Economic myth no.1: Who are the wealth creators?

One of the necessary consequences of governments failing to measure up to the current economic crisis – and as yet there is no evidence whatsoever that they plan to do anything the change or manage the system that put us where we are today – is that the old self-congratulatory myths start to resurface. Perhaps the most important of these myths is the fantasy that it is bankers and investors who are the true wealth creators.

Why does this myth matter? Because it is this myth ensures that the rich are also the powerful, through their unchallenged control the commanding heights of the economy. Because it is the myth that they are doing something unique and almost magical that we must not importune them for taxes or justifications of their prestidigitations, lest these magicians, these golden geese, fly away, casting us into helpless penury. It is also this myth that allows them to escape the sort of scrutiny to which every other strategic area of society is rightly subject, such as the social services, manufacturing, the education and health systems, the military and so on. It is this myth that allowed them to reward themselves with a disproportionate share of society’s wealth. It is even more important than the myth of the market because, above all else, the myth of the wealth creators allows those it mythologises to disempower everyone else.

But in reality is quite preposterous to identify wealth creation with a single sector of society. It is a simple tautology that wealth is created every time anyone takes a resource and turns it into something it solves a human problem (from hunger to vanity), that makes the real world materially more efficient or effective, or otherwise makes the world a better place.

A small part of this wealth is economic. But even if one focuses exclusively on goods and services that can be bought and sold, even there it would be preposterous to claim that wealth is created at the top. Every bolt screwed onto a machine, every machine operated to make a useful product, every product used to perform a valuable service, every service performed – they all add value. Nor is simply a question of the direct production of wealth. Every manager with a discretionary budget has the opportunity to create more wealth or less, depending on how they chose to use it.

One feature of modern economies that especially militates against the idea that wealth is created at the top is the progressive professionalization of roles in the economy. An employee is someone you pay so that you can tell them what to do; but a professional is someone you pay so that they will tell you what to do. This is clear enough with doctors, lawyers and so on, but it is equally true of professional staff. And their role in the organisation is specifically to know how to create wealth in their area better than their superiors. So the more the modern economic organisation is staffed by professionals, the less claim those a the top have to be exclusively the wealth creators. On the contrary, they are increasingly only coordinators of those who create the wealth.

Hence the difficulty of maintaining a hierarchical structure in strongly professional organisations – because it is increasingly difficult to maintain the myth that those a the top know best. This leaves senior executives in the contradictory position of wielding the power to hire and fire, to invest and disinvest and generally control the organisation, yet lacking any realistic claim to unique insight, awareness or pre-eminent skill. Rather like the absolute monarchs who created to modern state in the seventeenth and eighteenth centuries, the business hierarchs of modern world have created a massively powerful system – the modern capitalist business – that has less and less time or place for those who were its progenitors.

So what is it that distinguishes the bankers and the financial sector in general? In these terms, not very much. To the extent that they are merely managing budgets, nothing at all. The leverage and reach they exercise may seem vast, but to claim that this means that they create more wealth than others makes no more sense than saying that only the top person in a human pyramid gives it height. It’s rather like a previous era when it was salespeople who were idolised rather than the analysts, the superstar executives, the ‘quants’ and other financial monsters: they too were disproportionately rewarded for selling things other people actually made. Of course, an exceptional individual can make an exceptional difference, but that is true of wealth creation at every level. And it is not as though the evidence actually support the claim that bankers, let alone the financial sector as a whole, actually do create disproportionate wealth.

So what have they been doing for the last couple of decades that explains their fabulous rewards? Haven’t our economies grown exceptionally quickly? Isn’t that to the credit of the financial sector? In the illusory terms of global figures and monetary values, yes to both. But did anyone but themselves enjoy the wealth? No. When in 2008 the banks finally realised how unsure their financial footing was and started to pull the rug from under one another, it turned out that most of the monetary increase in wealth was an illusion. The bubbles had inflated the money but not increased the material wealth society enjoyed. In fact most people are no better off now than before the financial sector was let off the leash. The geese, it turned out, produced eggs of gilded lead, not true gold.

But even that is not the bottom of the barrel. Even if they had been creating exceptional wealth, those at the top of the tree are also the ones who decided on whose behalf wealth is created. This is not after all a completely neutral activity. You can decide how to divide up the surplus. The choice is quite simple: they can allocate the wealth to the shareholders, to the workers, to society (through taxation and true corporate social responsibility) – or to themselves. As ever, those at the top favoured their shareholders. But not as much, it turned out, as they favoured themselves. Despite the longer hours, the heightened insecurity and lower happiness, the average American is no better off than in the 1970s, and much the same is probably true in Britain too. There were no more goods and services, especially not for ordinary people – which is to say, for the vast majority of the real economic wealth creators. So even if they had created great wealth, don’t hold your breath waiting for your share. What you get is a insecurity and relentless pressure.

Finally, the bankers turned out to have produced something that is now busily reducing the total wealth in society. By dislocating the structure of ownership and credit in the economy as a whole, a great deal of its material wealth, its homes and security and comforts, has been debased from wealth to debt, as people of honest working people who thought they had the money to pay for it suddenly don’t. Through no fault of their own, millions are losing their livelihood. Among the very poorest in developing countries, tens of millions have been shoved into absolute poverty. Many will simply die.

But the mythology of wealth creation has already started to revive itself. And why not? For nothing has really changed, except that we now despise the bankers we once admired, and politicians (who have been offered a truly golden opportunity to become popular heroes without a hint of crass populism) are confirming the electorate’s worst suspicions about them.