14 Nov 2017
Capitalism, but without the Capital
Today's young and old, rich and poor are questioning whether capitalism works due to underinvestment in the UK, poor wages, student debt and low savings. How do we address the capitalism crisis? By making it more inclusive.
What does the fall of the Berlin Wall and China entering the World Trade Organisation have in common? Both signified cosy consensuses that free markets, free trade, light regulation and globalisation was the future.
However, fifteen years later and today’s young and old, rich and poor are now questioning whether capitalism works. Those with a minimal capital stake in the system know it is not working for them.
Global data tells us that capitalism is working well for three out of four groups of people. It has lifted billions of the world’s poorest people out of life-threatening poverty. Low interest rates have delivered for the comparatively wealthy in poor countries (creating a rising middle class). It has enabled Quantitative Easing and asset price inflation, and has worked too well for us, the rich, living and working in rich developed countries.
However, it’s the fourth group that is an ever growing concern: poorer and middle-class people in richer countries. Median salaries have barely risen for twenty years in the US or the UK - an inequality that is set to widen – as the life expectancy of the rich splits from that of the poor.
Poorer people with chronic illnesses in old age are trapped between the struggle to afford expensive care or making do with basic standards.
In the last twenty years businesses large and small have underinvested in infrastructure and housing, as well as in the technology and skills needed to improve productivity and raise real wages. In the UK, teenagers now sadly rank in the mid-twenties globally for maths and science. Our great universities lead the world in research, but we underinvest and sell out too early. Our enthusiastic entrepreneurs are creating companies at an unprecedented rate, but are rarely backed financially and limit their ability to scale up.
Best ever growth phase
This is overlaid by intergenerational unfairness. As opposed to previous generations, today we live in a world of lower real wages for those in their twenties and thirties, student debt, lower household savings rates and later first-time buying of homes. This means that fewer people have capital or a real stake in the capitalist system. This is a puzzle for government, business and society that is in desperate need of solving.
The answer to this crisis of UK capitalism is more, not less, capital.
Conditions for investment have never been so good. The global economy is undergoing its best ever growth phase with fewer countries currently in recession than ever before, and after a decade of historically low interest rates, the world is awash with money – $8 trillion of which, embarrassingly, is earning less than 0%.
Money is still flowing disproportionately into the global stock and bond markets – over $20 trillion in market capitalisation was invested last year – equivalent to ten times the UK’s economic output. More of this money needs to flow to real assets so that it can get to work on improving the broader economy and earn better than 0% for investors through long-term, patient capital, deployed into real assets.
Better capitalism - more responsible and inclusive, with better shareholder stewardship and a more long-term focus – goes hand-in-hand with using more, not less, capital.
At Legal & General, we believe that the UK remains a great place to invest. Our once great cities are stepping up, not just the obvious science and technology powerhouses like Oxford and Cambridge but other research-rich cities like Manchester, Leeds and Newcastle – the latter boasting a growth rate of over 4% and an unemployment rate lower than London. We can invest in affordable housing for young and old. We can invest patient capital in start-ups and scale-ups.
The capitalism debate has high stakes: if we fail to invest in the current conditions, future generations including the young of today will rightly accuse us of squandering a unique opportunity.
It’s time to move on from the debate about markets versus state, or privatisation versus nationalisation, and instead encourage constructive collaboration between businesses that are prepared to invest across the economy, a supportive government and enabling regulators.
We must make capitalism more inclusive and deploy today’s capital effectively. Now is the time to give everyone a stake in its success.
This blog has been written based on an article in The Sunday Telegraph on 12th November 2017.