Three days before the Brexit referendum we published a chart of household wealth distribution with the caption ‘Beyond the referendum, the real problem is chronic wealth disparity’.
Half the population have negligible amounts of wealth, and disposable assets are effectively restricted to just 30%. As we know, wealth inequality cannot only be seen across the breadth of the population but also by age cohorts.
- Generations born after 1970 have significantly lower levels of home ownership, & must save to pay for rent in retirement or rely on housing benefit
- Average house prices have risen from 2.5 x earnings to 5x: it’s 7 – 8 x in some parts, and 10 x for under 35s
The average first time buyer age was 24 in 1970, 28 in 2000 and 37 in 2013.
It’s widely acknowledged that the Brexit result and the near election of Jeremy Corbyn was the result of chronic wealth disparity and disenfranchisement. The political destinies of Europe, America and Britain are all being driven by huge polarisation of wealth. Well over half of their populations are either just about managing or not managing at all, and a slender 10% of households hold over 50% percent of wealth: with all the power and influence that it endows.
This is dangerous stuff. 100 years ago this month, polarisation of wealth caused the Russian Revolution and 70 years of communist dictatorship. Democracy may provide an escape valve today so that conflict is avoided, but unless we learn how to democratise wealth creation we will remain in the grip of the largest and most intractable economic problem to confront society.
The appeal of socialism and enforced wealth distribution remains strong because as yet no one has come up with a workable alternative. Yet we know that a society built on hand-outs, with no reward for enterprise, is bound to fail. Communism failed spectacularly with the collapse of the Soviet Union, but democratic socialism is also failing as public debt levels are driven ever higher by universal benefits and inadequate economic growth.
However capitalism is also failing to provide opportunity for all, and technology and globalisation - which could offer great opportunities - are instead accentuating the differences between the haves and the have-nots.
If it was simply a matter of wealth distribution and encouraging inheritance within families, the task should be relatively simple. However experience has shown that wealth distribution, which tends to be driven by the politics of envy rather than those of logic, does not work: it simply squanders private sector capital, either in vanity projects or as public expenditure.
There is no doubt that capitalism and the market economy are at the heart of wealth creation, fostering enterprise and creativity and encouraging the best from people: and yet the rich get richer, the poor poorer and the average age of wealth increases: until something snaps and very large numbers of people with no hope say: “up with this we will not put”. Then the pendulum swings once more.
Democratic capitalism which is not anchored by measures to give genuine equality of opportunity, particularly for the young, is doomed to experience dramatic reverses and to impose a serious degree of unhappiness. This is why the subject I am addressing is so important.
The chart we published just before the referendum went on to say “the solution is to democratise wealth creation: we can make it happen”, and that is why I welcome the opportunity to talk with you today about egalitarian capitalism: and how to build a strong and stable economy which works for the many, not just the few.
The first step aims for a proper programme of all-age financial education to help people from all walks of life to build a personal store of freely disposable assets.
The second seeks a reduction in institutional intermediation, in particular reducing the extent of parasitic intermediation which separates people from a sense of ownership and control, and a corresponding increase in direct share ownership to draw together the roles of employee, consumer and shareowner, and provide much improved corporate governance so that individual shareowners can participate fully in the companies in which they have chosen to invest.
Then we need a mature approach to risk, which should be properly recognised when setting taxation on reward. This means that the self-employed fiscal advantage should remain, and that capital gains taxes should be lower than income taxes.
In order to embed egalitarian capitalism for the long term we need to addresses inter-generational equity, and in particular introduce a program of incentivised financial learning for the disadvantaged young to enable them to achieve their full potential in adult life.
And universal benefits are one of the most difficult issues for democratic capitalism and bear the greatest responsibility for crippling the national debt over the past seventy years. We therefore need a new voluntary approach to give higher taxpayers the opportunity to make discretionary payments for the universal, state-run services that they use.
So firstly, we need to help people understand that a personal store of freely disposable assets is a central part of achieving economic freedom for all. Easily available credit may give the illusion of economic freedom but, as we have discovered over the past decade, it has no staying power: eventually the loans are called in. Political freedom and the ability to migrate are essential features in giving people respect and a sense of involvement, but lack of economic resources ties people into their circumstances as strongly as any physical chains. Building a store of disposable assets brings freedom, and helps make money work for you as opposed to you working for money, as in a treadmill.
Many people spend most of their lives working for money, trying to keep their income in line with ever-growing expenditure. Others learn the art of making money work for them, seeing their income-producing savings and investments build and give them increasing amounts of time for themselves.
It’s now several years since financial education became compulsory in the school curriculum, but there is little evidence of it in educational qualifications. An analysis of GCSE and A level exams taken this summer shows that, with the exception of mathematics, it’s necessary to go a long way down the list before finding subjects directly connected with life skills such as business studies and economics, and ‘Financial Awareness’ does not exist as a subject yet.
The introduction of the new ‘T’ level exams next year is very welcome, but we have to wait until 2021 for ‘Finance’; and subject choices in A levels are essential for university and thus heavily influenced by university entrance guidelines. It is therefore no surprise that future teachers emerging from universities and teacher training colleges are not equipped to teach the next generation of young people in schools in financial education, in spite of its now compulsory status in the curriculum.
With the average age of first time homeowners now in their mid-30s, little progress in savings and investment is being made by young adults: The Share Centre was one of the only three providers to be ready with a Lifetime ISA when it was launched this year, but still a relatively small number of accounts are open to date.
Here’s what we are asking for as a comprehensive and determined approach for improving financial capability:
- A new ‘Financial Awareness’ GCSE, designed to test progress with financial education in schools;
- Guidelines being given to universities that they should encourage schools to bring forward qualifications in life skills and in particular financial capability, and produce a new cohort of financially capable teachers;
- Proposals to encourage employers in both private and public sectors to provide more adult training in financial awareness. Such training for their staff should be made an allowable expense against gross income.
- With the agreement of the young person concerned, the ownership and ‘locked in’ status of Junior ISAs and Child Trust Funds should be capable of extension to 25. The present arrangements, which force disposal or transfer to an adult ISA at such an early age as 18, do not allow young adults to build an appreciation of the value of their savings/investment accounts. The real life experience of overseeing these accounts is a key part of becoming more confident with money generally.
- A major initiative to re-couple lost Child Trust Funds with their rightful owners. It is estimated that one million out of the six million issued have become ‘Addressee Gone Away’: this is a major issue which undermines the opportunity for building financial awareness, particularly in view of the fact that the oldest Child Trust Fund holders are now into their 16th year.
- The introduction of long-term flexible ISA conditions for those in retirement. Research has shown that older people are very reluctant to draw down from their ISAs and that in many cases they are still intact when they die. This psychological block can cause great hardship, for example denying them use of the funds for care services, and would be alleviated by confirmation that they could replace the money into the ISA if they wished.
Institutional intermediation and direct share ownership.
You may recall a few years ago the wave of protest movements brought together by the word ‘Occupy’: there was a major camp just outside St Paul's Cathedral. Many saw it as a reaction to the 2008 financial crash, but I think it had still deeper roots.
I spent an hour or so in conversation with one protester in the camp just outside the financial district in Boston. Massachusetts. We worked through the issues behind their concerns and concluded that it was really a call for disintermediation.
The financial sector has grown huge and fat on the takings of the middleman, and people don't like it: Capital Economics has estimated that in the US it comprised 7% in 2008, and it may be larger here. Politicians respond by introducing layers of regulation, which impose still more complexity and cost. Regulators have made some progress in reducing the more opaque forms of self-enrichment through schemes such as the Retail Distribution Review, but the City and Canary Wharf remain vibrant symbols of parasitic intermediation for all to see.
You can only empower people by democratising expertise, not by wrapping it up in ivory towers.
In 1987 the Conservative manifesto explained the then Government’s objectives for the development of a share-owning democracy:
“After eight years of Conservative Government, Britain is now in the forefront of a world-wide revolution in extending (share) ownership …. This is the first stage of a profound and progressive social transformation – popular capitalism.”
Jeremy Corbyn's and John McDonald's recent assault on the free market at the Labour Party Conference stirred the imagination of many, and clearly prompted its robust defence by Theresa May at the Bank of England. But while she spoke eloquently of the economic merits of the free market and capitalism, there is much more to be said if we are to address its flaws, so that it works as she intends ‘for the benefit of everyone in our society’.
The free market embodies many perspectives: open competition, prices responding to supply and demand, enterprise and creativity - but also excess and self-interest. At its heart is the free ownership of capital - or is it so free? Because, to the extent that it is owned by individuals it is excessively concentrated and, to the extent that it is owned by institutions, it carries no meaning to the general public, no sense of ownership - and therefore no reason why people should feel responsible for its well-being.
Excess intermediation kills off the vital link between ownership and responsibility - whether it’s by financial institutions or the state. By concentrating the power to steer these great engines of economic growth away from the people that they serve and employ, we must expect that those people will eventually bite the hand of those who expropriate the power - whether they are financial institutions or socialist governments.
That is why we must take steps to see less intermediation by institutions, and more direct share ownership by individuals. Margaret Thatcher understood this: she was right to espouse popular capitalism, but it did not go far enough and it was not embedded for the long term.
There were some serious flaws in that great privatisation initiative of the 1980s and 1990s. Too often the public issue of shares was seen as a booster for institutional demand. There was no education of business leaders about the merits of having a large personal shareholder base. Too often those new personal shareowners were just left on registers, having no-one to help develop their early interest in equity ownership. And the London Stock Exchange and corporate advisory firms soon slipped back into placings and exclusion of personal investors from new issues once the privatisation programme was over.
But, in spite of all these flaws, there was still an immense public interest, genuine participation. And it’s as relevant today as it was thirty years ago.
There's a saying at The Share Centre, which has just won a major customer experience award, of ‘More People Enjoying Straightforward Investing’. This speaks volumes about that participation. It’s to be seen in thousands of investment clubs, representing tens of thousands of people, in investors’ active interest in company news, research and in shareholder benefits. And it's why corporate governance reforms remain a priority, notwithstanding the significant advances, led by The Share Centre, which were made with the Companies Act 2006.
But most of all it’s in the link between ownership and responsibility. If someone owns a house, they care for it: rented houses are at the mercy of their landlords. And so it is with businesses - if people feel no sense of ownership, is it surprising that they feel excluded from the wheels of power?
And this is why we need to return to the drawing board in order to reduce the dominance of institutional intermediation and revitalise individual share ownership. Otherwise there’s a real risk that we will get state intermediation in its place.
So our proposal for a new drive for personal share ownership – a key element of egalitarian capitalism – is that the Government should form of a new working group to advise HM Treasury, the Department for Business, Innovation & Skills, and the Department for Work and Pensions on how to bring about these changes.
Fostering direct share ownership in this way should be seen as a continuing radical inclusion of people at all walks of life in the governance of British business, and is of course a key part of egalitarian capitalism.
Understanding risk is one of the most difficult aspects for all, at all walks of life, and encouraging a mature and open approach to accepting risk is fundamental in an egalitarian capitalist society.
The welfare state often seeks to shield people from risk, but it’s important to remember is that nothing is risk-free. From birth to death every action that we take has a risk associated with it.
- Risk is a subjective judgement.
- Risk is relative, depending on, for example, how you approach that risk, the nature of the risk and even your age.
- Risk does not remain constant, but can change when external events change.
- What is considered risky by some may be considered less risky by others.
- There are, of course, some risks that only a professional should take.
A sensible warning is that you should only take the risks you understand and get help if you are not certain that you can negotiate the risks safely and get to where you want to be.
Government has an important role in enabling responsible risk taking, not only through education but also in taxation policy, and it should start with a balanced approach towards the self-employed.
There’s a huge range of self-employment from working on a services contract to being an entrepreneur, but the key characteristic in common is significantly greater insecurity than for those who work in regular employment. Yet self-employed people are the backbone of local enterprise and through their businesses they generate most of the new employment for the future.
The risk they take extends beyond putting food on the table next month and the month after: it also affects their standard of living in retirement, as benefits such as pensions are hard to establish when earnings are volatile.
So rather than seek parity in tax and national insurance between the self-employed and the employed, the Government should acknowledge the additional risk and accept some differentials.
Those who risk their capital to finance businesses are also shouldering risk, and this too should be acknowledged not just in Enterprise Investment schemes but also in the differential between tax on capital gains and income.
Many people see assessing the level of investment risk as not so much a judgment of gradual increases but a step change of magnitude. This is because they lack the knowledge to assess relative risk: it’s as if you are stepping into the road with a blindfold on. The anxiety would be intense, even if there were no cars for miles around.
So the way to master risk is to build knowledge, so that what was an irrational fear becomes a judgement based on knowledge; those regulatory risk warnings saying “prices can fall as well as rise” don’t help much in this respect. The knowledge you need to build is about the different types of investment risk, the sort of investment return you can expect, and most importantly about yourself: understanding your own appetite for taking different types of risk.
A society in which everyone has the opportunity to share in the rewards of success is also one in which everyone is better equipped to understand risk, and is appropriately encouraged to take on some risk at the right time in their lives. An egalitarian capitalist society does not seek to cocoon people, but to prepare them for a better understanding of the balance between risk and reward.
The really big, long-term issue for capitalism is how to achieve inter-generational equity: now becoming a major issue, as fragmentation of families, dysfunctional parenthood and the pace of change in culture and technology have driven generations apart.
David Willetts addressed this very effectively in his book ‘The Pinch’. He argued that society is now more than ever characterised by horizontal relationships within generations rather than vertical relationship between generations, which are becoming stretched and fragmented. As medical science and healthier living has contributed to much longer lives and the average age of child-bearing has increased, the gap between generations has become even more extended.
He also shows how the post war baby boomer generation has reaped so much of the rewards, through a combination of property ownership, pensions and public spending: leaving a legacy of debt which must now be serviced by the young.
Immigration has also contributed to the generational disparity of wealth: immigrants are generally poor on arrival in the United Kingdom, and statistics show larger number of children and young people, and a higher birth rate. This has increased significantly the proportion of young people from disadvantaged backgrounds. In some areas of the country this has resulted in quite serious segregation, with all the toxic ingredients for spawning discontent and extremism.
Meanwhile private wealth is concentrated in the old. While employment opportunities have increased sharply for the over 65s over the past 10 years, for 18 to 24 year olds they have flat-lined. Self-employment is a very significant way of working now, but it favours middle age upwards with business experience. Meanwhile young people graduate from university with a great burden of student debt on their shoulders.
If this situation is not to result in societal and economic instability, something must be done to re-balance the scales to provide more opportunity and resources for the disadvantaged young.
Incentivised learning, operated at a national level and offered to young people most in need, would provide the way out of this impasse, and the funds to enable it could be at least notionally hypothecated from some of the tax levied each year on inheritance. Essentially incentivised learning would reward young people who make the effort to progress through a structured programme of building their life skills with small but meaningful tranches of capital to provide a resource base for starting adult life.
The terms would be carefully constructed, being focused on young people from poorer families: those in receipt of Child Tax Credit (c. 16% of the population). This would benefit c. 150,000 young people in each annual cohort. Incentivised learning would be offered in the years immediately before adulthood in order to give some experience of stewardship of capital as ‘financial education by experience’. If 10% of the current HMRC receipts of Inheritance tax (2016/17: £4.8bn) were applied in this way, the average receipts per young person completing the programme would be about £10,000.
The objective of building assets generally for young people is an established concept: the Child Trust Fund attempted to do this, but there was no incentive element, no reward for the young person’s effort. The scheme was also far from egalitarian as it relied on family contributions, not re-distribution, for its main effect. As a result children from well-off homes were bound to benefit substantially more.
However the Child Trust Fund did provide a platform for identifying children most in need – those looked-after by the state - and set them up with a capital account: so I established The Share Foundation to work with the Child Trust Fund structure on a voluntary basis. This led to its being appointed to operate the Junior ISA scheme for Looked After young people throughout the United Kingdom on behalf of the Department for Education. As a result we have now introduced a truly incentivised learning programme for young people in care (the ‘Stepladder of Achievement’) as part of that scheme, which has now been widened to include Child Trust Funds held for young people in care in Autumn 2017.
In the ‘Stepladder of Achievement’, measured progress with specific steps towards maturity – literacy, numeracy, financial capability and self-discipline - is rewarded by capital contributions to the individual’s Junior ISA account, which are accessible on reaching adulthood. In this way the young person develops the ability to achieve their potential in addition to earning the resources which can help them make it a reality.
The three ingredients necessary for this to be achieved - a positive attitude, life skills, and some resources – are therefore provided for young people in care aged 15-17 by the Stepladder of Achievement.
There are six incentivised learning steps in the Stepladder, which in total contribute the relatively modest sum of £1,500 to a young person's Junior ISA: literacy (£150), numeracy (£150), initial financial education (£200), 250 words on ‘my plans for the future’ (an indicator of attitude change) (£250), the 8-week Managing My Money course (£350), and mentoring to help find a job or a place in higher education (£400).
At completion there is a Certificate of Participation and, of course, the young person has access to their Junior ISA money at 18.
So as the evidence builds that this does indeed achieve results, the Government should introduce the programme for 15-17 year olds in all families in receipt of Child Tax Credit. If a young person aged over 15 did not have a Junior ISA on registering for the programme, one would be opened with an initial, say, £200 for the first step - but of course all those aged between 6 and 15 have a Child Trust Fund in any case.
Meanwhile the involvement of mentoring volunteers to work with these young people, helping them through the steps and showing interest in their progress, would help bind society together, repairing the damage caused by family fragmentation and the challenge presented by immigration.
This kind of inter-generational support for the disadvantaged young places no burden on natural inheritance within families: indeed it may suggest better ways to make that inheritance process more effective itself. However it does offer society a more stable future, based on social integration and inter-generational equity
Finally, universal benefits: a tricky subject, as Theresa May found to her cost during the recent election campaign. Politicians have known for years the siren-like attraction of universal benefits, and have shown considerable reluctance to address them. Indeed some years ago a Conservative minister described such an attempt as ‘electoral suicide’: and indeed Theresa May was unable to make to make the case for backing away from universal benefits, losing most of her lead in the polls in the process.
Her experience, however, lays bare the Achilles heel of ‘one person, one vote’ democracy in a secular age. In a society where everyone is driven by self-interest and more than half the population rely on government munificence, it is indeed very difficult to remove universal benefits from anyone other than the very wealthy.
And yet we know that universal benefits are based on the socialist dogma of state provision, and that they erode the scope for targeted benefits to support the really disadvantaged. ‘Free handouts for all’ has an immensely strong appeal even if they make no sense, and only a strong dose of selflessness makes it possible to see them for what they are: a socialist drug to sedate a market economy, which results in inexorably raising public debt.
Before the second World War welfare meant a safety net for the weakest, but it was replaced by the provision of universal services for all, no matter what their financial background: an ideology more based on socialism than on supporting the weak. State provision is based on state decision: no choice, but ‘free provision’ – but of course it’s all paid for by taxes or borrowing. So now hundreds of billions of pounds are spent each year providing universal benefit services to people who are well able to pay for them themselves: health, education, bus travel, winter fuel payments.
The Government could, of course, substantially reduce the public deficit by charging: however bearing in mind Theresa May’s experience in the election, my proposal is that this should be introduced on a voluntary basis.
A simple set of boxes on the tax return could invite higher rate taxpayers to declare their use of universal benefits, and recovery would be via their own annual assessment. Try it out with a well-publicised voluntary pilot scheme, with items appropriately costed: eg £125 for an annual bus pass, £25 for a visit to the surgery, etc.. Many people would respond willingly.
Universal benefits have become the enemy of benefits targeted on the poor and those in genuine distress, and are driving our public debt to completely unsustainable levels. They also channel resources away from wealth creation for all, and instil a culture of dependence on the state. In a recent TED talk the key ingredients of life were described as being ‘meaningful, manageable and comprehensible’. This culture of dependence fails on each of these three characteristics.
Our aim should be therefore to gradually discard the provision of universal benefits and concentrate on providing targeted benefits for the most needy.
Why do we care about others in the first place? It’s a difficult question which also goes right to the heart of voluntary and charitable activities, and as a Christian I would say it has a great deal to do with that unconditional love which floods the universe. However that’s not to restrict it in any way by religion: some years ago when Tesco surveyed their staff to establish a new set of values they had thousands of responses supporting ‘treat others as you would wish to be treated yourself’, not that different to ‘love your neighbour as yourself’.
I would never accept that there should be an impassable gulf between the desire to care for others and a healthy degree of self-interest. The latter is essential to create the wealth on which any social enterprise can be based: the former keeps us focused on the greater good. And in providing the means for wealth generation and human enterprise for others it is only to be expected that we should respect that motivation in ourselves. That concern for people, both as individuals and as a part of a society at peace with itself, is at the heart of egalitarian capitalism.
Taking an ongoing active part in community, whether as members of political parties, serving on local parish councils, or being involved in voluntary work is all part of being focused on the greater good. Our involvement for the community cannot succeed without continuing participation, and this may be as a charity volunteer, a school governor or a magistrate.
Ideally I would like to see an electoral weighting in democratic representation in favour of those who do give without counting the cost. Of course the very suggestion of making changes to ‘one person, one vote’ might raise concerns, but if we wish to move to a more equitable society we must learn to encourage instincts other than pure self-interest. For this reason it may also make sense in moving to an elected second chamber to ask people to vote on a long-term basis: for example, how they would like to see the country in 50 years’ time.
So, to conclude.
Thomas Jefferson said: “We hold these truths to be self-evident:
- that all are created equal;
- that they are endowed by their Creator with certain unalienable rights;
- that among these are life, liberty, and the pursuit of happiness.”
Egalitarian capitalism is about providing individuals with the opportunity to achieve their potential, both in this time and for future generations.
Why must poverty be a fact of life? Humanity has access to such huge resources and knowledge, but it is so concentrated. We know that poverty impacts health, longevity and saps determination. We know that poverty ferments bitterness and extremism. Yet we do not tackle it.
Communism and Social Welfare have both sought political solutions, but it is really only voluntary charity which slogs on and on as the safety net: more often than not, a safety net full of holes.
Yet we have an incredibly sophisticated, flexible and creative economic system in the modern market economy. Why can it not come up with the answers, not least due to the commercial reality that more people with a better standard of living increase the market for goods and services?
Education lies behind most of the steps that I have described for a more egalitarian form of capitalism: Darwin defined animal evolution as the ‘survival of the fittest’, but we have brought about a humanity defined by ‘survival of the smartest’. Education provides stability and security within which trade can flourish. Education helps farmers, producers and consumers to understand the potential of their resources.
In a country where higher level education is producing some of the best results ever, we still scour the developing world for their best educated. And we ourselves are not out of the wood, with over 50% of our own population having no or negligible savings or assets, and the spectre of personal debt continues to rise higher and higher.
Forty years ago Sir Keith Joseph spoke of breaking the ‘cycle of deprivation’. A few years before that Martin Luther King said ‘The American dream reminds us that every person is heir to the legacy of worthiness’. Yet little has happened.
We need a new realisation that poverty and education are inextricably linked. And, as a new academic year begins, it wouldn’t go amiss to propose an additional beatitude: “Blessed are the educators, for theirs is the ability to break the bonds of poverty”.
So – egalitarian capitalism can come about by empowering people from all walks of life, and particularly the young, with a combination of respect and care for others, and through enterprise. It can bring real strength and stability for the many, not just the few. It is worth pursuing.