the hands of so few?
To answer this question, we first need to distinguish between different types of wealth. For most of history the real wealth was in the land. In ancient civilizations, and much of Europe until quite recently, most land was claimed by the ruler of the state, or the Crown. Under the feudal system, the monarch could grant the rights to parcels of land to his barons, or lords, in return for their military service. The lords, who became tenants-in-chief, could then sub-divide this land among their own favored knights, who could in turn sub-let to other lesser mortals, and so on. In this way, over centuries, the land ended up as estates in the hands of the aristocracy, who either farmed the land themselves or rented it to other farmers, either for money or a share of the crop – as in sharecropping, a form of land tenure common throughout much of the world.
Figure 11
So the old money – the wealth of the old aristocracy of Europe – came from ownership of agricultural land, and also, in the last two centuries, from land that became more valuable as it was gradually absorbed into the growing towns and cities. This wealth passed down the generations, though some of it went to the government as taxes. But although it caused much anger among the ‘proletariat’, or at least among those intellectuals and revolutionaries who took up the cause of the proletariat, the inherited wealth of the aristocracy wasn’t that great compared to the new wealth that came after industrialization; the wealth of the capitalist owners of industry. Even the wealth of the 19th-century industrialists doesn’t look all that significant when compared to recent levels of wealth accumulation, mainly because of inflation; a millionaire of 1850 had the status of a billionaire by today’s standards. And, more to the point, there are far more very wealthy people around now.
Figure 12
Figure 12 shows an estimation of private wealth accumulation over the last century, based on the reports I’ve already mentioned, plus a few other sources as indicated. I’ve also plotted the world population. We can see how wealth has grown much more quickly than population, especially in the last two decades.
We can also see how the value of this accumulating wealth occasionally falls with the fortunes of stock markets and house prices; hence the blips around the times of the 1929 Wall Street crash and the crises of 1997 and 2008. But we also know that no real wealth was actually lost in these crashes; no buildings or gold bars were destroyed, nor bank-vaults full of cash burnt to ashes. The falls were numerical only, in the perceived values of companies and houses, which had been pushed beyond their true value by unrealistic expectations and the eagerness of banks to lend. Even when a bank fails, no real wealth is lost. As with the stock market, some people might lose money, but other people must have gained that money. In the case of company stock, the person who sells a share certificate when the price is high gains, while the buyer, if the price falls, loses.
If you have savings in a bank that fails and you’re told that your money has somehow disappeared, the chances are that it went on a bad loan. But where did that money actually go? What happened to all the money lost in the crash of 2008?
Figures in the ether
Various estimates have been made of the ‘cost’ of the recent financial crisis. The International Monetary Fund (IMF) reckoned in 2009 that $12 trillion had been lost, while in 2012 the US Treasury Department gave a figure of $19 trillion. Either way, it’s a huge amount of money. But what does it really mean? Where did that $19 trillion disappear to? Outer space?
All it really means is that the wealth of the world after the crash was valued at $19 trillion less than it was before the crash. But not one single penny coin was actually lost. All the real wealth – all the actual solid stuff like houses and factories and gold bars and even banknotes – still exists, exactly as it did before the crash. The losses are all a matter of figures in the ether, so, yes, in a way the money did end up in outer space. But, more to the point, it never really existed in the first place.
That $19 trillion was the credit bubble, or at least a part of it. In other words, the global financial system was responsible for creating $19 trillion out of nothing over the previous decade or so. In fact, according to my calculations regarding the difference between GDP figures and the real wealth of the global economy, as shown in my first chart, the credit bubble amounted to considerably more than $19 trillion. At its peak, the GDP figure for the world as a whole was overstating real economic output by over $20 trillion annually, and this situation had been going on for well over a decade, and is still going on now. The credit bubble hasn’t really burst, it just deflated slightly.
I return to this problem in more detail later in the book, because I think this overestimation of real economic activity has serious consequences for us all and is the main reason that parts of the world, especially Europe, will have to adjust to a new economic reality. In these difficult times – times in which the majority of the population in the developed world will continue to experience declining income in real terms (adjusted for inflation) – we need to look again at certain values.
The boom times are over and they won’t be coming back, and the main reason for this is the lack of real jobs, a shortage caused by the increasing productivity of industry, which in turn is linked to the growth of the financial sector, a sector of the economy that has no apparent interest in job creation but a very great interest in debt creation.
There has been a massive fraud committed by the banking sector generally, one in which the wealth that should belong to everyone has been taken by the rich. It wasn’t a planned theft, and no particular person or organization is to blame; it’s just the way things have worked out, a direct result of the free-market capitalist system, an inevitable consequence of the accumulation of ever more wealth in the hands of the few. It can’t go on for much longer.
I don’t mean that in a moral-outrage sense, though obviously I think it’s a bad thing. I believe that there are practical reasons why this situation cannot continue for much longer. The dynamics of the economy have changed greatly over the past few decades, in a way never seen before. The proportion of genuine wealth creation relative to total wealth has been falling. The rise of the banking sector has resulted in the credit bubble, and although this might have deflated slightly during the crash of 2008, as long as central banks keep paying off one type of debt by creating another type of debt, the problem can only get worse.
This transition from an industrial society to a financial society – from one that produces real wealth to one that produces credit – is obviously unsustainable. The free-market capitalist system is rapidly approaching its inherent limits. For the last two centuries, the developed world has thrived on industrial growth but, for the last three decades, that real growth has been increasingly overshadowed by a financial system that depends on the creation of credit for profit, while at the same time relying on real industrial growth to generate enough wealth to pay those debts. We have become dependent on economic growth, but continuous economic growth is impossible.
The creation of artificial wealth is bound to have a significant impact on the economy. By ‘artificial wealth’ I mean the creation of money by banks in the form of credit, as happened in a big way leading up to the 2008 financial crisis, or by governments in the form of ‘quantitative easing’,
