Predator capitalism v producer capitalism
Ed Miliband is hardly the first to attack ‘predator capitalism‘. It was Edward Heath in 2003, who, pointing to the money baron, Tiny Rowland, first coined the phrase, ‘the unacceptable face of capitalism’. In 2009, Lord Turner, chair of the Financial Services Authority described some of the activities of the City as ‘socially useless’.
When Mrs Thatcher and Ronald Reagan launched their campaign to change capitalism from the shackles of regulation, it came with big promises. Markets would be the route to economic renaissance bringing more enterprise and a boost to growth. Yet as I show in my new book The Cost of Inequality, Three Decades of the Super-Rich and the Economy, on all measures of economic performance bar inflation, ‘market capitalism’ has a much poorer record than the regulated model of the earlier post-war period.
In the UK, the post-1980 era has suffered from lower growth and lower productivity. Productivity growth has averaged 1.9% a year since 1980 compared with an annual average rise of 3% in the more regulated era. The average level of unemployment since 1980 is five times higher. Financial crises have become much more frequent and more damaging culminating in the crisis of the last four years.
The outcome of the post-1980 experiment has been an economy that is both much more polarised and much more fragile. Central to this failure has been the way blind-eye regulation has allowed financiers to cook up business activity that diverts existing rather than creates new wealth.
Wealth creating entrepreneurs – those like James Dyson and Tim Waterstone – who create and build companies from scratch, have become much rarer. They have given way to a new breed of financiers and bankers who can make big money not by creating new companies from scratch, or taking the long view, or being smarter, but by manipulating the financial structures of existing firms – through mergers, hostile takeovers, private equity and re-arranging balance sheets.
It is this that has made a new generation of business financiers super-rich, not by activity which adds to the size of the cake but by grabbing a bigger share of it. In 2011, nearly a fifth of the richest 1000 in the UK – including 51 hedge fund owners – had made their money through finance. Only 11% had made it in industry or engineering. Investing in the companies of the future has become a sideline in the UK. Today private equity companies – from the AA to Homebase – employ a fifth of the workforce. The volume of acquisition activity has increased twenty-fold in the last 20 years.
Yet while these activities provide big fortunes for a few, the evidence is that they are as likely to destroy and divert wealth as create it. When Debenhams was bought by a private equity consortium in 2003, it was stripped of its asset base, re-sold with a huge debt burden, and is now worth a fraction of its original value. Yet the consortium behind the deal tripled the value of its existing investment over 30 months. There are dozens of examples of successful British companies – from Marconi to Allders – which have been destroyed from within by the search for ‘fast-buck’ returns, but not before the City-led executives have walked away with huge jackpots, leaving staff and taxpayers to pick up the bill.
The chase for racier returns has also diverted resources away from the urgent needs of small business. In 2010, while the productive economy was being starved of cash, the banks cooked up £11 billion to finance the quite pointless takeover of Cadbury by Kraft.
The main winners from the market experiment of the last 30 years have not been the ‘deserving rich’ – those that create wealth and jobs – but the ‘undeserving rich’ – those which build personal fortunes by taking wealth from others. Market capitalism has failed on all fronts. It needs to go, replaced by a system that returns us to a model with wealth creation, not wealth diversion, at its heart.