In this piece, Jack Jeffrey, a Researcher at the Fairness Foundation, explores Britain’s current economic model and what changes could be made to craft an economy that works for everyone.
You can also hear from Will Snell FAcSS, Chief Executive of the Fairness Foundation, in this video below who summarises the key points from Jack’s article.
Between the late 1940s and early 1970s, Britain, along with the rest of the Western world, experienced an unprecedented era of economic expansion and prosperity. Rapid economic growth marched in lockstep with rising living standards towards a fairer and much richer country. GDP growth averaged around 3% annually, wages increased by an astonishing 130%, and public sector investment went from 3.6% of GDP in 1938 to 10.8% in the mid-1970s, contributing to a virtuous cycle of high growth and low inequality.
For all its limitations, the post-war consensus took it for granted that economic growth was desirable only in so far as the proceeds from it were widely shared. Despite continued but slower GDP expansion, the lessons of that earlier era have largely been forgotten. The economic model embraced by Britain in the 1980s allowed the richest groups in society to capture more and more national income and wealth. This has had both disastrously negative social consequences and questionable economic results.
The experiment in deregulation delivered a surge in inequality from which Britain has struggled to recover. In the mid-1970s, the UK had average levels of income inequality compared with other similar countries. Since the 1980s, Britain has been one of the most unequal countries in Europe. Alongside income disparities, private wealth has experienced a remarkable surge (mostly driven by passive factors), from three times national income in the 1970s to eight times national income today. This dramatic rise in asset prices, combined with inequalities in asset ownership, has led to a substantial increase in the absolute gap in wealth between households, generations and regions. All of this has contributed to a widely held sense that the rich are getting richer, while everyone else is getting poorer.
Persistently high inequality has been made worse by a period of relative economic distress. After growing faster than most other similar countries from the 1990s to the mid-2000s, the British economy has struggled to grow since, causing a prolonged period of wage stagnation. While rich British households still compare favourably with their European counterparts, the effects of this downturn for low-income households have been catastrophic. A British household in the bottom decile of the distribution is now 22% poorer than a similar household in France – a gap worth £3,800 per year.
It is in this context of low growth and high inequality that advocates for a more inclusive economy, believe that economic growth could be used to tackle inequalities, a view shared with the architects of the post-war settlement. A different economic model could deliver better wages and increased public investment, as well as achieving a carbon neutral future. And yet this admirable ambition often overlooks the structural barriers to an equitable growth agenda.
Economic stagnation in Britain has been attributed by some to capitalism’s inherent tendency to evolve, if unchecked, into unproductive rentierism. This critique, popularised but not invented by Thomas Piketty, focuses on disproportionate growth at the top of the wealth distribution, where returns on capital (r) consistently outpace the growth rate of the economy (g), leading to ever-widening inequalities. However, as Lisa Adkins and colleagues have pointed out, this analysis overlooks the fact that extreme wealth is embedded within a broader political economy that implicates not just elites but also the middle classes. The shift away from the traditional logic of employment and wage growth towards a new paradigm, centred on participation in asset ownership and appreciation, has restructured social relations such that class positions and life chances are now defined less by occupational status and more by relationships to assets. Income from wages is not insignificant, but important only in so far as it allows people to participate in the asset economy.
And the problem is that, in today’s Britain, people who don’t own assets are increasingly locked out of opportunities to build wealth. The promise of democratising capital initially appeared to deliver on its potential, allowing a broader segment of the population to participate in the ‘wealth effect’ through homeownership and other asset-building opportunities. As credit markets were liberalised and homeownership rates pushed upward, many households experienced meaningful gains in wealth through property appreciation. However, as asset values and particularly house prices continued to rise, the democratic nature of this development was compromised, making it progressively more challenging, and now almost impossible, for those without assets to benefit from an economy based more and more on what you own as opposed to what you earn.
There’s nothing inevitable about this dynamic but fixing it might require rethinking the function and purpose of wealth creation. Earlier radical reformers believed that sharing wealth could facilitate a permanently more equal society. One of the first advocates for a ‘property-owning democracy’ was the economist James Meade, Nobel laureate and advisor to the Atlee and Wilson governments. His was a fundamentally different vision to the model later promoted by Margeret Thatcher. For Meade, who argued that redistribution through tax and benefits was insufficient, the dominance of individual property ownership needed to be subsidised by an emphasis on collective ownership. This, importantly, did not mean further nationalisation, which Meade thought was not the route to greater equality. Instead, society should establish a growing stake in national assets and economic activity through the creation of social funds, a precursor to modern sovereign or public wealth funds. These would socialise the return on capital, which could then be used to pay out dividends to all citizens, thus decoupling individual life chances from an excessive dependence on labour market outcomes. While the newly established National Wealth Fund aims to boost growth, the fund functions more as a policy bank to reduce investment risk than as a tool for addressing capital concentration.
Unlike the post-war decades – when dependable growth led politicians to focus primarily on income distribution – the issue of wealth inequality now occupies mainstream prominence. Such a development would not have surprised pro-equality thinkers like Meade, who anticipated that wealth gaps would become increasingly problematic. A genuinely inclusive growth agenda will have to challenge and contend with a sclerotic economy that has been made to reward speculation at the expense of the production of real value, ushering in a new dynamic of stratification and inequality. Sharing wealth through mechanisms like a social (or citizen) wealth fund would create a counterforce to the pro-inequality bias of the current economic model, and should be considered as a way forward.
Jack Jeffrey is a Researcher at the Fairness Foundation. He has experience conducting and coordinating research across a range of issues, particularly constitutional reform, polarisation and social stratification, and green industrial strategy.
Image credit: Towfiqu Barbhuiya on Unsplash