The wealth divide, the damage it causes and how it came about

'The poor will always be with us.' So says Jesus in the new testament gospels. Whilst surely true, the gap between the rich and the poor just gets bigger. A couple of recent newspaper articles explore this.

Apart from basic fairness, wealth that is not spread about is bad for the economy. If wealth is spread, everyone has more and so can spend it on goods and services to the benefit of all. Wealth in the hands of the wealthy is often ‘invested’ in non productive assets like residential property often left unoccupied. Investment in farm land became unproductive when the price of land rose so far above its economic value. This happened because individuals and companies could rollover capital gains into assets that would also qualify for agricultural property relief for Inheritance Tax. In past generations wealth was invested in new industrial plant or the privately owned transport infrastructure : the railways and canals. This led to the multiplier effect much loved by teachers of economics in times of gone by.In the course of my lifetime, beginning when the Second World War was still fresh in people's minds, I have seen the gap first almost shrink in the fifties and sixties, but then open up and in recent years accelerate alarmingly.

In Britain there has always been a gap - the rich man in his castle, the poor man at his gate. Land was key. With the growth of trade and then industrialisation different people grew rich. The traders, and this includes slave traders, and those who served them. Then the factory owners, the canal and railway entrepreneurs but especially the financiers, the bankers. All the time, those working in mills, factories and mines and the many thousands working from their dwellings became only slightly less poor when the economy boomed but destitute in slumps. The Factory Acts and the trades unions slowly improved conditions. Equally British manufacturing and trading companies enjoyed a strong market position really until the start of the First World War.

There were dark clouds on the horizon. In Germany, Krupp and other industrialists were creating a vast war machine. In the USA, the benefit of a large home market was reaping rewards in establishing an electrical industry which was all too happy to supply the former imperial power. Westinghouse set up in Manchester and British Thomson-Houston in Rugby.

In addition to the cost of many thousands of lives, the war drained the nation's coffers as it, and Empire nations, provided the astonishing quantity of arms and ammunition used on an industrial scale by the Allied nations. The same would have applied in Germany. Yet, the production of war materiel maintained employment in the waring nations and importantly for them in the USA.

In the UK, jobs had already been lost in textiles as the nation's near monopoly position slipped away. Similarly in the other old staples jobs were lost in iron and steel and shipbuilding as developing nations took up the baton. The USA already had a strong steel and shipbuilding industry which had prospered from the demands made on it during the war. Germany began to rebuild itself under the 3rd Reich. Jobs lost in the northern British towns, despite some government initiatives, were seldom replaced and these once prosperous urban areas became deserts of unemployment.

Newer industries prospered: motor vehicles, electronics, chemicals and consumer products. These industries also prospered in competitor nations. Britain had lost its lead.

The Wall Street crash triggering the Great Depression was devastating for workers on both sides of the Atlantic. Winners took advantage of their strength and position. Those who avoided the crash did well.

Preparations for a Second World War brought back employment to old and new industries alike. The aircraft industry, which had been in an hiatus after bursting onto the scene in the First World War, was busy again developing new aircraft.

When war came, once again the nation was busy, but once again the coffers were further drained. America provided arms and much more, at a price.

War left Britain exhausted yet it had to find the energy for an export drive in order to pay its way. Hard work created the nation that had never had it so good, but its wasn't everyone.

The fifites and sixties saw a move away from steam powered railways and the Clean Air Acts, both of which reduced the demand for coal. Mines shut with corresponding unemployment. The steel industry grew until the sixties, but then foreign competition triggered its decline. Shipbuilding suffered in much the same way. The aircraft industry, with the notable exception of Rolls-Royce, simply couldn't compete with the American giants. 

The indigenous motor industry gave way to foreign ownership. The TV and Radio industry followed suite. The coming of North Sea Oil raised the exchange rate making exports more expensive and imports cheaper; manufacturing declined. Jobs were lost with some replaced in the low pay service sector. Coalminers and steel workers had been the aristocracy in their communities, not so warehouse, call centre or delivery workers.

Computerisation hit middle management and clerical employment.

The Thatcher revolution was predicated on inequality with rewards for hard working and ability. The reality turned out to be rather different. The Financial sector became to be seen as the saviour of the economy. Banks grew alarmingly. Deregulation led to ever more risky products and reward that was disconnected from risk. Banks allowed people to borrow beyond their ability to repay and house prices rocketed. A small number of people became very rich. The argument was put forward that this wealth would trickle down.

In 2008 the banks crashed leaving savers with losses, businesses without borrowing facilities and bankers unscathed. A number of banks merged to become even bigger. The Bank of England pumped money into the economy under the label of 'quantitative easing'. This money found its way into yet higher property prices. Austerity that followed bled the public sector, losing jobs and depleting services.

The decision to leave the EU, in effect our large home market, cost a fall in growth which in turn has resulted in lost jobs or the lack of new jobs.

Covid came as very near the last straw.

The economy and indeed the fabric of the nation is now in desperate need for repair. A parallel comes to mind of that which faced the Attlee government in 1945. Yet, as then, there are grounds for hope. We are a talented nation. There are huge challenges, not least the appetite of the UK capital markets for investment. Will Hutton has much of interest to add in his book This Time No Mistakes.

The question remains of whether growing the economy can benefit all. Aditya Chakrabortty raises questions but offers no answers. This is a complex subject and so that is hardly surprising. just to add a further layer of complexity, here is a piece exploring an alternative world view.

This Time No Mistakes by Will Hutton

I have admired Will Hutton for many years and devoured his book, The State We Are In, and his writing in the Observer. His most recent book is This Time No Mistakes - how to remake Britain.

Following a helpful introduction, Hutton begins by exploring the economic story of the USA. He looks at the freewheeling entrepreneurs: JP Morgan in banking and Carnegie in steel and their push for monopoly. [the links are to posts I have written for my History of British Manufacturing.] The monopolies were countered by antitrust legislation. The otherwise free market system though had inbuilt instability and banks and businesses crashed all too often  After four decades of spectacular growth, the Wall Street crash and subsequent Great Depression demanded action which took the form of Roosevelt’s New Deal. 

This had three main strands: regulation, the provision of credit with protection and a massive investment in infrastructure with a focus on employing those otherwise out of work.  So we have the federal mortgage lenders, the SEC and a raft of social security legislation. It worked and formed the consensus of western economics for nearly half a century. Hutton acknowledges also the massive benefit to the US economy of production for WW2 of which I wrote in War on Wheels and Dunkirk to D Day.

The consensus began to crack in the seventies with the oil shocks and inflation.  Hutton suggests that it was raised interest rates to cool inflation that led to the strengthening dollar and the flight of US manufacturing overseas. In the UK, as I wrote in Vehicles to Vaccines, it was North Sea oil that had a similar effect. Hutton suggests, in a later chapter, that UK interest rates raised for the same reason added to the strength of sterling.

The forces of the right, believing in the market and the small state, were ready in the wings and entered the scene with Ronald Reagan as the charismatic US face; much the same as Margaret Thatcher.

Neither Clinton nor Obama altered this new direction and left  a country of disgruntled former workers ready to embrace Trump's  brand of nationalism.

This very much sets the scene for the book.

Hutton then looks at the Tory years with particular focus on Thatcher and the way manufacturing was decimated. He explores the Brexit arguments and then the failed administrations of May, Johnson and Truss.

The next focus is on laissez faire and the way successive governments have embraced this doctrine combined with the straight-jacket of the small state.

In critiquing the doctrine he draws on the writing of Adam Smith, Chadwick and Engels, the action of Luddites, Tolpuddle martyrs and the Chartists, and finds practical examples of good practice in the Rochdale Cooperative and Robert Owen’s New Lanark. Interesting for me who has written on him he draws on John Ruskin's works on political economy in particular Unto his Last. Hutton of course writes on Marx and his critics.

1859 was a key date with the formation of the Liberal party. Hutton follows this by writing on influential thinkers: Green, Hobson, Hobhouse and their pupils Asquith and Keynes. 

Interestingly he quotes from Churchill's Poverty: the study of town life

“ A poverty-stricken working class could not possibly spend sufficiently to drive the economy forwards, while the aristocratic elite and upper-middle class were too small to compensate. Instead, they saved, with the savings’ surfeit flowing overseas to empire and the financing of other countries’ industries.” 

I have to observe that this is what we are witnessing in today's economy.

The growing union movement and the Liberal party found common cause and together selected Lib/Lab parliamentary candidates.

A somewhat belated fruition of this was the reforming Liberal Government of 1906-1911 and Lloyd George's budget.

I found it interesting that in 1918 when the franchise was enlarged to give the vote to some women, consideration was given but rejected for proportional representation, a topic to which Hutton returns a number of times in the book.

The interwar years contained the disastrous return to the Gold Standard and the hardship this caused. It contained too the ground breaking writing of Keynes whose influence Hutton warmly embraces. Sadly for Britain, governments did not share in the embrace but instead built tariff barriers around Imperial Preference which shielded Britain from healthy competition. The adherence to the small city remained key.

Moving to the post-war, Hutton rejoices in Beveridge and is admiring of Attlee and his government. He possibly offers warmer praise for Harold Macmillan and his Middle Way.

As a critique of post-war industry, Hutton offers this:

“ cosseted, dividend-hungry, rentier shareholders, aggressive shop stewards, disengaged finance and unenterprising managements looking for safety behind tariffs and cartels, rather than putting money into research and new products.” 

This is very much what I found in my research into British manufacturing since 1951 as expressed in Vehicles to Vaccines.

Looking at governments, he sees missed opportunities and barriers. For Wilson the barriers were the multiplicity of trades unions, but also a city wedded to laissez faire. Heath is criticised, but Hutton points out that he did want to remove barriers that reduce competition. The SDP and Blairism in practice are both filled with missed opportunities, although the Blair/Brown years did bring vital change, not least in the focus on early years in Sure Start.

Looking at a way forward Hutton would like to seeing a co-operation of New Liberal and Ethical Socialist. The fundamental shift through is from the emphasis on the 'I' to the 'We'. He draws on the thinking of the Fairness Foundation. 

There is much to be done. Hutton suggests that massive investment is needed to counter climate change, in infrastructure, skills, scientific research and levelling up. Increased borrowing would be possible if lenders could see that their money is being wisely spent. Increased taxation would be needed to service the debt. Our tax take is lower than many countries - but a poorly designed tax system needs attention. 

A sovereign wealth fund is needed. Hutton looks at how British funds and banks currently invest - most goes to real estate and overseas. This needs to be reversed.

Housing, education and health care are key issues where those already on the ladder not only have massive advantage but also live in silos removed from the rest of society.

None of this will just happen. A whole host of national and business governance issues need to be address in tandem. Hutton does not avoid the elephant in the room: we must build a vibrant relationship with the EU.

"The aim must be to create an environmentally sustainable, high-productivity Britain that is less unequal, fairer and economically dynamic, and which, while global in its reach, is firmly anchored in its own continent. That is what Britain must invest for – a ‘We Society’ around which the private and public sectors can coalesce."

It takes a virus for us to come clean on the shape of the economy

In 1914 government was worried that the war would lead to unemployment. In the event the whole nation came together to produce the munitions the army needed.

In 1939, all parts of British industry met the varied and massive demands of the armed forces. 

In 2020 the economy is largely based on services and, with the coming of Covid-19, consumers are deciding that they don’t need those services and the government is advising against social contact on which many services are based. We therefore face unemployment rather than people working at full tilt. This is totally  different. In parallel with the domestic service economy, there is an economy based on the consumption of largely imported products with deliberately short lives to encourage repeat purchasing.  Will it expose the 21st century economy as a con, or can we return to an economy where we each serve each other but without the manic need for never ending consumption?

The crisis is offering an insight into the actual shape of the economy. In this article in The Guardian, Richard Partington underlines the massive significance of the hospitality industry ‘Britain’s hospitality industry contributes more than £120bn a year to the economy and is worth more than the automotive, pharmaceuticals and aeronautics industries combined. More than 3.2 million people work in pubs, restaurants and other outlets, making it the third-largest sector for employment. A further 2.8 million work in the wider supply chain. In an economy no longer dependent on people making things, we are dependent upon them buying services. When they are told not to, the knock on is dreadful. I have done some analysis of the statistics 

Productivity

Apparently it IS our problem: our productivity is stagnant. The amount 'produced' by each worker is not growing and so there isn't the money to pay people more.

Hold on. As Ian Jack says in today's Guardian, only 10% of our economy is in manufacturing where workers produce things; the remainder is all about services, people doing things for other people.

I can understand productivity in manufacturing, where the use of machines can enable a worker to produce more. The Guardian Magazine article on robots helped me to understand the application of productivity to distribution centres.

Where I struggle is how productivity relates to the rest of the economy i.e. most of it. Let's take some examples.

Ian Jack talks of Baristas. Does increasing productivity mean that a machine will serve me my coffee?

There is much talk of the care sector. Are we to be looked after by machines, rather than people? The same might be said at the other end of life; are children in nurseries to be minded by machines? Of course not. Indeed if we are to improve the quality of care, we should have more rather than fewer carers.

The creative industries are said to be economically important. As a writer of non-fiction, I can vouch for productivity improved by using Google for research and my lap top for writing. But what of those whose work is what it is, because it is made by hand: Maggie's hand blown glass. What of musicians, what of actors and other who delight audiences? What of writers?

We can all see productivity savings in retail with DIY checkouts. As the Guardian leader says, one fifth of Amazon's employees are robots. I guess larger rubbish and recycling bins are examples of productivity.

Again, quoting the Guardian leader, millions of clerical jobs are now done by machines. This image from the Army Centre for Mechanisation at Chilwell in WW2, says a lot.

I would like to understand just what better productivity produces. Is it good for the many young people who now deliver parcels for their living? Another Guardian article by Sam Knight, on the billions of sandwiches we eat, highlighted the need for robot sandwich makers when we leave the EU since, apparently, the native British worker doesn't want to.

To my mind the question is bigger, and is much more about 'what is work on a post industrial society' and the related question of how the national cake should be shared out. Robert Peston touches on this and much more in his new book, WTF The question of a universal income needs to be explored. We are heading for a society of a mix of a small amount of high paid highly skilled work and low paid work that can't be done by robots.

Will this recession pass?

Simon Jenkins in the Guardian of 9 January takes leaf out of the historian's file to assure us that all will be well.

As usual with Jenkins, there are buckets full of common sense slopping around everywhere in his argument. I'm with him in his jibes. I have to say the Bishops got my goat particularly with their hefty shutting of the borrowing the door so long after it would have done any good.

My question though is whether we are seeing something that has a substantial structural element to it. A friend told me that he had been away from Falmouth for the Christmas Holiday and returned to find third of the shops shut. This is an exaggeration, but the high street of smaller towns are beginning to look like mouths after a visit to the dentist. Retail is changing. My own village is awash with courier companies delivering on line purchases. It has been apparent for ages that the high street is made up largely of financial services, opticians, designer clothes and coffee shops. Soon surely it wil just be spectacles and cups of coffee.

But what does or should this mean for the economy? As pointed out elsewhere in Jenkins's article one third of workers are relatively untouched by recession, being on the public payroll; another cohort, those already taking their pensions, are in the clear. Those at risk are those for whom economic growth is a vital link in the chain. Many jobs go on from year to year simply because they need to be done; these surely are pretty safe. It is the jobs that come from someone taking risk to gain advantage that go in recession but even then not all of these.

But in the longer term, are these jobs less likely to appear in the future? I think not. the entrepreneurial instinct is firmly in place and will be bursting through any minute now.
The landscape though will change and this we must accept. Perhaps though the old labourites were right. An economy cannot exist happily on financial service and retail alone. some how, somewhere, someone needs still to make something.