I noticed this tweet this morning:
If the UK was a US state, it would be the poorest in the country: Mississippi wages, with Californian housing prices.
— Peter Jukes (@peterjukes) July 30, 2023
My hypothesis is pretty straightforward. Our problems are threefold.
First, we have always based our economy on extracting value, not creating it. That's the legacy of empire, which was based on this logic.
Second, in the absence of anyone else to extract value from now those in power seek to extract value from those in this country, rather than take action to create value. Hence our remarkably low investment rate and high inequality.
Third, the consequence is the dominance of the financial services sector and rental income within our economy, both of which indicate extractive activity since neither creates added value of any consequence.
My guess is that some work on OECD GDP datasets might illuminate this, but I doubt I have time to do that today. If anyone else has the data though, please let me know.
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Piketty and others suggest that capital’s move from entrepreneurialism into assets (from growth to value extraction) is a natural development for capitalism, so increasing inequality is too, unless the state intervenes to stop it.
Perhaps the UK, being the oldest of the pretty thoroughly capitalist states, is simply further down to road to perdition…
Maybe
This is quite close to the classic Marxist thesis that as capitalism develops so the number of capitalists will diminish and there will be increasing immiseration of the working class. It was based on a theory of value which, as Stephen Keen among others, points out, was flawed and not accepted by most economists today.
Despite this, it doesn’t seem too far away from what we see. Even in the world’s largest economy the number of mass health care providers and aerospace manufacturers is less than it was even 20 years ago. The income of ordinary people is static and they are loaded with debt.
As so often, Keynes saw the key role of investment and advocated the euthanasia of the rentier. Resources should be directed to production and useful ends ( which included culture-man does not live by bread alone) and not speculation.
We took a wrong turn when he was sidelined in the late 70s . His views , as I recall, were linked to ‘stagflation’ and therefore redundant. Probably to ease the return to old style economics.
Keynes was right
Ringing endorsement from Emeritus Professor Christopher May!
I couldn’t quite understand point 2, but there MAY be a typo?
Otherwise, the compact argument suits me better.
I have simplified and improved point 2 in an edit now
Over-extracting value is Michael Hudson’s thesis for the fall of the Roman Empire.
There were a lot of problems in the later Roman Empire. Firstly, the Senatorial class came to own almost everything, at least in Italy, but elsewhere too. A lot of the later Emperors were quite weak relative to the Senators and had great difficulty getting any tax out of them. The Senators also tended to accumulate the money, rather than spend it all, so it went out of circulation. Slaves were largely outside the money economy and the Plebians and Knights were impoverished and in many cases either subsistence farmers or in Rome on the Imperial Dole. As there were no new conquests and the Senators owned so much land, it became very difficult to recruit legionaries based on a promise of a farm on retirement. The Emperor was the currency issuer, but that also became problematic. The Cornish silver mines dried up, as did many other sources of gold and silver. Without those you could not mint new coinage, hence shrinking amounts of metals in new coins and devaluation. Meanwhile, the Senatorial class loved their luxuries, and large quantities of silks, porcelain, etc were imported from China. In a familiar problem, the Empire did not have much that appealed to the Chinese other than gold and silver, so there was a substantial net outflow of those to the East (i.e. a large trade deficit). I think we do not realise Rome was actually quite well connected trade wise to Asia, as for example the Emperor Tiberius had a Komodo Dragon as a pet.
So while the Senators got selfishly richer, the Empire crumbled and was given a serious shove in 410 with the first Sack of Rome by Alaric, finally toppled by the cutting of the aqueducts by the Ostrogoths in 537. The population of Rome fell from 1 million or so in 400, to about 50,000 by 600 AD. The Senatorial palaces on the hills became uninhabitable without a water supply.
You can’t really classify Rome as a capitalist society, but it does have lessons. An over-concentration of wealth and power causes trouble both politically and economically. Selfish accumulation is all very well for the individual, but it ended up disastrous for everyone including the Senators.
Thanks Tim
Indeed, the UK is a rentier economy. Consider its property market, and that of London in particular. 70% of all premium developments are owned offshore, many by companies in places like the British Virgin Islands with nominee directors facilitating concealed ownership. Much of the money invested is flight capital from elsewhere. In Westminster alone, the total is 11% of all properties.
The result of the flood of dirty money is to drive up property values, widening inequality, making it impossible for average earners to get a foot on the property ladder.
The ultimate expression of the UK’s grotesque inequity is residential leasehold tenure, something abolished everywhere that inherited it from English common law and which now persists only in England and Wales.
What better illustrates rentier capitalism than the ability to sell something but retain ownership and control of it? The value of many freeholds in terms of monetised ground rent is frequently as little as 0.5% but landlords retain control and attempt to monetise it in many ways (skimming building insurance & engaging in many, many conflicts of interest). That is, until asked in recent years to take responsibility for unsafe cladding.
Because of the refusal of the UK Establishment to stop trying to live in the past and adjust to it’s position in the modern world, particularly in terms of education.
I totally agree with your post.
I think the U.S. are further down the road than we are though – and they’ve been pillaging our business sector too as much as anyone one else.
Your first line (‘First, we have always based our economy on extracting value, not creating it. That’s the legacy of empire, which was based on this logic’) makes perfect sense to me and potentially opens the door for a dramatic re-write of our recent history and how working people won the war but lost the peace in this country.
What a betrayal of a country by (essentially) its elites?
I grew up in South Africa, my family worked on the gold mines, and were originally from the UK mining industry. Gold mining has a limited life span – there is only so much gold you can extract. The UK economy is a bit like that – everything of value has been plundered – land, property, cheap raw materials which made manufacturing cheap, exporting to captive markets. There is very little of value due to the short term neoliberal vision. The consumer kept the economy afloat until 2010.
What it comes down to, is a small group of people (royal family particularly) owning almost everything. There is nothing left. They privatised everything possible to extract value. There is no real way of change unless we start implementing Keynsian reform. I can’t see Labour doing this. I truly despair. Are we about to see civil unrest? I suspect we will.
Good analogy
Our seams are worked out…..
As Noam Chomsky observed “In 1970, about 90% of international capital was used for trade and long-term investment—more or less productive things—and 10% for speculation. By 1990, those figures had reversed.” — How the World Works, https://www.amazon.co.uk/How-World-Works-Noam-Chomsky/dp/B08ZBJF1VQ
Then the Tories sold off Britain’s manufacturing base, its energy, and pretty much any industry that made money, so that the money went to private investors. And then the financial sector made money from money without having to manufacture anything.
Of course the more well-off made billions, and the rest of the population voted for them under the mistaken belief that they could join them.
That is the problem
Would love to know the source of the Chomsky figure. It feels about right though I’d not entirely trust Chomsky.
In the UK, how banks deploy their capital is similarly revealing. The last figures I had – and Id be grateful for up to date figures – suggested that UK bank lending was about 2/3s on property with business lending down around 10-15%. The remainder being deployed in various forms of trading and speculation. Overall not that far from Chomsky’s suggested figure.
Sorry – I am not sure which Chomskey figure you are referring to.
The 10-15% business lending feels right.
My query was about Chomsky’s figure of 90% of international capital in 1970 being deployed on trade and investment, falling to 10% by 1990. Feels a bit extreme but certainly in the right direction and very roughly right.
There is a repressed element of residual mercantilism that has always infected British commercial culture. This culture has its origins in the Caribbean slave Empire, and the East India Company. Gains are only really made at someone else’s (usually penal) expense. Hence the lack of success or interest in our dismal productivity performance. You thus cannot join a commercial union unless you run it exclusively for yourself, or can break the rules for advantage, with impunity. The British disease.
Quite so.
I would call it the economic cannibalism of capital on society.
The finance sector long ago forgot what real investment means. They are now purely about wealth extraction. Trading the rights to revenue streams, speculating on assets, and buying and selling businesses. Leeches on the wider economy.
Sadly no party either understands the sector’s destructive role, or has the courage to challenge it.
Our growth industry is armaments. Our political system is not equipped to deal with the uncontrollable forces of the internet, social media, climate change et al so our political parties take swats at each other about which is the higher tax one and “Rome” burns, our health, education, justice systems collapse. So much for free market economics. What I find so extraordinary is that what seems so flipping obvious and commonsensical, isn’t to everyone else. Is it us or them?
An excellent summary Richard.
It always surprises me that so few people can see what appears to be obvious.
Let us hope that they can get to the next step of understanding what we have to do about it.
Coincidentally there is a piece in the Guardian this morning that gives us another example of the same problem.
It reveals the critical insight that Donald Trump is a criminal sociopath. Well, no-shit-Sherlock.
Are there really only a small number of people who know this?
Apparently so…..
We do badly, typically because we are subject to politically fatuous leaders dressing their fatuity as sense. Rishi Sunak flew up to Scotland on a pointless journey by private jet, to make a point about green policies he could have made by Zoom from Downing Street, for nothing. He didn’t come to Scotland to make a decision. He came up to take a Photo Op and go on a series of interviews he could have done from Whitehall; and lectured everyone about the best use of a leader’s time. As I said – Fatuous. Nothing more to be said.
Agreed.
No one, anywhere, is impressed.
Brett Christophers’ Rentier Capitalism seemed to me pretty good on this subject.
Agreed
‘The financial services industry doesn’t create any added value of consequence”.
Even by your standards, this must be one of the most stupid comments you’ve ever made.
Maybe you never created any value in your career in financial services, but plenty of us do so on a daily basis. I’m sorry you don’t understand that.
If you think accountancy is financial services you are deeply mistaken.
I started my working life dealing with financial services in the City in the 70’s. Watched as it went through Big Bang, dealing with all the different parts of finance. Ended up working with senior management and directors including central banks. There was a time when the sector existed to serve the wider economy but it has transformed over time to become something that exists primarily to feed itself. During the 90s and early 2000s it shed most of those who understood how actual business and the wider economy works. I watched as those managers and sector specialists were got rid of. Talk to SMEs, farmers, local government and others – all knowledge of what they actually do has gone from the banks.
It is now almost entirely about wealth extraction for the benefit of those in the City including their facilitators in the law, accountancy and property. Trading assets and revenue streams. Flogging dubious financial products to earn fees such as the hedged loans that proved so disastrous for many businesses. Businesses to be bought and sold and fees extracted. Start-ups to be speculated in and sold as soon as possible, not built up over time into substantial businesses generating real wealth and jobs.
Cash extracted to be put in the pockets primarily of the wealthiest is NOT creating value – a term that has lost all meaning. The price of everything but the value of nothing perhaps. Perpetually bending or ignoring regulations and the law as reflected in the massive fines that have been paid, way beyond any other sector. With next to no accountability for those who run the organisations, as we have seen over and over again.
We need a healthy financial services sector, one which genuinely works to build the wider economy, and yes makes reasonable profits. What we have now is one that is primarily a parasite on the wider economy and pays itself at obscene levels. The failure to pass on rate increases is just the latest example. And that is before we include its role in tax evasion, money laundering, enabling oligarchs and the rest. It is no coincidence that it is the largest contributor to our current rotten government.
As the old joke goes, for the City, ‘ethics is a country East of London’. It is a ‘value’ free zone. With honourable exceptions.
Entirely agreed, Robin.
Wholly accurate Mr Stafford. Therefore we can’t trust the banks; and since the regulation of the City is so weak, and failed so often, and at frighteningly penal cost; that is ultimately the responsibility of Government. Clearly this too often repeated failure is not an accident; so we can’t really trust Government either (oh, and it matters not a jot whom you elect, you just receive the same government, with different political window dressing; serving the same interests that definitely aren’t the general public’s; all in order for Government to continue endorsing the same cartelised public rip-off that subvents, subsidises, bails-out or otherwise generally dispenses public largesse like confetti to so-called ‘markets’, and protects or promote their monopoly windfall gains) ….. The public can shift for itself; and pay the penalty taxes for the failure of ‘markets’ to do more than clean up at our expense.
I’d recommend Philip Augar’s book about Barclays, The Bank That Lived a Little. How they transformed from the conservative organisation with Quaker roots, to the out of control collection of shysters that we know today.
As has been said so often, until a bunch of suits find themselves doing the perp walk and then a substantial period time inside, along with substantial personal fines, nothing will change.
As an aside, during the 70’s I worked a lot with the building societies. Those people in ‘green suits and brown boots’ as City folk disparagingly referred to them. They genuinely cared about their members (not ‘customers’), paid themselves modestly and were very efficiently run. I developed financial models for a number of them and their cost/income ratios were half those of the retail banks. They managed every penny. That remained true even as the product range they offered expanded. The demutualisation of so many, and the resulting collapses of what had been well run organisations like Northern Rock or Halifax was a tragedy for the finance sector.
Much to agree with.
I agree with most of the points being made – rentier capitalism, cultural hangover from HEIC and colonialism, decline in number of big enterprises even as the rest of the world “catches up”, and being first we maybe are further down the road to perdition.
I would highlight some additional cultural issues – some arise from from being first and others are compounded by it.
(1) the desire of those running companies to sell up and become a member of the landed class – its widely said we lack a mittlestadt -(BTW there are some tax breaks for people who turn there business over to their workers – a little know bit of legislation pushed by the lib-dems in the coalition, but examples like Richer sounds remain rare)
(2) the automation/inventions that needed initial investment (think The Lunar Men) whose work underlined a lot of early industrialisation were boosted by colonial monopoly that masked the extent to which we were “sweating the investment” to a disastrous degree…remember when large swaths of industry went bust in the 1980’s some of the machine tools dated from the 1880s
(3) if there is any truth in Kondriatef cycles finacialisation which follows each major innovation/expansion phase is usually challenged by organised labour but in the UK this has been systematically weakened since Thatcher
(4) not getting Marshall Aid, and having to pay back lend-lease.
(5) Getting a free pass with North Sea oil, and later being propped up through the EU but frittering it away…