THE spat between Labour and business shows no sign of abating, not least after Ed Miliband used Parliamentary privilige to describe the tax arrangements of former Tory treasurer Lord Fink as “dodgy”.
Labour is accused of being anti-business and stirring up feeling against corporate bosses to win a few more votes. The Opposition, meanwhile, is trying to downplay the row, even backtracking on some of its earlier criticism of what Mr Miliband once called ‘predatory capitalism’.
This is all a far cry from the New Labour years when the party’s leaders bent over backwards to woo City and corporate leaders by maintaining the model of deregulated, pro-market, low taxed capitalism introduced from the mid-1980s.
Yet this debate is central to the vitality of the economy, and perhaps one of the most important political issues of the day.
At heart, the question is whether we have the right model of capitalism for creating wealth. Corporate Britain is always going to be the ultimate lifeblood of the economy – the main source of jobs and growth – but the evidence is that in recent years, too much business activity is playing a negative and destabilising role.
Far from contributing to wealth creation by creating new products, companies and jobs, a growing proportion of trading activities, big business deals and accountancy practices has been geared to ‘wealth extraction’, aimed at grabbing a larger share of the cake.
Indeed it is this extraction – or ‘rentier’ activity as economists call it – that is the source of the runaway personal fortunes accumulated by a small financial and corporate elite in recent times.
This leaves less to share among everyone else. Business activity built mainly on wealth diversion, rather than on building a bigger cake which benefits all, has driven the surge in inequality in recent times.
Today’s billionaire class is much less likely to have built their personal fortunes by taking large financial risks with their own money to pioneer new products and processes, than through financial and property speculation, private equity-led mergers and hedge-fund activity.
Every time a big multi-billion-pound deal is enacted, the repercussions permeate across society, affecting jobs, pay, tax (look at the impact of such acquisition on HSBC), wider opportunities and stifling productivity growth.
Examples abound. Investing in companies of the future is an increasingly fringe activity, with banks favouring ‘financial’ over ‘real engineering’, preferring the artificial short-term gains from corporate restructuring and acquisition to more sustained long-term investment.
The post-Millennium boom in merger and acquisition activity merely created giant conglomerates with the monopoly power to exert new pressure on small suppliers, a key driver of the worsening pay and conditions of the last decade.
Finance has launched wave after wave of savings and investment products – from inappropriate endowment and sub-prime mortgages to precipice bonds and payment protection insurance and personal pension schemes – which have been little more than sophisticated devices for fleecing savers.
The privatisation of the former publicly-owned utilities has been a key source of the extractive process at work, one that has brought a huge bonanza for corporate and financial executives at the expense of staff, taxpayers and consumers.
Far from delivering the promised boost to efficiency, productivity and investment, the scores of state-owned enterprises sold since 1983 have instead been used for hikes in managerial pay, profits and shareholder returns paid for by staff lay-offs, eroded pay and security, taxpayer losses and higher prices.
From its foundations, the history of economic thought has recognised these distinctions. As Adam Smith, the founder of modern economics, warned in 1776, because of their love of quick money, ‘the prodigals and projectors’ could lead the economy astray. In the 1930s it was Keynes who called for the ‘euthanasia of the rentier’.
In a modern-day equivalent, the leading World Bank economist Branko Milanovic has distinguished between ‘good’ and ‘bad’ inequality. If it’s good enough for Smith, Keynes and Milanovic, why is debate being smothered in the UK? We have too much ‘bad’ and not enough ‘good’ inequality. Until that is recognised, debated and corrected, inequality will continue to rise, while the economy will go on stuttering from crisis to crisis.
Stewart Lansley is the author (with Joanna Mack) of Breadline Britain: The rise of mass poverty, published by Oneworld.