There is nothing surer,
The rich get richer and the poor get poorer
– lyrics of Gus Kahn
In those two simple lines, Gus Kahn teaches us more about economics than many an economist's 500-odd page book does. Economists are excellent at summing up what has happened; they are even quite reasonable at telling what is happening; but they are hopeless at telling what is going to happen and, as to what should happen, they are miserably divided – and always wrong. That is because economics is a pseudo-science or, even better, a sham science; in fact there are no true laws in economics apart from the one Gus Kahn espoused.
Thomas Piketty, the famous French economist and certainly one of the very best, often stresses that ß=s/g is a fundamental law of capitalism whereby ß represents the capital to income ratio of a nation and s is that country's rate of savings, whilst g is its rate of growth. He then blows his own law apart by admitting the equation is not applicable in all cases and then only over a limited period of time; his equation is, in fact, a general rule of thumb; and a law, to be a law, has to be applicable in all conditions and over all time.
This is the problem with economics; you can only generalise concerning the average situation.
Piketty's rule of thumb means that a country where savings are high but where growth is slow will amass a large amount of capital wealth in relation to its income. That is why, in the UK, we are witnessing the rich getting richer at quite a rate whilst the poor obey Kahn's Law and become increasingly poorer. This is in part because real incomes today, for the average wage earner, are much the same as they were 40-odd years ago (in relative terms) whereas capital, in all its forms, has continued to grow with the consequence that privately-held wealth is returning to the level it was at the end of the 19th century in comparison to public wealth.
In 1899, private wealth was almost seven times greater than public wealth and, in what was then the wealthiest country in the world – Great Britain – the poor were living in, arguably, the worst slum conditions on the planet and dying young: average life expectancy in the industrial towns of northern England was around 17; the army never lacked recruits because you had good clothing and were regularly fed – and so you lived longer.
The Great War followed by the Wall Street Crash followed by yet another World War all acted to even matters out and private wealth, which had been used up by these events, fell back to around three times public wealth and this held for most of the later 20th century.
Today, private wealth has returned to around 700% of public wealth, although the disparities in society are not as marked as they were 120 years ago largely because of the socialist innovations brought in by the Atlee Government after the Second World War – advances that also helped stabilise the gap between rich and poor. The disparities in society are not as marked largely because of the National Health Service and the Social Security Systems in place today (and the development of the Old Age Pension system in 1925) all of which help support the poorer members of society (not to mention food banks and the growth of other charitable institutions).
A related digression: economics deals too often with average conditions and that, in turn, obfuscates the reality of a situation. Looked on in micro-economic terms therefore, Great Britain was doing very well at the end of the 19th century – but not for those living in the slums of Liverpool, Glasgow or Dublin. Consider averages in this light; Warren Buffett (one of the better multi-billionaires) lands in Prestwick; immediately, on average, everyone in that town is a multi-millionaire; that is why a charity helping the poor might then skip Prestwick on the assumption everyone is well off. Then Warren Buffett leaves and everybody collapses back (on average!) to simply getting by.
Thus to say things like 'the economy is strong' or that 'growth is up' does not necessarily mean as much as it sounds since that only covers the average position. That is why, although the British economy is still one of the world's most powerful, we still need to raise taxes (on those who can most afford it) to support our crumbling infrastructure – notably the National Health Service: and this despite Britain being the third largest world trader in services and finance, the sixth largest exporter and, overall, the fifth largest economy (worth almost £3tr per annum). And the recent budget, although some of its measures are welcome with regard to the infra-structure, will do nothing to solve the underlying problem of wealth inequality.
To put it plainly, the wealth of Britain is too tied to the top 5% of the population – indeed, even with the top 0.1%. The UK is one of the most unequal of the developed countries in terms of wealth distribution – a fact that may have influenced the vote to leave the EU. According to Equity Trust, the poorest in our nation receive less than £10,000 in annual income, whereas the top 1% receive well in excess of £250,000, with the 0.1% enjoying well over £1m annually and some even earning around £50m. Related to this, a recent Oxfam report highlighted the richest 1% (about 634,000 people) having an accumulated wealth 20 times more than the bottom 15 million.
This situation may be acceptable to some – seeing it as simply a fact of life; but it leads to consequences; high crime rates and social unrest being two significant ones; and, not so immediately obvious, is that the economy tends to stagnate in such circumstances which, in turn, tends to push up the value of assets (more people own homes worth £500,000 than ever before). The spate of privatisations carried out by both the Conservative and Labour Governments over the past 30 years or so has played a part in this; selling off at extremely low prices – essentially a gift to those who bought in.
The slow rate of growth also encourages a higher rate of saving – effectively helping to swing the balance between capital and immediate income. Thus, more young adults are now continuing to live at home with their parents as they can afford neither to buy nor to rent. At least 25% of millennials now stay well into the 25 to 35 age range, contrasting with 10% back in the Swinging Sixties.
In fact, this has all reversed the trend to home ownership and more are now renting; in the late 1970s over 70% of homes were owned, whereas today, that number has fallen to a little over 60%: again all a moving of wealth to the rich from the poorer. The irony is that, as the country rated the fifth richest in the world, we should all be enjoying the good life – but Gus Kahn's Law holds and this despite the levelling effect of the coronavirus which has, initially, hit shares hard and damaged what used to be called the 'middle classes' – and no, the really rich were but lightly affected wealth-wise by it all.
So, Kahn we do something about it that is just and fair? Certainly – but more another time.
Bill Paterson is a writer based in Glasgow