Why wealth matters

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Over the past 12 years Labour has generally shied away from expounding on the subject of wealth, preferring instead to be seen to wish to “reward success” and focus efforts on giving aid to the worst off, rather than taking pops at the rich.

This wasn’t such a bad political strategy – especially in the 1990s, when, for good or for ill, we needed to do everything we could to convince the British public that we were able to accept the status quo in a society which fetishized great wealth.

But the way things are now, we need to focus on the issues that wealth and its present distribution present; both in terms of the way our political discouse takes place, and in the nuts and bolts of policy.

The first point is on the very different ways in which moral judgements are made about the rich and the poor. Consider the 50% tax rate. This comes via a particularly daft unreconstructed Thatcherite:

Economic think-tanks have already readily condemned the tax rise as pointless with the Institute of Fiscal Studies warning that the treasury’s predictions regarding the tax have a “very high degree of uncertainty” and many predicting that this could lead to an overall loss in government revenue rather than a gain with businesses simply moving abroad and many using loopholes to declare their income as Capital Gains.

Forget for a second that he’s simply wrong. Forget that there is no evidence to suggest that the 50% rate will have a negative tax yield (no matter what the Laffer-curve believing monetarist flat earthers think), and that very few of the extremely rich will actually leave the UK (most of them seem to like London, for some reason).

What’s significant here is a complete moral absolution of people who choose to arrange their affairs such that they avoid paying UK tax, and so drive up the tax that must be found from you and me. The wealthy are never – never, ever, ever – condemned for this sort of behaviour.

But the wealthy are not the only group in society against whom it is levelled that they arrange their work affairs so that they can maximize their own income – the unemployed are, if you believe the tabloids, very assidious about avoiding work and maximizing the benefits that they receive as a result.

The outcome here? Widespread and loud moral condemnation, of a sort that drowns out the calmer voices in debates about economc inactivity and work.

It’s clear to me, then, that – despite the fact that “economic rationality” is acting in the same way in each instance – the “public debate” holds that the poor have very strong moral duties to the rest of us which trump their economic self interest. The wealthy, on the other hand, have no moral obligations of any kind: they must simply carry on being splendid.

That this is the case has led to a deterioration in the way we think about wealth, poverty, inequality and social cohesion.

The second point about wealth is that growth benefits the general public in different ways, depending on where it is generated. I’ll take just one small example of what I mean.

An important, and oft-overlooked, component of the benefits of economic growth is the externalities that arise from increasing demand for certain goods and services – usually, in the form of product improvements and market enhancement.

What this means is that broad based growth, which raises the disposable income of a relatively large number of people, has the potential to be extremely beneficial to future consumers.

The economic good years of the 1950s, for example, were broad based, and resulted, famously, in a huge expansion in the ownership of consumer durables – fridges, TVs, washing machines and vacuum cleaners.

But the best bit is that this becomes a virtuous circle, because the demand in these sector drives innovation and competition. So, a family which bought a fridge for £75 in 1952 were benefiting families who bought a better fridge for £40 in 1957.

Growth in the last 25 or so years, though, has been based on a very small number of very wealthy people – and this is where the mass benefit breaks down.

The improvements to the quality of yachts, or the redesign of the Bentley Continental, have far less application to our own lives than would improvements to products that we actually buy – and in a world where the wealthy are increasingly cut-off from the rest of us in lifestyle, this is increasingly the case. The growth and its benefits we have seen in positive GDP growth figures up to before the recession has, in actuality, been concentrated in a very few hands.

Before we can be honest with ourselves about the limitations of Britain’s wealth fetish, we will have a blinkered view of what can be done to make our economy one that is broad based, and so able to benefit more people more of the time.

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One Response to “Why wealth matters”

  1. duncanseconomicblog Says:

    Excellent Post.

    I’ve said similar, in a fairly long-winded manner.

    http://duncanseconomicblog.wordpress.com/2009/07/02/a-new-political-economy/

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