The decline of the British economy has entered its terminal stage, and the reason for it is simple: Britain’s elites are addicted to a fundamentally unsustainable economic model of financialisation. Adapted from OULC termly magazine.
The British public is divided on many issues, but the state of the economy is not one of them: 71% of the public thinks the government is handling the economy “badly”, down from a record 89% last October. However I doubt a similar consensus would emerge if we asked the public’s opinions on the causes of this decline. Should we blame the Truss-Kwarteng duo fumbling their proposed tax-cuts and shooting up gild yields, even after the IMF’s warnings? As much as Sunak would love for us to consider the current crisis a temporary Truss blunder, now averted thanks to chancellor Hunt and his “steady hands”, Britain was already struggling before Truss took power. What about Brexit? Should we consider leaving the single-market to be the great error that sunk the ship of state? Whilst Brexit was no help, the deck was already underwater: British productivity per hour worked grew only 0.4% per year after 2008, according to some economists the period of lowest growth since the industrial revolution. To find the correct answer we must take a step back and examine the fundamental structure of the economy and how it evolved over the decades, eventually reaching its breaking-point in 2008. If we do this we reach the incontrovertible conclusion that the British economic elite’s addiction to financialisation is the principal cause for its decline.
Perhaps it’s best to start our history, as most stories of British decline do, with the prime ministership of Madame Thatcher. Her policies transformed not only the Conservative party orthodoxy, but led to New Labour’s rebrand as the party of “Third Way” politics, signalling the ultimate supremacy of the neoliberal tsunami that crashed upon Britain’s shores. When she took power in 1979, union membership was at its peak at just above 50% of the entire workforce. I don’t think it’s such a coincidence that at the same time the income share of the 1% was at its lowest, at around 5%. These two statistics thus constitute the two chief “problems” that the Conservatives had to solve: crushing worker power and restoring profitability to British capital. Ronald Reagan was elected President of the United States in 1980 with a similar program, thus inaugurating the neoliberal revolution in the Anglosphere, which went global in the form of the “Washington consensus” especially after the fall of the Soviet Union in 1991. This agenda materialised in the UK through two distinct thrusts, with the first being the dethronement of union power. In service of this goal, the Keynesian goal “full-employment” was ditched and replaced by Monetarist policies of tightly controlling the money supply by raising interest rates to control inflation. This change in policy led to a temporary decline in economic activity, and an increase in unemployment, swiftly curbing inflation due to one simple reason: when the economy crashes, people can’t spend as much and prices go down. As unemployment more than doubled from 5% in 1979 to 11% in 1984, a reserve army of labour was created that crushed the negotiating power of workers. Along with cuts to unemployment benefits, workers were now desperate to find a job and willing to work without unions. Even if they joined unions and protested against their new conditions, any striking workers could be sacked and hastily replaced. Whilst this left workers subordinate to their bosses, it also reignited fears of a dilemma first realised by Henry Ford: how could a consumption based economy function if most people do not have the income to consume? The second thrust of neoliberalism, financialisation, and its global character is necessary to explain how capital was able to fully reap the benefits of a rapidly faltering organised labour movement.
Capitalism is explained by an enormous cycle of previous profits being reinvested to beget more profit, and economic decline can be measured by the rate of profit in the economy. In the 1970s, the economic conditions that led to Thatcher’s election were exactly such a crisis of profits: corporations weren’t able to make profits at enough scale to reliably reinvest and remain competitive. The problem got so dire that the Labour government had to take out a loan from the IMF during the 1976 sterling crisis. The ensuing national embarrassment was one of the deciding moments for Thatcher’s 1979 triumph. This general decline in the British economy was due to many factors, some among them being inter-capitalist competition(particularly the post-war rise of Germany and Japan), and the high cost of labour due to organised labour. With the crushing blows to labour, the cost of production went down, but for corporations to maintain or even increase profitability, prices needed to remain the same. How could this happen if people couldn’t afford as much as they used to? Simple: give people loans to make up for declining incomes. This is how financialisation through a deregulated financial sector became the British model for growth and restored profitability. To raise capital for these new loans, restrictions on trade and capital flows were reduced and “The City” became the centrepiece of the British economy. However, with more access to foreign markets, profits could now be invested into countries where it could net a higher return, with cheaper, more controlled labour and less environmental protections like Taiwan, South Korea and eventually China. This offshoring caused the deindustrialisation of the country, disproportionately affecting the North and those in the working class. On the other hand, the shortfall in consumption was plugged with commercial loans now available thanks to cheap money, especially with OPEC oil profits flowing through the newly “liberated” British banking system. What followed is that total British debt as a percentage of GDP rose from around 200% in 1987, to 540% at the end of 2009. A particularly pernicious part of that massive amount of debt is held in residential debt to keep up with exploding house prices. This initially made home-owners feel wealthier than they actually were and encouraged excessive consumption. However the long term effects have been that today housing prices are closer to fantasy than anything tangible. The exploitative housing market drains not only the spending power of the younger generations but also their hope in the future as they fall further down the ladder of social mobility.
With the backdrop now established, we can see how the model of debt-fueled growth reached a breaking point with the great financial crisis in 2008. In the two decades prior to 2008, people believed that the economic pie was growing, so it was not a big deal for the rich to pay up for some redistribution. This was essentially New Labour’s pact with the financial sector: we’ll deregulate you even more, but you have to pay your fair share to fund public goods, particularly the NHS. When the housing bubble popped, so did the naive optimism that the British economy was prospering, and with it Blair’s third way compromise. Since Cameron’s election in 2010, successive Conservative governments have embarked on a wide-ranging programme of austerity with major cuts to public services like the NHS and social security. The financial elites are now fully aware the pie is stagnating if not shrinking, and naturally, they want to ensure they have the lion’s share.
With all this history, it’s not difficult to see why Britain’s economy is faltering today. Finance is not productive by itself, and its empowerment has left Britain with an inability to care for its own long-term economic interests. A significant amount of profits are not reinvested by any organisation responsible to society, or even “productive” capitalists that might invest in the real economy, but instead flow to asset speculation and derivatives that are of very little use to anyone except those trading them. You can only borrow so much, and the redistribution of wealth to the top through ballooning housing and stock prices does not inherently lead to more investment as neoliberal economics would have us believe. The phenomenon of financialisation is what broke the British economy, and it must be tackled head on if any government is to enact long lasting change and uplift the material conditions of the British people.
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