How dominance by wealthy elites ruins economies and societies
Cycle of decline
The world is suffering the worst man-made economic disaster for generations. The originators of the mess are the giant investment banks that used the freedom granted by financial de-regulation and the repeal of legislation separating retail from investment banking, releasing a maelstrom of wild speculation resulting in the collapse of the world financial system. These huge banks were deemed too big to fail and bailed out with public money supplied by governments that had previously been the butt of scorn by free-marketeers - and still are. Since the major crash in 2007/8, there have been enquiries, recommendations for cleaning up the system and bold statements by politicians; but in reality little has been done to constrain the banks, which have merrily continued to distort the financial system, launder dirty money and pay bonuses that have little connection with reality in the world around them.
Meanwhile, economists and politicians wrangle over the best ways to manage the financial system, and in particular on how to handle the mountains of debt caused by decades of speculation, cheap credit, irresponsible spending and banking incompetence.
To simplify the arguments, there appear to be two schools of thought amongst economists. One school believes in free markets, light government and unfettered enterprise as the way ahead, dismissing the disasters of the last years as being mainly the fault of governments, and promoting austerity to clear the debt created by them as a precursor to allowing the private sector to move on and grow the economy. This group includes the right wing of the current UK government and many US Republicans.
Another group, which has gained a stronger voice since the crash, believes essentially that governments have a duty to provide clear and policed rules to govern the financial system, but also that government has a strong role alongside other major stakeholders in investing to create balanced economies and provide the essential infrastructure to support the economy.
Behind the scenes, an intense struggle is being waged for the hearts and minds of politicians and the populace at large.
Nobel Laureate Joseph Stiglitz puts it simply: ....“One such battle involves on one side those who believe that markets mostly work well on their own and that most market failures are in fact government failures. On the other side are those who are less sanguine about markets and who argue for an important role for government. It is an ideological battle, because economic science - both theory and history -provide a quite complex and nuanced sets of answers”.
This battle is being played out most strongly in the two developed economies that suffered more than many others from the crash, Britain and the United States. So they are good laboratories for examining the forces that have made life more difficult for more people than has happened in countries like Germany, The Netherlands, Sweden, Denmark, Norway and some South East Asian nations. And it should also be realised that Greece and Spain suffered heavily from a lack of strong government regulation of the economy, leading to overspending, waves of speculation and gross inequality.
The Dynamics of economic instability and decline
The description below indicates the relationships between a range of social and economic factors, which acting together, have a marked effect on the performance of economies and the quality of society.
- The start point in both Britain and America can be taken as the massive power of economic elites. Both countries have a concentration of wealth in the hands of a tiny minority of individuals and corporations that give them power to influence economic and political policies.
- They use this power to bolster and increase their influence. Their three aiming points are loose regulation of industry and finance, low taxes for the wealthy and the weakening of the powers of government.
- They also seek to influence public policy by “recruiting” individual politicians, political parties and massively lobbying government, as well as controlling much of the media.
- The impacts of weak regulation, weak government and concentration of wealth in a few hands are very damaging:
- Weak regulation fosters speculative bubbles in finance and stock markets, thus destabilising the economy. This has been a growing feature of free market capitalism over the past 30 years, culminating in the 2007 crash.
- Concentration of power and wealth creates massive and increasing inequality, the earnings of the majority become stagnant, or in the case of the poorest, decline. The earnings and wealth of the rich soar away from the rest.
- Speculation and instability in finance and the stock markets causes failure amongst large, medium and smaller companies equally; an increasing focus on maximising earnings in the short term and a consequent decline in medium to longer term investment. (Britain has the lowest rate of long term investment in the whole developed world). The economy becomes increasingly skewed away from activity which requires consistent long term investment. It also causes more dependence on investment banking causing further destabilisation.
- Tax revenues come under pressure as economic decline, low tax for the rich and systematic tax avoidance by corporations, banks and individuals. Further pressure is caused by a permanent balance of trade deficit.
- Government debt becomes a permanent problem. The ability of the state to invest in infrastructure, fundamental research, education and health is diminished and it comes under mounting pressure from free-marketeers to progressively withdraw from the economy. (Government funding of essential infrastructure such as transport, national power and water supply and fundamental research has historically been a major driver of economic health in most countries, including Britain and the US). Withdrawl from these activities is never replaced by a risk-averse, short-term private sector and this fundamentally weakens long term economic health and wellbeing in society. The quality and availability of job resettlement, skills training and social security declines.
- More and more people are subjected to a labour market in which skilled work declines and more and more part-time and low paid jobs are created. Insecurity and working poverty abound, exploitation and consequent stress, together with a lack of meaning and satisfaction from work increase. This state of affairs is lauded by free-marketeers as creating a “flexible” labour market that will increase economic efficiency. But instead, productivity and quality decrease
- Burgeoning inequality has dire social and economic consequences. The quality of education, health and access to skilled employment is markedly worse amongst the poorer and deprived sections of the population. Over time, as the wealthy suck more and more wealth and power to themselves, a permanent underclass is formed. Different segments of society become separated by geography, wealth and opportunity, and communities become increasingly fragmented.
- A situation is reached where economic growth, which is heavily constrained by the instability and inefficiency of “free” economies, fails to improve the condition of the poor, as the wealthy take ever more of the economic “pie”.
- Growing inequality, the behaviour of powerful banks and corporations and unequal distribution of wealth also affects middle income earners, as does the limitation of middle and skilled occupations caused by the “hollowing out” of the industrial economy. (The real earnings of the middle and lower 50% in the US and latterly Britain, have been static or declining for some time, whilst those of the poorest 25% have decreased most markedly).
- The social effects are terrible: society becomes fragmented, more and more people withdraw their participation in activities that link across social and economic divides; trust in politicians, finance and industry declines. The direction of travel heads further and further towards economic and social stagnation.
Evidence for these cycles of decline are there for all to see. Inequality, undue power in elites, instability and low investment, together with decreasing economic and social mobility, government debt, degrading public services and investment in public “goods” are all happening now - and have been for some time.
The real tragedy is a kind of long-term downward “Slope of Decline” manifested by lack of investment, inability to learn from evidence and an economy that becomes progressively weaker with each crisis. The last financial crisis left behind nothing of value: it depleted the state, left degraded housing and ruined businesses in its wake. At least the Dot. Com boom which destroyed huge tracts of financial value left behind a few technological advances. This one has just left misery and waste.
Until sufficient people realise what is happening in their midst and empower politicians and governments to reverse the current direction of travel, challenge the power of the elite and set the economy and society on a more positive and equal track, the situation will only get worse.
The way ahead?
Collaboration not competition
The world has experienced one gross economic failure, characterised by state dominance of the economy in the Soviet Union. This has become demonised as “Communism” in the US. We are now in the midst of another catastrophic failure, that of unfettered “free” markets. However, there is not yet sufficient perspective on the fatal flaws of neo-liberal economics to totally discredit it in the minds of the majority. But what is clear, and has been for some time, is that neither the extremes of government control or market control seem to work in creating a healthy economic and wholesome society that serves the majority of its members well.
What we should know by now that the answer lies in collaboration and equal participation in politics and the economy by all major stakeholders.
The Scandinavian countries exemplify this. As an example, Sweden has strong participation by labour organisations, industry bodies and local and regional government; acting in partnership with national government to formulate and enact economic and social policy.
Countries like this have less inequality and deprivation, excellent health and education, low crime, high rates of innovation - and - a final blow to free-marketeers - healthy and balanced economies.
A new “narrative” is needed for countries in thrall to market fundamentalism - describing the interactions between the economy and society - and promoting partnership between the state and private industry.