Professorial Fellow at SPERI

May 2015

The debate on inequality often highlights the increasing disparity in incomes, but to understand why inequality is so persistent we need to ask why wealth is even more unequally distributed than income.  This requires an examination of structures of ownership, how they reflect concentrations of power, and create economic rents.  Redistribution of income alone will not change patterns of inequality. What is needed is a redistribution of property rights.

In the debate now raging on inequality a great of attention is paid to income inequality, partly because of the way in which the pay of CEOs and bankers in recent decades has soared so spectacularly in relation to their employees.  But to understand why inequality is such a persistent feature of capitalist market economies we also need to focus on ownership and wealth.

The ownership structures of a society express its fundamental power relationships.  One of the basic features of our kind of political economy is that, while everyone is legally entitled to be an owner, in practice the only thing most people reliably own is their capacity to sell their labour.  Most people in capitalist market economies are property-less, because they possess only very limited physical property and financial assets.  Many people have no financial assets at all.  This is of course in sharp contrast to the top 10 per cent who have significant financial assets, whether in the form of ISAs or pension funds, and even more to the top 1 per cent whose share of financial assets and total wealth has been steadily increasing.  As a result, as the Equality Trust shows the distribution of wealth is even more unequal than the distribution of income.  The extent of the inequality has fluctuated in the history of capitalism, but in the last forty years it has been increasing again towards levels last seen when the Titanic sank.  Andrew Sayer estimates in Why We Can’t Afford the Rich that the top 1 per cent now own 14 per cent of all the wealth in the United Kingdom and 35 per cent in the United States.

Concentration of ownership was seen as an evil in the nineteenth century by both radical liberals and socialists.  Tom Paine argued that democracy could not work unless there was a rough equality between citizens, with all citizens owning sufficient property to make them independent of their fellow citizens and the state.  Socialists argued for collective and co-operative forms of ownership in which all citizens would have a sufficient stake to empower them against the landlords and the capitalists who controlled the economy.  In general, the connection between unequal ownership of land and capital and the inequality of income and wealth was widely understood.  Property ownership allowed the extraction of unearned rents, cementing the division of society into rich and poor.  The most hated form of unearned rent was that extracted by the rentiers of the landed aristocracy, who owned so much of the land on which the great industrial cities were built, as well as benefiting from mining royalties and other unearned windfalls.   Yet the profits and dividends extracted by the new class of industrial owners came a close second.

In the last hundred years the political salience of land ownership has lessened, with the decline of landed aristocracies across Europe, while the attention paid to ownership of capital shifted because of the growing divorce between ownership and control with the decline of capitalist owners and the advent of the managerial revolution.  Some argue that ownership is increasingly formal and that power now lies elsewhere, predominantly in the self-perpetuating oligarchies which run the giant transnational companies that dominate the international economy.  It is true that ownership has changed and that it has become much harder to understand the structures of control at the heart of modern capitalism.  But that does not mean it is no longer important.  The emergence of a class of absentee owners who only have a financial interest in the companies in which they hold shares disguises the way in which the other attributes of ownership, in particular the control over the assets themselves, are exercised by executives operating within the legal form of the modern corporation.  This process has also been disguised because of the blurring of the lines between states and big companies.  Both have become dependent upon one another, to the point where, despite some frictions, there is no fundamental conflict of interest between them.  The weakening of trade unions as a countervailing power has further meant that there has been little pressure either through the state or within companies themselves to ensure transparency and accountability in the way in which ownership rights are now exercised.

The consequences are plain.  Corporate managers in big companies and in the banks have used the ownership powers vested in them to extract an ever increasing stream of rents.  Some of this takes the form of increased incomes, but it is also evident in the share options, bonuses and other perks which senior executives receive.  There is no market justification for these rewards.  They reflect the current set of power relationships in our political economy, which ultimately rest on the exclusion of most citizens from significant property ownership. It has been a recurring political ambition of the Conservative party in the UK to establish a property-owning democracy, and the means by which it has sought to bring this about have included at different times tax incentives to home ownership, the sale of council houses and shares in privatised industries at a discount.  But these measures of popular capitalism have failed to stop the inequality of wealth increasing.  The number of individuals owning shares rose sharply in the 1980s, but has since fallen back.  Only 15 per cent of British citizens hold any shares at all.  Yet ownership of shares is the major repository of the wealth of the top 1 per cent.

There will be no lasting change in the drift towards ever greater inequality unless the source of the problem is tackled – namely, the cartel character of ownership at the heart of our political economy, which constantly distorts free markets by encouraging collusion and rent seeking, yet is defended as the embodiment of competition.  This should not surprise us.  The financial markets were celebrated before 1997 as a perfectly formed and infallible mechanism for pricing risk.  The concentration of ownership and the shareholder value model of corporate governance reinforce the privileges of an increasingly closed elite and weaken both social mobility and social cohesion.  Commentators across the political spectrum have become alarmed at these trends, but there are few ideas about what to do to arrest them. Nothing is likely to change unless there is a redistribution of property rights.  This means looking again at stake-holding and the reform of corporate governance, at capital funds for the young financed by inheritance taxes, at employee share ownership and at the accountability and transparency of pension funds.  There are plenty of radical ideas around for a new reformed, civic capitalism.   If we do really want to reduce inequality, translating them into reality is overdue.