The OECD has formally admitted that trickle down economics has failed us, stating that “the UK economy would have been more than 20% bigger had the gap between rich and poor not widened since the 1980s.”
The notion – that money will magically trickle down as entrepreneurs are left unshackled so that they can build great businesses which create wealth to benefit all of us – looks great on paper, and it was an easy sell in a 1980s Cold War world; the triumph of a progressive, rational, efficient, free-market idea over the moribund, meddling, inefficient orthodoxy of socialism.
Looking back from the future, it’s easy to see how the perceived threat of totalitarian ideology clouded our political and academic judgement, swinging the pendulum in favour of severely deregulated capitalism at the expense of equality and sustainability: a free market mantra that coincided with the very real dismantling of the regulations and unions that inflated wages and other resource costs.
Over the last three decades, we have witnessed the steady rise of mega-enterprises seizing the opportunity to maximise shareholder value over input costs. For all the talk about “people being our greatest asset” most corporations have had little incentive to ensure that lower-level wages keep up with the cost of living. Even at higher wage levels people are seen as unavoidable expense items rather than assets, with companies frequently initiating projects where the entire business case turns on a significant reduction in “people costs”.
The modern corporation seemingly has no choice but to act in this way. It’s seen as the only way to do business in a world dominated by cut-throat capital markets, where investors demand a competitive return and CEOs get paid bonuses based on those profits.
It’s good to see that the OECD is – finally – questioning this orthodoxy, but it is worrying that the analysis still doesn’t question another great pillar of laissez-faire capitalism: growth. Saying that the economy would have been “20% bigger” if we had a fairer distribution of income seems designed to appeal to the very same profit-driven, clinical, capitalist mindset: a world where “more is always better”.
I don’t know what exactly the optimal size of the UK economy is, and I’m not saying that I’m in favour of stagnation – we do need a sustainably dynamic economy. And we need clever entrepreneurs who are left free to innovate and build new businesses. Of course we do.
But we also need a change in mindset when it comes to the how we evaluate success. The principle of growth, when simply expressed as an increase in aggregate wealth and improvement in general standard of living, looks great on paper. But raw growth based on a pure profit-maximising mindset is not sustainable. If the UK economy was 20% bigger based on how we live and how we run things right now, that would be terrible from an environmental perspective. Using current income levels, the average UK person has an environmental footprint amounting to 3.5 planets. Simply increasing economic output using the same technology, resource profile and carbon intensity of GDP will make that footprint even larger.
From growth and profit, to financially and socially sustainable innovation – that’s the change we need, and promisingly, many younger entrepreneurs and rising politicians already have already made this shift.
But we don’t have time to waste. In an economic world still dominated by old, self-serving, conservative, white men we need to accelerate this change in mindset. For a start, it means that we can’t have this conversation about income distribution and wealth without looking at the true cost of our lifestyles. And it raises some uncomfortable questions: what happens to the standard of living of people on low incomes when when we factor environmental costs into the price of energy, travel and food?
Unless we want an even unfairer distribution of income, are those of us who are relatively well off willing to take an even larger hit in terms of higher taxes and reduced consumption on the understanding that a sustainable, fair economy will bring new opportunities and improvements in general wellbeing that will eventually dwarf the short-term sacrifices we need to make?
Or will it take us another three decades to realise that this reliance on growth without factoring in its true cost is a mistake too? And following three more decades of environmental and social exploitation, will we have time to fix things at that point?