According to a new OECD working paper, Britain is one of the wealthiest countries in the world. Net wealth is estimated to stand at around $500,000 per household – more than double the equivalent figure in Germany, and triple that in the Netherlands. Only Luxembourg and the USA are wealthier among OECD countries.

On one level, this isn’t too surprising – Britain has long been a wealthy country. But in recent decades Britain’s economic performance has been poor. Decades of economic mismanagement have left the UK lagging far behind other advanced economies. British workers are now 29% less productive than workers in France, and 35% less than in Germany. How can this discrepancy between high levels of wealth and low levels of productivity be explained?

The process of how wealth is accumulated has been subject of much debate throughout history. If you pick up an economics textbook today, you’ll probably encounter a narrative similar to the following: wealth is created when entrepreneurs combine the factors of production – land, labour and capital – to create something more valuable than the raw inputs. Some of this surplus may be saved, increasing the stock of wealth, while the rest is reinvested in the production process to create more wealth.

How the fruits of wealth creation should be divided between capital, land and labour has been subject of considerable debate throughout history. In 1817, the economist David Ricardo described this as “the principal problem in political economy”.

Nowadays, however, this debate attracts much less attention. That’s because modern economic theory has developed an answer to this problem, called ‘marginal productivity theory’. This theory, developed at the end of the 19th century by the American economist John Bates Clark, states that each factor of production is rewarded in line with its contribution to production. Marginal productivity theory describes a world where, so long as there is sufficient competition and free markets, all will receive their just rewards in relation to their true contribution to society. There is, in Milton Friedman’s famous terms, “no such thing as a free lunch”.

The aim was to develop a theory of distribution that was based on scientific ‘natural laws’, free from political or ethical considerations. As Bates Clark wrote in his seminal book, ‘The Distribution of Wealth’:

“[i]t is the purpose of this work to show that the distribution of income to society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates”.

Seen in this light, wealth accumulation is a positive sum game – higher levels of wealth reflect superior productive capacity, and people generally get what they deserve. There is some truth to this, but it is only a very small part of the picture. When it comes to how wealth is created and distributed, many other forces are at work.

Wealth, property and plunder

The measure of wealth used by the OECD is ‘mean net wealth per household’. This is the value of all of the assets in a country, minus all debts. Assets can be physical, such as buildings and machinery, financial, such as shares and bonds, or intangible, such as intellectual property rights.

But something can only become an asset once it has become property – something that can be alienated, priced, bought and sold. What is considered as property has varied across different jurisdictions and time periods, and is intimately bound up with the evolution of power and class relations.

For example, in 1770 wealth in the southern United States amounted to 600% of national income – more than double the equivalent figure in the northern United States. This stark difference in wealth can summed up by one word: slavery.

For white slave owners in the South, black slaves were physical property – commodities to be owned and traded. And just like any other type of asset, slaves had a market price. As the below chart shows, the appalling scale of slavery meant that enslaved people were the largest source of private wealth in the southern United States in 1770.

When the United States finally abolished slavery in 1865, people who had formerly been slaves ceased to be counted as private property. As a result, slaveowners lost what had previously been their prized possessions, and overnight over half of the wealth in the southern US essentially vanished. All of a sudden, the southern states were no longer “wealthier” than their northern neighbours.

But did the southern states really become any less wealthy in any meaningful sense? Obviously not – the amount of labour, capital and natural resources remained the same. What changed was the rights of certain individuals to exercise an exclusive claim over these resources.

But the wealth that had been generated by slave labour did not disappear, and it wasn’t only the USA that benefitted from this. Many of Britain’s major cities and ports were built with money that originated in the slave trade. Several major banks, including Barclays and HSBC, can trace their origins to the financing of the slave trade, or the plundering of other countries’ resources. Many of Britain’s great properties, which today make up a significant proportion of household wealth, were built on the back of slave wealth. Even today, many millionaires (including many politicians) can trace some of their wealth to the slave trade.

The lesson here is that aggregate wealth is not simply a reflection of the process of accumulation, as theory tends to imply. It is also a reflection of the boundaries of what can and cannot be alienated, priced, bought and sold, and the power dynamics that underpin them. This is not just a historical matter.

Today some goods and services are provided by private firms on a commodified basis, whereas others are provided socially as a collective good. This can often vary significantly between countries. Where a service is provided by private firms (for example, healthcare in the USA), shareholder claims over profits are reflected in the firm’s value – and these claims can be bought and sold, for example on the stock market. These claims are also recorded as financial wealth in the national accounts.

However, where a service is provided socially as a collective good (such as the NHS in the UK), there are no claims over profits to be owned and traded among investors. Instead, the claims over these sectors are socialised. Profits are foregone in favour of free, universal access. Because these benefits are non-monetary and accrue to everyone, they are not reflected in any asset prices and are not recorded as “wealth” in the national accounts.

A similar effect is observed with pension provision: while private pensions (funded through capital markets) are included as a component of financial wealth in the OECD’s figures, public pensions (funded from general taxation) are excluded. As a result, a country that provides generous universal public pensions will look less wealthy than a country that rely solely on private pensions, all else being equal. The way that we measure national wealth is therefore skewed towards commodification and privatisation, and against socialisation and universal provision.

Capital gains, labour losses

The amount of wealth does not just depend on the number of assets that are accumulated – it also depends on the value of these assets. The value of assets can go up and down over time, otherwise known as capital gains and losses. The price of an asset such as a share in a company or a physical property reflects the discounted value of the expected future returns. If the expected future return on an asset is high, then it will trade at a higher price today. If the expected future return on an asset falls for whatever reason, then its price will also fall.

Marginal productivity theory states that each factor of production will be rewarded in line with its true contribution to production. But although presented as an objective theory of distribution, marginal productivity theory has a strong normative element. It says nothing about the rules and laws that govern the ownership and use of the factors of production, which are essentially political variables. For example, rules that favour capitalists and landlords over workers and tenants, such as repressive trade union legislation and weak tenants’ rights, increase returns on capital and land. All else being equal, this will translate into higher stock and property prices, which will increased measured wealth. In contrast, rules that favour workers and tenants, such as minimum wage laws and rent controls, reduce returns on capital and land. This in turn will translate into lower stock and property prices, and lower paper wealth.

Importantly, in both scenarios the productive capacity of the economy is unchanged. The fact that wealth would be higher in the former case, and lower in the latter case, is a result of an asymmetry between how the claims of capitalists and landlords are recorded, and how the claims of workers and tenants are recorded. While future returns to capital and land get capitalised into stock and property prices, future returns to labour – wages – do not get capitalised into asset prices. This is because unlike physical and financial assets, people do not have an “asset price”. They cannot become property. As a result, it is possible for measured wealth to increase simply because the balance of power shifts in favour of capitalists and landowners, allowing them to claim a larger slice of the pie at the expense of workers and tenants.

To the early classical economists, this kind of wealth – attained by simply extracting value created by others ­­– was deemed to be unearned, and referred to it as ‘economic rent’. However, ever since neoclassical economics replaced classical economics as the dominant school of thinking in the late 19^th century, economic rent has been increasingly marginalised from economic discourse. To the extent that it is acknowledged, it is usually viewed as being peripheral to the story of wealth accumulation, resulting from  ‘market frictions’, such as monopsony and asymmetric information, which give rise to certain instances of ‘market power’. For the most part, economists have tended to focus on the acts of saving and investment which drive the real production process. But on closer inspection, it is clear that economic rent is far from peripheral. Indeed, in many countries it has been the main story of changing wealth patterns.

To see why, let’s return to the OECD wealth statistics. Recall that net wealth per household in Britain is more than double what it is in Germany, even though Germany is far more productive than the UK. This can partly be explained by comparing the power dynamics associated with each factor of production.

Let’s start with land: Germany has among the strongest tenant protection laws in Europe, and many German cities also impose rent controls. This, along with a banking sector that favours real economy lending over property lending, means that Germany has not experienced the rampant house price inflation that the UK has. Remarkably, the house price-to-income ratio is lower in Germany today than it was in 1995, while in the UK it has nearly tripled over the same time period. The fact that houses are not lucrative financial assets, and renting is more secure and affordable, means that the majority of people choose to rent rather than own a home in Germany – and therefore do not own any property wealth.

In Britain, the story couldn’t be more different. Over the past five decades Britain has become a property owners’ paradise, as successive governments have sought to encourage people onto the property ladder. Taxes on land and property have been removed, and subsidies for homeownership introduced. The deregulation of the mortgage credit market in the 1980s meant that banks quickly became hooked on mortgage lending – unleashing a flood of new credit into the housing market. Rent controls were abolished, and the private rental market was deregulated. Today tenant protection is weaker than almost anywhere else in Europe. Meanwhile, the London property market has served as a laundromat for the world’s dirty money. As Donald Toon, head of the National Crime Agency, has described: “Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK”.

The result has been an unprecedented house price boom. Since 1995, skyrocketing house prices have increased value of Britain’s housing stock by over £5 trillion – accounting for three quarters of all household wealth accumulated over the same period. While this has been great news for property owners, it has been disastrous for tenants. As I’ve written elsewhere, the driving force behind rising house prices has been rapidly escalating land prices, and we have known since the days of Adam Smith and David Ricardo that land is not a source of wealth, but of economic rent. The trillions of pounds of wealth amassed through the British housing market has mostly been gained at the expense of current and future generations who don’t own property, who will see more of their incomes eaten up by higher rents and larger mortgage payments.

So while German property owners have not benefited from skyrocketing house prices in the way that they have in Britain, the flipside is that German renters only spend 25% of their incomes on rent on average, while British renters spend 40%. The former is captured in the OECD’s measure of wealth, while the discounted value of the latter is not.

Now let’s look at capital. In the UK and the US, the goal of the firm has traditionally been to maximise shareholder value. In Germany however, firms are generally expected to have regard for a wider range of stakeholders, including workers. This has led to a different culture of corporate governance, and different power dynamics between capital and labour.

Large companies in Germany must have worker representatives of boards (referred to as ‘codetermination’), and they are also required to allow ‘works councils’ to represent workers in day-to-day disputes over pay and conditions. The evidence indicates that this system has led to higher wages, less short-termism, greater productivity, even higher levels of income equality. The quid pro quo is that it also tends to result in lower capital returns for shareholders, as workers are able to claim more of the surplus. This in turn means that German firms tend to be valued less than their British counterparts on the stock market, which contributes to lower levels of financial wealth.

None of this means that Germany is poorer than Britain. Instead, it just reflects the fact that German capitalists and landowners have less bargaining power than they do in the UK, while workers and tenants have more power. While lower shareholder returns and house prices are reflected in the OECD’s measure of wealth, better pay and conditions and lower rents are not.

Conclusion

All statistics tell a story, but stories can be told from different perspectives. Embedded in the definitions of all economic statistics are value judgements about what is desirable and what is undesirable, which in turn shape the way we think about the economy. At the moment, the way we measure the wealth of nations mainly reflects the fortunes of capitalists and landowners rather than workers and tenants. Britain looks wealthier than Germany on paper, but this does not reflect the lived reality for most people. While it’s important not to overstate the extent to which statistics can influence the real world, this is important for at least three reasons.

Firstly, it illustrates how seemingly objective metrics often have ideological assumptions baked into them. While there is already a well-established literature on alternatives to GDP, many economic metrics are used in economic analysis and policy appraisal without any critical appraisal of their underlying ideological assumptions. This needs to change.

Second, it highlights how paper wealth has in many places become decoupled from productive capacity, and how conflating the two can be highly misleading. This is particularly the case where zero sum rentier activity is widespread, as in the case of Britain. Such discrepancies raise the question of whether the way that we currently measure wealth is really the most sensible.

But most importantly, it illustrates that the distribution of wealth has little to do with contribution or productivity, and everything to do with politics and power. As J.W. Mason states: “It’s bargaining power, it’s politics, all the way down.”

For economists who see their discipline as a ‘value free’ science which is separate from politics, this is uncomfortable territory. But if the aim is to understand the economy as it really exists, then analysing power beyond the narrow concept of ‘market power’ is essential. Among other things, this means grappling with the power dynamics that underpin ownership and property relations, as well as those that that drive inequalities between different social groups and identities.

It’s been 200 years since David Ricardo described the “principal problem” of political economy. Perhaps it’s time to revisit it.

The post Why the distribution of wealth has more to do with power than productivity appeared first on New thinking for the British economy.

Britain’s economic model is broken and needs to be radically overhauled. In 2018, this is not a controversial statement. But when the messenger is one of the UK’s most influential think tanks, backed up by voices as diverse as the Archbishop of Canterbury, the Global Managing Partner of McKinsey and Company, and the General Secretary of the Trades Union Congress, it certainly means something.

Today the Institute for Public Policy Research (IPPR) published the final report of its Commission on Economic Justice (CEJ) – Prosperity and Justice: A Plan for the New Economy. The report is the product of a two year long work programme, led by Director Michael Jacobs and supported by a crack team of policy wonks: Mathew Lawrence, Grace Blakely, Laurie Laybourn Langton, Catherine Colebrook, Carys Roberts, Lesley Rankin and Alfie Stirling.

Throwing their weight behind the report are 21 Commissioners from the world of business, policy and academia. Although it is made clear that the Commissioners do not support every single recommendation, the fact that they all support the “broad thrust” of the report is significant.

Prosperity and Justice begins with an astute diagnosis of where contemporary British capitalism has gone wrong, building on the findings of the interim report published a year ago: an over-reliance on household debt and rising property prices; a large current account deficit; stagnant productivity and low wages; a financial sector that serves itself rather the real economy; a corporate sector plagued by short-termism; and a highly unequal distribution of income and wealth. This economic model is broken, and as with previous episodes of socio-economic breakdown, it must be replaced.

The report structures its key recommendations for a “new economic settlement” around ten policy areas. Among these are new mechanisms to raise the level of public investment (including reference to my own work on state investment banks with Professor Mariana Mazzucato, who was one of the Commissioners), a new industrial strategy, stronger collective bargaining powers, higher minimum wages, worker representation on company boards, greater control over the financial system, and a more progressive tax system.

But much to its credit, Prosperity and Justice goes beyond reheated social democracy. It offers fresh thinking on a range of policy areas, much of which stems from the consistently excellent output from the CEJ team over the past two years (work which we have featured regularly on this site). Proposals such as commencing a process of ‘managed automation’ to accelerate the diffusion of productivity enhancing technologies across the economy; a new ‘Office of Digital Platforms’ to regulate the major digital platforms like public utilities; and the creation of a ‘digital commons’ to organise and curate public data, show an acute understanding of the forces shaping our future.

Perhaps most significantly, Prosperity and Justice has put the issue of ownership back into the limelight. New models of ownership are central to the report’s overarching goal of rebalancing inequalities of power and reward. A new Citizens’ wealth fund would transform private and corporate wealth into shared public wealth and pay a ‘universal minimum inheritance’ of £10,000 to all 25-year-olds, while new legal and tax incentives would encourage employee ownership trusts and co-operative and mutual businesses. Taken together, these proposals represent a significant step towards democratising the ownership of capital – a radical ambition from what was once described as “Tony Blair’s favourite think tank”.

Last but not least, environmental sustainability is treated as a binding constraint, not a vague ambition. A new Sustainable Economy Act would require on government to set environmental limits in law, and to produce economy-wide plans to achieve them.

Prosperity and Justice is not a final blueprint, and neither was it intended to be. There is hardly any mention of welfare policy or trade policy, for example, and in some areas there is scope for bolder thinking. But taken as a whole, the report is an impressive attempt at setting out a credible alternative to the failures of neoliberal capitalism.

For this the IPPR should be commended. At a time of political upheaval and environmental collapse, we need bold and ambitious ideas more than ever. But too many of our think tanks – and most of our media – have failed engage in this debate, or even acknowledge the scale of the challenges we face.

That’s why at openDemocracy, we have been collaborating with the IPPR and others from across civil society to get to grips with the long running economic crisis unfolding in Britain, and promote discussion and debate on alternatives.

Prosperity and Justice has set a high benchmark. The task now is to challenge, critique and expand its offering, and to build the infrastructure that is needed to turn ideas into reality.

The post Prosperity and justice: a new vision for Britain’s economy appeared first on New thinking for the British economy.

The aim of openDemocracy’s ‘New Thinking for the British Economy’ project is to present a debate on how to build a more just, sustainable, and resilient economy. In the project so far we’ve debated policy areas ranging from trade policy and universal basic income, to childcare policy and housing .

But across Britain, hundreds of people are working tirelessly to build a new economy on a daily basis, putting new economic ideas into practice from the ground up. In a new video series, we will be showcasing some of the most exciting initiatives that are already working to replace different aspects of our failing systems with fairer and more resilient alternatives — from housing and finance to food and energy.

This week, Rhea Stevens and Shea Buckland-Jones from the Institute of Welsh Affairs discuss their work creating a practical plan for Wales to move to 100% renewable energy by 2035.

Watch the full video below:

The post Re-energising Wales appeared first on New thinking for the British economy.

The aim of openDemocracy’s ‘New Thinking for the British Economy’ project is to present a debate on how to build a more just, sustainable, and resilient economy. In the project so far we’ve debated policy areas ranging from trade policy and universal basic income, to childcare policy and housing .

But across Britain, hundreds of people are working tirelessly to build a new economy on a daily basis, putting new economic ideas into practice from the ground up. In a new video series, we will be showcasing some of the most exciting initiatives that are already working to replace different aspects of our failing systems with fairer and more resilient alternatives — from housing and finance to food and energy.

This week, Paul Sander Jackson from Wessex Community Assets discusses how Community Land Trusts and other community led asset owning organisations are making communities more sustainable across England. 

Watch the full video below:

The post Community Land Trusts: creating more sustainable communities appeared first on New thinking for the British economy.

Back in February I found myself in the unusual position of being attacked in an editorial published by The Times. In a piece setting out the paper’s position on the land reform agenda in Scotland, I was named and shamed as the author of a “disturbing document” which “blithely ignores the rights of private owners and the laws that protect them”.

The document in question is a discussion paper that was commissioned by the Scottish Land Commission. In the paper (which is available here), I outlined how a broken land market lies at the root of the housing crisis, drawing on a recent book I co-authored on the subject.

The problem with the paper, according to the editorial, is that it “urges the compulsory purchase of land”.

Even if that was the case, it shouldn’t be controversial. In virtually every developed country on earth it is recognised that there are circumstances where individual property rights become secondary to the wider public interest, which is why compulsory purchase powers exist. In Britain these powers emerged in the nineteenth century to prevent individual landowners from blocking the construction of new railways. Without these powers, landowners could hold society to ransom by refusing to sell land for critical infrastructure and development projects.

But that’s not what the paper was about. Instead, the paper proposed reforms to enable what is often referred to as ‘land value capture’. The basic premise of land value capture is that in modern economies, especially in urban environments, the value of a piece of land depends on what can legally be built on it, and the infrastructure and amenities in the surrounding area. The granting of planning permission, or the creation of new transport links or other infrastructure, typically brings about a large increase in the locational value of the land.

The question of who should capture this uplift in land value has been at the centre of land reform debate for centuries. In many countries, the planning system or compulsory purchase laws enable the uplift generated by planning and collective development to be captured by the state – effectively enabling the costs of development to be recouped. This was also historically the case in the UK, and it was this self-financing model that delivered the New Towns.

There is a strong moral case for this: the uplift in the value of land does not reflect the efforts of landowners (who don’t lift a finger), but that of the state and the wider community who grant planning permission and develop the surrounding infrastructure and amenities. It also makes economic sense: there is solid evidence from around the world that capturing land values is an efficient way of funding new housing and infrastructure.

The early classical economists such as Adam Smith and John Stuart Mill objected to the ability of landowners to make windfall gains at the expense of wider society. They considered returns earned from the ownership of land to be unjust and inefficient – referring to these windfalls as ‘economic rent’.

However, under current legislation public authorities across the UK are prevented from adopting this method of land value capture. Legislation introduced in the 1960s, notably the Land Compensation Act of 1961 (1963 in Scotland) reinstated the principle that landowners are entitled to ‘hope value’ on any land compulsorily purchased. In practice, this means that where public authorities wish to purchase land for development, landowners must be compensated not on the basis of what the land is actually worth at the time, but on the basis of what it one day might be worth if it was granted planning permission.

Because the difference between existing use value (i.e. agricultural value) and ‘hope value’ is usually dramatic, these changes significantly increased the cost of land for development, and ended the ability of public authorities to acquire land cheaply for new housing. In other words, the changes meant that the benefits from rising land values would flow to landowners rather than the general public.

Since land acquisition is usually the largest single cost of housebuilding, this system has created a significant obstacle to building genuinely affordable housing. It has also created incentives for speculators to buy land and hold onto it as a financial asset rather than develop it.

In my paper I proposed that the law should be changed so that public authorities, rather than just the landowner, are able to capture some of the uplift in the value of land that results from collective development, unlocking significant funds for development without having to raise taxes. As I’ll return to below, I am far from the first person to propose this.

The mechanism for doing this involves making changes to the Land Compensation Act so that assessments of market value for compensation purposes do not include prospective planning permissions for land acquired for housing and infrastructure. Although this relates to compulsory purchase orders (CPOs), it does necessarily mean that more land will end up being bought compulsorily. Evidence from the UK’s own past, and from other countries, shows that the very existence of strong compulsory purchase powers can be enough to shift the balance of incentives in the operation of the land market. In the knowledge that the land could be purchased by the state at near use value, landowners would be incentivised to sell land for development at a low but fair price. Speculation and land banking would become much less attractive.

But this crucial point was lost on The Times, who presumably saw the words “compulsory purchase” and robotically deployed the usual tropes around state coercion and erosion of property rights which, as I have written about previously, aren’t coherent anyway.

But should we really be surprised by this? After all, the right wing media has consistently resisted the land reform agenda in Scotland – occassionaly resorting to hysterical headlines involving comparisons between the Scottish Government and Robert Mugabe’s Zimbabwe.

But here is the irony: The Times and the rest of the right wing press are now spectacularly out of touch with political reality – not just in Scotland but across the UK. Thanks to years of campaigning by organisations such as Shelter to Civitas, there is now cross-party political consensus on the issue of land value capture. The Conservatives quietly included proposals to reform compensation laws in their 2017 general election manifesto, and Labour recently committed to similar reforms in its new housing green paper. Politics has moved on, but the press is still stuck in the past.

Then last week I came across a new article titled ‘Rewriting a 1960s law would take us past the annual target of new homes — without spending £44bn’. Funnily enough, the article was published in The Times.

The article refers to the “growing consensus” that the land market is “quite literally, the underlying cause of our housing crisis.” It then identifies the legislation that lies at the root of the problem:

“The market takes its cue from the Land Compensation Act 1961: public bodies that force owners to sell land for development must pay prices that assume planning permission would be granted. Yet before 1961, councils had powers to buy at “existing use value”. When Milton Keynes was built, the land was bought at just 1% of the final value of a house at the time.”

The article ends by offering a solution to fix the problem. Referring to a recent study by the Centre for Progressive Policy the article explains that:

“If we fixed the land market, councils could buy plots at low agricultural or industrial values. They could give planning consent, borrow against the higher value to build infrastructure, then sell ready plots to developers, as well as small and self-builders.”

If this sounds familiar, it’s because it’s literally the exact same as what was proposed in my paper, which The Times said “blithely ignores the rights of private owners”. In fact, the author of the study cited in the article is Thomas Aubrey, whose excellent work I also referenced extensively in my paper.

I’m glad that The Times eventually decided to give land value capture a fair hearing within its pages. It’s just a shame they didn’t extent that courtesy to me.

But as the saying goes: first they ignore you, then they laugh at you, then they fight you, then…. Well, we all know what comes next.

The post First they ignore you… How the media is playing catch up on land reform appeared first on New thinking for the British economy.

The aim of openDemocracy’s ‘New Thinking for the British Economy’ project is to present a debate on how to build a more just, sustainable, and resilient economy. In the project so far we’ve debated policy areas ranging from trade policy and universal basic income, to childcare policy and housing .

But across Britain, hundreds of people are working tirelessly to build a new economy on a daily basis, putting new economic ideas into practice from the ground up. In a new video series, we will be showcasing some of the most exciting initiatives that are already working to replace different aspects of our failing systems with fairer and more resilient alternatives — from housing and finance to food and energy.

This week, Tim Crooks from Regen discuss how community energy groups can accelerate the transition to a decarbonised, decentralised and democratic energy system.

Watch the full video below:

The post VIDEO: How to create a democratic energy system appeared first on New thinking for the British economy.

Laurie Macfarlane speaks to Finance Watch about how addressing today’s major challenges such as climate change and inequalities means not only challenging the power of finance, but also tackling the ideology that underpins it.

Watch the full video:

The post VIDEO: Why the power of finance is rooted in ideology appeared first on New thinking for the British economy.

The aim of openDemocracy’s ‘New Thinking for the British Economy’ project is to present a debate on how to build a more just, sustainable, and resilient economy. In the project so far we’ve debated policy areas ranging from trade policy and universal basic income, to childcare policy and housing .

But across Britain, hundreds of people are working tirelessly to build a new economy on a daily basis, putting new economic ideas into practice from the ground up. In a new video series, we will be showcasing some of the most exciting initiatives that are already working to replace different aspects of our failing systems with fairer and more resilient alternatives — from housing and finance to food and energy.

This week, Stewart Lansley, Steve Schifferes and Duncan McCann from City University discuss how citizens’ wealth funds — collectively owned investment vehicles with social aims — could tackle key issues such as poverty, housing, the NHS and social care.

Watch the full video below:

Stewart, Steve and Duncan will be launching their new report on citizens’ wealth funds at an event in central London on 10 May 2018. Tickets and further information are available here. 

The post How citizens’ wealth funds could transform our economy appeared first on New thinking for the British economy.

This week hundreds of activists will gather in Wigan for ‘CTRLshift: An Emergency Summit For Change’ – a three day conference exploring the uncertainties and opportunities of our times, convened by around 20 grassroots, social change organisations.

Kicking off on Tuesday 27 March, the event will bring together activists, organisers, and entrepreneurs to develop a shared agenda to shift power over our democracy, economy and environment, from Westminster and multinational corporations, to people and communities across Britain. By bringing these solutions together and mobilising people for local and regional action, the organisers hope to make ‘taking back control’ a positive reality. As the conference summary explains:

“Our departure from the European Union is a moment of significant disruption and presents us with an unparalleled opportunity to reshape the future. We believe that the best way to effect change is to bring together those working to reform the system with those actively building practical radical alternatives on the ground.”

Over the course of the conference participants will hear from a wide range of organisations and speakers and spend time discussing challenges, examining possible solutions, and exploring opportunities for collaboration. There will also time for socialising, networking and live performances. The overarching goal is to help a more effective movement for positive change to emerge from collective actions.

Partners include Co-ops UK, The Alternative UK, Forum for the Future, People’s Food Policy, Shared Assets, Permaculture Association, Solidarity Economy Association, Social Enterprise UK, The Finance Innovation Lab, Stir Magazine, Totnes Economy Project, Transition Network, Local Futures, Shared Future CIC, Coop Business Consultants, Schumacher Institute, The Low Impact Living Initiative, Real Farming Trust, Red Pepper, Schumacher College and many more.

For more information on the programme, or to find out how to attend, visit the summit website: www.ctrlshiftsummit.org.uk

The post CTRLShift: An emergency summit for change appeared first on New thinking for the British economy.

Roger Bootle is the founder and Managing Director of Capital Economics, and one of the few high profile economists who supported Brexit. His most recent book, ‘The Trouble with Europe’, was published in 2014. 

In the second of a new series of interviews with leading economists, Roger speaks to openDemocracy about the key challenges facing Britain’s economy, and the economic policies needed to overcome them.

The post VIDEO: In conversation with Britain’s leading pro-Brexit economist appeared first on New thinking for the British economy.

The aim of openDemocracy’s ‘New Thinking for the British Economy’ project is to present a debate on how to build a more just, sustainable, and resilient economy. In the project so far we’ve debated policy areas ranging from trade policy and universal basic income, to childcare policy and housing .

But across Britain, hundreds of people are working tirelessly to build a new economy on a daily basis, putting new economic ideas into practice from the ground up. In a new video series, we will be showcasing some of the most exciting initiatives that are already working to replace different aspects of our failing systems with fairer and more resilient alternatives — from housing and finance to food and energy.

This week, Mark Walton from Shared Assets speaks to us about the work the organisation is doing to reclaim land as a common good, and pioneer new models of land management that deliver shared social, economic and environmental benefits.

Watch the full video below:

The post Reclaiming land as a common good appeared first on New thinking for the British economy.

The aim of openDemocracy’s ‘New Thinking for the British Economy’ project is to present a debate on how to build a more just, sustainable, and resilient economy. In the project so far we’ve debated policy areas ranging from trade policy and universal basic income, to childcare policy and housing .

But across Britain, hundreds of people are working tirelessly to build a new economy on a daily basis, putting new economic ideas into practice from the ground up. In a new video series, we will be showcasing some of the most exciting initiatives that are already working to replace different aspects of our failing systems with fairer and more resilient alternatives — from housing and finance to food and energy.

This week, Anna Laycock and Marloes Nicholls from the Finance Innovation Lab speak to us about the work the Lab is doing to incubate the people and ideas that can transform the financial system to make it serve people and planet. Watch the full video below:

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Paul Mason, Dr Faiza Shaheen, Anthony Barnett and Dr Johnna Montgomerie discuss whether radical social democracy offers a way out of the crisis of neoliberalism, and what that means for future economic policy. 

The debate is part of a new series by Paul Mason exploring what radical social democracy means during the next decade. Paul’s first essay in the series can be read here. 

* Dr Faiza Shaheen is Director of the Centre for Labour and Social Studies (CLASS)

* Anthony Barnett is co-founder of openDemocracy and author of The Lure of Greatness. 

* Dr Johnna Montgomerie is Deputy director at the Political Economy Research Centre, Goldsmiths University of London. 

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Public versus private is back. After the liquidation of Carillion, the government’s use of private companies and outsourcing to deliver public services is under close scrutiny. Now the National Audit Office has added to this with a new report which reviews the costs and benefits of the Private Finance Initiative (PFI). The conclusion will come as no surprise to anyone who has ever scrutinised any PFI deals. It finds that PFI projects can be 40% more expensive than doing it directly with public money.

This begs the obvious question: why did we ever enter PFI contracts in the first place? The answer is provided on page 11 of the NAO report: PFI is off-balance sheet for national accounts purposes, which means it “results in lower recorded levels of government debt and public spending in the short term”.

Time and time again, governments and other public bodies have been lured into using PFI, even when it costs taxpayers much more over the longer term. But while part of the reason for the proliferation of PFI undoubtedly stems from political short-termism and an irrational fear of the national debt, there is another culprit which is rarely discussed: Britain’s rather peculiar approach to measuring public finances.

Now be warned: this is not the sexiest topic. But it has had an enormous impact on the way that our economy has been run in recent decades, so try and bear with me.

Whenever the government establishes a new body or privatises or nationalises an existing one, the resultant body must be classified for National Accounts. The Office for National Statistics (ONS) decides the treatment in the National Accounts by applying international accounting standards. If a body is deemed to be controlled by government or a public corporation, then it will be classified as in the public sector. If not, then it will be classified as in the private sector. So far so good.

Once a body has been classified as either public or private sector, the next step is to assess whether it will have an impact on Public Sector Finance statistics and the UK Government’s fiscal targets. Here’s where things get interesting.

In the UK, the main measure of public debt is ‘public sector net debt’, which is defined as public sector financial liabilities (for loans, deposits, currency and debt securities) less liquid assets. According to the ONS definition, the public sector comprises central government, local government and public corporations.

While the UK government targets total debt across the whole public sector, this is not standard practice internationally. Most other countries, including across the EU, monitor and target ‘general government gross debt’, which includes both central and local government but excludes public corporations. There is a logic to this: typically, bodies classified as ‘public corporations’ are operated on a commercial basis at arm’s length from the government. Excluding the liabilities of these companies from measures of government debt and deficits ensures day-to-day running of government is kept separate from commercial, albeit publicly owned, operations.

The difference between these two approaches is particularly significant for countries where public ownership is widespread. Take Germany for example: in 2015 Germany’s general government gross debt stood at 71% of GDP – slightly below the average for EU countries. When the liabilities of public corporations are added (as they are in the UK measure) the total amounts to 181% of GDP – the third highest in the EU. This is largely attributable to the scale of the German public banking sector which includes the KfW at the federal level, the state banks (Landesbanken) and the municipal savings banks (Sparkassen). So much for the fiscally prudent Germans!

While German public banks and utilities can borrow and invest prudently without clouding the debate about day-to-day government spending, British public corporations cannot. In the age of austerity, this self-imposed constraint creates an obvious political bias against public ownership. It’s little wonder we hardly have any public corporations left.

The Green Investment Bank (GIB) is just one example: George Osborne said that it would only be granted borrowing powers when the ratio of public sector net debt to of GDP was falling. Of course, this never happened, so it was swiftly privatised on the basis that it could only access the capital it needed under private ownership. Contrast this with the German KfW, a publicly owned bank which raised €73 billion to invest in the German economy in 2016.

The UK’s approach is entirely voluntary: the inclusion of public corporations in measures of debt and deficit is not imposed on us by Brussels or anyone else. But it’s not an accident. In practice, these rules have served to reinforce an ideology that seeks to shrink the state and hand over our public services and public assets to the market. There will no doubt be many politicians who will be quite happy with the way things are. But for any progressive government,  a logical and straightforward step would be to align the UK’s measurement of debt with the approach used elsewhere and unshackle public corporations from their financial straightjacket.

But that’s not all. A balance sheet has two sides: assets on the one side, and liabilities on the other. But for some reason, when we assess public finances we only seem to focus on the liability side of the balance sheet: the ‘national debt’. But what about our ‘national assets’? Why do we never hear anyone talk about them?

We all know that government borrowing increases the deficit and the national debt. But borrowing is often used to invest in a new asset, for example new housing. Often these assets will generate a future income steam. However, under the current approach these new assets aren’t accounted for anywhere. To the casual observer (and to our less astute politicians) borrowing to invest simply appears to worsen the public finances.

But as any City analyst will tell you, if the return on the asset being invested in is greater than the cost of borrowing then the investment should be made because it is a net positive. So instead of having a debate about whether we can afford to make these investments, we should really be debating whether we can really afford not to.

But when it comes to management of the public finances, these basic accounting principles are overlooked. As Vince Cable, who knows a thing or two about dealing with the Treasury, has explained:

“borrowing to finance investment by a government body may create an asset (machinery, a building) but – bizarre as it may seem – this is not properly accounted for and so the activity is treated as adding to gross and net debt as well as government borrowing. The current enthusiasm for ‘selling the family silver’ has its roots in bizarre Treasury accounting conventions.”

A more rational way to measure public finances would be one which recognises we have national assets as well as national debts, and which differentiates between borrowing for consumption and borrowing to invest in new income generating assets.

From PFI to privatisation, countless daft decisions have been encouraged by our peculiar national accounting rules. These rules defy all economic logic. It’s time to change them.

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If you hoped that 2017 would be the year Britain finally saw its economic fortunes improve, you were soon to be disappointed. Over the past twelve months, Britain’s economic malaise has continued: investment remained the lowest among advanced economies, productivity stagnated yet again, real wages declined even further, and households relied on ever-growing levels of borrowing to maintain living standards. Combined with an intensifying housing crisis, disintegrating public services and looming environmental catastrophe, the picture that emerges is not one of economic recovery – but of deep, existential crisis.

It is within this context that we enter 2018. As if these challenges weren’t enough, this year the UK government also faces the small task of delivering Brexit and navigating a path outside the EU. The magnitude of this task cannot be understated: Brexit entails a once-in-a-generation reshaping of our laws, trading relationships and economic model. The path is fraught with risk and uncertainty, and the decisions made will have major repercussions for decades to come.

Like it or not, 2018 is set to be a year of change. With so much at stake, what are the most important economic issues to mobilise around? Here are five suggestions:

1. A progressive trade policy

Following the passing of the EU Withdrawal Bill in December, attention is now turning to the UK’s future trade relationship with the EU and the rest of the world. This is a critical juncture: trade policy cuts across many aspects of our lives – from how we run public services like the NHS, to how we set food standards. Agreeing trade deals is notoriously difficult, and highly controversial. It’s not at all clear that the UK government is up to the task.

So far the headlines have been dominated by David Davis’s posturing about a prospective UK-EU trade deal. While agreeing a sensible deal with the EU should be the top priority, perhaps a bigger threat comes in the form of Liam Fox’s Trade Bill, which so far has attracted far less attention. Published back in November, the Trade Bill will allow the British government to negotiate new trade deals after Brexit. As Nick Dearden wrote here back in November: 

“If you were worried about US-UK trade deal TTIP, you need to take Liam Fox’s new Trade Bill seriously. If it isn’t amended, we have every reason to fear a ‘TTIP on steroids’ is coming our way. The Trade Bill will allow the British government to negotiate trade deals after Brexit. It is our only chance to make sure that these deals done will be open, democratic and accountable. And we only have a few months to do it.”

In 2017, we got a taste of some of the issues that trade deals can throw up (remember when Liam Fox told us not to be afraid of US chlorinated chicken?) – but as things stand we won’t be told what else might be sacrificed. That’s because, in its current form, the Bill ensures that trade policy will not be subject to any kind of public or democratic oversight. As Dearden continues:

“As things stand, MPs have no right to know what’s going on in these talks – or the talks that Fox hopes will commence with 16 other countries including human-rights bashing Saudi Arabia and Turkey. MPs can’t set any guidelines for Dr Fox. Once he concludes a trade deal with any of these countries, they can’t amend or stop that deal.”

The clock is already ticking. There is an urgent need to build consensus around what a progressive trade deal in the 21^st century looks like, and to ensure that any negotiations are subject to appropriate democratic oversight. Regardless of your political persuasion, we simply cannot afford to leave our future in the hands of someone like Liam Fox.

2. Meaningful financial reform

It’s been a frustrating few years for those of us who have been working to put meaningful financial reform on the agenda. After years of watching the limited reforms introduced after the financial crisis being watered down or rolled back, in December 2015 the Bank of England Governor Mark Carney declared that “the post-crisis period is over”. The message was clear: the financial system had been fixed, lessons had been learned, and it was time to move on.

But this return to “business as usual” was premature. The human and financial costs of the crisis are still being felt across the country, and scarcely anyone believes that the post-crisis reforms went far enough to prevent it from happening again. As I wrote back in August:

“As memories of the crisis fade, it is essential that civil society doesn’t roll over to the demands of bank lobbyists. Many experts outside the industry-regulator nexus warn that financial reforms went nowhere near far enough, and have predicted that another crash could be just around the corner. The Systemic Risk Council, a group of global experts on financial stability, recently warned G20 leaders that the global financial system is vulnerable to another crisis. This time round, they warn, central banks and governments will have far less ammunition available to respond.”

In 2018, many key events of the financial crisis will be marked by their 10 year anniversaries – from the collapse of Lehman Brothers to the bailout of RBS. Various civil society initiatives have already been established to capitalise on the ‘10 years after’ moment and put meaningful financial reform back on the political agenda. These include the ‘10 Years After the Crash’ project by PEP and the RSA, Finance Watch’s ‘Global Change Finance Campaign’ and a major conference being organised by the Transnational Institute.

With the Brexit negotiations heating up, the stakes are even higher. As more banks threaten to shift operations abroad, the government has indicated that it may respond by slashing regulation in a bid to stem the outflow of business. Bank executives and lobbyists are already working hard behind the scenes to turn Brexit to their advantage.

To avoid history repeating itself, there is a vital need to develop a credible and effective counterweight to the lobbying power of the banks, and work to transform our broken financial system to ensure that finance serves society, not the other way around.

3. Action on the housing crisis

In 2017, the Grenfell tragedy brought Britain’s housing crisis into sharp focus. Social housing tenants burned to death due to a lack of basic safety standards, while a few hundred metres away some of the world’s most expensive properties lay empty, acquired only as speculative playthings for the world’s super rich.

Grenfell was only the tip of the iceberg. Britain’s housing crisis is rapidly becoming one of the greatest policy failures in living memory, and the consequences for the economic and social fabric of the country are immense. After Grenfell, people have slowly been beginning to wake up to the scale of the problem. As Christine Berry wrote for us back in June:

“the spotlight is turning onto the human cost of our dysfunctional housing market, and it must be kept firmly on it until we start to turn houses back into homes, rather than simply financial assets to be speculated with.”

I’ve written extensively about how to fix Britain’s broken housing market. But proposing policy solutions is the easy bit. The real challenge is one of political economy: the drive to increase homeownership over the past fifty years has created an electorate where the majority’s personal wealth is tied to the buoyancy of the housing market. Although homeownership has been falling for over a decade, most of the electorate (63% of households) still have a vested interest in seeing housing perform well as a financial asset. Politicians have faced a tension between resolving the problems of supply and affordability for non-homeowners on the one hand, and maintaining the asset wealth of existing homeowners on the other. Time and time again, their actions have prioritised the latter — to the great expense of renters.

But with homeownership rapidly becoming a pipe dream for most young people, and the number of people renting privately skyrocketing, a tipping point has now been reached. A broad coalition comprising those stuck in the private rented sector, social tenants and concerned homeowners would be a powerful voice. If mobilised effectively, 2018 could be the year when Britain’s housing crisis finally starts to be addressed.

4. Breaking with neoliberalism                                

In November, the UK government published its industrial strategy. While the content is far from perfect, its publication marks a historic moment. The fact that a Conservative government has published a document which hails “a belief in a strong and strategic state that intervenes decisively wherever it can make a difference” is hugely symbolic. It represents the end of neoliberal orthodoxy’s role as the dominant intellectual force underpinning UK economic policy, after 40 years in the driving seat.

The rejection of neoliberal orthodoxy by both major UK political parties, combined with the intellectual upheaval underway in the economics profession, means that we are on the cusp of an epochal shift in economic thinking and policy. The question is what comes next.

There is already a broad movement spanning academia and civil society that shares a common diagnosis on the failings of neoliberalism, and a growing convergence on the need for an alternative rooted in inclusivity, sustainability and democracy. As Laurie Laybourn-Langton wrote here back in November:

“This movement is growing and we think it now covers most of the major functions required to shift the paradigm – from academic groups and think tanks, through communications websites and supportive networks, to funders and political figures. Each year, this movement becomes more influential and is full with talent stretching across generations.”

There remains much to be done to bolster the intellectual underpinnings, policy development and communications infrastructure required to make the transition from one political-economic paradigm to another. 2018 should be the year when these efforts shift into the next gear.

But making a definitive break with neoliberalism also hinges on developing a critical mass of political support. As Nick Pearce wrote for us back in November:

“Who will be the political agents of economic transformation, and how can broadly based coalitions that unite the interests of low- and semi-skilled workers with those of middle-class professionals be created? The decline of the industrial working class, the rise of finance and decline of the UK “national” business class in core sectors, the spread of the gig economy and the parallel growth of higher education as a social insurance policy for the middle classes, coupled with the electoral dominance of a socially conservative older population, have all made the task of constructing progressive economic reform coalitions much harder.”

It’s clear that the methods of the past are no longer fit for purpose. New approaches are needed to mobilise political support for economic transformation among an increasingly diverse and splintered electorate. Glimmers of what this might look like came in the form of the ‘Big Organising’ model pioneered by the Bernie Sanders campaign in 2016, which was also used to great effect by Momentum to mobilise young voters in last year’s general election. But Labour’s defeat shows that more still needs to be done to convince voters that change is needed. 2018 provides an opportunity to build on these successes and broaden the base of support for transformative change.

5. Stepping up the fight against climate change

 Given the scale of the above challenges, it’s easy to forget about the greatest challenge of all – the fight against climate change. Despite some positive developments in recent years, the hard truth is that we are still hurtling headfirst towards global climate catastrophe. As my colleague Adam Ramsay wrote for Civil Society Futures in June:

“Civil society organisations have mobilised across the country – and the planet – to demand ambitious action on climate change. And yet new fossil fuel projects continue to attract investment. Communities across the world face ever more extreme weather. The planet continues to warm. While there are many positive things to say, honesty requires acknowledging a simple truth: civil society, as it’s currently structured, has failed to stop climate change. And we’re still failing.”

What to do about this? Jamie Clarke, Executive Director of Climate Outreach, says that the climate movement must learn lessons from past failures, and take a fundamentally new approach:

“We need a mass, society wide, long term, sustained effort to keep the fossil fuels in the ground… And we need to make sure in 10 years’ time the new government doesn’t decide to change the policy. We need to shift the way society thinks about fossil fuels that make them morally, socially, and economically unviable and that’s a balance that our society has very rarely managed to do. The only equivalent is something like banning the slave trade. It took a mass-mobilised group of people, direct action from slaves and those impacted, and a moral shift and understanding that this was abhorrent.”

This means ending the presentation of climate change as an environmental or lifestyle issue, and reinforcing its status as an economic, political and – most critically – a moral issue. On a practical level, it means moving away from campaigning on climate change as a standalone issue and instead assimilating it into all progressive struggles. Working with other stakeholders to place environmental concerns at the heart of the four issues mentioned in this article – trade policy, financial reform, housing policy and replacing neoliberalism – should be a priority for 2018.

***

With so much at stake over the next twelve months, informed public debate is more important than ever. But for the most part the media has failed to engage in these debates, or even acknowledge the scale of the challenges we face. That’s why at openDemocracy we are bringing people together to get to grips with the long-running economic crisis unfolding in Britain, and stimulating a debate about a sensible way forward in 2018. Join the conversation.

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It’s January, which means another winter crisis in the NHS. Last week record numbers of patients were forced to wait in the back of ambulances as hospitals in England struggled to cope with demand for treatment. On Tuesday, NHS England told hospitals to postpone non-urgent operations, leading to tens of thousands of cancellations.

The winter crisis has become an annual affair. So why can’t our health service cope?

The NHS is a complex beast, but as usual it helps to follow the money. There are good reasons why spending on health should be expected to increase over time: an ageing population means that demands on health services rise since older individuals on average consume more, and more expensive, healthcare. Demand will also increase over time as a result of the rising prevalence of some chronic conditions, improvements in access to care, and improvements in technology.

In recent decades spending on the NHS has indeed increased: since 1948, spending has risen by 3.7% each year on average (adjusting for inflation). Spending relative to the size of the economy – the most effective way to evaluate trends in health spending – increased from 4.1% of GDP in 1978/9 to 7.6% in 2009/10.

Since 2010, however, this trend has reversed. As the Kings Fund has reported, we are now experiencing an unprecedented sustained decline in NHS spending as a share of GDP.

More than anything else, the reason the NHS is under so much pressure is that the Government has decided to squeeze resources at a time when demands on the service are increasing. According to the King’s Fund, spending on the NHS must rise to at least £153 billion in 2022/23 to keep pace with demographic change and other increasing cost pressures. On current plans, however, the government will only spend £128 billion.

This funding shortfall is not inevitable: it is a political choice. The now common response that “there’s no magic money tree” is a cynical ploy. It is simply a convenient way to mask an ideological crusade to squeeze public services. For a country like the UK, financing government spending is not a problem. The truth is that the Government has simply decided spend money on other things. Like giving tax breaks to large corporations.

According to the Institute for Fiscal Studies, the Government’s corporation tax cuts since 2010 have reduced tax revenues by at least £16.5 billion a year. Then there’s the cuts to inheritance tax and capital gains tax – both of which will primarily benefit the wealthy – which have reduced revenues by another £1.5 billion.

Claims that “health tourists” are to blame for the crisis are also a myth. The Government’s own figures show that this activity amounts to no more than 0.3% the NHS’s budget.

There are undoubtedly cost efficiencies and service improvements that can be made in the NHS. But let’s be clear: the reason the NHS is in crisis yet again is because the Government has decided to spend money on other things it deems more important.

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In 2013 Thomas Herndon shot to fame when he found major errors in a widely cited academic paper by Carmen Reinhart and Kenneth Rogoff which had been used to justify austerity policies in Europe and North America.

We caught up with Thomas at this year’s Festival for New Economic Thinking to discuss austerity, the financial crisis and the future of economic policy.

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On 12 December 2017, Rethinking Economics and the New Weather Institute published ’33 Theses for an Economics Reformation’ to mark 500 years since the Catholic Reformation. The Theses, which were endorsed by students and economists and nailed to the doors of the London School of Economics, are reproduced below.

The world faces poverty, inequality, ecological crisis and financial instability. We are concerned that economics is doing much less than it could to provide insights that would help solve these problems. This is for three reasons:

• First, within economics, an unhealthy intellectual monopoly has developed. The neoclassical perspective overwhelmingly dominates teaching, research, advice to policy, and public debate. Many other perspectives that could provide valuable insights are marginalised and excluded. This is not about one theory being better than another, but the notion that scientific advance only moves ahead with a debate. Within economics, this debate has died.
• Second, while neoclassical economics made a contribution historically and is still useful, there is ample opportunity for improvement, debate and learning from other disciplines and perspectives.
• Third, mainstream economics appears to have become incapable of self-correction, developing more as a faith than as a science. Too often, when theories and evidence have come into conflict, it is the theories that have been upheld and the evidence that has been discarded.

We propose these Theses as a challenge to the unhealthy intellectual monopoly of mainstream economics. These are examples – of the flaws in mainstream theories, of the insights that alternative perspectives have to offer, and of the ways in which a more pluralist approach can help economics to become both more effective and more democratic. This is an assertion that a better economics is possible, and an invitation to debate.

THE PURPOSE OF THE ECONOMY

1. The purpose of the economy is for society to decide. No economic goal can be separated from politics. Indicators of success represent political choices.

2. The distribution of wealth and income are fundamental to economic reality and should be so in economic theory.

3. Economics is not value-free and economists should be transparent about the value judgments they make. This applies especially to those value judgments that may not be visible to the untrained eye.

4. Policy does not ‘level’ the playing field, but tilts it in a direction. We need a more explicit discussion of what sort of economy we want, and how to get there.

THE NATURAL WORLD

5. The nature of the economy is that it is a subset of nature, and of the societies it emerges within. It does not exist as an independent entity. Social institutions and ecological systems are therefore central, not external, to its functioning.

6. The economy cannot survive or thrive without inputs from the natural world, or without the many lifesupporting systems that the natural world provides. It depends upon a continual through-flow of energy and matter, and operates within a delicately balanced biosphere. An economic theory that treats the natural world as external to its model cannot fully understand how the degradation of the natural world may damage its own prospects.

7. Economics must recognise that the availability of non-renewable energy and resources is not infinite, and the use of these stocks to access the energy they contain alters the planet’s aggregate energy balances, creating consequences such as climatic upheaval.

8. Feedbacks between the economy and the ecology cannot be ignored. Ignoring them to date has led to a global economy that already operates well outside the viable thresholds of the ecology that houses it, yet requires further growth to function. But economics must be grounded in the objective constraints of the ecology of the planet.

INSTITUTIONS AND MARKETS

9. All markets are created and shaped by laws, customs and culture, and are influenced by what governments do and by what they do not do.

10. Markets are outcomes of the interactions between different types of public and private organisations (as well as those in the voluntary sector and civil society). More study should be done on how these organisations are actually organised, and how the inter-relationships between them do work and could work.

11. Markets are also more complex and less predictable than may be implied by simple relationships of supply and demand. Economics needs a deeper understanding of how markets behave, and could learn from the science of complex systems, as used in physics, biology, and computing.

12. Institutions shape markets, and influence the behaviour of all economic actors. Economics must therefore consider institutions as a central part of its model.

13. Since different economies have different institutions, a policy that works well in one economy may work badly in another. For this reason among many others, it is unlikely to be helpful to propose a universally applicable set of economic policies based solely on abstract economic theory.

LABOUR AND CAPITAL

14. Wages, profits, and returns on assets can be shown to depend on a wide range of factors, including the relative power of workers, firms, and owners of assets – not merely on their relative contributions to production. Economics needs a broader understanding of these factors so as to better inform choices that affect the share of income received by different groups in society.

THE NATURE OF DECISION-MAKING

15. Error, bias, pattern-recognition, learning, social interaction, and context are all important influences on behaviour that are not recognised in economic theory. Mainstream economics therefore needs a broader understanding of human behaviour, and can learn from sociology, psychology, philosophy, and other schools of thought.

16. People are not perfect, and ‘perfectly rational’ economic decision-making is not possible. Any economic decisions that have something to do with the future involve a degree of unquantifiable uncertainty, and therefore require judgement. Mainstream economic theory and practice must recognise the role of uncertainty.

INEQUALITY

17. In a market economy, people with the same abilities, preferences and endowments do not tend to end up with the same level of wealth, subject only to some random variation. The effects of small differences in luck or circumstances can drive vastly different outcomes for similar people.

18. Markets often show a tendency towards increasing inequality. In turn, unequal societies fare worse across a range of social welfare indicators. Mainstream economic theory could do much better in understanding how and why this happens, and how it may be avoided.

19. The proposition that as a country gets richer, inequality must inevitably rise before it falls, has been shown to be false. Any combination of GDP growth and inequality is possible.

GDP GROWTH, INNOVATION & DEBT

20. Growth is a political, as much as an economic choice. If we choose to pursue ‘growth’, then the questions – ‘growth of what, why, for whom, for how long, and how much is enough?’ – must all be answered either explicitly or implicitly.

21. Innovation is not external to the economy; it is an inherent part of economic activity. Our understanding of GDP growth may be improved if we see innovation as occurring within a constantly-evolving, disequilibrium ecosystem, shaped by the design of markets and by the interactions between all actors within them.

22. Innovation has both a rate and a direction. A discussion of the ‘direction’ of innovation requires an understanding of ‘purpose’ in policy-making.

23. Private debt also profoundly influences the rate at which the economy grows. and yet is excluded from economic theory. The creation of debt adds credit-financed demand, and affects both goods and asset markets. Finance and economics cannot be separated.

MONEY, BANKS AND CRISES

24. The majority of new money circulating in the economy is created by commercial banks, every time they make a new loan.

25. The way in which money is created affects the distribution of wealth within society. Consequently, the method of money creation should be understood to be a political issue, not merely a technical one.

26. Since banks create money and debt, they are important actors in the economy, and should be included within macroeconomic models. Economic models that do not include banks will not be able to predict banking crises.

27. Economics needs a better understanding of how instability and crises can be created internally within markets, rather than treating them as ‘shocks’ that affect markets from the outside.

28. Financialisation has two dimensions: short-termist and speculative finance, and a financialised real economy. The two problems must be studied together.

THE TEACHING OF ECONOMICS

29. A good economics education must offer a plurality of theoretical approaches to its students. This should include not only the history and philosophy of economic thought, but also a wide range of current perspectives – such as institutional, Austrian, Marxian, post-Keynesian, feminist, ecological, and complexity.

30. Economics itself should not be a monopoly. Interdisciplinary courses are key to understanding the economic realities of financial crises, poverty, and climate change. Politics, sociology, psychology, and environmental sciences must thus be integrated into the curriculum, without being treated as inferior additions to existing economic theory.

31. Economics should not be taught as a value-neutral study of models and individuals. Economists need to be well versed in ethics and politics, as well as being able to meaningfully engage with the public.

32. An overwhelming focus on statistics and quantitative models can leave economists blinded to other ways of thinking. Students should be supported in exploring other methodological approaches, including qualitative research, interviewing, fieldwork, and theoretical argumentation.

33. Above all, economics must do more to encourage critical thinking, and not simply reward memorisation of theories and implementation of models. Students must be encouraged to compare, contrast, and combine theories, and critically apply them to in-depth case studies of the real world.

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We caught up with economist and former MP George Kerevan at the Festival for New Economic Thinking to discuss the state of economics and the media in 2017.

Watch the full video:

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openDemocracy economics editor Laurie Macfarlane spoke at this year’s Disruptive Innovation Festival about learning from the financial crisis, and building an economy that is fit for purpose for the 21st century.

Watch the full video:

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We spoke with journalist and author George Monbiot about the task of replacing neoliberalism, reinvigorating democracy and averting climate breakdown. Watch the full video:

George’s new book, ‘Out of the Wreckage: A New Politics for an Age of Crisis’ is out now.

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One of the basic claims of capitalism is that people are rewarded in line with their effort and productivity. Another is that the economy is not a zero sum game. The beauty of a capitalist economy, we are told, is that people who work hard can get rich without making others poorer.

But how does this stack up in modern Britain, the birthplace of capitalism and many of its early theorists? Last week, the Office for National Statistics (ONS) released new data tracking how wealth has evolved over time. On paper, the UK has indeed become much wealthier in recent decades. Net wealth has more than tripled since 1995, increasing by over £7 trillion. This is equivalent to an average increase of nearly £100,000 per person. Impressive stuff. But where has all this wealth come from, and who has it benefitted?

Just over £5 trillion, or three quarters of the total increase, is accounted for by increase in the value of dwellings – another name for the UK housing stock. The Office for National Statistics explains that this is “largely due to increases in house prices rather than a change in the volume of dwellings.” This alone is not particularly surprising. We are forever told about the importance of ‘getting a foot on the property ladder’. The housing market has long been viewed as a perennial source of wealth.

But the price of a property is made up of two distinct components: the price of the building itself, and the price of the land that the structure is built upon. This year the ONS has separated out these two components for the first time, and the results are quite astounding.

In just two decades the market value of land has quadrupled, increasing recorded wealth by over £4 trillion. The driving force behind rising house prices — and the UK’s growing wealth — has been rapidly escalating land prices.

For those who own property, this has provided enormous benefits. According to the Resolution Foundation, homeowners born in the 1940s and 1950s gained an unearned windfall of £80,000 between 1993 and 2014 alone. In the early 2000s, house price growth was so great that 17% of working-age adults earned more from their house than from their job.

Last week The Times reported that during the past three months alone, baby boomers converted £850 million of housing wealth into cash using equity release products – the highest number since records began. A third used the money to buy cars, while more than a quarter used it to fund holidays. Others are choosing to buy more property: the Chartered Institute of Housing has described how the buy-to-let market is being fuelled by older households using their housing wealth to buy more property, renting it out to those who are unable to get a foot on the property ladder. And it is here that we find the dark side of the housing boom.

As house prices have continued to increase and the gap between house prices and earnings has grown larger, the cost of homeownership has become increasingly prohibitive. Whereas in the mid-1990s low and middle income households could afford a first time buyer deposit after saving for around 3 years, today it takes the same households 20 years to save for a deposit. Many have increasingly found themselves with little choice but to rent privately. For those stuck in the private rental market, the proportion of income spent on housing costs has risen from around 10% in 1980 to 36% today. Unlike homeowners, there is no asset wealth to draw on to fund new cars or holidays.

In Britain, we have yet to confront the truth about the trillions of pounds of wealth amassed through the housing market in recent decades: this wealth has come straight out of the pockets of those who don’t own property.

When the value of a house goes up, the total productive capacity of the economy is unchanged because nothing new has been produced: it merely constitutes an increase in the value of the land underneath. We have known since the days of Adam Smith and David Ricardo that land is not a source of wealth but of economic rent — a means of extracting wealth from others. Or as Joseph Stiglitz puts it “getting a larger share of the pie rather than increasing the size of the pie”. The truth is that much of the wealth accumulated in recent decades has been gained at the expense of those who will see more of their incomes eaten up by higher rents and larger mortgage payments. This wealth hasn’t been ‘created’ – it has been stolen from future generations.

House prices are now on average nearly eight times that of incomes, more than double the figure of 20 years ago. It’s unlikely that house prices will be able to outpace incomes at the same rate for the next 20 years. The past few decades have spawned a one-off transfer of wealth that is unlikely to be repeated. While the main beneficiaries of this have been the older generations, eventually this will be passed on to the next generation via inheritance or transfer. Already the ‘Bank of Mum and Dad’ has become the ninth biggest mortgage lender. The ultimate result is not just a growing intergenerational divide, but an entrenched class divide between those who own property (or have a claim to it), and those who do not.

Misleading accounting and irresponsible economics have provided cover for this heist. The government’s national accounts record house price growth as new wealth, ignoring the cost it imposes on others in society – particularly young people and those yet to be born. Economists still hail house price inflation as a sign of economic strength.

The result is a world which is rather different to that described in economics textbooks. Most of today’s ‘wealth’ isn’t the result of entrepreneurialism and hard work – it has been accumulated by being idle and unproductive. Far from the positive sum game capitalism is supposed to be, we have a system where most wealth is gained at the expense of others. As John Stuart Mill wrote back in 1848:

“If some of us grow rich in our sleep, where do we think this wealth is coming from?  It doesn’t materialise out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.”

Britain’s housing crisis is complicated mess. Fixing it requires a long-term plan and a bold new approach to policy. But in the meantime let’s start calling it what it really is: the largest transfer of wealth in living memory.

The post It’s time to call the housing crisis what it really is: the largest transfer of wealth in living memory appeared first on New thinking for the British economy.

openDemocracy partnered with the first ever Festival for New Economic Thinking which took place in Edinburgh on 19-20 Oct 2017. The Festival brought together organisations and individuals from around the world to discuss how to advance economic thought and inspire change.

Economics is at a turning point. Society faces mounting challenges, yet our dominant economic models are out of touch. But around the world, new ideas, approaches, and concepts for building a just, sustainable, and resilient economy are being developed.

At the Festival, we spoke to people about the ideas they have for building a new economy. Check out the highlights:

The post VIDEO: Highlights from the Festival for New Economic Thinking appeared first on New thinking for the British economy.

openDemocracy is delighted to be partnering with the Festival for New Economic Thinking which is taking place on 19-20 Oct 2017 at the Edinburgh Corn Exchange.

Economics is at a turning point. Society faces mounting challenges, yet our dominant economic models are out of touch. But around the world, new ideas, approaches, and concepts are being developed by disparate communities of thoughtful people. The Festival for New Economic Thinking brings together organizations and individuals committed to moving forward economic thought for the future. As we celebrate the nuance and richness of the history of economic thought and the diversity of current economic thinking, the Festival will provide fertile ground for us to inspire economic thinking for tomorrow.

Over the course of the Festival oD will be providing coverage of events and posting interviews with key participants. We will also be sparking a debate on two key themes, both at the Festival and online. These are:

Theme#1: Does economics have a democratic deficit?

Economics affects everyone, but few people feel have any power over the economic decisions that affect their lives. Around the world democracies are often captured by powerful financial interests. Should this be a concern for economists? If so, what alternatives are there to develop more democratic institutions and structures which re-distribute economic power?

Panel session time and date: Thursday 19th October, 16:30 – 18:00, Media stage

Speakers: Laurie Macfarlane (oD), John Christensen (Tax Justice Network), Reema Patel (RSA), Maggie Chapman (Scottish Green Party)

Theme#2: Cutting through the spin: Economics and the media

For most people, politicians and the media are the main sources of information about the economy. But does the way that economic issues are discussed in the media inform people, or alienate them? Do politicians and journalists sometimes reinforce misleading or false narratives about how the economy works? How can journalists and economists work together to improve the quality and accessibility of economic debate?

Panel session time and date: Friday 20th October, 09:30 – 11:00, Media stage

Speakers: Adam Ramsay (oD), Yuan Yang (Financial Times & Rethinking Economics), Antonia Jennings (Ecnmy.org), Izabella Kaminska (Financial Times) & George Kerevan (journalist and former MP)

Check out the full program of workshops, talks and events here.

We hope to see you there!

The post oD partners with the Festival for New Economic Thinking appeared first on New thinking for the British economy.

openDemocracy economics editor Laurie Macfarlane sat down with Real Media to discuss the roots of Britain’s housing crisis, the polarising effect it is having on society, and what can be done to fix it.

Via Real Media

The post Video: Laurie Macfarlane discusses Britain’s housing crisis appeared first on New thinking for the British economy.

The UK, along with many other advanced economies, is facing a major housing affordability crisis. Average house prices are now on average nearly eight times that of incomes across England and Wales, and up to 39 times in parts of central London.

A whole generation finds itself priced out of the market, struggling to make ends meet in the face of eye-watering rents. Over the past 15 years’ levels of home ownership have been falling sharply, particularly among young people. Homelessness is rising fast.

How did we get here? A popular explanation is ‘we’re not building enough homes’. While this is part of the answer, it is far from the whole story. At the root of the problem lies something that has for a long time been overlooked: the role of land in the economy.

But the issue of land goes far beyond the housing shortage. It lies right at the heart of many of the key challenges facing modern economies, from mounting inequality and financial instability, to intergenerational conflict and poor prospects for sustainable development.

To understand land properly, we must take a cross-disciplinary approach – we need a bit of history, a bit of economics and a bit about power and the law.

Theft and freedom: the paradox of property

Land is essential for all activity to take place, and indeed for life itself. Nobody ‘created’ land, it just exists. And we can’t create any more land, even if we wanted to. Land is not simply soil, and its economic uses are not simply agricultural. In economic terms, land is better understood as a set of legal rights over physical space.

Land first began to be treated as tradable, private property in the 16th century, triggering the birth of modern capitalism. But this transformation gave rise to a tension. On the one hand, landed property empowered people by providing physical and economic security, including collateral to leverage credit, which helped drive economic growth and technological advancement. But at the same time, private property in land was inherently exclusionary: by its very nature, granting some people exclusive rights over what was previously a common resource involves taking away the rights of others. Millions of people were driven off the land, often violently. Those who were allowed to stay found themselves having to pay rent to landlords to access what had previously been available for free. Landowners became the gatekeepers to an essential resource, a role which meant they were able to absorb much of the value that was being created in the economy in the form of higher rents.

The introduction of private property therefore brought economic power to some and dispossession to others – a paradox that was perhaps best summed up by the anarchist Pierre-Joseph Proudhon, who said that property was both “theft” and “freedom”.

Fast forward to the 21st century and this paradox is alive and well, it just manifests itself in different way: this time through the housing market.

Land in the Twenty-First Century

Today the value of the UK housing stock stands at £5.5 trillion – around 60% of the entire net wealth of the UK. This has increased from just over £1 trillion only twenty years ago.

As the Office for National Statistics acknowledges, this rapid increase is largely the result of soaring house prices:

“The increase in the value of dwellings was largely due to increases in house prices rather than a change in the volume of dwellings.”

But the price of a property is made up of two distinct components: the price of the building itself, and the price of the land that the structure is built upon. We don’t know the exact breakdown between these two components (bizarrely, there is currently no reliable public dataset on the land market in the UK) but the available data implies that land under homes is currently worth around £3.7 trillion – nearly 70% of the total value of the housing stock. This makes residential land the UK’s most valuable asset, even in today’s high-tech economy.

So why is land so valuable? And why have land values, and thus house prices, increased so much relative to incomes in recent decades?

Land values increase naturally over time as economic growth and a rising population increases demand for a resource that is inherently fixed in supply. Public and private investment in infrastructure and amenities also increases the value of land, making some locations much more valuable than others. For example, new transport links or being in the catchment area of a good school can dramatically increase the market value of nearby land. As a young Winston Churchill said in a famous speech to Parliament in 1909:

“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced.”

There is also good evidence that as economies mature, the demand for land relative to other consumer goods increases. Land is a ‘positional good’, the desire for which is related to one’s social status. In economics jargon, land has a ‘high income-elasticity of demand’ – people will stretch their incomes to consume it. This goes some way to explaining why the rise of information technology and globalisation has not meant ‘the end of distance’ as some predicted, but has driven the economic pre-eminence of a few cities that are best connected to the global economy and offer the best amenities.

But this is only part of the story. The land economy is most decisively shaped by the laws and regulations that govern the ownership, trade and use of land. In other words, the rules of the game matter. But these rules have very little to do with economics, and much more to do with politics and power. They have varied immensely over time reflecting the evolution of power and class relations in society.

From a place to call home, to a financialised asset

After the end of the Second World War, council housing provision, tight mortgage regulation and taxes on property kept supply up and house prices (land prices) under control. The Labour government’s 1947 Town and Country Planning Act 1947 kept land in private hands, but nationalised the right to develop it – meaning that landowners and developers had to apply to their local authority for planning permission to build new property. Strong compulsory purchase powers enabled land to be acquired at low cost for housing development. This system was perhaps most successfully embodied in the New Towns programme which began in 1946.

For each New Town, a public development corporation was established which purchased land compulsorily at agricultural prices, drew up a comprehensive masterplan for the town, and then built the necessary infrastructure using money borrowed from the Treasury. They granted planning permission on the sites they owned and sold them to private house builders, using the uplift in the value of the land to repay the loans. This combination of low-cost land acquisition, strong plan-making and the power to determine planning applications proved to be a powerful means of delivering affordable housing.

But beginning in the 1960s this began to change. Taxes on property were removed, beginning in 1963 when the ‘Schedule A’ income tax, a tax on imputed rental income, was abolished. When capital gains tax was introduced in 1965 an exemption was made for primary residencies. Subsidies for buyers were also introduced: in 1969, the government introduced mortgage interest relief at source (MIRAS) which provided tax relief for interest payments on mortgages. Court judgments on compensation (particularly the Myers case of 1969) reinstated the principle that landowners should be able to claim ‘hope value’ on any land compulsorily purchased. This increased the price of land and ended the ability of public authorities to capture land value uplifts to fund new development – the model which had so successfully been used to build the New Towns.

With the arrival of Margaret Thatcher, the government withdrew from large scale house building, and councils were forced to sell their housing stock through ‘Right to Buy’, and prevented from building more. There was a shift away from supply side subsidies of ‘bricks and mortar’ towards demand-side subsidies of paying housing benefit to boost households’ incomes to enable them to access accommodation. Whereas in 1975 more than 80% of housing subsidies were supply-side subsidies intended to promote the construction of social homes, by 2000 more than 85% of housing subsidies were on the demand side aimed at helping individual tenants pay the required rent. Today the UK government spends an eye watering £25 billion on housing benefit.

Perhaps the most significant changes came with the liberalisation of the mortgage lending market. Before the 1970s, mortgage lending was mostly carried out by building societies. But beginning with the Competition and Credit Control Act of 1971, restrictions on lending were removed, and banks were incentivised to become active players in the mortgage lending market. This unleashed a flood of new mortgage lending into the economy, which increased from 20% of GDP in the early 1980s to over 70% before the financial crisis. An ever increasing supply of credit interacted with a fixed supply of land, fuelling a house price boom. In turn, households were forced to take out ever larger mortgage loans to get on the housing ladder. Thus, a feedback loop emerged between mortgage lending, house prices and ever increasing levels of household debt. The changes in credit supply conditions have been described as the ‘elephant in the room’ when it comes to understanding the behaviour of house prices, land prices and consumption in advanced economies.

The normalisation of double digit house price growth, combined with the expectation that house prices will continually increase, fuelled demand for houses as financial assets. Whereas fifty years ago houses were mostly regarded as simply somewhere to live, today homeownership is viewed as a means of accumulating wealth and long-term security in the face of stagnating wages and dwindling pensions. Although attempts to widen access to the benefits of homeownership succeeded for a while, eventually a tipping point was reached: prices are now so high that a whole generation finds completely itself priced out of the market, and levels of homeownership have been falling for 15 years.

The Great Divide

In recent years there has been a growing public debate about the causes and consequences of the widening gap between rich and poor, and the impact it has on our societies. In his bestseller ‘Capital in the Twenty-First Century’, Thomas Piketty argues that the rising inequality observed in recent decades is explained by a tendency for the rate of return to wealth to exceed the economic growth rate, causing a growing accumulation of wealth among those who already have it (a relationship he describes as r > g in notational form). When the return on wealth significantly exceeds the growth rate of the economy, Piketty states that inherited wealth grows faster than output and income.

Seen in the context of the UK, this explanation would appear to carry some weight. In recent decades growing economic inequality has been accompanied by a rapid increase in the amount of wealth relative to national income (the so-called ‘wealth-to-income’ ratio). Following a significant decline in the first part of the twentieth century, the ratio began to rise the 1950s and saw a marked increase after 1970. The return on wealth has significantly exceeded the growth rate of the economy for many decades now.

However, on closer inspection Piketty’s dataset indicates that much of the increase in the wealth-to-income ratio observed since 1970 is the result of capital gains from housing – or more accurately, from rising land values. Once the effects of housing are removed, the underlying wealth-to-income ratio has actually fallen significantly in the UK since 1970.

The implications of this are vital for understanding the dynamics of growing inequality in recent decades. It means that the increase in the wealth-to-income ratio observed in Piketty’s data, which has underpinned the rise in inequality, has been driven not by skills or technological advancement, but rather by increasing residential land values which have manifested themselves through rising house prices.

Some economists defend rising inequality on the basis that some people getting richer is not a bad thing, so long as nobody else is being made poorer. But in Britain this is not what has been happening, because housing wealth is fundamentally different to other forms of wealth.

When the value of land under a house goes up, the total productive capacity of the economy is unchanged or diminished because nothing new has been produced: it merely constitutes an increase in the price of the asset. For those who own property, rising land prices generate an unearned windfall gain which increases net wealth. This provides immense benefits to homeowners – housing equity can be converted into income via home equity withdrawal, increasing spending power for a new car or holiday, or it can be used to leverage up further, perhaps buying a second-home, or entering the Buy to Let market.

But rising land prices also has a corresponding cost: those who don’t own property see their rents increase, or have to save more for a deposit. This cost is not captured in wealth data such as that compiled by Piketty, because under current national accounting frameworks only the capital gain feeds through to measures of wealth; the present discounted value of the decreased flow of resources to those who don’t own property is not captured.

The reality is that the housing ladder is rather like a zero sum game. Much of the wealth that has been accumulated in recent decades has come at the expense of current and future generations who do not own property, who will see more of their incomes eaten up by higher rents and mortgage payments. The key dividing line running through society today is not wealth accumulation from entrepreneurialism or hard work, but ownership of property and the ability to capture unearned windfalls from rising land values. The paradox of property is back with a vengeance, and it is driving society apart.

As spiralling house prices render homeownership increasingly unaffordable for much of the population, this divide is set to grow larger. In some lucky cases, people will be rescued by Mum and Dad as housing wealth is passed onto some of the next generation via inheritance. Already the ‘Bank of Mum and Dad’ has become the ninth biggest mortgage lender in the UK. But many others will miss out.

Not only is this not particularly fair, it’s also not particularly efficient. Rising land values suck purchasing power and demand out of the economy, reducing spending and investment. The availability of comparatively higher returns from relatively tax free real estate investment crowds out productive investment, both by the banking system itself and non-bank investors. This may help us explain – at least in part – the great ‘productivity puzzle’.

The forgotten factor

The early pioneers of political economy – Adam Smith, David Ricardo and John Stuart Mill –acknowledged that land had unique qualities, distinct from capital and labour. They recognised that land was a free gift of nature, and considered returns earned from the ownership of land to be unearned – referring to these windfalls as ‘economic rent’. They believed that the ability to extract economic rent was so powerful that landowners could effectively absorb much of the value created in an economy. It was feared that this could undermine the political legitimacy of the private property system itself, and so they sought to limit the extent to which landowners could make unearned windfall gains at the expense of the rest of society.

Since then, the concept of economic rent has been expanded to cover any excess returns derived purely from the possession of a scarce or exclusive resource, unrelated to the costs of bringing it into production. Today a good deal of economic regulation exists to limit economic rents that arise from monopoly power, for example in the water, energy and rail sectors, because it is recognised that these rents are both inefficient and unjust. Strangely, however, the original and largest source of economic rent – that arising from land – gets a free ride.

Over the past hundred years land has been increasingly marginalised from economic discourse in the developed-world. Today’s economics textbooks mostly neglect land as a distinct factor of production, instead conflating it with capital in the still dominant ‘two factors of production’ models. Meanwhile, theories of distribution still follow the tenets of ‘marginal productivity theory’ which states that ‘income’ is understood narrowly as a reward for one’s contribution to production, whilst wealth is understood as ‘savings’ from deferred consumption.

Although presented as an objective theory of distribution, marginal productivity theory has a strong normative element. It paints a picture of a world where, so long as there is sufficient competition and ‘free’ markets, all will receive their just reward in relation to their true contribution to society. But marginal productivity says nothing about the rules around the ownership of factors of production – not least land – which are essentially political variables. For economists who see their discipline as a ‘value free’ science which is separate from politics, this is uncomfortable territory. The result is that unearned windfalls resulting from land ownership – the largest source of economic rent – are overlooked.

But these windfalls play an enormous role in a country like Britain, where much of the wealth accumulated in recent decades has come from housing. The classical economists would have viewed this as the accumulation of unearned economic rent; a transfer of wealth from the rest of society towards land and property owners. But in Britain, these windfalls are celebrated — house price inflation is hailed by economists and the media alike as a sign of economic strength. The cost this imposes on the rest of society is ignored. As John Stuart Mill wrote back in 1848:

“If some of us grow rich in our sleep, where do we think this wealth is coming from?  It doesn’t materialize out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.”

Putting land back into economics and policy

How then to deal with these challenges? Firstly, the teaching of economics and related disciplines needs to be reformed to reaffirm the role of land. Practitioners across the field should seek to highlight land’s role as a distinct factor of production separate from capital, and a set of legal rights over the use of economic space. The role of economic rent should be placed squarely into theories of distribution and taxation, and the interaction between the value of land and the macroeconomy must be taken more seriously.

When it comes to policy, there is no quick fix. Because legal frameworks are essential for land to become property at all, any analysis of the land problem that starts from the premise of minimising state involvement cannot succeed. There can never be an entirely free market in landed property. Instead, policymakers need to start getting their hands dirty.

Compulsory purchase laws should be changed to enable public authorities to purchase land at agricultural prices, enabling the planning and development uplift to be captured for public benefit once again. A new National Land Bank should be established and made responsible for developing and leasing land, acquiring idle and vacant land for resale, and developing more New Towns. Planning authorities should be given more resources and stronger powers of plan making or zoning so that planning can be a ‘market maker’ rather than a market stifler.

Housing policy should seek to level the playing field between tenures, in terms of taxation and subsidies, so that people are not incentivised to invest in property over more productive assets. The stock of non-market housing, like social housing and community-led schemes, should be expanded in order to lessen dependence on the volatile market in land and homes. Taxation should be used to capture the unearned windfalls landowners currently pocket at the expense of society at large. This could be achieved by replacing council tax with a tax on the unimproved value of land.

Bold steps should be taken to break the positive feedback cycle between the financial system, land values and the wider economy. This should involve wide ranging changes to the regulation, ownership and structure of the banking sector to direct lending away from property and towards the productive real economy.

The long term-aim must be to return to a society where houses are viewed as somewhere to live, not as vehicles for accumulating wealth. This can’t happen overnight, and it won’t be easy. The task involves taking on the unholy alliance of private developers, banks and – most difficult of all – ordinary homeowners, many of whom now view ever rising house prices as normal and just.

This may seem ambitious. But the alternative is growing polarisation in society, ever increasing levels of household debt and bleak economic prospects. If we are to create a fairer and more sustainable economy, then we must start taking land a lot more seriously.

‘Rethinking the Economics of Land and Housing’ (Zed Books) by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane is available at Zed Books and Amazon.

The post To solve the housing crisis, we need to fix our broken land economy appeared first on New thinking for the British economy.

Ten years ago the French bank BNP Paribas ceased activity in three hedge funds, announcing that it could no longer measure the value of instruments based on US subprime mortgages.

The event is widely regarded as representing the beginning of the global financial crisis, as what had previously been regarded as minor turbulence in the US housing market became something far more serious. Banks stopped lending to each other and the financial system froze, sending shockwaves around the global financial system. The UK, with one of the biggest, most complex, and most interconnected banking systems in the developed world, was uniquely exposed.

A decade on, and the cost of the crisis – both human and financial – cannot be understated. The cost of bailing out the banks peaked at over £1 trillion, while the cost to the economy in terms of loss of income and output has been much greater. According to Andrew Haldane, the Bank of England’s Chief Economist, the cost may be as high as £7.4 trillion – similar in scale to a World War. Since the crisis real wages in Britain have suffered a larger decline than in any other advanced country apart from Greece. Years of austerity has pushed public services towards breaking point, and falling living standards has seen families resort to desperate measures like using food banks. Mark Carney, governor of the Bank of England, recently described the past ten years as the “first lost decade since the 1860s”.

As each ten-year milestone approaches – from the collapse of Lehman Brothers on September 2008 to the G20 London Summit held on 2 April 2009 – much will be written about the role of each of the major culprits: the reckless bankers, the weak regulators, the captured credit rating agencies and the blind economists. But what about civil society? What is there to learn from the experience of the financial crisis, and what does this mean for the future of civil society?

Civil society’s blind spot?

In 1960 UK banking sector assets totalled £8 billion, or 32% of the country’s annual economic output. By 2010 this had increased to £6,240 billion, or 450% of annual economic output. Relative to the size of the national economy, the UK banking system grew to be the largest among advanced economies, with most of the growth coming in the two decades prior to the crisis.

Despite this rapid increase in the size and influence of the banks and other financial institutions, civil society did not pay much attention to their activities. Of course, organisations such as credit unions have played a key role in local communities for many years. But in the run up to the crisis few organisations asked difficult questions about the financial sector as a whole, or asked whether it was serving the long-term interests of society.

Of course, civil society was not alone in failing to see the crisis coming. The vast majority of macroeconomists were caught entirely off guard, as were the regulators whose job it was to prevent such crises from happening. While the economy was hurtling towards catastrophe, central bankers were hailing the arrival of the ‘Great Moderation’ and Gordon Brown had declared the end of ‘boom and bust’.

Nonetheless, one of the roles of civil society is to ask difficult questions and to challenge power. While it would be unfair to pass blame for failing to foresee the crisis, elements within civil society could and should have acted more courageously to challenge the power of the City of London. But too often they found it easier to look the other way.

Too little, too late

Once the crisis hit, civil society organisations scrambled to come to terms with what happened, and what it meant for them. Few organisations were well placed to respond quickly. A longstanding perception that finance was a technocratic field best left to experts had left civil society woefully underequipped to intervene, despite the fact that civil society organisations are perfectly capable of getting their heads round other complex issues. Moreover, civil society’s capacity was reduced just as it was needed most, as funding sources started to dry up amid the economic fallout. Without a coherent analysis of what went wrong and what needed to happen, civil society struggled to make its voice heard in the process of reform that followed.

Despite this, there were a number of positive developments. The crisis triggered an awakening on issues of banking and finance, and gave birth to a dynamic new movement dedicated to the cause of financial reform. New organisations such as Positive Money, the Finance Innovation Lab and Move Your Money were established, and alongside older organisations like the New Economics Foundation set out explain the workings of the financial system and repurpose it for the common good. But despite some heroic efforts, these organisations inevitably faced an uphill struggle against the lobbying might of the sector and the ‘insider’ culture of the regulators.

It is difficult to know exactly how much the sector spends on lobbying, but an investigation by the Independent Bureau of Investigative Journalism revealed that City of London firms provided more than 50% of the Conservative party’s funding in 2010, the year of David Cameron’s general election victory. In 2012, a similar investigation revealed that the British financial services industry spent £92 million in one year lobbying politicians and regulators. Combined with the serial ‘revolving door’ culture between the industry and the regulators, it’s easy to see how civil society’s voice was drowned out.

While the limited reforms did rein in some of the worst excesses, it wasn’t long before intense lobbying from the sector led to them being watered down or rolled back. By 2015 this had paid off, as George Osborne announced a ‘new settlement’ between policymakers and the City and quietly passed a string of concessions to big banks in areas of tax and regulation. Then, in December 2015, Bank of England Governor Mark Carney declared that “the post-crisis period is over”. The message was clear: the financial system had been fixed, lessons had been learned, and it was time to move on. We could return to business as usual.

What next for the future?

As memories of the crisis fade, it is essential that civil society doesn’t roll over to the demands of bank lobbyists. Many experts outside the industry-regulator nexus warn that financial reforms went nowhere near far enough, and have predicted that another crash could be just around the corner. The Systemic Risk Council, a group of global experts on financial stability, recently warned G20 leaders that the global financial system is vulnerable to another crisis. This time round, they warn, central banks and governments will have far less ammunition available to respond. Similar warnings have come from the Bank for International Settlements, which recently said that another global financial crisis could soon hit “with a vengeance”.

Now, with Brexit on the horizon, the risk is even greater. As more banks start to shift operations abroad, the government has indicated that it may respond by slashing regulation in a bid to stem the outflow of business. Media outlets have reported that bank executives and lobbyists are already working hard behind the scenes to turn Brexit to their advantage.

To avoid history repeating itself, there is an urgent need to strengthen civil society’s voice on finance, and develop a credible and effective counterweight to the lobbying power of the banks. We must also work to transform our broken financial system to ensure that finance serves society, not the other way around.

What does this mean in practice? Firstly, it means establishing a credible and well resourced civil society voice on banking and finance. This isn’t a new idea – in 2011 the European Parliament established a new independent NGO called Finance Watch. This organisation receives public funding from the EU, and is tasked with acting as a public interest counterweight to the powerful financial lobby. While Finance Watch’s expert staff are still vastly outnumbered by industry representatives in the corridors of Brussels, the organisation has played a vital role educating lawmakers and the public about the financial system. As Britain starts to plan a future outside of the EU, plugging this gap with a new UK-focused organisation will be vital.

Secondly, civil society must begin the long hard task of transforming our banking sector. The UK has among the most concentrated banking sector in the developed world, and is uniquely dependent on commercial, profit maximising banks. The banking sector channels billions into the economy each year, however most of this flows into property and financial markets, inflating asset prices and destabilising the economy. In other countries, the banking sector plays a more positive role by investing sustainably in local communities, and these banks are often characterised by ‘stakeholder’ ownership and governance. In other words, the mission of the bank is not to maximise profits but to optimise returns to a range of stakeholders, including customers and the broader local economy. Empirical evidence shows that these institutions, such as co-operatives, mutuals and public savings banks, perform much better than their large competitors on measures of financial stability, local economic development, business lending, and financial inclusion.

Learning from best practice around the world, steps should be taken to increase the diversity of the banking sector and create new institutions which serve the interests of businesses and local communities. Initiatives like the Community Savings Banking Association are already doing this from the bottom-up, but much remains to be done before these models can achieve the scale required to make an impact.

But reforming the banking sector is merely the tip of the iceberg. The financial sector’s grip over of our politics and economy did not happen in a vacuum – it is the result of a set of deliberate political choices to rewrite the rules of our economy. The UK’s sprawling financial sector was, and still is, the pinnacle of neoliberalism – the economic system which has allowed privatisation, deregulation, and market logic to penetrate every area of society.

The financial crisis was one product of this system. But challenges such as poverty, inequality, alienation, climate change and homelessness cannot be separated from the economic system which breeds them. To overcome these issues, civil society must go beyond simply ameliorating symptoms, and start tackling root causes. This means challenging the tenets of neoliberalism itself, and working together to build a fairer and more sustainable alternative.

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