The Bankruptcy of Capitalism in Britain or How to Get Rich without Creating Wealth

Within the space of two days the vast inequalities in the UK in remuneration for "work" done have been exposed to public gaze. On the one hand it was announced on August 18th that public sector workers are to be limited to a 2% pay increase this year, whilst the day before the press reported on the bonuses paid at the start of the year to those who inhabit the boardrooms of big companies and the dealing rooms in the City.

Chancellor Gordon Brown has sent a letter to the chairs of the public sector pay review bodies urging them to limit pay rises to 2% for teachers, nurses, doctors, dentists, health professionals, prison officers and the armed forces. The letter stresses the importance of "public sector pay increases (not contributing) to inflationary pressures". Brown also warns that rising mortgage rates and increasing fuel costs should not be used as an excuse (sic) to offer higher salary increases. In other words, public sector workers are expected to suffer a fall in their living standards whilst Brown attempts to reduce the public debt and control inflationary tendencies in the economy. Those who therefore work to provide a healthy, educated and trained workforce are to be rewarded with cuts in their standard of living!

City Bonuses

Yet a day earlier, on August 17th, it was announced that bonus payments to City workers had jumped by 16% to a record £19 billion, some £10bn of which will go to those who work in the financial sector, an average of £25,000 for every City worker. In the space of just two years these bonuses have risen by a staggering 25%.

The money, however, will not be shared out equally. The really big bonuses will go to a very small number of investment bankers or financiers who "achieved" large merger deals, or large amounts of business for their employers. Banks have reported vast increases in profits because of rising share prices and increasing numbers of mergers and acquisitions. Whilst increasing numbers of people face rising debts and personal bankruptcies, the banks made a record £33bn in profits in 2005 and are set to make even more this year.

And what have been the effects of these bonuses apart from making a small number of people very rich? House prices in London are rising at their fastest rate for two years due to a "healthy financial services sector" and farmland prices have risen by an average of 9% per hectare, the fastest rate for 12 years. City yuppies are buying up an increasing amount of the countryside. But don't think that they are investing to increase agricultural production. What attracts City bankers are the attractions of a rural retreat and the tax advantage of buying agricultural land. Income tax on bonuses can be avoided by buying agricultural land. The result of all of this is that local people are being priced out of the market as bonuses push up land prices! Who said something about inflationary pressures?

City bonuses have been defended by leading figures in the government on the basis that hard work should be rewarded. Peter Mandelson once said that New Labour was relaxed about people getting "filthy rich". If those bonuses were being paid as a result of effort to develop the productive forces and take society forward, then perhaps they could be defended. Recent reports, however, have indicated that those who work in the City have not been working harder to increase productive capacity.

In an article entitled "Chief executives quietly enrich themselves for mediocrity" The Guardian (23/01/06) reported that in 2002 the boss of a FTSE 100 company could expect to make about £1.4 m a year - some 54 times more than an average worker. In 1985 the ratio was 25:1. In 2005 it was 120:1 with the same bosses raking in an average of £3.3m per year! How does this rise in income relate to what the bosses are doing to increase the productivity of their companies?

From 1983 to 2002 the sales of the top 100 quoted companies on the Stock Exchange rose by an annual 2.7%. Pre-tax profits rose by roughly the same amount, whilst the market valuation of the companies rose annually by 18.2% and the pay of Chief Executive Officers (CEOs) rose by 26.2% per year. The study referred to in the article also revealed that the increase in the market valuation of the companies had nothing to do with the management of the same companies. In other words the bosses had done nothing to increase the wealth-producing capacity of industry.

The study also reveals that those who benefit from corporate "success" are no longer the workers or the public at large, but shareholders. What a revelation! Despite the much-vaunted claim that we live in a share-holding democracy, the reality is that only households in the richest half of society actually own shares, so therefore the rich have got richer. In addition, there are others who are making a lot of money. CEOs, the article says, have been "value skimming", an interesting term to describe people who have been "making a big show of doing all the things beloved of management gurus but in reality quietly enriching themselves for mediocre performance".

We can now see that management, in the form of CEOs, has done little if anything to boost productivity and production, but has been very well rewarded. Perhaps, however, there are other sections of the capitalist class who have been doing what they are supposed to do - develop the productive forces and take society forward. Don't you believe it!

The Guardian of April 1st 2006, which initially looked like an April Fool's joke, reported that "escalating personal fortunes are not closely linked to record levels of wealth creation. Rather, the ranks of the rich contain many tycoons, investment bankers and business executives who, far from creating wealth, have taken advantage of our pro-rich culture to grab a larger slice of the cake". So wealth flows to wealth, and larger amounts get concentrated into fewer and fewer hands.

Entrepreneurs

When capitalism was seen as a revolutionary force in the sense that massive investment took place in factories and technology to rapidly expand the productive forces, the "entrepreneur" was seen a "risk taker", a motor force for capitalist development. Today, the "modern entrepreneurs" are "more likely to have made their money not through building up firms and products from scratch, or by adding value by introducing new processes, but through financial raiding, deal-making and speculative share-dealing, which involves less risk and arguably create less, if any, wealth" (ibid).

It gets worse. These spivs and speculators at the top of society, who we are supposed to admire and seek to emulate, have negotiated contracts that guarantee rewards and huge pensions even when they fail. They get generous payoffs known as "golden parachutes". In the USA, known for its more down-to-earth language, these payoffs are known as "golden condoms" because they protect the CEO and screw the shareholder. The cynicism of those at the top towards this situation was revealed when a former deputy chairman of Lloyd's, the top London City-based insurance company, stated that, "God would not have made them sheep if he didn't intend them to be fleeced" (ibid).

So now we can see where the bonuses in the City come from. Huge fees are charged for transferring or sometimes destroying wealth, rather than creating it. So "mergers and acquisitions are often driven by the prospect of fat bonuses and fees for directors and their City advisers rather than the long-term financial interests of the companies. Financial speculation, the source of many modern fortunes, is rarely associated with creating value. As one leading figure in the hedge fund industry has admitted: 'When I first went into the City, I could not believe that anyone would pay me so much for creating nothing'".

Perhaps all is not lost. For those who have grown richer now face the prospect of paying higher taxes of their newfound wealth. Don't you believe it! An increasing number have now set up home in the sunnier climes of Monaco in order to avoid paying tax. Inland revenue tax loopholes allow them to commute from there to "work" in Britain. Such figures include the retail tycoon, the recently knighted Sir Philip Green, whose family fortune is put at £4.9bn, and the Easyjet boss Stelios Haji-Ioannou, with a family fortune of only £727m. These two illustrious citizens "have been joined by a new class of astonishingly wealthy hedge fund managers, property developers and internet entrepreneurs" (Guardian 10/07/06). The same paper adds that it has traced 650 directors of British companies who give their current address as Monaco, and the top 10 residents there with British interests alone control family assets worth more than £13.5bn.

Whilst Gordon Brown exhorts public sector workers to show restraint, the rich get richer. "The richest 1% have been taking an increasingly disproportionate share of the nation's wealth: 23% today compared with 17% at the end of the 1980s. In contrast, the share going to the bottom half of the population has fallen from 10% to 6%." (Guardian 01/04/06)

You have to pity those at the top, however, as this wealth is not distributed evenly! The rich, according to Tulip Financial Research, are divided into four classes!!

"First is the "mass affluent", 4% of the population, who now have average liquid assets of £144,000. Then come the High Net Worth (HNW) individuals, 0.7% of the population, with average liquid assets of £665,000. There are 135,000 people in the third class, the ultra-HNWs. What this means is that Britain contains a community the size of Peterborough whose average liquid assets (which does not include their first or second home) average £6.4m. This one group, 0.3% of the population, owns almost half the liquid assets in Britain, and they are on average 66% richer than they were five years ago. The last group, the super-rich, the 1000 richest individuals in Britain, have seen their liquid assets increase by 79% in five years, to an average £70m each." (Guardian 17/04/06)

So there you have it - obscene concentrations of wealth at the top and wage restraint for the rest of us! And in the process the rich do absolutely nothing to take society forward, to develop the productive forces, to increase society's ability to create wealth.

Capitalism is Bankrupt

Historically speaking, the justification for the existence of a ruling class in any society was precisely that it fulfilled its historical mission by developing the productive forces. Capitalism in its heyday did exactly that, a revolutionary force ushering in a new society, taking humanity out of the serfdom of feudalism into a higher level of existence, creating world markets and technological innovation. Today, the facts show that these erstwhile revolutionary forces have now become parasites, have become both a relative and an absolute barrier to the development of society, to taking humankind forward.