September 25, 2022

Finance & Economy

Let's Talk About Investment

This age of inflation reveals the sickness ailing Britain’s economy: rentier capitalism | William Davies

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Inflation in the UK has hit its highest level in 40 years, particularly thanks to the dramatic rise in energy and food prices. This fact has provoked panic among some commentators and policymakers that Britain is about to relive the inflationary turbulence of the 1970s, and has prompted Rishi Sunak to announce a last-minute £15bn “cost of living package” partly funded by a one-off tax on energy companies. Andrew Bailey, the governor of the Bank of England, has already been the subject of outrage for suggesting that workers should show “restraint” in their pay demands, to prevent an upward spiral in wages and prices as seen in the 1970s. Right now, with inflation at 9% and employers expecting to increase pay this year by just 3%, Bailey should be able to relax on that front.

Inflation aside, the differences between Britain’s economy of 2022 and that of 40 years ago are stark. In 1982, unemployment hit a postwar record, at more than 3 million, as manufacturing employment plummeted. Today, Boris Johnson boasts of record low unemployment. Trade union coverage was still over 50% in 1982; today, it’s less than half that, and almost half of that again in the private sector. The inability of most workers to negotiate collectively for wage increases is one of the principal reasons why Bailey sounded so out of touch, and why comparisons with the 1970s miss the mark.

We are not witnessing a rerun of the 1970s and early 80s. But there are other reasons to consider the relationship between the crisis now facing Johnson’s government and that which confronted Margaret Thatcher in her first term in office. Put simply, the crisis today is a legacy of how that previous crisis was handled.

It is worth remembering that inflation represented the dominant economic policy challenge through most of the 1970s. It was inflation that prompted the historic reckoning by Jim Callaghan at the 1976 Labour party conference, heralding the end of the Keynesian consensus: “We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists.” Politicians and experts disagreed over the solution to inflation, but the urgency of finding one was widely accepted.

In the political imagination of the 1970s new right that emerged from thinktanks on both sides of the Atlantic, the problem of inflation was tied up with a whole host of broader social and moral crises: overpowerful unions, an excessively generous welfare state, the weakening of entrepreneurship, family breakdown, disdain for capitalists. What all of these problems had in common, from this perspective, was a failure to respect the ultimate value of money. Britain would beat inflation by rediscovering its respect for property, hard work, fiscal discipline and responsibility.

The medicine administered by Thatcher was socially devastating. The monetarist doctrine, originally developed by Milton Friedman, which held that governments should target the amount of money in circulation then set interest rates accordingly, caused interest rates to rise to such punitive levels that Britain entered the deepest recession since the 1930s. Inflation fell, eventually, but only after whole industrial regions, towns and cities had been dragged down with it. The collapse in trade union membership was as much an effect of the destruction of unionised jobs as it was of anti-union legislation.

What is the significance of this today? Reflecting back on the upheavals of that time, many political economists have come to view monetarism as a deliberate political project that sought to re-establish the supremacy of asset owners and financial elites. After all, it was quite clear who suffered most from inflation, and who would benefit most from having it flushed out: creditors and the wealthy. It was only after Thatcher had strangled the life out of inflation (and much else besides) that the City and the housing market could begin their dramatic ascent that, aside from the wobbles of the early John Major years and the 2008 banking crisis, has continued ever since.

Viewed this way, Thatcherism wasn’t so much an unleashing of “enterprise” or risk-taking, as its supporters have always claimed, but rather an unleashing of capital to chase the highest returns possible, regardless of any broader social or economic benefit. In his book Rentier Capitalism, the social and economic geographer Brett Christophers has shown that the central effect of Thatcherite reforms was to open up whole new income streams that owe little to productivity and a great deal to gaining a stranglehold over those who depend on rentiers.

We can see this in the outsourcing specialists such as Serco and G4S that hover around government departments to secure lucrative long-term contracts, using legal muscle to protect themselves against any downside; in the descent by private equity funds on essential adult and children’s care to extract abnormal profits, largely through squeezing an already disempowered workforce. We can see it in the way that house prices and rent have become entirely unmoored from wages. Rent-seeking extends well beyond the sphere of “the market”, to extract revenue from – and raise the cost of – the basic necessities of life.

According to orthodox economic theory, profit is the reward that a business or investor receives for taking a financial risk, including the risk of bankruptcy. But in a rentier economy such as Britain’s, profits become guaranteed, while risks are eliminated by fair means or foul. The 2008 bailout of banks that had become “too big to fail” was emblematic of this kind of phoney capitalism, in which vast rewards are divorced from any genuine acceptance of risk. Similarly, now that the retail price of energy is effectively decided by Ofgem, the soaring profits of energy giants such as Shell have to be understood as official UK government policy, just as the house price inflation that followed Sunak’s stamp duty holiday was. Although Sunak’s one-off levy on energy firms ameliorates certain effects of rentier power, it does nothing to weaken the underlying shape of the economy.

Some critics wonder if this economic model even counts as “capitalist” any longer, seeing as it has abandoned the risky, productivity-enhancing investments that have long been seen as capitalism’s hallmarks. Certainly, the liberal language of “citizens” and “consumers”, “public” and “private” sectors, feels inadequate to describe a cost of living crisis in which we are largely trapped in our payment obligations, living at the behest of businesses that have neither a political nor an economic incentive to serve our interests.

The state, in Thatcher’s view, had become captured by labour. Today, the problem is the opposite one: the state now protects certain forms of capital at every turn, to the point where many businesses, funds and wealthy elites have forgotten how it feels to lose. It may well be that much of today’s inflation stems from geopolitical factors (war and Brexit), but until a government is elected to represent the economically vulnerable and take a stand against rentier power, merely living will remain a high-cost exercise for many.