Why Unregulated Capitalism Leads To Greater Inequality

This excerpt from Stewart Lansley (author of The Cost of Inequality: Three Decades of the Super-Rich and the Economy) succinctly sums up some of the problems caused by the deregulation of Capitalism:


The main outcome of the post-1980 experiment – one based on a return to blind-eye regulation of the City, fewer controls over business and a weakening of collective bargaining – has been an economy that is both more unequal and more fragile and prone to crisis.


So why is this? The reason lies in the relationship between wages, productivity (the increase in productive capacity) and growth. When wages fall increasingly behind growth and productivity – as they have in both the UK and the US in the last 30 years, and at an accelerating rate – the natural mechanisms that bring economic stability stop working. The decoupling of earnings from growth creates three powerful forces that bring first imbalance and then economic failure.
First they suck purchasing power out of the economy. For the last thirty years, an increasing number of rich nations have been running their economies on low levels of wage-generated consumer demand, necessitating an increasing reliance on debt to prevent implosion. In both the UK and the US, the rising levels of politically sanctioned debt enriched financiers and kept economies going for a while. But they were never sustainable.


Secondly, concentrating income at the top, amongst a group more likely to engage in reckless speculation than spend their wealth in ways that benefit the productive economy, eventually leads to asset price bubbles in property, commodities and business values. Thirdly, great levels of inequality bring unequal power. Over recent times, the rise of dominant wealth-diverting finance capitalism has created a powerful new and unaccountable economic elite. Hence the inaction on tax havens, blind-eye regulation on the City and Wall Street and the way the super-rich are treated as a special case for tax. These are all factors that contributed to both the build-up to the Crash of 2008 and to the persistence of the crisis.


Rising executive pay and soaring personal fortunes are important issues of social justice. Levels of personal wealth at the top have risen to levels that are indefensible in terms of economic contribution. But they also have important implications for the way economies function. Until we find ways of breaking up these great concentrations of wealth and power, fragility will remain, and the global economy will struggle to recover.