Margaret Thatcher’s neoliberal revolution wasn't just successful because it reorganised the economy – it was successful because it embedded a particular narrative about how wealth is created and distributed in society. This is a world where, so long as there is sufficient competition and free markets, every individual will receive their just rewards in relation to their true contribution to society. Where a rising tide lifts up all the boats. There is, in Milton Friedman’s famous terms, “no such thing as a free lunch”. It’s a world where businesses are the “wealth creators” who create jobs and drive innovation, and business owners are entitled to the financial rewards of success – regardless of how enormous they are. It wasn't like that, of course. Every time that the rich and their companies become insolvent, they are bailed out, from easy bankruptcy for the very rich who are then allowed to refloat themselves with cheap and extravagant loans, through subsidies to large corporations that end up paying no tax, lack of action on fiscal paradises, through to bank bailouts. Socialism for the rich, capitalism for the poor.
Tony Blair and Bill Clinton’s ‘Third Way’ largely accepted this narrative of wealth creation, and until relatively recently nobody in the mainstream of British politics challenged it. It is what is taught in business schools and really nothing alternative is every studied or taught.
The problem, of course, is that it bears little resemblance to how the economy actually works. While it is true that working hard will generally help you earn money, you won't necessarily earn more this way. And the causality doesn’t hold in reverse: not all wealth has been attained through hard work. In practice, the distribution of wealth has little to do with contribution, and everything to do with politics and power. The current campaigns against inheritance and wealth taxes are supported by many people who will not benefit overall from them. The Thatcherite narrative that taxes are bad took hold and the alternative thesis that they are part of a decent, redistributive, collaborative society has been silenced. The narrative that owners are the only important stakeholders is also palpably false, and excludes others affected by economic activity, such as those who live nearby, consumers and workers.
Someone that is born in the UK will earn more than someone born in Sub-Saharan Africa, even if they perform exactly the same labour. Why? Because one was lucky enough to be born in a powerful country with a legacy of imperialism that has rigged the rules of the global economy in its favour. It is the same in London compared to the north of England, say. The economist Branko Milanovic has estimated that 60% of someone’s income is determined by where they were born, and an additional 20% is determined by the income level of their parents. This means that place of birth and parental background accounts for around 80% of someone’s earning power on average.
Within countries, extreme fortunes almost always derive from control over a scare resource – fossil fuels, minerals, land, monopoly networks, money etc. To the early classical economists, this kind of wealth – attained by simply being a gatekeeper to scarce resources – was deemed to be unearned, and they referred to it as ‘economic rent’. But today the Sunday Times Rich List is dominated by rentiers – financiers, real estate tycoons, oil barons, monopolists and aristocrats.
As Grace Blakeley puts it: “You do not become a billionaire through labour. You become a billionaire through inheritance, corruption or economic rents – or, in most cases, some mixture of all three.”
But it’s not just billionaires that accumulate wealth without working. Over a third of all the income in Britain is paid out as capital income (dividends, rents and interest) rather than labour income (wages and salaries). Capital income is inherently passive: it doesn’t correspond to work or skill, but ownership.
Since 1995 three quarters of all wealth accumulated in the UK – totalling £5 trillion – has come from rising house prices. The driving force behind rising house prices has been rising land prices. But land is not a source of wealth but of economic rent. The truth is that most wealth made through the housing market has been gained at the expense of others who are now seeing more of their incomes eaten up by higher rents and larger mortgage payments. The housing boom is not an example of wealth creation, but wealth redistribution on an unprecedented scale.
And then there is inheritance: around £100 billion of wealth is passed on to new owners every year without any corresponding productive activity, much of it escaping any tax.
Overall, the proportion of wealth in western countries that can truly be ascribed to “hard work”, however loosely defined, is infinitesimally small. The idea that Britain is a meritocracy is objectively false.
This means that we should start to recognise that wealth
creation is a collective process involving many different interdependent stakeholders – workers, the government, the natural environment, civil society, and, yes, entrepreneurs. It means highlighting how the mechanism linking contribution and reward for each of these stakeholders is fundamentally broken: workers are being paid less than the value they create, owners are appropriating wealth they didn't create, vast profits are being made by destroying our ecosystems, and the role of the state in wealth creation is undervalued. And it means proposing new mechanisms for distributing financial rewards that more accurately reflect the collective nature of wealth creation, and rebalance power between capital and labour.
Crucially, it also means challenging the idea that rising asset prices – Britain’s favourite form of wealth – constitutes wealth creation. As John Stuart Mill wrote back in 1848:
“If some of us grow rich in our sleep, where do we think this wealth is coming from? It doesn’t materialise out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.”
The extraction of natural resources and the externalisation of costs that are so intrinsic to capitalism are nothing but the transference of wealth from one future generation to the present one. The ownership of land, together with inheritance laws that protect rich families, enables the concentration of wealth in few hands.
Great inequality is incompatible with democracy because money is used to buy power in a corrupted representative system. Learning that there a now more billionaires than ever, individualistic neoliberalism has encouraged the greedy to think that they too might climb up and be the new Jeff Bezos, and to hardly spare a thought for those unfortunates that aren't winners in this winner-takes-all system, accepting the lie that it's mostly their own fault anyway. If they stopped to think about it, there is no millionaire class if everybody's a millionaire. Being rich requires that you can buy the labour and land off those who are poor. As George Carlin said, ‘it's a big club, and you ain’t in it.’
