The answer to this crisis of British capitalism is more, not less, capital
When China entered the World Trade Organisation and the Berlin Wall fell, a cosy consensus emerged around free markets, free trade, light regulation and globalisation. The West had won.
But celebrations were premature and today young and old, rich and poor are asking whether capitalism works. Particularly, those with a minimal capital stake in the system know it is not working for them. Global data tell us that capitalism is working well for three out of four groups of people. In poor countries, it has delivered for the comparatively wealthy, creating a rising middle class. More importantly it has lifted billions of the world’s poorest people out of absolute, life-threatening poverty. And aided by low interest rates, quantitative easing and asset price inflation, it has worked well for the rich, living and working in rich developed countries.
However, it has been failing a fourth group: poorer and middle-class people in richer countries. Median real wages have barely risen for 20 years in the US or the UK. Inequality has widened. The life expectancy of the rich is diverging from that of the poor, and poorer people with chronic illnesses in old age are trapped between the struggle to afford expensive care or making do with basic standards.
In the last 20 years businesses large and small, alongside government, have under invested in infrastructure and housing, as well as in technology and skills. Our great universities lead the world in research, but we under invest and sell out too early. Our enthusiastic entrepreneurs are creating companies at an unprecedented rate, but we rarely scale them up. This is overlaid by intergenerational unfairness. Lower real wages for those in their twenties and thirties, student debt, lower household savings rates and later first-time buying of homes means fewer people actually have capital or a real stake in the capitalist system. This is a puzzle for government, business and society that we need to solve.
The answer to this crisis of UK capitalism is more, not less, capital.
The global economy is undergoing its best ever growth phase with fewer countries currently in recession than ever before. And after a decade of historically low interest rates, the world is awash with money, $8 trillion of which, embarrassingly, is earning less than zero. The money is still flowing disproportionately into financial instruments – global stock and bond markets have added over $20 trillion in market capitalisation in the last year – equivalent to 10 times the UK’S economic output. This is cold comfort for the low-earner, graduate or start-up. More money needs to flow from financial instruments to real assets. Better capitalism – more responsible and inclusive, with better shareholder stewardship and a more long-term focus – goes hand-in-hand with using more, not less, capital.
At Legal & General, we believe that the UK remains a great place to invest. Our once great cities are stepping up, not just the obvious science and technology powerhouses like Oxford and Cambridge but other researchrich cities like Manchester, Leeds and Newcastle, which now has a growth rate of over 4pc and an unemployment rate lower than London. We can invest in affordable housing for young and old. We can invest patient capital in start-ups and scale-ups. And we can support measures like Lord Sainsbury’s “T-levels” and Baroness Wolf ’s maths academies to provide the skilled, productive workforce our SMES need.
Defending capitalism requires moving on from the arid debate about markets versus state, and instead working in constructive collaboration between businesses that are prepared to invest, a supportive government and enabling regulators. Above all, we must make capitalism more inclusive and deploy today’s capital effectively to give everyone a stake in its success. Nigel Wilson is chief executive of Legal & General