​​​​​​​​​​​​​​This is the second of two blogs which focus on Jacques Peretti’s recent BBC documentaries on the Super-Rich and the causes of the widening inequalities in both income and wealth which characterise British society in 2017. If you are studying AQA Stratification and Differentiation or OCR’S Understanding Social Inequalities hopefully you will find this blog useful in explaining why the UK is a stratified society and also gain some insight into how inequality has come about and why the gap between the rich and poor is at its widest.
I shall begin with a simple fact. The 1970s was the most egalitarian decade in British history and inequality in the UK was at its narrowest. For example, the pay of public sector workers such as teachers and doctors (GPs) did not significantly lag behind the pay of private-sector managers and bankers. However almost 50 years later the 21st century is on course to become the most unequal period in human history.
How has this happened? How have we travelled from an egalitarian 1970s to the massive inequality of 2017? Peretti points out that inequality is not an accident. It is actually the realisation of a plan formulated by members of the Super-Rich elite who saw inequality and austerity as a business opportunity or cash cow. In other words the rich deliberately set out to make money from the poor. This plan involved making nine profound changes to the way that capitalism operated in both the USA and UK.
Firstly, the 1970s saw primary industries such as coal-mining, iron and steel and shipbuilding as well as manufacturing industry in the industrialised West severely undermined by globalisation. Both the USA and the UK found it difficult to cope with competition from developing countries such as China and the Asian Tiger countries which could produce primary materials such as coal, ships and manufactured goods at much cheaper costs and prices. Consequently both the US and UK economies went into recession and unemployment soared. According to Peretti this decline led to the first business opportunity for the burgeoning Super-Rich as they formed ‘shell’ companies whose only function was to ‘asset-strip’ failing companies and to sell- on their technology to the very same companies in the developing world which were responsible for their demise. We can see a great example of this stage of capitalist development in the Hollywood film ‘Wall St’. in which the asset-stripper character Gordon Gekko played by Michael Douglas proclaims ‘Greed is good’.
Secondly, globalisation and the decline of domestic manufacturing led to a new theory of management which justified giving business executives and entrepreneurs very high rates of pay. Consequently the incomes of the top 1 per cent increased steeply as high rewards were linked to business success which was measured by increased profitability. However there is a good case for arguing that this quest for profitability was partly responsible for increasing inequality because it often involved stripping down the workplace, outsourcing work to the developing world or cutting wages by using cheap labour found in the the ‘gig economy which meant that often workers were hired on precarious zero-hours contracts in order to reduce costs and increase both profit and the share value of companies. Peretti argues that work was de-stabilised as employers abandoned the notion that they should have some responsibility for the welfare of their workers. Executives were judged by their ability to make profit by holding wages down and cutting costs. Paradoxically unemployment increased dramatically as did the pay of top executives. In the period 1995-2010 the pay of the top 1 per cent quadrupled. By 2015 it was estimated that top executives in the UK on average earned 30 times more than teachers or GPs.
Thirdly, according to Peretti, a report by the influential American Citigroup Bank recommended that the Super-Rich could enhance their wealth by investing in high-end luxuries which guaranteed economic gain and growth in value including real estate (See my other blog on the Super-Rich which discusses their impact on property prices in London), yachts, jets, diamonds, jewellery, vintage cars, art and antiques.
Fourthly, the Citigroup report saw a huge possibility of profits to be made at the bottom end of society too and recommended investment in companies that mainly cater for the poor, for example, the supermarket chain Walmart. The 21st century has seen a consolidation of this process as the Super-Rich have invested in companies whose core customers are mainly the poor such as those companies that specialise in gambling, lotteries and fixed-odds betting terminals, loan companies such as Wonga, Rent to Own operators such as Brighthouse, modern pawnbrokers such as ‘Cash for Gold’ and care-homes.
However the 1980s saw a fifth major change in the way capitalism was organised and managed. In this period finance-capital became the dominant sector of Western economies. Peretti argues that the philosophy of ‘risk’ became influential in banking circles in this period. (You should think about how this economic risk fits into Ulrich Beck’s theory of late-modernity). The prevailing rationale which underpinned financial investment was the notion that ‘to win big, you had to bet big, the more you risk or gamble, the more you win’. In particular betting on the futures market (known as derivatives) became a principal means of making money. This might involve betting on the future value of foreign currencies or raw materials such as copper, gold or silver or crops such as coffee or tea. This type of financial gambling and its immoral downside is entertainingly portrayed in the Sky series ‘Billions’.
Sixthly, the notion that ‘risk was good’ was extended further when American and British banks started to trade in securities. Securitisation was invented by Robert Dall who argued that banks should buy up ‘bundles of debt’ in the form of mortgages. Mortgages are loans given by banks to people who want to buy their own home. They are normally only granted after banks have carried out background checks to make sure the buyer has the income to make regular monthly payments. Initially, therefore, gambling with bundles of mortgages or securities was low-risk because few people de-faulted on their payments.
However a seventh change to the organisation and management of capitalism occurred when goverments de-regulated the financial sector. This meant that state controls over lending in particular were relaxed. This led to a credit card revolution and massive consumer debt. For example, household credit card debt totalled £350 billion in Britain by the late 1980s. Marxists argued that money was deliberately lent to poorer households in order to reduce industrial strife which had been common in the 1970s. It was argued that a worker who had lots of credit card debt was less likely to go on strike.
Peretti’s eighth observation is that debt in the form of mortgages and credit cards turned the financial sector into a huge money-making machine which depended on sucking more debt from new sources. Early investment in securities carried less risk because bundles of mortgages involved loans to those who could afford to re-pay them. However in the late 1980s banks allowed riskier individuals to take out what were called sub-prime mortgages. Essentially these were phoney mortgages because the individuals who were given them were in precarious work and were unlikely to be able to pay them in full. However banks continued to gamble with sub-prime securities until 2007 when sub-prime home-owners defaulted in unprecedented numbers in the USA and the securities market collapsed forcing a number of American banks to go under and out of business. This had a domino effect as British and European banks had also gambled with securities. In 2008 the British banking sector crashed and the Labour government had to bail out the banks with £375 billion, that is, £24,000 for every household in the UK.
A nineth factor that consolidated the position of the Super-Rich in Britain and increased inequality was that 95 per cent of the profit from the government’s bail-out of the banks went to the Super-Rich in the form of the bonuses paid out to bankers in the last 8 years.
In addition to the nine changes to capitalism highlighted by Peretti we can add a tenth. Recent investigations have discovered that the Super-Rich have also consolidated and increased their wealth by transferring it to offshore schemes located in tax havens such as Jersey, Mauritius and the British Virgin Islands. The Panama Papers of 2016 and the Paradise Papers of 2017 suggest that these schemes have enabled the world’s most wealthiest individuals including the Queen, Prince Charles, ex-PM David Cameron, Lewis Hamilton and corporations such as Twitter, Facebook and Amazon to opt out of their tax responsibilities.
So what are Peretti’s predictions for the future? Like Barack Obama he claims inequality is the defining challenge of our time. Peretti claims that inequality is likely to be a major cause of instability especially in societies which claim to be meritocratic. The great divergence in earnings, wealth and social mobility which exists in 2017 is likely to lead to more riots, demonstrations and strikes as the unequal reject consensus, cohesion and democracy because they feel they no longer have a stake in society. There is evidence too that the vote for Trump in the USA and the Brexit vote in the UK may have been partly fuelled by the unhappiness created by inequality and the writing off of the poor as a ‘business opportunity’ by the Super-Rich. Peretti observes that the Super-Rich can no longer seal themselves off in their luxury bubble from the grievances felt by those who Standing calls the ‘precariat’ who have to rely on micro-jobs for hand-to-mouth existence. The alternative is that the Super-Rich might one day be forced to invest in a police-state to protect themselves from the rest of society.