

A generation ago, the baton of economic philosophy was passed from the social democrats to the market theorists, with disastrous consequences. It is now time it was passed back.

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Stewart Lansley is the author of The Cost of Inequality: Three Decades of the Super-Rich and the Economy. A longer version appears in the winter 2011/12 Fabian Review.

Stewart Lansley will be appearing on a panel discussion about inequality, class and the crisis alongside Lord Glasman, Owen Jones, Baroness Lister and Emma Burnell on the 14th January at the Fabian New Year Conference 2012.