Since the financial crash of 2008 national and international authorities have implemented a range of reforms aimed at reducing the risks which individual financial firms can take, and the systemic risks which the financial system as a whole poses to the rest of the economy.
But critics of the structure and behaviour of the financial system argue that these reforms do not go far enough. They note that the incentives faced by financial companies and the herd-like behaviour of financial markets tend to drive asset bubbles in an upswing and exacerbate recessionary forces when the economy experiences a downturn. Closer regulation of the shadow banking sector and stronger counter-cyclical measures are required if financial instability is to be reduced.
The financial crises of 2008-12 showed that, while shareholders gain the benefit of financial firm profitability, major losses will be borne by debtors, and by society and taxpayers. A number of reform proposals therefore focus on ensuring that financial firms share the liability for failure.
The financial system connects savers and investors. But recent decades have seen the growth of 'agency capitalism', in which a wide range of financial intermediaries manage investment funds. Reformers seek to ensure that such companies have stronger fiduciary duties to act in the interests of savers.
Deeper financial reform proposals centre on the goal of creating a 'purpose-driven' financial system, designed to serve the rest of the economy rather than itself, and in particular which supports efforts to build a more environmentally sustainable and inclusive economy.
Wealth is far more unevenly distributed than income. In 2016-2018 the wealthiest 12% of households owned half of the UK's wealth, while the least wealthy 30% of households held just 2%. The poorest tenth of the households have negative wealth: that is, their debts exceed their assets. Measured by the Gini coefficient, wealth inequality has increased since 2006-8, with financial and property wealth showing the largest rise.
Pension wealth has become more equal in this period, as automatic pension enrolment has been rolled out. The rise in property values has led to a sharp increase in intergenerational inequality. For the most part, income and wealth are closely linked, with high incomes allowing people to accumulate assets, which have consistently grown faster in value than national income over recent decades. The poorest households most exposed to income shocks often have no savings to fall back on.
One consequence is the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade, and the increasing use of food banks.
The multiple drivers of income and wealth inequality mean that many different kinds of policies and approaches are needed to reduce them. One of the core features of the growth of inequality in most high-income countries since the 1970s is the significant fall in the proportion of national income which has gone to wages and salaries (the 'labour share') and the corresponding rise in the proportion which has gone to the owners of capital assets (such as company shares and land and property). This suggests that policy needs to focus, on the one hand, on raising the productivity of labour and the bargaining power of workers; and on the other on reducing the rate at which assets appreciate in value. Both kinds of approach would reduce the growth of 'market' income and wealth, before tax. Reforms to the tax system and welfare measures can then further reduce inequality.
In recent years the growth of low-paid and insecure jobs has led many to argue that there needs to be a revival of the role of trade unions in the labour market, able to bargain collectively on behalf of workers and employees. There is a strong correlation between the decline of union membership in most high-income countries since the 1970s and the rise of income inequality. Productivity improvement - for example through automation - will enhance wages, but only if the benefits are shared between workers and the owners of the automating technologies and software.
Over recent decades there has been an increasing concentration in the ownership of company shares, and the values of stocks and real estate have grown substantially faster than national income (GDP). Companies have become more 'financialised', using more of their profits for dividends and less for investment, and and banks (particularly in the UK and US) have lent increasing sums for land and property. Various proposals have been made to counter these trends, including stronger financial regulation, higher taxation of financial companies and transactions and new forms of corporate governance. There have also been proposals to widen the ownership of company shares, both to their workers and the population as a whole.
The ownership of UK firms is highly concentrated. Apart from institutional investors such as pension funds, individual share ownership is dominated by the wealthy, many of whom are based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
Over recent years there has been increasing interest in how ownership can be widened. One way is through nationalisation, in which the state would take equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual or collective employee share ownership schemes.
A particular proposal is for democratic ownership funds, in which firms above a particular size would be required to transfer ownership of a percentage of their equity to funds managed by representatives of their workers. This would widen the distribution of profits and, in the process, give workers a say over how the firm is run.
The idea of widening ownership can also be applied to other assets. For example, in online transactions consumers provide large amounts of personal data for free. This data has considerable commercial value to the firms who collect it. Proposals to reform the regulation of digital companies include making ownership of data a common resource of benefit to the community or requiring private companies to make data publicly available.
The ownership of UK firms is highly concentrated. Over the last fifty years there has been a dramatic decline in the proportion of shares held by ordinary individuals. Share ownership is dominated by institutional investors such as pension funds, asset managers (many now operating passive investment funds), and the wealthy, many based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
In recent years there has been increasing interest in how ownership can be widened. One way is through public ownership, in which the state takes equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual employee share ownership schemes, or through collective worker ownership funds which would both widen the distribution of profits and give workers a say in how businesses are run.
Another route increasingly advocated would be through the creation of a national ‘citizen’s wealth fund’, which would build a portfolio of company shares and distribute a dividend to every citizen.
The idea of ‘wellbeing’ is now widely used to characterise the goal of a flourishing economy.
Wellbeing includes income but is not limited to it: it also includes other factors, including the quality of work, physical and mental health and public goods (such as the natural environment and social cohesion) that make up people’s overall quality of life. The general concept of wellbeing includes both individual life satisfaction and the flourishing of society as a whole.
A common focus of those arguing for a ‘wellbeing economy’ is that we need new indicators to measure economic and social progress, in place of growth of GDP (see below). Economic and social policy needs to be designed to achieve wellbeing directly, rather than relying on economic growth.
A number of countries, including Iceland and New Zealand, are using ‘wellbeing budgets’ and new indicators to try and ensure that this is achieved.
The wide disparities in the distribution of wealth have led to an emerging consensus that the way in which wealth is taxed needs to be reformed. While wealth has soared relative to incomes over recent decades, with these gains concentrated very narrowly among high-income households, the tax take from wealth has remained flat.
Property wealth constitutes an important part of this. House prices in the UK have tripled relative to incomes since the 1970s, a key driver of economic inequality. But soaring property values have been left largely untaxed, with a council tax system still based on 1991 property values. Economists point out that land and property taxation is an efficient mechanism since they are fixed and their rise in value often occurs without any work, effort or skill on the homeowners’ part.
Income from wealth , including dividends and capital gains, is currently taxed at lower rates than income from work, one reason why the very wealthy pay a much lower effective average rate of tax on their remuneration. The system of inheritance tax includes a range of reliefs and exemptions, which can allow the wealthiest estates to avoid it: the effective rate of inheritance tax paid on estates valued at over £10 million is half that paid on those with a value of £2-3 million. Tax avoidance schemes also allow the very wealthiest to circumvent tax. Among the wealthiest 0.01% of household, who hold 5% of national wealth, approximately 30-40% of wealth is held offshore.
Proposals for tax reform include equalising the rates of tax on income from wealth and income from work; reforming land and property taxation; reforming inheritance tax; and proposals for annual or one-off taxation of household wealth.
A healthy natural world is a necessary precondition for healthy societies. Hunger cannot be kept at bay without fertile soil, long term economic planning is impossible in a world of persistent catastrophic storms. In many ways, the fundamental benefits of nature to our economies is not included in how markets and governments value economic decision-making.
Natural capital, a concept that underpins the Government’s 25 year plan for the environment, seeks to calculate the value of those bits of nature that are typically seen as being free. The idea is that putting a figure on the value of nature will lead to better decisions by government and in markets. Some reject this idea, questioning how a value can be put on the aesthetic beauty of a river or on the value of the global nitrogen cycle.