The following is an excerpt from an essay written in 2023 by Tim Thorlby for his Beautiful Enterprise website blog, Insight, and reprinted with his permission. It explains how his home country, the UK, has become a world-leader in "rentier capitalism" over the last 40 years, how this situation is fueling inequality, and why it is urgent that this systemic process of injustice is reversed. Note the striking similarities between what has happened across the Atlantic with our situation here in the US.
Rentier capitalism may sound like an obscure academic idea, but we need to talk about it. It is the reason why oil and gas companies are making historically unprecedented profits, why your water bills are so high, why work doesn’t seem to pay any more, and why a small minority of people seem to be getting richer each year whilst the rest of us are switching off the heating.
It turns out that ‘owning assets’ is more lucrative than ‘working for a living’. Understanding this, the core of rentier capitalism, is the only way we will ever make our economy operate more fairly – for all of us, not just a few. A biblical perspective also provides a clear and urgent route-map out of the mess.
We all need to become economists, even if just for a while.
© Zaraq Iqball and Mykola Lytvynenko via Canva.com
Who is eating all the pie?
In January (2023), whilst the world’s wealthy elite put on their snow shoes at Davos in Switzerland for the World Economic Forum, Oxfam published its annual report on global inequalities. ‘Survival of the Richest’ is an extraordinary read.
It shows how, during the pandemic, the world’s richest 1% continued to enrich themselves faster than the rest of the world. From 2019 to 2021, the top 1% took nearly two-thirds of all of the new wealth created, whilst the poorest got poorer. It means that a small wealthy minority helped themselves to an even bigger slice of the world’s pie.
The UK plays a world-leading role in making this happen. Here, the richest 1% own as much as the bottom 70% of our nation’s population (Our note: the top 1% of Americans own more than the entire middle class). No, it is nothing to be proud of. What is most mind-boggling is that this has been going on for 40 years. Every year, Oxfam releases a report saying much the same thing and….well, not much seems to happen. But this is not inevitable. It is not how it used to be. It is something we have constructed, so it is something we can change.
But first, we must understand the root cause of this problem. And that means we need to meet the Rentier.
Meet the Rentier Capitalist
A blog about rentier capitalism may seem a little niche perhaps, but it is the key reason why a small number of people in the UK have become very wealthy in recent decades and why the rest of us have not. It is impossible to understand the UK's economy without grasping the role of the rentier. It will also be impossible to fix the UK’s enormous disparities of wealth without addressing it.
So, here goes.
Rentier capitalism in a nutshell
It was Professor Thomas Pikkety’s enormous 2014 book ‘Capital in the Twenty-First Century’ which influenced the world’s economists to take a closer look at the role of the rentier capitalist. Don’t worry if you have never read this book, most economists haven’t either, even if it sits on their bookshelves behind them in Zoom calls.
The core argument of Pikkety’s enormous tome is that r > g. Yes, you can drop that one into conversation at your next team meeting; you will sound even smarter than usual. In other words, over the long term (and unless governments act to influence the outcome), the rate of return on capital (‘r’) tends to exceed the rate of economic growth (‘g’), leading inevitably to wealth inequality.
Capital means ‘assets’ – land, buildings, money, investments, etc. – and so the rate of return on capital (‘r’) is the income that asset owners make each year from their assets – the interest, the rent, the dividends. You can earn a lot of money from assets. Economic growth (‘g’) is the overall rate at which the national economy grows each year – the size of the national pie, if you like, and how fast it grows.
Pikkety crunched a lot of historic data over a long time period and observed that, all other things being equal, the owners of capital tend to grow their wealth faster than the surrounding national economy grows overall. This means that as the national pie (“economic growth”) slowly grows each year, the owners of capital take a disproportionately larger slice each year.
At whose expense, you might ask? Who else is eating this pie? Well, the other slice (there are only two pie eaters by the way, so only two slices) is ‘labour’ – i.e. anyone who works for a living earning a wage or salary. So, as the ‘capital’ slice of the national pie grows each year, the ‘labour’ slice gets smaller, and pay stagnates. In other words, all those pay rises each year (in %) add up to a bit less than the income rises (in %) that the asset owners secure each year.
It’s a race that workers in the UK have been losing for 40 years. It’s why most of us are currently experiencing the worst pay squeeze for two centuries, but the FTSE 100 (a British index comparable to the S&P 500) recently hit an historic, record, high (Feb 2023). The fortunes of capital and labour are now on very different trajectories. Hence, r > g. Our economy currently tends to reward capital (asset owners) more than labour (workers).
You are now an economist. Congratulations! And merci beaucoup, Professor Pikkety.
Twas ever thus? No
Is this just how it is, then? No. During the 20th Century, successive UK governments actually did a reasonable job of ensuring a balance of returns between capital and labour – sometimes labour even won out. Which just goes to show that rentier capitalism is not inevitable.
But in the 1980s, this truce was shattered, and capital has been slowly but surely taking more of the national pie again. We have seen both the growth of rentier behaviours and the consequent growth of wealth inequality in the UK over the last 40 years. Today, the rentier is not an individual but a company.
The rise of neoliberal economic policies, pursued by Mrs. Thatcher, created the circumstances for rentierism to thrive, and thrive it has. Enabled by multiple privatisations (expanding the range of assets on offer to the private sector) and by a raft of monetary and fiscal policy changes, rentierism has become a lucrative way of doing business.
So, how does rentier capitalism work?
A rentier is a company earning ‘rental’ income from the “ownership, possession or control of scarce assets under conditions of limited or no competition.”[2] Fundamentally, the business makes most of its money not by doing or making something, but by owning something. Its scope for making significant (and often excessive) returns is enabled by a degree of monopoly in whichever sector it happens to be – limited competition from others. It is sometimes called ‘balance-sheet capitalism’, as its profits come from its assets (recorded on the balance sheet).
Assets can also be more than just land – they could be any assets, licenses, intellectual property rights, exclusive contracts, permits to mine natural resources like oil or gas or web platforms which have value and which have limited competition in their market. Where a company can exploit an asset, with limited competition to stop it raising prices, then you have rentier behaviour – the extraction of income well above anything that could reasonably be understood as ‘earned’ through work.
But does this matter? I think it matters a great deal; let’s look at why.
Why does it matter?
Firstly, just to be clear: enterprise is a wonderful thing. Investment can be a force for good. There is nothing wrong with owning assets and nothing bad about profits, when made honestly.
The issue with rentier capitalism is that assets are not evenly owned, and that within monopoly situations they can be exploited to deliver enormous profits for the owners at the expense of many other people. Rentiers love monopoly situations and endeavour to protect them.
There are four main problems with rentier capitalism:
A position of power is being abused – Rentierism thrives where competition is limited and so is fundamentally an abuse of power; in this case, the power that comes from being the only supplier in a ‘market’.
Excessive profit is not merited – The excessive profits often earned by asset owning rentier companies are not earned by hard work nor derived from great innovation, but are the ‘lucky’ outcome of having an advantageous monopoly position and (usually) few, if any, competitors to keep them on their toes. An element of rentier income and profit may be earned through work, but the rest of it (which can be substantial) is neither earned nor merited but a windfall.
The outcomes are unfair – Rentier capitalism has victims. In the case of the water companies, for example, it is the customers with higher bills to pay and the fish killed in the polluted rivers and the home owners washed out by the floods from old leaking pipes. All while the owners of the company make significant profits.
The playing field is not level to start with – On the day we are born, some of us have the great luck to be born into asset-owning families and some of us do not. Given that assets essentially convey an advantage in the marketplace, it means that the playing field is very uneven indeed. Any approach to economics which does not take into account this Great Unfairness, is implicitly endorsing inherited advantage.
Thomas Pikkety’s book (where we started the blog) highlights how this kind of capitalism drives both income and wealth inequality at a national level. Over time, it enriches a few at the expense of the many; it has an in-built tendency to concentrate wealth in fewer hands. It has big long-term consequences.
A biblical perspective
The core issue with rentier capitalism is the way that assets are owned in a monopoly situation that conveys significant power onto the owners of those assets. Many choose to use this powerful situation to enrich themselves.
The Bible is positive about enterprise, risk taking and investment, even marketplaces. (See a previous blog for more on this). It is a normal and healthy part of a society’s shared life. But the Bible does not accept the abuse of power as a natural, inevitable, and acceptable consequence of how the marketplace operates. It recognises the abuse of power as a problem.
The Old Testament Law sets out practical ways to prevent situations arising where one person has excessive power over another because of their wealth. Repeatedly in Leviticus the people are told ‘do not take advantage of each other’. The marketplace has always generated winners and losers, but this is not to be exploited to the detriment or impoverishment of our neighbours.
Speaking truth to power
Rentier behaviour is only possible in economic sectors where the laws, regulations and taxes enable it. Such spaces of super-profit are enabled by Government, sometimes deliberately, sometimes unwittingly. They are man-made. Which means, of course, that they can be un-made.
At the start of this blog, I referenced the recent Oxfam report on global inequality. Their solution to the problem we have just looked at is to tax the super-rich; a one-off wealth tax followed by higher annual taxes. This kind of wealth redistribution may well be part of the answer but it does not address the underlying problem; those who continue to own lots of assets will continue to earn more income than everyone else.
The question as to who owns and controls major assets needs to be addressed; the truth is that in the UK today we need less monopolies, less oligopolies and more distributed ownership.
What does this mean in practice?
Stronger regulation – There is undoubtedly a case for much more robust regulation of some sectors where competition is limited (e.g. financial services). Some of those big companies need dismantling into smaller enterprises, or regulation needs stronger teeth to bring some competition back into the cosy rentierised sectors.
Rewired taxation – The greater taxation of unearned wealth is also a reasonable response – for example the windfall taxes currently imposed on the oil and gas companies, or a land value gains tax to recoup rises in land values that have not been earned. A wider rethink of what is taxed and what reliefs are offered could go a long way to correcting some of the most damaging rentier behaviours and incentivising the more productive use of capital. This is not necessarily about ‘more taxes’ but about ‘different taxes’.
Wider asset ownership – Who owns the nation’s assets is at the heart of what we have been looking at. Part of the challenge here is to broaden out the ownership of some of these assets – either through creating more private entities (breaking up a monopoly into smaller enterprises) or taking the assets back into public ownership (the water companies being a great example) or perhaps, in some cases, moving assets into community ownership. The broader ownership of assets, closer to the people whose lives they affect, is a crucial part of building a fairer and more hopeful future.
For any free marketeers reading this and feeling a bit agitated, it is worth noting that the result of these changes would, on the whole, be more enterprise, more innovation, and more competition, not less. The wider and more distributed ownership of assets is far more likely to unlock the talents and energy of this nation than their concentration into the sclerotic hands of an unimaginative few.
These are big issues, big ideas and big challenges. We need national vision and leadership to turn the tide in favour of the majority – but it has been done before, and it could be done again.
In the meantime, there is an urgent role for individuals, civic institutions, churches and responsible businesses – as well as aspiring MPs – to grasp the nettle and agitate for change.
If you want to know more, there are a growing number of reports and books to read, as well as various charities researching and campaigning on these kinds of issues – including Common Wealth (campaigning for wider ownership), We Own It (campaigning for public ownership) and the New Economics Foundation (developing initiatives to rewire our economy) amongst many others. I’m not endorsing everything that these charities do, but they are a good start for more information.
Vive la revolution?
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Were you struck by the similarities of what has happened in the UK and the US over the past forty years, the fact that these issues began at the same time, and that these similarities do not seem to be widely known or discussed? I certainly was, even though I had written about one aspect of this state of affairs in an earlier blog.
The fortunes of the few have been allowed to grow quietly and exponentially in both countries, all while most of us went naively about our business, wondering why our dollars/pounds didn't buy as much as they did the year (or decade) before and randomly assigning blame for our circumstances.
Depending on your perspective, Tim's action points above may either strike you as about-time necessary or over-reaching. To those who are skeptical of regulation and taxation, I would like to restate that he is talking specifically about monopolies. I think everyone would agree that regulation of these kinds of assets or businesses, especially when they control necessary products or services, is needed. Reforming this situation is critical and will be addressed again in future blog posts.
If you have comments in response to this thought-provoking article, please share them with us at info@bettercapitalism.org. We look forward to continuing the discussion about better capitalism with you!
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