This book sets down what I have learned about the world in the hope that it will be helpful to others who like me are severely disturbed by the state it is in and seek to understand how we got here and how we might change things for the better. It is for people who give up the search for answers when they read phrases such as 'evils of spiralling debt deflation' or 'rigidities of the gold standard', the meanings of which are assumed by the writer to be self-evident but which to the reader are completely opaque. Until recently that reader was me.
It is a book about fairness and unfairness. It seems strange that there should be such vast wealth inequalities both within and between the countries of the world, when wealth is created either directly by humans or by the environment with human assistance and management, and we humans have the ability to share out wealth however we see fit. It wouldn't seem so bad if inequalities were merely in terms of luxuries, where everyone had the necessities of life but enjoyed different levels of luxury, but tragically it goes much deeper than that. While some people have unimaginable levels of wealth others are so poor that they and especially their children die of starvation or succumb to easily preventable diseases.
Historically the strong took what they wanted and everyone else provided it. Now we have the rule of law to prevent exploitation by strength, so now the unscrupulous rich[24],[25] take what they want and everyone else provides it. What is missing is a law to prevent exploitation by wealth. In fact the law as it stands positively encourages it (Reich 2016, Chapter 8).
While it seems fair that a person who by their own efforts creates wealth should be free to enjoy the value of that wealth, it seems much more questionable that a person who has not created wealth should be free to enjoy wealth created by others. In earlier times such people made no secret of how they did so - brute force - but now the mechanisms are much more subtle but no less effective.
The best known mechanism and the one that has been around forever is lending money. If I have money that I don't need for myself I can lend it to you and charge interest - and the more desperate you are the more I am able to charge - thereby enjoying a continuing stream of income from a fixed amount of money, and as that income accumulates I can lend yet more money. You do all the work that earns the interest but I get all the benefit. The same applies when property or any other asset is let for rent. Lending and letting certainly aren't wrong in themselves, they can be very helpful, but the line between helpfulness and exploitation is easily crossed.
The above lending and renting mechanisms are examples of a more general process whereby wealth attracts wealth. It does so because the means of producing wealth is itself a form of wealth. Another example is the factory that makes and sells widgets. The factory itself is a form of wealth and is for sale (normally in the form of publicly quoted shares), so I buy a share of it and enjoy a continuing stream of income from the profits. I save that income and in time use it to buy more shares, and so it goes on. I become richer and richer and never make a single widget. You do the work that makes the widgets but don't share any of the profits; in fact I usually prefer you to be paid as little as possible because that leaves more for me.
Let's call this process wealth accretion. The fact that wealth attracts wealth is not bad in itself. It's a natural feature of an economy where people have freedom to spend their money as they wish - on things to consume or things that make more money. Nevertheless it can have bad consequences if it crosses the line into exploitation - when borrowing or renting charges are so high that discretionary income is almost wiped out or labour payment so low that workers struggle to buy life's essentials, so measures should be in place to limit its power. Measures that can be adopted are discussed in chapter 100.
Another mechanism is that increasing wealth brings increasing freedom of choice, which is used in transactions to improve one's own bargaining position. We're all aware of this and have exploited it ourselves. If I am desperate to sell my house because I can't pay the mortgage and you have money and plenty of houses to choose from then who gets the better bargain? You do of course; you can walk away with no penalty whereas I can't - you have more freedom of choice than I do - and you use it to your own advantage and to my disadvantage, and the more unscrupulous you are the more you take advantage of my plight. A common and convenient saying is often used to justify ruthlessness: 'It's just business, it isn't personal', and to many that is sufficient to excuse such behaviour. The same thing happens all the way up the scale with the wealthier normally able to get the better of the less wealthy if they choose to do so. The poorest[26] get the worst bargains of all: they are unable to shop around easily; they pay extra because they have only enough money to pay bills monthly rather than annually; they pay more for energy because they are only allowed to have prepayment meters; they don't get direct debit discounts because they don't have bank accounts; they can't get credit except at extortionate rates; they can't afford bulk purchase discounts; they pay higher insurance premiums because of where they live; and so on.[27] Let's refer to this mechanism simply as bargaining power.
Again the fact that increasing wealth brings increasing freedom of choice is a natural feature of human transactions. Nevertheless measures should be in place to limit its power to exploit, especially when used against those bargaining for the essentials of life.
The least understood mechanism is what is usually referred to as wealth extraction, which is charging more for a product or service than fully informed and unexploited buyers would be willing to pay. This goes on right under our very noses and for the most part we aren't even aware of it. It transfers wealth - in great quantities - from customers to owners of businesses that engage in these practices, and many businesses do. The willingness to extract wealth from others is regrettably a natural feature of human nature, but it is one that should be severely limited because it always seeks to exploit. It is discussed in Part 2.
These are broad categorisations applied to make it easier to think about the dynamics of wealth transfer, in reality there is considerable overlap between them.
Taken together these mechanisms ensure that the possession of wealth attracts more wealth - created by others - without any effort on the part of the owner. This is the modern driving force behind inequality - where wealth migrates from poorer to richer (Piketty 2014). Thomas Piketty's great insight - backed up by mountains of evidence - was that this is a process that occurs naturally in the absence of very deliberate measures either to prevent it or to redistribute the proceeds more equitably. One of the basic tenets of modern economics - neoliberalism - is that prosperity comes to all by the natural forces at work in the free market, which in recent times has come to include the freedom to manipulate, misinform and exploit. Provided that the market is permitted to work its magic without any external interference then, so neoliberalism would have us believe, everyone prospers. Let's call this belief the free market utopia belief.
That message has been very successfully sold as a law of nature, just like gravity, so we are all subject to it whether we like it or not because it operates at all times and in all places. There is no better way to subjugate people than to convince them that even though they don't like the world they live in - as most don't - any attempt to change it will make it worse.
The other message that has been just as successfully sold is that the more wealth the wealthy have the more wealth the rest of us have too, because the wealthy are the ones who create the jobs and pay everyone else's wages. This is the famous 'trickle-down' theory that sounds so plausible on first hearing, but just like the free market utopia belief it delivers precisely the opposite of what it promises. For 'trickle-down' read 'hoover-up'.
Neoliberalism gives the wealthy a licence to exploit, and the unscrupulous take full advantage of it. It provides a semblance of legitimacy to practices that are thoroughly reprehensible.[28]
In a democratic society we are entitled to expect the authorities to protect us from the worst excesses of these wealth transfer mechanisms as they protect us from other harmful activities - to apply appropriate limits to prevent exploitation by the unscrupulous. The trouble is that the authorities have heard and become convinced by the neoliberal messages - free market utopia and trickle down - so not only do they not protect us, they encourage all forms of market freedom, promoting measures that add to the wealth of the wealthy and turning blind eyes to their avoiding tax. The process has by now been going on for so long that wealth power[29] has even taken control of governments, by extending market freedom to international markets, where the power of multinational corporations and international investors acting together exceeds even that of national governments, though, importantly, it only does so by the continued acquiescence of those governments. As people see the injustice of it all they apply less self-restraint themselves and become more selfish in their dealings with others. The 'look after number one and nothing else matters' mentality is seeping into the fabric of society.
Joseph Stiglitz recognised the problem in the preface of his book (Stiglitz 2012):
...capitalism is failing to produce what was promised, but is delivering on what was not promised - inequality, pollution, unemployment, and most important of all, the degradation of values to the point where everything is acceptable and no-one is accountable. [His italics]
My purpose in this book is to explain my understanding. It is not to lay blame on any individual or group of individuals for the situation in which we find ourselves, though here and there my exasperation is bound to show through. I believe that we have all become enmeshed in a thoroughly rotten system - neoliberalism. It's the system together with human nature that is to blame. But how has it happened? How can a system be to blame when the people who set it up aren't to blame, except for being human?
At its heart is the eternal struggle between freedom and control, where control is deemed to be bad and freedom is deemed to be good. This rings true to most people because everyone wants freedom and no-one wants to be controlled. But herein lies a conundrum. While no-one wants to be controlled we all want to have control, at least over our own lives, and because we are interdependent social animals control over our own lives necessarily involves others. I might want a garden full of tall trees, but that limits my neighbours' freedom to enjoy light and good views; my neighbour might want to play loud music, but that limits my freedom to enjoy peace and quiet. For reasonable contentment all round there has to be some limit to individual freedom, some threshold beyond which individual freedom is severely restricted, hopefully set by the community as a whole to promote harmony, where the threshold is acceptable to the majority. If there isn't then it leaves a power vacuum, which will be filled by someone who seizes authority and enforces it, not to promote harmony but to promote their own interests by constraining the freedom of others. This in effect defines the required threshold - it should be set so as to permit the greatest freedom without allowing the emergence of a power vacuum.
We see the effects of absent or inadequate freedom thresholds everywhere. In the ancient world the unscrupulous strong used their greater power to dominate and enslave others - to remove their freedom completely (Harari 2011 p114). In schools with inadequate discipline the more dominant children bully the less dominant, causing great suffering. In strategic games - where scruples don't come into it - skill is the very ability to constrain the freedom of action of one's opponent. In business, which is the area we are interested in, if there is little external control the unscrupulous have the advantage because they are least constrained by self-limitation from conscience or concern for others, and they use it to take for themselves as much as they can. This has the self-propagating effect of drawing many of those more troubled by conscience into the same process. If I depend for my livelihood on a business that competes with the unscrupulous then if I don't do what they do then I risk losing my business. My excuse is that if I don't operate in that way then someone else will, and although it sounds lame it's perfectly true. Therefore, without external constraints, and neoliberalism seeks to remove all such constraints, the unscrupulous set up systems that attract to themselves the most wealth and the most power, and, like whirlpools, those systems then draw in others, whether unscrupulous or not, who operate in the same way to avoid being severely disadvantaged. Once established such systems become self-perpetuating. In business, the bigger the business and the bigger its dominance in the market the more opportunities there are to profit from unscrupulous behaviour. Smaller businesses, where competition is fiercer, are much more constrained by the normal operation of the market, because a small unscrupulous business is much more likely to be shunned by its customers and lose out to businesses with more integrity.
The only way to limit the power of dominant unscrupulous businesses is for society, acting through its agent[30] the government, to apply appropriate freedom thresholds. This was recognised by Robert Reich in his book 'Saving Capitalism' (Reich 2016). In the Preface he gives us a warning:
Britain has not moved as far toward American-style oligarchic capitalism, to be sure, but Britain is following America's dubious lead. Markets do not exist without rules. When large corporations, major banks, and the very rich gain the most influence over those rules, market outcomes begin to favor them - further adding to their wealth and their political influence. Unaddressed and unstopped, this vicious cycle accelerates.
Britain, beware. This trend is not sustainable, economically or politically.
Examples of practices used by the unscrupulous, taken from Reich's book, are given in chapter 98.
Unless freedom is constrained by governments acting in the best interests of society it will be constrained by others acting in their own best interests, and the most unscrupulous have the advantage because they apply least self-restraint.
Unconstrained freedom - the laissez-faire[31] essence of neoliberalism - forces bad practices to drive out good practices.
Let's call this effect the freedom conflict - where an initial state of equal freedoms soon polarises into more freedom for those with least self-restraint and less freedom for everyone else. It's a phenomenon that emerges naturally whenever individuals have more freedom than is good for the society in which they live. It isn't a conspiracy.
In itself the freedom conflict allows blame to be laid at the door of the unscrupulous for exploiting others. But there's another factor - an apparently legitimate science that declares that in spite of appearances what they are doing is for the good of everyone. This is classical economics and its modern offspring neoliberalism, which teach us that the market is the best possible mechanism for applying the freedom threshold. All we need to do is allow market participants maximum freedom to pursue their own self-interest and the result is full employment, universal prosperity, and all-round material and social wellbeing. What we must not do is try to better the market by setting up external freedom thresholds because they are sure to make things worse. This is the free market utopia belief cited earlier and it provides a convincing veneer of legitimacy to unscrupulous behaviour. It is very easy to believe, especially by those who profit from it, coming as it does from many very eminent and respected economists throughout the developed world.
However, things are beginning to unravel. It is becoming ever clearer that neoliberalism not only doesn't live up to its promises, in fact it does the opposite of what it promises, as Stiglitz so succinctly pointed out above.
Piketty's painstaking and thorough investigation shows that the neoliberal messages are completely at odds with reality. It establishes formally what is evident informally from common sense. There are many who still believe in the magic of free markets even after Piketty's work, and indeed even after the 2008 crash, which was a direct result of neoliberalism, and which, but for government interference on an almost unimaginable scale, would have brought the entire economic world to a standstill. Piketty and the crash destroyed the whole basis of neoliberalism, but it not only refuses to die, it is making a fierce comeback, largely successfully. The reason is that wealth power benefits hugely from it and is desperate not to give away any of its massive gains, which it will have to do if neoliberalism is abandoned for a fair system. Wealth power has a fearsome array of weapons to bring to bear: money, media, political influence, 'economic experts', top lawyers, and so on[32], and it uses them all with formidable effect. The ability of people to believe what is in their interests to believe, especially when those beliefs are shared by many others, is an extremely powerful force that resists any change.
What we are seeing now are the results of almost forty years of this system. The world's wealth is increasingly owned by fewer and fewer people[33], and that is dangerous. The danger isn't that they are able to live luxuriously if they choose to do so, enjoying all the very visible trappings of wealth - mansions, yachts, jets, fast cars and so on, those things are merely the icing on their cake. The real danger lies in the fact that they own the bulk of the world's productive resources, and of course they apply those resources to benefit themselves. What they want is a good return on their investments, so most resources, including the labour of working people, are devoted to producing things that make a profit for investors. This process is helped by the widespread belief that any job is as good as any other job that pays the same money. New businesses that create jobs are favoured, regardless of whether those jobs create things that are desperately needed to save lives or things that provide frivolous indulgences for those who can afford them. The only criterion that investors consider is the profit that can be made. At the same time governments do their best to turn as many resources over to private control as possible in the firm belief that private control is always better for everyone than public control because that's where the market operates. There are circumstances where it is better for everyone, but only when fair market conditions are met. In unfair markets, of which there are many (see chapter 29), private control does precisely what you would expect - it takes resources that could benefit everyone and hands them to private interests for their own benefit. In consequence the supply of resources that society needs - for services that incur an immediate cost but don't deliver an immediate profit[34] - is drying up more and more. This shows up most clearly in poor countries[35], but it also affects rich countries too. In the UK the National Health Service is increasingly unable to cope, the police and emergency services, prison service, social services, schools and local councils are chronically under-funded, and care for the elderly has been in crisis for a long time. The longer the current system persists the worse it will become. What we are witnessing is the fabric of society breaking down. This is considered further in chapter 92.
An economic system that permits and encourages unscrupulousness to secure benefits for the wealthy from the work of everyone else, especially the very poor in poor countries, is not merely unjust, it sows the seeds of destruction. When the level is reached at which people at the bottom are so dispossessed that they and those dear to them are denied the necessities of life they become filled with hatred for those who have grown rich at their expense. It is made all the worse by modern technology, which allows everyone to see how we in rich countries are able to live. The contrast couldn't be starker. Hatred is the most destructive of forces. It is self-reinforcing and passes down generations undiminished. It justifies any action however brutal or indiscriminate, and people consumed by it are easy prey to those with extreme views that promise justice provided that they give them their allegiance. Throughout history extreme poverty has led to revolutions and wars, with widespread and extreme suffering and bloodshed. The Second World War, the most devastating war in human history and still within living memory, when for almost six years people were being deliberately killed at the rate of over twenty-five thousand every day[36], was significantly fuelled by hatred and desperation caused by the imposition of crushing reparations after the First World War.
There is a lot that is wrong with the modern world. Most people know it and feel it even if they don't understand why it is. Most of us think that we live in democracies with governments pledged to work for the benefit of all, but democracy and governments have been subverted to work for wealth power at the expense of everyone else, because just as wealth attracts wealth, wealth also attracts power. It needn't be like that, but it would take a government of extraordinary determination, courage and conviction to wrest power back so as to reclaim democracy for everyone's benefit, including, perhaps surprisingly, the wealthy - whether unscrupulous or not (see chapter 97).
Throughout the book I express a great many opinions - as I am sure you have already noticed - but it would be tedious to prefix each one with 'in my opinion...' or 'it seems to me that...', so please treat all opinions as if they are prefixed in that way. I also make many change suggestions which reflect my own opinions as to how we might deal with the problems that are exposed. The necessity is to make changes. How things should be changed is a matter for serious consideration and debate, so please treat my ideas as inputs to that debate.
However, before we can understand how all the injustice has materialised, before we can clear away all the smoke and peer behind all the mirrors, we have a lot of ground to cover. So let's climb aboard the bus and get started...