This is the Introduction to Michael Roscoe’s book, From Brexit to Fixit
The disaffection that British and American voters expressed through the ballot box in 2016, it seemed to me, went deeper than the commonly stated grievances concerning those meddling, bungling Brussels ‘eurocrats’ (in Britain’s case), or the out-of-touch elitism of our leaders generally; the feeling that globalization and immigration were responsible for the rising hardship and declining prospects experienced by ordinary people, especially those in the rural and industrial heartlands.
Behind all these issues, obscured by the complexity of the modern global economy, there lay a related but poorly understood trend that began sometime around the late 1970s, in which the wealthy found new ways of becoming even wealthier, just by moving money around. To an increasing degree, these new forms of ‘investment’ no longer involved long-term support for industrial enterprises, and consequently they were not in themselves wealth creating; they merely transferred money from one party to another. What they did, ultimately, was to channel an increasing portion of the wealth created through industrial production – which, if we include agriculture and construction, is the source of all economic wealth – from the workers to the owners of various forms of financial assets and property.
This is not a process that one sees taking place: it is hidden from view because it consists only of financial transactions; private transfers of data over computer networks. And it all sounds so legitimate, why question it? The word ‘investment’ has such a positive ring to it, while associated terms such as ‘speculation’ and ‘unearned income’ are rarely used by the financiers. But the truth is this: the rich are getting richer because they are taking from the real workers, from the majority, even if they don’t realize it themselves.
So the populist revolutions that resulted in Brexit and Trump might not have been, explicitly, protests against rising inequality, which is not something that most people normally complain about because they don’t actually see it. But I would argue that, behind the widespread distrust of the governing elite and the general feeling that things are getting harder, there is this deeper issue: the unobserved transfer of wealth from the majority to the rich, brought about by the financialization of the economy.
The Covid pandemic and the Ukraine war have added to the problems, but the underlying economic trends go back almost half a century. And although disease and war are external shocks in economic terms, they have inevitably caused large increases in public debt, to pay for all the government spending required to soften the impact of the disruption to economic activity and the destruction of wealth.
All this public borrowing is likely to make things worse because, under the system that we have now, debt tends to make the poor poorer and the rich richer (for reasons that will become clear later in the book). It also hits younger generations the hardest. In other words, debt increases inequality, as does a system that rewards financial speculation while discouraging long-term investment in real industry.
Such are the failures that follow from an extreme free-market ideology that implies, incorrectly, that we Brits should concentrate our efforts on trying to make money from money rather than making real stuff, which other nations can supposedly do more efficiently. Britain’s speciality – our ‘comparative advantage’ – is finance, we are led to believe.
The problem with this theory being that money is nothing without the wealth that backs it up, and the real stuff is the wealth. So making money from money is ultimately impossible: all you can do is take it from someone else, which is what the City of London specializes in. There’s an irony here that might be funny if it wasn’t so damaging to the nation: Britain has one of the biggest financial sectors in the world, but one of the lowest rates of industrial investment.
All these issues are linked by, and to some extent caused by, a common fault-line that runs through our economic structure. The way we create money in the modern economy is inherently flawed, being based on an outdated banking regime that promotes both debt and speculation as a matter of course, enabling the rich to get richer at the expense of everyone else. Expectations have been boosted by credit, and we are living beyond our means. We will not solve the major problems unless we fix our monetary system.
In this book I will show how the relationship between work, wealth and money, the balance of which is vital to our economic wellbeing, has broken down. A critical equilibrium affecting the market process of price discovery, a process that forms the heart of the free-market system, has been thrown out of kilter by distortions to the one price that underpins the whole economy: the price of labour.
In a truly free market, different rates of pay, or compensation, should reflect differences in the relative values of the workers’ output, as assessed by everyone who buys and sells in the marketplace (ie, most adults). Some people would earn more than others because their work would be deemed more valuable to society. But these differences would normally be constrained by competition, and by the fact that, overall, incomes and outgoings must equate: we can only spend what we earn, and we can only earn what others spend. So excessive rates of pay, relative to the earnings of the majority, should not occur in a truly free market: competition should ensure fair prices.
But this fundamental principle of the capitalist economic process cannot cope with excessive wealth inequality. It is based on the assumption that we all need to earn our money through work. When financiers can create money out of nothing, with no effort, enabling some buyers to come to the market loaded with unearned income, the rules are broken and the system fails.
This is nothing new, of course, but in recent decades the problem has grown much worse, because the deregulation of finance, in conjunction with the information-technology revolution and the globalization of the marketplace, has accelerated the processes by which financiers and their clients gain from the earnings of others, thus boosting the unearned income of the wealthy. This self-feeding loop is linked to our credit-based monetary system. The money-creation process is out of date, out of control and inherently flawed. It might as well have been designed to make the rich richer and the majority poorer.
Making the rich richer was, in fact, always the main objective, and while making the majority poorer was never the intention, it has become in recent times an unfortunate consequence of the increasing debt and inequality that the system promotes.
So the whole process of wealth creation and distribution – our economic system – has broken down, and this breakdown is the ultimate cause of the discontentment that brought us Brexit and Trump, among other things. Which is rather ironic, really, because the system that dominates today is sometimes referred to as the Anglo-Saxon model, and both Brexit and Trump became symbols, as well as symptoms, of the model’s worst failings.
Where lies the irony here? Because the British people, in voting for Brexit, chose to leave the European Union, which has served over the years as a moderating influence on the Anglo-Saxon model and is home to its strongest critics. And in the case of Trump, because a man who claimed to represent American workers, especially those who had been ‘left behind’ by globalization and digital technology, made use of the global financial system to make himself billions without truly earning such sums, an achievement that highlights one of the model’s core weaknesses, namely the distortion through debt and speculation of the market process.
We should not be surprised by the fact that wealth, unlike money, cannot be created out of nothing, yet that is what the modern financial-capitalist system is continually trying to do. And this is the real problem with this model: that in trying to perform a trick that is ultimately impossible, it is not the wizards of finance who lose out, but the real workers.
In the following chapters I expand on the points made above in a way that I hope will make it easier to understand why our economic system is in serious need of a radical overhaul: why we must replace the dysfunctional Anglo-Saxon model with something designed for the world we live in today; a model fit for the challenges that lie ahead; a system that will benefit the majority, and not just the one-percent. Because extreme inequality is not only morally indefensible, it is also economically inefficient, wasteful of wealth, socially divisive and environmentally destructive. It doesn’t have to be like this: there is a better way.