Monday, May 28, 2012

wealth, what it is, how to get it.

It is important to ask the question: where does wealth come from? In my mind there are two main sources of wealth, there is generative wealth, where money is gained from techniques and products that simply create new value, without taking any wealth away from the pre-existing supply. Then there is parasitic wealth, that which relies on taking value from other things.

     In a classical sense generative wealth is that which involves new inventions, mechanisation, new techniques, any form really of creative wealth. Parasitic wealth is that which takes money, so it would be things such as charging rent on land or outsourcing factories to other parts of the world. The modern system we live under has both sources of wealth, though capitalism seems to encourage more of the parasitic form of wealth, as is epitomised best in the stock market. Because although wealth can be generated through investment in new companies much of the gubbins of stock trading involves buying and selling stocks and shares, which means while one trader will gain a profit, automatically someone else will lose out. This zero sum way of gaining wealth is innately destructive, in the same way as asset stripping of companies, downsizing and outsourcing factories is. This however is the wealth system we have increasingly got ourselves in the west locked into, and it is largely what is leading to our gradual decline as nations.

    The most important question that can be asked in any of this is where exactly where are we heading as a nation. Are we still capable of generating wealth that will sustain our standard of living? Does it really matter where we are on the league tables of wealth? Are we undermining their foundations of our own wealth by outsourcing to other countries?

  It is obvious that the UK is in decline in terms of relative wealth and power in the world. Just by looking over the last century it can be seen that in 1900 Britain was the wealthiest and most powerful nation in the world, and now we are barely in the top ten. It is inevitable that this will decline further, just as the USA is seeing the last days of its role as world superpower. But does it really matter whether we are number one or number one hundred in terms of wealth? While it may matter in terms of national pride as to whether we are bigger and richer than others, does it make a difference to the majority of people?

  When you look at the UK a hundred years ago the majority of its citizens lived in poverty, while the wealth it had remained in the hands of relatively few people. Britain may have been the wealthiest nation in the world, but that wealth was restricted to those at the top. The majority in Britain never experienced a decent share of that wealth, so to all intents and purpose Britain may have been the richest country in the world, but its people certainly were not. It was only after world war two and the creation of the welfare state that wealth began to be redistributed, and to be born poor in the UK wasn't an effective death sentence. It was also a change not just of wealth but potential to gain wealth, so that you could be born poor, work hard at school and gain a position of respect in the world. So it can be argued that in terms of individuals it doesn't really matter how rich a country is, what matters is how that wealth is distributed. The USA now is the worlds richest nation, yet it has millions of its citizens living in poverty. That is fine for those at the top, but hardly fair for the rest.

  So in future thinking terms the problem is that currently Britain's wealth is not very equally distributed, and the gap between rich and poor is growing rapidly. We are not getting much richer as a nation, but the rich are, and the poor are getting poorer, relatively speaking. Now some on the right may argue that this does not matter, because nobody is getting absolutely poorer. While we were a more equal society in the 1970's than today (in that our wealth was spread more equally and fairly, and social mobility was higher) we are objectively wealthier than we were forty years ago. We have material goods in abundance, nobody need starve and the welfare state still provides the necessary basics. So it would seem that it doesn't really matter how wealth is shared, so long as we have enough so that the poorest are getting a half decent standard of living.

  But the question is, will we always have enough to ensure this basic standard of living? This is a more long term concern, and it is worth looking at the decline of other societies, and here we look at the problem of outsourcing and the rise of other nations. Now Britain's wealth did not come about purely because our businesses were better than others and we were more innovative than other nations (although that was a factor, and here equality of opportunity is always useful, but that is for another essay). We became rich because we were more powerful and ruthless than other countries. The colonies we gained and drained were fought for, not just from the people who lived there but from other nations who wanted them. Our government supported British business not just in a cheerleading way but by destroying native industries. In India it was British policy to effectively destroy the Indian weaving industry so as to boost the cotton industry in Lancashire. And while the machines of Lancashire may have represented generative wealth (industry that came about because of innovation) the British empire used it as a form of parasitic wealth, so that even in Indian British made cotton goods were cheaper than their Indian rivals.

    Exactly this attitude prevails today, the US government through the WTO and many other institutions makes sure that it is able to dominate world trade, and certainly does not rely on the vagarious of the market to dictate the success or failure of American companies. China too is beginning to use its growing weight to support its economic system, though much like the British it is using its economic strength first and then will no doubt bring in military strength afterwards. And this is where outsourcing comes in, because we have done the opposite in china as what we once did in India. We have given all the factories to china, because they can make things cheaply, and we keep all the head offices and brand names in the UK, and supposedly reap the profits. Now this works for a while, because it reduces company costs and never mind the British worker thrown out of work, because they can go into the service sector (more on that later). We can buy cheap goods from china, which we can afford with our high wages, supported because we can still dictate the rules of the world. The problem then becomes that our wealth is reliant on the rules being bent in our favour, and that will not always be so.

  The main problem of outsourcing is that you outsource knowledge and talent. While initially Asian factories were meant to only produce goods designed by the west and that did not take much skill. But it did not take long for those trained to assemble, such as car parts or electronics goods to realise that they could manufacture and design them all themselves. This is largely what Japan and Korea did four decades ago, and what China and India are doing now. Where once it was IBM that got Chinese workers to make PC's, it is now a Chinese company that makes PC's for IBM. This puts all the power in the hands of China, though IBM has yet to realise that. By being in charge of both production and the companies themselves it means that China only really needs the west as a market for its goods, and that is not a massive incentive for cooperation, nor one where china will happily accept being told what to do by the west. It is interesting to see in this what happens if you lose control of the brand, as we see in the UK our manufacturing plants scramble desperately to get production to stay in the UK. France and Germany tend not to have this problem, because they have made sure they keep control of the brands. If a French car company was going bankrupt as Rover did in the UK they will give it money to keep it afloat, because then when times are good the company cannot then relocated to another country and stuff your workers.

  As Britain and the USA thus become less powerful they will have less say in world affairs, and while that might be something of a relief there is no guarantee that anyone wiser will be in charge. The fact is countries act the ways they do is for power and power alone. Every country will try and bend the world system in their favour, and to ensure that other nations are kept as weak as possible.

  This is the major danger then to the continuing prosperity of the UK, that if we are unable to hold our weight in the world other countries will get us to sign up to precisely the same sort of unfair treaties that we in the west used to make them sign. Business is never fair, and there is no reason for any of the rising nations of Asia or south America to give us any favours, especially with the memory of colonialism hanging over us.

  Therefore while Britain's world decline is not harmful in itself, and entirely inevitable, the threat to our standards of living is that there may be a finite amount of wealth that it is possible to generate. While generally there has been an upwards curve in the technological development and our standard of living this curve is not inevitable. There are many more unpredictable things on the horizon, our economy have to make the transition to being able to generate energy without relying on scarce fossil fuels, and as has been pointed out to support a western standard of living for all we would need the wealth of several other earths.

   Thus while we may try and maintain our standard of living there might not be enough wealth to support it for everyone. We have no greater moral claim to our wealth than anyone else, and it is almost impossible to justify why we should be so much richer than other parts of the world. Plus while it might be nice to think that we could all share the resources of the world equally there is little evidence to support this. We in the west hardly have a glowing track record when it comes to sharing our wealth with others, indeed as pointed out before much of Britain's wealth has been parasitic, in that we stole much of it from other nations.

  While there may be room for manoeuvre in that perhaps technology will improve and resources will become less scarce it is better to assume that things will largely follow the same pattern they always have. We must assume that just as Britain and Europe happily colonised other nations and created a world system that impoverished many other nations, thus the new rising nations will most likely do the same. While they may not be quite as brazen as European nations were they are more likely to act as the USA did, economically colonising other nations and slaving their economies to its own.

  We thus face the choice between carrying on as we have done before and inevitably declining. There are many parallels with past nations and empires that have collapsed without being destroyed in war. The example of Venice is a good one, as it was an Empire based on trade with a very advanced governmental system, that gradually declined over years, giving the impression of strength before inevitably crumbling. It was able to maintain a generally good standard of living throughout most of its years but once the decline set in then poverty for the majority was what happened.

  Which brings us to the nature of our decline, the emphasis on restructuring our economies along service sector and luxury jobs means that we are very poorly placed if the world system is changed. We no longer produce anything that can be sold overseas. We can work in call centres and work in shops, but this focus on the consumer economy relies on us being able to spend our money in shops. This bubble has already burst, as we have seen in the last recession. The money we think we have is just debt leant to us by various banks, and all those banks rely on the fact that the people of china save more than they spend. We have impoverished ourselves and placed the power again in the hands of other nations, and they will not be slow in exploiting that. Therefore the wealth of most British people relies on the service sector, and by working in the head office (admin etc) of various large companies, or in public sector jobs that are likewise reliant on others generating income. As has been pointed out both of these are very weak, as again we are finding now that when demand slumps there is almost nothing we can do about it. We can have short term stimuli such a when Labour dropped VAT in 2009, but that simply doesn't last. The current government’s policy of austerity in addition has made things horribly worse, as one of the few ways to get the economy moving again would have been for the government to invest in growing the public sector in a Keynesian sense, because then at least it stimulates some spending. That is of course only short solution, as the government can’t just keep making money from nowhere unless it learns to innovate.

The way ahead for our economies in the post-industrial era  is thus to be more protective of the wealth we generate, to focus on creating jobs and wealth that is genuinely sustainable. We need an economy that focuses on generative wealth, not parasitic or service sector wealth (which is usually reliant on other peoples income). In order to be able to genuinely prosper we need to be able to control the sources of our incomes. At the moment we are at the mercy of foreign corporations whose loyalty is elsewhere, and to home grown corporations whose only loyalty is to money and how they can get more of it. As ever the nations that seem to able to get this right are the ones who have been able generate wealth without having to resort to the parasitic mode employed by the UK and USA. A good example of this is Germany, a nation that has been able to become the richest in Europe without a colonial legacy and by utilising only the skills of its people in the last half century. While obviously Germany has more than a dodgy past, to say the least, it had been able to redevelop itself from next to nothing after WW2. It did this, admittedly with US money, largely due to its strong social organisation and a very rationally thought out sense of mission. The German economy has been focused on industry, of high quality goods that have remained competitive despite many years of changing markets. This is partially a legacy of the time before the wars, when the German economy was second only to Britain and was the world leader in electrics and chemicals. The fact was that it was able to reach this position by focusing on innovation and development. Partly because Germany had no colonies it was forced to behave differently to other European nations, it could not, as Belgium did, steal large amounts of wealth from Africa.

  Germany thus had to concentrate on stimulating domestic demand, by focusing on skills that people needed to succeed and to place innovation at the heart of economic policy. This is how to build a successful economy and one that ensure wealth is generated successfully.

  The worst thing is that Britain used to do this, not in the Victorian age so much but in the age before. The reason why Britain became the wealthiest country in Europe was not its empire, in fact it was the other way around. It gained an empire because it was successful at generating wealth, and it is instructive to look closer at how it did this.

   Firstly Britain opened itself to new ideas. By getting rid of the catholic church in the 16th century and the monarchy for a bit in the 17th century there was less of an incentive towards doing things in the old way. Innovation was held back in Europe because new ideas threatened those at the top and were thus outlawed. In the UK however we had a royal society that had ideas about science before the 1700’s, and Newton was also put in charge of dealing with the national debt. Britain was a place that was forward thinking, and where new ideas meant that those beyond the narrow aristocracy actually had an incentive to get ahead. In the late 18th century the men who put England into the industrial age were not from wealthy backgrounds. They were the middling sort, educated and with the belief that with hard work and innovation they could get ahead. Luckily they lived in a society that thrived on innovation, or at least one that tolerated change in some form. Men like Arkwright and Wedgewood who spent their lives innovating in what they made, how they made it and how they sold it. of course these men weren’t very nice, Arkwright made himself incredibly rich often at the expense of others, and his free market ways would eventually lead England into its current difficultires, but the principle remains.

   In order for the UK to be successful again it does not need to focus on manufacturing, as various people like Dyson would have us believe. The age of manufacturing in its current state is probably over, but to innovate in terms of ideas. We need to follow the principles that we live in a society that is open to new ideas and new ways of doing things. Those industries at which Britain currently excels are ones that rely on us inventing stuff, which we are quite at. What we lack is investment in those things we invent and long term strategy for holding onto their benefits. Britain invented everything from the jet engine to the world wide web, but we are fairly rubbish at exploiting them. What we need is a system that from the start encourages people to innovate, to be creative and to be sure that success can happen regardless of what part of society you are born into. This of course means concentrating on schools and culture as much as anything else, because the subjects we teach at schools are not really aimed at creating the kind of adult who is meant to be economically useful. Much as I like the idea of education for its own sake, if we are considering that the future prosperity of our society is at stake then we have to be rational about how we intend to keep it.

    Again Germany is the example, while traditionally trades were looked down upon in Britain (and vocational training is still seen as the poor cousin of university education) Germany excelled in technical education. Britain still can’t even come up with a decent vocational training course that people will accept as being academically rigorous and useful to building the economy. What we need is to focus on creating things, not in a narrow Daily Mail fashion of focusing on old fashioned science and maths, but on the new industries where people actually make good money. The high tech research of people in Cambridge, for instance. It has been called for before but the idea that kids in school should be taught coding is one that is simple but vital. Britain is good at writing software, and software pretty much runs the world. If we can innovate in new industries then we might have a chance at keeping up our much prized standard of living.

   The down side is of course we need to be open to new ideas, and our society is class bound, with those at the top jealous to hold on to their riches that they will never willingly invest in such ideas. It would be too much of a challenge to current market orthodoxy to abandon the consumer society and accept that the service sector is not the way forward. Thus we find ourselves floating to obscurity, like a good few ex great nations before us.