Even before the emergence of the economic crisis in 2007, the idea that inequality is itself responsible for the worst excesses and deepest failings of the UK’s financial sector had become rather well-trod. Stewart Lansley produced Rich Britain in 2006, and for a more gossipy version of many of the arguments presented in Lansley’s book one might turn to the BBC Business Editor Robert Peston’s 2008 effort Who Runs Britain? And Who’s to Blame for the Economic Mess we’re in?. Here too, as in The Cost of Inequality and Rich Britain, is the staggering parade of statistics to tell us just how rich the very richest have become, and Peston implies (though never quite states outright) that these ‘super-rich’ hold much too much of the power in contemporary Britain. Another interesting thread to be found in both books is the slightly shocked reflection on New Labour’s fostering of highly concentrated mega-wealth in the UK; both books remind us of the mindset that lay behind Peter Mandelson’s statement that he and his party were “relaxed” about people becoming “filthy rich”.
The difficulty here is in connecting an intuitive distaste for large-scale inequality – connoted so clearly by the phrase filthy rich – with the features of our economies that contributed to the financial crisis. The correlation is easy to point out, and Lansley claims to be undertaking a somewhat different project from the authors of The Spirit Level, which set out the correlations between equality and desirable societal outcomes so clearly. How, then, does Lansley approach this territory – does he succeed in his apparent aim to move from correlation to demonstrated causation – and what does he offer that’s new?
The Cost of Inequality sets out a brief history of the British financial sector, building to a contemporary model of capitalism where, as he pithily puts it in his introduction, “deregulation has created the opportunity to make money, big money, not by being smarter, or by taking the long view, or by investing in new systems, but by a number of new business practices that manipulate the financial structures of existing firms.” At this point lies the crux of Lansley’s argument. With stagnating real incomes for the vast majority of people – a “consumer society without the capacity to consume” – the gap was filled by extraordinarily cheap credit. Meanwhile, the “flush personal bank accounts” and “apparently compulsive obsession with building ever larger personal fortunes” created the context and motivation for increasingly risk-prone behaviour within the finance sector.
This is a compelling narrative, if well-rehearsed. It is at least partially dependant upon cultural and psychological assertions (as so often economic arguments must be): an atmosphere of security and a feeling of “triumphalism” contributed to the behaviours that led to the crash. The argument is also plausible, and quite worldly. Lansley states that “[o]f course, any finance system needs the freedom to take risks to innovate and invest”, and points to the competitive innovations of technology giants as an example of capitalism done right.
What seems to be missing from this account is an in-depth consideration of the importance or effectiveness of government action in relation to the financial crisis. Many have argued that the first Basel Accords created a regulations-based incentive to over-invest in mortgage-backed bonds (see, for example, Friedman and Krause on this topic). Governments also moved to cement the culture of ‘too big to fail’ by bailing out the worst-hit banks, with a very few exceptions. Interesting counterfactual questions ought also to be asked as to the effectiveness of the various stimulus packages deployed by the UK and USA. If Lansley could tackle such considerations directly, the result would be a more compelling argument for his preferred end of greater state intervention in the finance sector. As things stand, we are given a relatively clear picture of the failings of the current system, without any clear indication that a more regulated alternative would necessarily be preferable.
This is an edited preview version of my review of Stewart Lansley’s 2011 book, The Cost of Inequality. The rest is available on my academia.edu page.