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A Few thoughts on ‘wealth creation’, inequality, and the Labour leadership

Andy Burnham:

‘Labour must always champion wealth creation, and show we understand that if we want high-skill, high-wage jobs then we have to support the businesses that create them.’

‘A fairer spread of health, wealth and life chances. That really would summarise what I’m in politics to achieve. I think we still live in a very uneven and unequal country.’

Yvette Cooper:

‘Our rhetoric can’t be set against the wealth creators and drivers of our future economic growth. We can’t be set against business, and too many believed we were.’

‘The Tories don’t have any of the answers for Britain’s future. All they will do is divide us, holding families back, widening inequality, helping only the richest in the country while everyone else gets left behind.’

Liz Kendall:

‘On business, I want to change our whole approach, not just set up a new committee. I want to lead a Labour Party that’s genuinely as passionate about wealth creation as we are about wealth distribution. I want Labour not just to ‘understand’ business but be the champion of people who take a risk, create something, build it up and make a success of it.’

‘So my approach to building a fairer Britain – and reducing the crippling inequality that shames our nation and holds it back – will be rooted in transforming the life chances of all our children.’

The frontrunners for the Labour leadership are in agreement that they need to promote ‘wealth creation’, and that inequality is a bad thing. If we take the phrase ‘wealth creation’ literally, there is a paradox which no-one seems to have noticed: as it is a relative concept, you cannot create wealth without widening inequality. Alternatively perhaps ‘wealth creation’ is merely a soundbite, not to be taken literally. Perhaps what these politicians mean is that they wish to procure wealth for the UK, rather than create it. Alternatively, maybe their focus is on creation, but it is value that they wish to create, rather than wealth. I decided to jot down a few thoughts on each of these possibilities.

What it means to literally ‘create wealth’

Any definition of wealth generally includes the word ‘abundance’. For abundance to exist, so must scarcity. If everybody had an abundance it would no longer constitute an abundance. The word implies surpassing a norm or average. Wealth cannot therefore be considered an absolute concept. If I own a Ferrari in contemporary Britain I would be considered wealthy relative to most. But if I own a Ferrari in a society where most people own helicopters then I am likely to be considered poor. Either way my situation is unchanged but it is the context – the norms or the average set of circumstances – that decides if I am rich or poor. The rewards society gives to those who are successful are always comparative. An income of £100,000 a year is only a lot because most others have less. A big house is only ‘big’ because most others are smaller. For anyone to be considered wealthy, another must be poor by comparison. It is a zero-sum game. As John Ruskin observed in 1860:

 ‘Primarily, which is very notable and curious, I observe that men of business rarely know the meaning of the word “rich”. At least, if they know, they do not in their reasonings allow for the fact, that it is a relative word, implying its         opposite “poor” as positively as the word “north” implies its opposite “south”.    Men nearly always speak and write as if riches were absolute, and it were      possible, by following certain scientific precepts, for everybody to be rich.     Whereas, riches are a power like that of electricity, acting only through    inequalities or negations of itself. The force of the guinea you have in your pocket depends wholly on the default of a guinea in your neighbour’s pocket. If he did not want it, it would be of no use to you; the degree of power I possess       depends accurately upon the need or desire he has for it,-and the art of making  yourself rich, in the ordinary mercantile economist’s sense, is therefore equally       and necessarily the art of keeping your neighbour poor.’

Wealth creation is therefore intrinsically tied to inequality. Increasing ones wealth, while a private good, is a social evil: everyone else’s happiness will decrease because they are using others as a reference point for their own status and success. If they wish to create wealth in a literal sense, then they clearly do not recognise its relativity. To create wealth equally means to create relative poverty, and thus to create inequality.

Do they actually mean ‘procuring wealth’?

We have all been educated and socialised into believing that we are all wealthier when the UK’s GDP increases. The conventional wisdom is that, as Tim Jackson succinctly put it, ‘if we’re spending our money on more and more commodities it’s because we value them. We wouldn’t value them if they weren’t improving our lives. Hence a continually increasing per capita GDP is a reasonable proxy for a rising prosperity’. This conception is remarkably flawed, for three primary reasons. Firstly, the GDP figure is a highly arbitrary one, conflating costs and benefits. Spending on education or entertainment is counted the same as spending on divorce lawyers, or to clean up an oil spill. Secondly, GDP has no bearing on the distribution of gains from growth. Measuring aggregate economic activity could be misleading: increased activity is often limited to distinct regions or industries, or to certain classes or social groups. Thirdly, much GDP increase is merely the monetisation of goods and services that were previously available for free through the community or the natural commons.

Regardless of its flawed nature, the belief that higher GDP per capita equals higher prosperity has taken hold throughout society. Perhaps, then, the labour leadership frontrunners’ goal is simply to increase GDP, believing that procuring for the UK an increased share of global wealth – exacerbating global inequality – is compatible with achieving greater equality within the UK. The problem with this view is that, as Thomas Picketty shows in his brilliant Capital in the 21st Century, inequality is a fundamental feature of capitalism. The rate of return on capital will always grow faster than economic output, steadily concentrating wealth. Picketty argued that state interventionism – a progressive global wealth tax of up to 2% and a progressive income tax reaching as high as 80% – is the only way to combat this intrinsic tendency toward inequality. If any of the Labour leadership candidates were promoting Picketty’s prescriptions then they would have a credible case to put forward for reducing inequality while attempting to procure a greater share of global wealth. None have yet indicated anything like this.

Perhaps they actually mean ‘creating value’?

If we are to assume that these politicians are actually trying to promote creation in the economy, while tackling inequality, then presumably it is value rather than wealth which they wish to see businesses create. This fits in with the slavish devotion to GDP common to almost all politicians. Value, from this perspective, is assumed to come from the importance an individual subjectively places on a good or service to achieve their desired ends. It is not an inherent property of a good or service, nor a reflection of the labour required to produce it. If many individuals value something highly then it must be improving our lives. Firms who create or cater to this demand are viewed as the creators of value. Ultimately, it is capital which is seen to be improving our lives.

This is a dramatic change to the traditional Labour position on who is responsible for such creation. They have traditionally subscribed to the the so-called ‘labour theory of value’. That is the idea that the good things in life exist, as David Graeber puts it, ‘because people took the trouble to produce them; doing so was seen as involving brain and muscle’. This was the conventional wisdom for centuries. Abraham Lincoln observed that:

          ‘Labour is prior to, and independent of, capital. Capital is only the fruit of        labour, and could never have existed if labour had not first existed. Labour is      the superior of capital, and deserves much the higher consideration.’

It still seems odd to see Labour leadership candidates kneel at the alter of capital rather than labour, but this has been the major change in the party in the last thirty years. Yet there still exists the same dividing line between owners of capital and workers. Workers still lose out on much of the value of what they produce, as owners retain or reinvest profit, and the workers are still a majority. Labour’s raison d’être remains the same at it ever was.

Putting capitalists on a pedestal as the creators of value seems at odds with reducing inequality. It seems unlikely that the next Labour leader will venerate business owners one minute and then radically increase taxes on their wealth and profits the next. And without redistributing wealth more radically, how can capitalism’s natural tendency toward inequality be reversed?

Conclusion

New Labour under Tony Blair, to its eternal credit, was spectacularly good at lifting people out of absolute poverty. The introductions of the minimum wage and working tax credits, amid a myriad of other anti-poverty measures, enabled many to achieve security in the basic biological necessities of life – food, clothing and shelter. Meanwhile, however, the rich were allowed to get richer. Not just a little richer, but an awful lot richer. Absolute poverty decreased, but relative poverty grew enormously. Ed Miliband tried to shift the focus onto the consequences of inequality, but was castigated for being anti-business and anti-wealth creation.

It seems to me that a Labour leader cannot focus on both inequality and wealth creation, however they interpret it. As wealth is an inherently relative concept, it is incongruous with equality. If their goal is to improve the wealth of UK citizens relative to the rest of the world, while reducing their inequality, then that will require a great deal more redistribution than we have seen for the last three decades. Rhetoric which reveres capital as the creator of value suggests that this is unlikely. The next Labour leader will have to choose whether their priority is wealth creation or tackling inequality. They cannot do both.

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