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Inequality undermines capitalism

John Cleese, Ronnie Barker and Ronnie Corbett: "Class" in the Frost Report

John Cleese, Ronnie Barker and Ronnie Corbett: "Class" in the Frost Report

Two big structural changes in the 1980s launched by its Tory predecessor are now coming back to haunt this Tory government.   Thatcher thought that the abolition of exchange controls in 1979 together with screwing down the trade unions in the vice of anti-union legislation throughout the 1980s would consolidate the market capitalism she so much cherished as well as crushing any working class threat to her own class dominance.   For a time they did have such an effect.   But now their long-term effects look very different and are undermining the very system she fought so hard to protect.

The removal of exchange controls, one of the basic foundations of the neoliberal hegemony of the last 30 years, did indeed weaken labour relative to capital by freeing up capital to search the world for the cheapest labour bargains, leading to a significant decline in labour’s share of Western GDP compared to the previous 20 years.   However, the flip side of this major change entails the fundamental dilemma of a globalised economy: if profits and output keep on rising faster than wages, where is the demand going to come from to absorb rising output and the growing share of profits?

It has been said many times, correctly, that the financial crash was precipitated by the build-up of unsustainable bubbles in both the credit and housing markets.   What is ignored is that these artificial bubbles were generated to fill the major void in aggregate demand created by a persistent falling wage share in international GDP, both in the US and UK as well as other European countries.

Given also that the draconian anti-union laws of the 1980s, including the nit-picking legalistic niceties now being used to hamstring union efforts to improve the share of wages, are further reinforcing these anti-labour trends, this lack of growth in real wages sufficient to underpin final demand is now emerging as a central problem for Western economies, not least Britain.   The enormous unconstrained ballooning of inequality unleashed in the last 20 years is turning back like a boomerang to corode the system that generated it in the first place.

This problem goes almost totally unrecognised.   The meltdown in 2008-10 was not caused by excessive public expenditure – quite the reverse – but rather by excessive private sector borrowing to fund speculative property development, not only in the UK but also notably in Spain and Ireland.   When the crunch came in 2008, the private sector de-leveraged, private investment dramatically collapsed, and the Government’s revenue deficit soared.

The moral of the coming cuts catastrophe is not only that it makes a double-dip recession more likely than not (as Ken Clarke has admitted), but that this is a very deep hole from which Western countries will not achieve a sustainable escape until the gross imbalance in the wages and capital shares in capitalist economies is fundamentally rectified.


  1. Robert says:

    The problem for people like me, we had Thatcher who killed the Unions, then we had major and then we had Blair and brown, did anyone of them help the Unions, nope Brown was asking if he could take Unions to courts to get the political levy, because Lard ass thought all Unions were of course labour, did he remove any of the Laws. the fact is Blair and brown are were Thatcherite believers.


    William Keegan in the Observer yesterday makes the same point: lack of effective demand caused by the squeeze on wages over 30 years was bridged by debt-financed consumer spending, until the banks hit its limits in 2008.

    How will Capital save itself this time? Gouging out the public sector is likely to polarise society further and cause deepening levels of insecurity, and perhaps for the first time impact on a large part of middle classes. Perhaps in this country and Europe we may have reached the system’s limits for self expansion. There is no prospect presently of the UK and Europe returning to anything like 3% growth, and without that there will limited job creation.

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