Ideas
NS Essay - Britain is now back to levels of gross income inequality
Published 04 October 2004
The rich are getting richer, faster. Yet those who call into question their rights to such great wealth are accused, even by those on the moderate left, of the "politics of envy"
In the past decade and a half, a remarkable revolution has been taking place in Britain - a great surge in both the numbers of the mega-rich and the level of their wealth. Since 1997, the number who own more than £5m has nearly doubled. According to the Sunday Times, which has been chronicling the country's rich since 1989, the number of people worth £100m or more has increased from 90 in 1990 to 411 today.The combined worth of the top 200 richest people in Britain - a mixture of entrepreneurs, businessmen, City deal-makers and landowning aristocrats - has more than trebled over the same period.
The past two decades have not just coincided with a swelling of the ranks of the mega-rich and their personal wealth holdings. Fortunes that it would once have taken a lifetime to accumulate can today be built in a few years. For example, Philip Green, the clothing entrepreneur who owns Bhs and Topshop, has gone from having very little to £3.6bn in just over a decade. That is electric speed by historical standards.
The forward march of the super-rich has profound implications for Britain. It is changing the structure of the class system with the addition of a layer of the new mega-rich, parallel to but different from the old upper class, which is largely in decline. It is also the central driving force of the sharp rise in inequality over the past two decades. Twenty years ago, Britain was one of the most equal societies in the developed world. Recent international estimates suggest that although the United States tops the rich-nation inequality league, Britain is the second most polarised.
Britain is now back to levels of gross income inequality that are higher than those last experienced at the end of the 1940s (see table on page 28). Official figures for the share of wealth enjoyed by the top 1 per cent show inequality hovering at the levels they were more than 25 years ago. According to Tulip Financial Research, specialist wealth consultants, the top 45,000 people (0.1 per cent of the adult population) enjoy one-third of all liquid assets (marketable wealth that includes cash, savings and shares ) averaging more than £8m each.
Britain may not be back to the extreme levels of inequality that prevailed up until the 1920s, when a tiny proportion of the population - a mix of the landed aristocracy and the new industrial and commercial barons - held an even greater share of the nation's wealth and income. In those times, however, the constraints on wealth-making were much weaker, monopolies could operate largely unchecked, the Inland Revenue was in its infancy, and trade unions were few and regulations minimal. It was a society in transition, and that degree of inequality was eventually to prove unsustainable.
What is surprising is how, in today's much more mature democracy and with its complex regulated economy, the top few thousand individuals are able to win such large shares of Britain's economic wealth.
The question of inequality used to divide the political parties and the public. In recent times, however, a consensus has emerged, straddling the bulk of political and much popular opinion. Tony Blair has applauded the rise of a new wealthy superclass, and has invited a good number of its members to tea at No 10. As he put it, "I don't care what David Beckham earns. I want a society that encourages levelling up, not levelling down."
In today's conventional wisdom, it is seen as churlish and certainly old-fashioned to question the increase in wealth owned by those at the top. To do so invites the risk of being accused of the "politics of envy" not just from the right, as would be expected, but from much of the moderate left as well. This acceptance of growing levels of personal wealth is perhaps one of the defining characteristics of the shift away from the social-democratic values that used to dominate postwar politics and opinion.
Is it right, however, to accept these levels of personal enrichment without question? Are the modern tycoon, businessman and financier really worth so much more than their predecessors - those who in earlier decades seemed sufficiently motivated and content with their more modest lot?
A vibrant entrepreneurial and innovative culture is vital to economic progress. Exceptional merit and dynamism deserve generous reward. But there is no evidence that the current business and financial elite are presiding over an entrepreneurial renaissance or promoting a historic rise in the rate of productivity and business performance. In fact, recent studies have shown that Britain has low innovation rates compared with continental Europe.
We have many successful entrepreneurs who are creating wealth, jobs and opportunities, just as in the past. People such as Richard Branson, James Dyson and Stelios Haji-Ioannou, the founder of easyJet, are widely seen as being worth their place at the top. Philip Green has done perhaps more than anyone else to transform the fortunes of the high street.
Yet this is far from true of all those who have topped the wealth leagues in recent times. Canadian-born Conrad Black, who took British nationality to become a life peer, treated Hollinger International more like a private fiefdom than a public company, raiding its finances to pay for a lavish lifestyle until the directors pulled the plug. Russian oligarchs such as Roman Abramovich, who has chosen to relocate to Britain, are rich because of the way they took advantage of the privatisation rush initiated by Boris Yeltsin. Far from being the men who discovered the oil, laid the pipelines, built the refineries and took the risks, they have simply inherited the wealth created by earlier generations mainly by working as a small, favoured and influential group of insiders who successfully subverted plans for the wealth to be shared.
Moreover, the modern entrepreneur typically plays a very different role from the mogul of the past. Today, he is more likely to have made his money not by building firms and products from scratch or through adding value to them by introducing innovative processes, but by financial raiding and deal-making - especially mergers and takeovers.
The past decade has been one long bonanza for top businessmen; even failed executives have walked off with huge pay-offs or "golden parachutes". The management expert Charles Handy has noted that such pay-outs have made ineptitude on the part of senior executives the shortest route to millionaire status. In America, they are known as "golden condoms", because they "protect the executive and screw the shareholder".
Once, boardroom executives, who were generously rather than lavishly paid, would have stayed on the margins of the super-rich but, now, becoming a director of a FTSE-100 company virtually guarantees multimillionaire status. The going "rate for the job" for top executives bears little relationship to merit. The business magazine Management Today has condemned the gulf in pay, arguing that it defies "any sense of fairness and undermines social cohesion". Other countries such as Sweden, France and Japan operate successfully with much lower corporate rewards.
The City lawyers, accountants and investment bankers who are paid huge fees for organising mergers, acquisitions and corporate finance have also risen to the top of the rich league. No fewer than seven current or former partners of the US investment bank Goldman Sachs have fortunes of at least £50m. When in April this year Joyti De-Laurey, a personal assistant at Goldman Sachs, was found guilty of stealing £4.3m from the private bank accounts of two of her bosses, they admitted that for more than a year, they had simply failed to spot the missing millions.
Supporters of the explosion in wealth argue that today's wealth tables are much more meritocratic than those of the past. Yet the argument is undermined by the continuing, if declining, presence of the nobility in the rich lists. Four aristocrats - the Duke of Westminster, Earl Cadogan, Lady Howard de Walden and Viscount Portman - are among Britain's 30 billionaires, all there by virtue of their parentage. No less than 14 per cent of the top 1,000 are aristocratic landowners.
Most modern aristocrats have had to reinvent themselves as businessmen, turning themselves into property developers or their estates into leisure parks in a process that has been dubbed "the Thatcherisation of the aristocracy", but most of their continued - and in many cases expanded - wealth has come from rising land and property prices.
Again, although "old money" inherited from the business giants of the past is less prevalent than it was, representatives of 19th-century wealth, from the Rothschilds and the Guinness family to the Vesteys and the Rothermeres, are still prevalent among the current moneyed elite. While there has been an increase in the proportion of successful entrepreneurs who are "self-made" - who have not inherited a business or a fortune - most of these come from a relatively privileged background. One recent study of successful business leaders found little change in their background compared with leaders from the past, despite a century of dramatic social and economic change.
The study concluded that "becoming a business leader is still largely determined by the interconnected characteristics of a wealthy family and prestige education". "New money" is not, in general, a sign of a more opportunistic culture. The degree of mobility from the bottom to the very top is, if anything, slightly lower than it was a generation ago.
A common argument for claiming that the growing wealth gap does not matter is that personal wealth accumulation is said not to hurt anyone else. This is the essence of the argument used by Tony Blair to defend rising inequality. It is true that some of today's personal fortunes are the product of real wealth-creation that harms nobody and may well benefit the many.
However, others are largely the result of "transfer payments" from one group in society to another. In Britain, the soaring salaries of Premiership footballers are paid for at least in part by soaring ticket prices. When individuals find ways of avoiding tax, they are in effect engineering a redistribution from other taxpayers as a group. The continued wealth of the old landowning class, resulting from rising land and property prices and rents, has been borne in part by increased burdens on small tenant farmers and leaseholders.
The financial industry is often engaged in activities that involve the transfer of wealth rather than its creation. During the past 15 years, one scandal after another has involved the selling of inappropriate products, from endowment mortgages to precipice bonds, that lined the pockets of the firms and advisers promoting them at the expense of those unwittingly buying them. The fees charged by the financial services industry are known as the "croupier's take" and overcharging is commonplace. The financial journalist and former banker Edward Chancellor has described the industry as "bloated and parasitic".
For centuries, society has chosen to distinguish between the deserving and undeserving poor, a distinction that continues to affect anti-poverty policy. Yet such logic has never been applied, officially, to the rich. Certainly, those who have added to the size of the cake through inspired economic and entrepreneurial leadership would, in most people's eyes, be seen as deserving of exceptional reward. Yet there are others - tycoons, investment bankers, business executives - who, far from creating wealth, have taken advantage of a culture that is much more in favour of the rich and seized a larger slice of the cake for themselves.
We might well argue about who and how many fall into each camp but, meanwhile, the signs are that the very rich are likely to continue to prosper, and that the steady rise in extreme discrepancies of income and wealth may not yet have reached its peak. Corporate rewards are still soaring; the post-millennial stock-market crash proved merely a brief stumble in the upward march of the super-rich; big City bonuses are back.
It is possible that the tide will turn against the rich. The public takes a lukewarm view of the growing gap in income and wealth. An increasing perception by the middle majority that they are not getting a fair share of growing prosperity, that they are carrying an excessive burden of taxation, that they are bearing too much of the risk associated with unequal societies, from rising crime to crushing debt, could all foster a backlash.
Nevertheless, the broad signs are that higher degrees of wealth concentration are proving more acceptable than in the past. If so, Britain is almost certainly in the early stages of an epoch that accepts extreme personal fortune and growing inequality. The wealth explosion of the past two decades looks increasingly like a permanent shift, and one that is still not complete. If so, it is the age of egalitarianism, which lasted for a generation and a half, that may come to be seen as an aberration, an interruption of a more natural state of deeper economic and social polarisation.
Stewart Lansley is author of After the Gold Rush and co-author of Poor Britain. His book Rich Britain will be published in 2005
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