Why is the gap between rich and poor growing, why are the political parties hollowed-out shells and who is to blame?
It is the great surprise of our time, and an unwelcome one, which is why we have taken so long to confront it. But the evidence is plain enough. Instead of democracy widening and deepening as we had hoped, power and wealth have, slowly but unmistakably, begun a long migration into the hands of a relatively small elite. That migration started in the second half of the 20th century, which had been billed as the century of the common man. It shows little sign of weakening in the present century, let alone of going into reverse.
We have experienced a stunning change of direction. For 30 years after the second world war – in fact probably ever since the first world war – the gap between rich and poor had been narrowing; often not by much and seldom as a result of deliberate policy, but narrowing none the less. When the sociologist WG Runciman published his classic Relative Deprivation and Social Justice in 1966, relative deprivation was actually declining. It was expected that, as economic growth continued, the poor too would enjoy their share, and more than their share of that growth. Of course people on low incomes still had good reasons to resent being worse off than the people above them, but they also had reason to hope that this disadvantage would soften as the years went by. The slow amelioration of inequality was tacitly understood as a collective purpose, shared by all political parties.
Nobody seems to be very clear precisely why Britain has become more unequal again in the past 30 years. And the gap is still widening today. The ratio of the total rewards enjoyed by chief executive officers of FTSE 100 companies to the pay of the average UK employee rose from 45:1 in 1998 to 120:1 in 2010. By contrast, over the past 30 years the share of national income going to the bottom half of earners in Britain has fallen steeply. Real wages nearly doubled overall during those 30 years, but only 8% of that growth went to the bottom earners. The wages of the top 1 to 5% of the working population have gone on zooming into the stratosphere, recession or no recession, while wages at the bottom remain virtually stagnant.
Nor, four years after the crash, is there the slightest sign of repentance. On the contrary, the men at the top have become even more insatiable. At a time when average living standards are being severely squeezed, Incomes Data Services reported at the end of October 2011 that the pay packages of directors of FTSE 100 companies had soared by 49% in a single year, to an average figure of £2,697,644. Chief executive officers collected rather more, an average of £3,855,172. Some of their number soared far beyond that level: Mick Davis of Xstrata collected more than £18m, Michael Spencer of Icap more than £13m. By contrast, after the great crash of 1929, the salaries of the discredited and demoralised bankers and CEOs shrank rapidly, and remained in relative decline for several decades.
People seem at a loss to understand exactly what has happened. When I picked my way between the tents outside St Paul's Cathedral last autumn, I was struck not only by the rage but by the bewilderment. Those scrawled slogans and laments pinned to the railings had so little coherence. There was nothing you could call a logical argument or a clear set of demands. It isn't easy either to squeeze a satisfactory answer out of the conventional left-right punch-up. Tax cuts for the rich, for example, might help to explain some of the inequality in post-tax incomes. But the real shock has been the rise in the pre-tax incomes of the top earners. Besides, inequality in Britain went on growing during the 20 years during which Nigel Lawson's tax rates were left unchanged. As a result of those lower rates, the rich were readier to pay their taxes, and in fact they paid far more tax than they ever had before and provided a much higher proportion of the Treasury's total revenue. So tax changes don't look much like the main problem – and they don't look much like the main answer either.
Oddly enough, the protesters outside St Paul's agree with the high priests of capitalism that globalisation is the villain. Professor Irwin Stelzer, resident guru to Rupert Murdoch, argues that globalisation has brought undreamed-of affluence to millions of Chinese and Indian workers, but concedes that "Globalisation has also exacerbated inequality in many western countries, especially America." The woman making T-shirts or trainers in the US is undercut by millions of Chinese who are ready to work for a dollar a day. On the other hand, managerial skills can now be marketed internationally and fetch higher prices as a result. Globalisation hurts the workers in Britain and the US, but it's a golden opportunity for the footloose elite.
At first sight, this argument sounds quite convincing. But if you think about it, there's a bizarre inconsistency lurking in there. If global competition levels down the wages of people who make trainers or motor cars – which it obviously does – then why doesn't it level down the wages of managers and the professionals, too? There are, for example, millions of well-educated Indians who can handle a spreadsheet and could easily acquire those precious managerial skills (if they haven't already), and who will travel anywhere in search of better opportunities. This sort of competition from the emerging nations ought to nudge top-level rewards downwards, just as it does for workers in call centres and car factories, other things being equal.
The suspicion grows that perhaps other things are not equal. Are the markets for top talent genuinely free? Or are they constrained and distorted in various ways – by monopoly power, by professional cartels to keep wages high, by government regulation, by stitch-ups in the boardroom, by undetected market abuse, and by outright looting?
It seems unlikely that this sharpening inequality should have emerged as a natural economic development in so many very different countries. It seems more like a symptom of something else, some deep-lying vulnerability in our custom and culture, an undiagnosed malfunction or series of malfunctions.
Some people would prefer to brush the whole question aside. "Surely," they will claim, "it is better to tolerate some degree of inequality if it energises the economy. A rising tide lifts all boats. Anyway, how can you possibly decide at what level inequality becomes intolerable? You surely are not arguing that everyone's income should be mathematically equal?"
This response might have sounded all right 20 or 30 years ago. But it ignores the very different character of inequality today. The truth is that wealth is not trickling down to anywhere near the bottom. The rowing boats are stuck on the mud. Many of the worst off are sinking into a demoralised and detached underclass, just as the top earners are congealing into a super-class who hardly belong to the society they flit through. What is so dispiriting is that the gap appears to be widening all the time, regardless of whether we are going through a boom or a slump, and certainly regardless of which party is in power. As a result, we begin to sense that we are living in a dislocated society. Who would have expected a generation ago that there would now be a thinktank called the Centre for Social Cohesion or that Tony Blair's Cabinet Office would have had a Social Exclusion Unit?
It's much the same story with the other disquieting trend that we cannot help noticing: the trend towards centralisation. Power in Britain used to be spread around in a rather casual fashion that had grown up over the years. We rather looked down on continental countries such as France, which had inherited a highly centralised state from Napoleon and Louis XIV. General de Gaulle once said that centralisation was the one thing that France would never be able to get rid of. But now the roles are reversed. While many other European nations, not least the French, have been busily decentralising their arrangements, power in Britain has drained away from private individuals and local communities up to central boards and bureaucracies and government agencies and ministries. Central control is our orthodoxy, in private and public sector alike. And for the men and women at the centre, the salaries and bonuses go zooming up, for hospital administrators and university vice-chancellors and the director-general of the BBC and the head of the Post Office just as fast as they have for bank chiefs, retail tycoons and the bosses of privatised utilities.
Again, we lament the change without having much clue about its causes. Why in one area of life after another has centralisation become the default solution, the irresistible option? What or who is driving this apparently inexorable trend? How come local government was so effortlessly stripped of its old powers? Why have political parties become hollowed-out shells, relegated to impotence and contemptuous manipulation by their leaders? Is it possible that centralisation and inequality are related, that the one trend enables the other, and that both are facets and consequences of oligarchy? Is it possible that, as well as sheltering the oligarchs of other nations, we have been hatching our own? It is oligarchy – the rule of the few – that appears to be the common denominator of the system. So perhaps we need to ask what are the factors that make oligarchy possible.
It is tempting to load all the blame on this or that government or prime minister. But that really isn't plausible. The trends are too insistent and entrenched. You can blame Peter Mandelson for being intensely relaxed about the filthy rich. Certainly you can blame Margaret Thatcher for the careless liberation of financial services in the big bang of 1986, but then you must also blame Bill Clinton for making exactly the same mistake in 1999. The roots of our shared illusions lie deeper and further back in modern history. After all, George Orwell said in 1946 that "for quite 50 years past the general drift has almost certainly been towards oligarchy." He detected then "the ever-increasing concentration of industrial and financial power and the diminishing importance of the individual capitalist or shareholder". In their classic, The Modern Corporation and Private Property, published in the depths of the great depression, Adolf Berle and Gardiner Means pointed out that the powers of shareholders to control runaway executives had already become an illusion. The concentration of power had brought forth "princes of industry", or as Tom Wolfe called them half a century later, "masters of the universe".
The princes dazzled us. We lost our bearings. Worse still, we lost the will to defend our institutions. Two centuries ago, Adam Smith warned us about the dangers of merchants conspiring together and of ownerless corporations. The trouble is not that our policy-makers had read too much Adam Smith, but too little. So they let corporate governance go slack, and believed everything the bankers told them. For our part, we watched the big political parties wither away with indifference if not pleasure – who needed those gangs of outdated obsessives? We let local government, so unglamorous, so drearily provincial, fall under the total control of Whitehall. We watched Parliament decay into near-irrelevance – or rather we didn't watch, for BBC Parliament was reserved for the anoraks and the bedridden.
And now at last, at a cripplingly slow pace, we might be waking up to what we have allowed to happen. The coalition has had plenty of stick, quite a bit of which it deserves, but it is the first incoming government that has promised to restore the local dimension, to diversify the financial system and make the banks behave sensibly, to revive the co-operative ideal and the mutual tradition. It still has a couple of years left to deliver on those promises.
For different reasons, recent governments, whether Labour or Tory, have pretended either that inequality was not getting worse or that this did not matter. Now even that embarrassing subject has been allowed back on the agenda.
The great economist Walter Bagehot remarked of the bank crash of 1866 that "the losses were made in a manner so reckless and foolish that you would think a child who had lent money in the City of London would have lent it better." The only consolation, then and now, is that the practical remedies are pretty much child's play too: break up the big banks and other damaging monopolies, give shareholders an explicit power to veto outrageous pay rises, restore the financial independence of local government, stop taxing the poor, bring in a living wage for the lowest earners, to name but a few.
Oligarchy is not unstoppable. It is no more historically inevitable than communism turned out to be. And nor is galloping inequality.