A year ago tomorrow, we met in this very room to celebrate the 80th birthday of Lord Randolph with
a wonderful colloquium with Johann Habermas and Fritz Stern and many people,
including members of the DA and our family, who we're delighted to see here today,
to celebrate that birthday and to have a very fascinating discussion which you can find recorded in the publication on Liberté, on the table outside.
At the end of that colloquium, Fritz Stern said, This was so interesting.
Why don't you do it again? Why don't you do it every year?
On his birthday, tragically. Ralph Randolph died only a few weeks later, on the 17th of June.
But we thought that we should do it again anyway.
We thought he'd like us to. So we have established at this college a Don Dorf program for the Study of Freedom, which has really three parts.
There is a major research agenda which focus this year, particularly on free speech.
We have a small group of Don Dorf scholars who are selected from among the students
of the college in a competitive process and who do research projects of their own,
as well as working with the program. And we have this annual lecture.
The program is generously supported by the Aurora Foundation from Canada, the Ford Foundation from Norway, and the Site Foundation from Hamburg,
a foundation with which Ralston Dorf was very closely associated for many, many years, as has been this college.
And we're delighted to have with us Professor Michael Gehring,
the chairman of the executive board of the Tiger Foundation, who will say just a few words before we move to the lecture.
Professor Garrett, Professor Garton Ash, ladies and gentlemen,
it's a great privilege for me and for the side of doom to welcome you this afternoon for the first half down of Memorial Lecture at St Anthony's.
As Timothy just said, drive down. Rob has been very close with this site and the site foundation.
Personal friendships with Mario and Dino, with the former chief editor to Zuma and also with the publisher Get Materials
himself made him a critical observer of and an important adviser to the paper and,
of course, an eminent author for this site, whose articles in this side always found a very big audience in 1997, 1998, and beginning of 1999,
once Donald wrote the biography of our founder Get Good, Serious, this made him spend many, many weeks with us in our archive.
Those two years were also the formative years of the Site Foundation shortly after our founders death,
and I personally owe a lot to our founder as we had many talks while he was with us in the archive.
Many projects I discussed with him well before they became projects and he shaped many of them.
He was a member of the founding board of the Good Serious Law School.
One of the biggest things that the good Serious Foundation has started so far, and I must say I do miss him.
I miss these talks over some cups of coffee and I miss his invitations to the House of Lords where we sometimes met and had lunch together.
Not that I miss the luncheons too much,
but I knew that Lord down North always enjoyed showing the splendour and tradition of the Upper House to friends from Germany,
and I miss the exchange of ideas. If he were still around and we could meet at night to discuss the growing problem of social inequality with him,
the Federal Republic has always been so proud of its rather tight social cohesion.
Today, however, the growing concern about the split of society the greater number of poor people,
the diminishing middle class, the integration of our immigrant population is a major topic for many,
many foundations in my country,
and therefore I look forward very much to today's lecture on wellbeing and inequality in post-industrial societies and on tomorrow's discussion.
I wish us all the most fruitful start into a sunny May a month.
That will always start with Ralph Da Randolph's birthday.
Thank you very much. That has had a remarkable career between business, public life and intellectual life.
He's worked with all four BP, Chase Manhattan, McKinsey's merrill Lynch and Standard Chartered, amongst others, so he knows where off he speaks.
He's been director general of the CBI, chair of the Pensions Commission, chair of the Government Committee on Climate Change, chair of the SCC,
very relevant to this university and became Chair of the Financial Services Authority in
autumn 2008 with perfect timing just to greet the largest financial crisis for 70 years.
He is also a very notable author and lecturer.
He's given a remarkable series of lectures, and he's the author of a very interesting book called Just Capital, published in 2001,
to which Ralph Don Dorf wrote a preface in which Roth called it a highly original
political economy of liberty at a time of global pushes and local pools.
I think we're just about due for a sequel, so maybe we'll have the prequel to the sequel this evening.
We're equally fortunate in our commentators, both of whom have flown the Atlantic to be with us today.
On my right. Robert Skidelsky. Lord Skidelsky is a master of political economy.
He's taught that subject at Warsaw, at Warwick University.
Warsaw, too. He's taught it, I would say, in the House of Lords and as chair of the Social Market Foundation.
I've been reading him since I was a boy, since I read politicians in the slum in sixth form at school.
His great masterpiece is, of course, his three volume biography of John Maynard Keynes, an absolute masterpiece of its kind.
And I think he probably feels that Keynes has something still to say to us about the state of capitalism today.
And finally, our own Paul Collier of this college and the world, one of this country's and the world's leading development economist.
We all knew he was absolutely remarkable.
I think the world found out at the latest with the publication of his book, The Bottom Billion Billion, which became a phenomenon.
He subsequently published a book called Wars, Guns and Votes.
And if you hurry to Blackwell's, you may get his latest book, The Plundered Planet, which is out just after the election and before.
No competition, of course. Before I turn over to Ed, I do have to say one important thing,
which is one or two of you will have noticed that we have an election on what the
chair of the FSA says can possibly occasionally play a role in British politics.
And therefore, I have to say, particularly to all the journalists present, that this meeting is under the Chatham House rule,
which states that you may quote some of the things that have been said, but not attribute them to any identifiable individual.
And I would ask you all to respect that until the 7th of May, when everything may be quoted.
And indeed, this discussion will go up on the Oxford University i-Tunes website.
This does not mean that you have to sing, but we look forward very much to what you have to say.
Please join me in welcoming a dash of. Thank you very much.
And good afternoon, everybody. It really is a huge honour to have been asked to give this first memorial lecture in Ralph's Honour.
I first met Ralph some 15 years ago, and I very soon realised that I had gained not only a good friend, but also a great advisor.
As Tim said, he provided a sparkling preface introduction to my book, Just Capital,
and he also provided detailed responses to many of the lectures or essays which I would send him pre or post publication.
And he always came back with comments. And since we agreed on many issues, his comments were on the whole supportive.
But they were perceptive in their specific criticisms or suggestions of different lines of argument that one ought to look at.
But on one occasion he wrote back and he said, Look, honestly, while appreciating my arguments, he was instinctively unsympathetic to my conclusions.
My article had been entitled Capitalism and the End of History, and in it I argued that Francis Fukuyama's end of history,
which foresees a sort of convergence of all countries to a sort of mixed economy.
Switzerland of perpetual peace was, while certainly not inevitable, that perhaps no other societal end point other than that was likely to be stable.
Growth, however, would have absolutely nothing to do with this attempted compromise with the Fukuyama point of view.
He was he wrote back, and I quote, instinctively suspicious of all end isms.
And indeed he was the suspicion of end isms of any idea that society can ever achieve some
status beyond which there is no social conflict was indeed one of Ralph's enduring themes,
and it is stated clearly in one of his first and most famous books.
Class and Class Conflict in Industrial Society.
In the final paragraph of that book, Ralph argued that, I quote Totalitarian monism is founded on the idea that conflict can and should be eliminated.
In contrast, the pluralism of free societies is based on recognition and acceptance of social conflict.
For freedom in society means above all that we recognise the justice and creativity of diversity, difference and conflict.
Now, half a century has passed, actually 53 years since Ralph wrote those words.
And since then, of course, much has changed Britain certainly, but even to a degree, Germany have become, in some senses, post-industrial societies.
Even in Germany, by the way, only 20% of people actually now get their employment from manufacturing.
And in both countries, there have been transformational increases in the average standard of living.
But the issues of social conflict and social competition still remain.
One of the major parties in Britain's general election next week has said that British society is broken.
And while some them some measures of class differentiation, particularly, I think, in Britain, have become less obvious over the last 50 years,
the sort of class differentiation by by accent, by culture, by what you wear,
actually inequalities of income and growth, quantitative inequalities have grown.
So my aim in this lecture is to explore how growing economic prosperity and inequality relate to one another and to perceived well-being,
and how those relationships change as the structure of economic activity changes.
So while Ralph wrote of Class and class conflict in Industrial Society,
my title for this evening is Wellbeing and Inequality in post-Industrial Society.
Attaining a superior growth rate and thus increasing prosperity was central to political debates in most developed countries in the late 20th century.
Now, of course, other issues such as culture, morals, religion, national identity were not entirely present,
but the issue of which political party would best deliver material prosperity was often a key
electoral battleground in a way which was not true in 19th or early 20th century politics.
The shared assumption across the political spectrum was that economic growth, which you could measure through growth in GDP or per capita GDP,
would feed directly through to rising well-being, welfare, happiness, contentment, whatever word we want to use for that.
And therefore, that delivering that success would deliver political success for whichever party managed to achieve it.
And the debate was essentially about what policies would achieve that end.
The conservative narrative, which was asserted with increasing confidence towards the end of the century,
was that free markets were the best way to deliver prosperity and that significant inequality.
Was acceptable and indeed required.
But it was required because it provided the incentives to entrepreneurs, to executives and to ordinary workers through low taxation,
which would ensure innovation, competitive success in global markets, high productivity growth, and thus rising prosperity.
So unlike in the 19th century, when conservatives defended inequality and property rights as elements of some sort of natural order,
conservative parties have tended to advance an instrumental justification of both markets and inequality.
Flexible markets and low taxes on the rich are good for you because they will help in some indirect sense, make you the average voter richer.
So parties of the right have tended to be defined less by the classic parameters of conservatism.
Nations, social order, religion, received morals and culture, and have become instead parties of a liberal economic ideology.
What is left in turn, have to decide how much of this narrative they accepted and how much was compatible with egalitarian instincts.
Reactions differed by country and between those parties with strong Marxist traditions and those more willing
to accept that the simple amelioration of working class conditions was an acceptable aim of a left wing party.
But the direction of change everywhere was towards at least a partial acceptance.
And in some countries, I would say in particular in Britain, in a full scale embrace of a liberal economic ideology,
the assumption that markets helped create growth in GDP, that growth in GDP meant social well-being and individual welfare,
and that significant inequality was acceptable because but also to the extent that it helped deliver enterprise competitive success,
productivity growth and rising GDP per capita. Those assumptions became increasingly shared across the political spectrum.
But I think what is interesting is that even as that increasing consensus has grown,
economic and social developments have occurred which tend to undermine the assumptions on which it is based,
and it's on those developments that I would like to focus this evening.
The central fact is illustrated by the next chart, which is taken from Richard Layard book on Happiness,
and it sets out the very simple fact that at the levels of income already attained by rich,
developed countries which are up there in the top right hand side,
there does not appear to be any strongly link or indeed any link at all between
average GDP per capita and people's perception of their average happiness.
Now, of course, one immediately has to understand that there are considerable theoretical and empirical
problems in defining and measuring this thing called well-being or contentment or happiness.
And indeed, there are theoretical problems in deciding whether average happiness should be the overriding aim of society.
Suppose, for instance, that the average citizens of a dictatorial country make themselves very happy by a oppressing a small minority.
In that we face all the complex issues of how you add up different people's happiness,
which the 19th century utilitarians raised but never really worked out how to solve.
But while these pro-black problems certainly make me very wary of the idea that
we can define and then pursue some sort of index of gross national happiness,
I think it's still important to note that a wealth of data suggests that people in rich,
developed countries do not feel on average any more content now than 30 years ago.
And that, as this chart shows, self-reported measures of happiness in different countries tend to suggest that people's sense
of well-being increases as average income per capita rises from very low levels to around,
say, 15 or £20,000 per capita per annum.
But it then caps out. And then that empirical evidence, of course,
might tend to accord with what common sense would tell us that freeing people from hunger, ill health or continuous,
backbreaking work in either the workplace or the domestic environment is likely to make a big difference to people's self-reported happiness,
but that once you have an adequate car, the new car with new styling and better acceleration is not going to transform your long term happiness,
even if it gives you for the few days that you first got it, a sort of temporary buzz,
and that once you've got perfectly pleasant clothes designed at least with some sense of style,
changing them continually to keep up with the latest fashion is going to make less of a difference.
Taking the bottom billion about whom Paul has written from extreme poverty down in
the left hand corner there to the standard of living achieved in Western Europe by,
say, 1970 or. 1980 would clearly be transformative,
taking China's 1.4 billion from $3,000 per day per annum today to say $20,000 per annum will probably
deliver significant increases in something that we can with reasonable certainty label as human well-being.
But it is simply not clear that further increases in the average measured GDP of already rich societies
will make much of a difference to how well-off or content or happy the average citizen will feel.
So why is that? Well, in part, it follows simply from some concept of a hierarchy of human needs and thus of partial satiation of needs.
One winter coat keeps you warm. Two winter coats don't keep you warmer, though they may give you a benefit of variety and style,
but that is a less important in the hierarchy of human needs than just being warm.
And that sensible behavioural assumption, if I can have the next chart,
is of course expressed in the formal economics concept of the diminishing marginal utility function.
Economists have always drawn charts like this which show that as you go up on income on the horizontal axis, something utility,
well-being, happiness, whatever it is, tends to go up, but it tends to go up on a diminishing marginal basis.
And concepts like that are fundamental to the way that economists are able
to manipulate the algebra of these assumptions and end up with some results.
But one that classic concept could help explain a curve of steadily declining increase.
It cannot explain why the curve might actually turn quite flat.
Or indeed, as some evidence suggests, for some societies, we might actually go negative,
but such a flattening might become more understandable once we think about three ways in which the nature of
consumption and its relationship to human well-being is changed by the very fact that we are getting richer.
The first of those factors is that the richer people on average are the more that they
are devoting their income to buying goods because other people have bought their goods,
those goods, in order to prove that they have relative status,
they are buying things in order to feel that they are in with the new fashion and that they have relative status.
Now, that is most obvious, for instance, in relation to fashion clothing.
One of the reasons why people are willing to spend large amounts of money to buy the latest fashions of clothes
is to prove by being wearing them that they are able to afford them that they are as good as the next person.
And that, you may say, is a relatively small part of expenditure.
But actually it turns out that there may be quite some significant chunks of expenditure which are of the form of competing for relative status.
Let me give you one particular fact.
It has been noted that the amount of money that parents spend each Christmas on children has soared over the last 20 years.
And that is partly because children are very, very aware of relative status and they are very,
very concerned to make sure that they have the latest gizmo,
the latest fashion, the shirt, which has David Beckham's name on it, the latest iPod, the latest, whatever it is.
But there's no sign whatsoever that it has made children on average happier.
But a very significant amount of parental income of families is now devoted essentially to keeping up the relative status of each family's children.
The second factor which goes on, however, and I think this is a bigger factor as people get richer,
is that a higher percentage of their income is devoted to competing for the enjoyment of goods and services
which are location specific and that which at least in a densely populated country are an inherited,
inherently limited supply. And therefore, what matters even to enjoying that is not your absolute income, it is your relative income.
In order to be able to stay at the hotel on the beach rather than a hotel half a mile away from the beach.
Your absolute income is irrelevant. All that matters is your relative income relative to everybody else in society.
The same for the hotel on the skiing piece, rather than half a mile away from the skiing piece.
Now, again, you may say, well, that's relatively small, but actually it turns out to be crucially important.
And one of the things that we spend a very large amount of money on,
which is where we live and people spend a very significant amount of their income in competing.
To live in nice places. It's fundamental to your quality of life, whether you live in the part of town which is free of crime or free of graffiti,
which looks nice, which is a pleasant place to to live or not.
And also, you may compete in order to be able to live near your work with a smaller commute.
These things are incredibly important to your standard of living, but your ability to get the nicer product,
the house in the nicer part of town or the house in the unspoilt countryside or the house which is in the more pleasantly aesthetic part of town,
is not driven by absolute income, it is driven by relative income and as absolute income goes up.
It's very interesting. What tends to happen is that the average price of all houses relative to our income goes up.
We devote more than growing, come to this competition for relative status.
The third thing that is going on, however, is that in some ways, as we get richer, growth produces externalities,
environmental effects, where the very process of getting richer produces externalities detrimental to present or future human welfare.
Now, actually, interestingly, some of these externalities have improved in the last 50 years.
London no longer has the smog which it used to suffer,
and indeed local pollution externalities have declined in pretty much all rich developed countries.
But even when we solve those pure congestion, effects remain.
Driving a car along a country road in 1950s Britain, for those who could then afford it, was simply a more pleasant,
relaxing experience than doing the same today because you were much less likely to be driving bumper to bumper behind the car in front.
And the simple fact is that a very large percentage of all car advertisements on television today,
which appear to have been shot in rural Scotland or Scandinavia at 4 a.m. on
a summer morning are bound to produce a sense of frustration and road rage,
since they entice you to buy a product which you will almost never enjoy.
So in all sorts of ways, as we get richer, if we do not carefully manage the process,
increasing wealth degrades the very benefits it seems to make more generally available.
The more people who can afford to enjoy the unspoilt beach or countryside, the more spoilt it is.
So in each of these three ways, what we have is a fashion in which this standard utility function,
which assumes that your utility is a function of your income,
isn't right, because your utility is a function not only of your income, but of the income of everyone else in society.
And that is quite a problem. So some standard bits of economic theory alongside, however, this process of a change in the nature of consumption.
There also, however, appear to be ways in which the pattern of production is also changing.
Roger Bootle In his recent book The Trouble with Markets makes what I think is a
very useful distinction between what he calls distributive and creative activities,
where creative activities are those things which do directly increase at least measured GDP.
Whether or not that translates into well-being,
whereas distributive activities are those things which simply tend to move money from one person to another, they are part of a zero sum competition.
Now that distinction between distributive and creative activities has in fact always
been present in market economies and indeed probably in all human societies.
So the salesman who wins an order for his firm at the expense of another firm does not directly increase GDP per capita.
He makes his firm richer and another poor even more clearly.
A clever lawyer whose client wins essentially just redistributes money from the opposing client and the financial trader who bets,
well, makes money at the expense of the one who bets badly.
And so the market economy has never created growth because every person is involved in a directly value generating activity,
but because it is supposed competition between people and firms will tend over time to give advantage to the better idea and the more efficient firm.
So the existence of some activities which are purely in rojiblancos terms distributive has always been with us.
But I think it's highly likely that the relative importance of such distributive activity tends to increase as societies get richer.
And it is certainly the case that a disproportionate share of high skilled human
resources appears to get devoted to such purely distributional activities.
Financial.
Of us, particularly those involved in wholesale trading activities, include a large share of activities which are in their indirect effects,
in their direct affects, purely distributive and which are very highly remunerated.
And the share of financial services in our economies has grown.
Richer societies tend to different degrees to be more litigious societies.
Litigation is essentially a zero sum distributive activity, and lawyers are very highly paid.
And in rich societies, consumers are able to devote a significant slice of income to buying goods simply because
they bear a celebrity brand buying celebrity A's perfume versus celebrities bees.
But brand competition of this sort is, I think, essentially distributed rather than value added and is distinct in its economic function.
From the early development of brand branding, which performed a vital,
important function in enabling consistent quality products to dominate over the multiplicity of poor quality and often, frankly, dangerous products.
Now, how far such distributive activities in advertising and PR in much of financial
services and legal services have increased as a percentage of the total economy.
I don't know, but I would suggest it is a very interesting subject for economic research.
But some increase I'm fairly certain has occurred and it is certainly noticeable that
many of the highest paid and therefore presumably high skilled people earn their
living from activities where the devotion of higher skills must simply increase the
intensity of distributional competition rather than deliver value added benefits.
If high income attracts cleverer people to become divorce lawyers,
society does not gain from the increased competition in the courtroom between those different lawyers.
So in different ways. Therefore, I think an increasingly rich society is both one in which increasing income is likely
for behavioural reasons to deliver diminishing marginal improvements in wellbeing,
and one in which more of our productive activities and our consumption is devoted to forms
of zero sum competition in which relative skill is crucial to success and relative status,
crucial to the individual's sense of well-being. And I think those changes help us to understand why the relationship between
average income and contentment might not merely be one of a diminishing curve,
but actually flat.
Now, in addition, however, in this environment where relative status matters quite a lot and GDP growth has less power to make people happier,
inequality has been increasing in rich, developed societies, and it's been increasing along two dimensions.
First, there is a tendency most prominent in Anglo-Saxon countries, and in particular in the US, but also present,
as you were mentioning earlier, in Germany, for the bottom of the income distribution to fall away from the median.
Second, a very strong and indeed quite startling tendency, most extreme in the US, but also pronounced in the UK and throughout the developed world.
For the top to pull away from the middle and the very rich to pull away from the merely moderately rich.
We have a phenomenon where increases in the income of the top decile over the last 30 years have significantly exceeded those of the median.
The top percentile has been doing much, much better than the poor.
Not so very rich top decile.
And as for the top 0.1%, well, they've really been worrying the rest of the top percent because they've been really pulling away at a ferocious pace.
Now, the first of these two phenomena, the poorer relative position of the poorest, is, I think,
probably best explained by a combination of technology and globalisation with free movement of traded goods and to a lesser but still
important degree migration labour bound in economic theory to reduce the relative income of lower skilled people in richer countries,
even when it increases the average income level. That is what classic trade theory would tell us.
The second phenomenon the richer relative position of the richest is, I think,
rooted in an interplay of factors too complex and multifaceted to address this evening.
But I think it includes some which are related to the changing nature of consumption and production, which I referred to earlier.
One striking development at the very top of the distribution is increasing returns to stardom and celebrity to high sporting and artistic skill.
Stanley MATTHEWS, the great Stoke City and Blackpool Football, great of 1950s Britain,
never earned from his football genius any more than an adequate middle class.
Standard of living. He was not in the rich of Britain.
David Beckham is in the super rich. C.S. Lewis, for all his novels, ended up with a very nice, adequate upper middle class income.
J.K. Rowling, creator of Harry Potter, is a billionaire now.
Technology and globalisation are among the factors at work here,
which is the ability of the TV and the Internet to make David Beckham and Harry Potter global brands.
But actually, rising average income level is also important because as people's income rise,
they can devote more of that rising income simply to providing their children with the latest branded merchandise,
which happens to have Harry Potter written all over it, without which their relative status is lost.
And buying that merchandise puts huge amounts of money in the hands of celebrities.
One of the reasons why Stanley MATTHEWS was not a billionaire was that the ordinary kids of working class Britain in 1950s,
Britain didn't have enough money to make him a billionaire.
And while the superstars a few once the minor stars and passing celebrities,
the agents and the lawyers and the PR firms and the executives of the media channels are included.
We have one of the phenomena helping to understand this accelerating growth at the top of the income decile in parallel.
Meanwhile, the changing nature of consumption and the increasing devotion to goods and services which
in the hierarchy of human needs are not essential but nice to have and driven by fashion.
Emotional appeal style means that in some areas of economic activity,
highly talented individuals can make their companies very much more successful very rapidly and in a highly measurable way.
A talented retailer with a flair for store design and ambience for range,
select range selection and for marketing can make a huge and very immediate difference to a retail chains success.
Whereas a talented manufacturing manager can only do so over many years as research and development,
investment or manufacturing efficiency improvements very slowly reach fruition.
And the shorter the time period over which results are achieved,
and the more easily that they seem identifiable with the individual rather than the team,
the more likely it is that they get reflected in individual remuneration.
So I believe that the higher the percentage of our consumption devoted to goods and services where soft factors like style,
ambience and brand matter, the higher will be the naturally arising inequality at the top end of the income distribution.
This phenomenon of highly measurable and immediately measurable economic impact, moreover,
is particularly present in some of those activities which are most clearly in Roger Bhutto's distinction distributive rather than creative.
The successful lawyer redistributes income in favour of his or her client, and away from the other lawyer's client.
And his or her success in doing so is immediately apparent in a way which is not true of the research
scientist working alongside many others on a drug which will produce patient benefits ten years down the line.
And a similar logic explains why we pay or have paid financial traders so much money.
It appears to be measurable how much money they have created.
Now, we've actually worked out that sometimes attached to the money that they created in 2007 was a sort of toxic tail of liabilities.
Two years later, we are trying to fix that problem. But I suspect that even when we have fixed it,
we will still have a natural process for financial traders to be one of the forms of highly paid activity in the economy.
And therefore, the larger the share of financial services within the economy, the wider again will tend to be these income disparities.
Finally, these factors I've already mentioned the nature of celebrity, the nature of jobs, where you can make a difference quickly.
The nature of these distributed activities, they then help change attitudes, and that in itself unleashes further change.
If the world of celebrity and fashion and media generates very high pay,
and if there are more highly paid corporate lawyers and investment bankers than in the past,
and if there are some businesses such as fashion retailing, where the star CEO can make a big difference and get highly rewarded,
then the sense among the generality of the income elite of what is normal and justifiable shifts, and in addition,
the income that that income elite need in order to end up owning the house in the nice part
of town goes up because their ability to buy that house is driven by their relative income,
not their absolute income. If you then add in the impact of a partly global market in executive talent, the role of.
Remuneration consultants with their comparisons between this CEO and that and the central
role which relative status competition plays in the motivation of high talent people.
And you have the ingredients for the relentless rise in the relative income of the best of which we have seen in the last 30 years,
a rise which in the dominant narrative of the last 30 years could be justified because it made them the economy more efficient and competitive.
But actually there's no clear proof that it has such an effect.
The capitalist, but somewhat less unequal economies of the 1950s and 1960s produced just as rapid overall growth rates.
But conversely, there is some evidence that the scale of the increase in inequality may have undermined average wellbeing.
Richard Wilkinson and Kate Pickett in their recent book The Spirit Level,
present evidence that a society where the bottom of the income distribution has drifted away from the medium will be one
in which a wide range of common sense indicators of wellbeing look worse indicators like worse health or higher crime.
And that extreme inequality and awareness of inequality at the bottom end has a direct impact on the well-being of the
less successful because precisely because they feel they have lost out badly in a competition for relative status,
a feeling which actually can be worse the more apparently meritocratic the society is, rather than one defined by immovable class barriers.
Now, of course,
one question in relation to all this is whether all that matters in this respect of inequality is the relationship between the bottom and the median,
or whether the relationship between the median and the top is also important?
And of course,
a classic liberal or conservative argument has been that the latter does not matter both because the numbers at the very top are so small
that any attempt to redistribute their income via progressive taxation would only make a trivial difference to the average or poorer citizen.
Or indeed, if we're talking about a very small scattering of billionaires,
that the lifestyle of the celebrity rich is so detached from ordinary people that people can,
as it were, by reading Hello magazine at the dentist,
gain the thrill of vicarious interest without actually being made less happy through unachievable status competition.
And it is true that people often seem intensely concerned about their position relative to those very close to them
in the income distribution and not so concerned about people who appear to live simply on a different planet.
But arguably, I think that indifference to the much richer may change if, in addition to, as it were, a little thin scattering of billionaires.
It is the whole of the top decile which pulls away, enjoying a highly visible and reasonably widespread standard of living,
to which a broad mass of people aspire, but which only a minority can ever achieve,
given that the standard is defined by relative income, not by absolute.
So let me sum up my argument. So far, I've described a classic political narrative in which the market,
economy and significant inequality were required and justified because they delivered economic growth, which delivers well-being.
But I then observed that empirical evidence suggests that in most rich, developed countries,
further economic growth does not seem to be producing an increase in perceived well-being.
And I suggested that that may be explained by a combination of four things the classic concept of
diminishing marginal utility rooted in the common sense observation of a hierarchy of human needs,
the changing nature of consumption in richer societies, which makes it increasingly the case that one person's utility is affected by other
people's income as well as his or her income with relative status competition.
Quite important the changing nature of production activities,
which means that a greater relative share of purely redistributive activities is probably occurring.
And with those purely redistributive activities actually being among the highest paid and increasing inequality,
which certainly matters as between the bottom and the median, and which may also matter to human well-being as between the median and the top.
All of which, if it is true,
creates a major challenge to the dominant and increasingly cross-party narrative of late 20th century politics in which growth delivers well-being.
Growth requires markets, and markets require inequality.
Therefore, vote for deregulation and low taxes because it's going to make you the average citizen, richer and therefore happier.
The fact is that the narrative doesn't appear to fit the facts any longer.
So what follows? Well, first, I'd like to reiterate that I am more wary than some others.
For instance, more wary than my very good friend Richard Layard,
of the idea that we should make increased happiness the explicit and formal objective of economic and social policy.
And that's for two reasons. First, as I already said, I think the problems of.
Getting different individual happiness is are truly intractable.
I think no additive quantification of utils of happiness will ever prove that it is wrong
for the majority to maximise their happiness at the expense of oppressing a minority.
I think we need to introduce an absolute concept of justice as well as a utilitarian quantification of utils.
But second, because even at the level of each individual are measures of happiness or I think highly imperfect and will remain so.
I think they are good enough to tell us that there is no necessary reason to believe that growth will deliver more happiness,
but not good enough to tell us with any precision whether society is getting happier year after year.
So we do not have, and I suspect never will have the ability to construct a gross national well-being
index whose maximisation should now be pursued instead of GDP per capita.
Rather, I think our knowledge lies in knowing what is not true, but knowledge of untruth is still valuable knowledge.
And I think we know with a high degree of probability that the idea that growth in average GDP per capita will necessarily translate into
perceived human well-being or happiness is almost certainly not true beyond the levels of income already achieved in the rich developed world.
So what follows from that partial knowledge?
Well, of course, some might suggest that what follows is what I might call a radical green socialism, strongly egalitarian,
in order to undermine the corrosive impact of relative status competition by just telling people, pack up on that.
I'm not going to let you do it because I'm going to tax you enough that you can't even try and opposed in principle to economic growth,
since it has no positive benefit and generates harmful externalities.
So is that right? Have the arguments in favour of the market economy as the route to innovation and productivity growth simply collapsed?
Well, I don't believe so. And indeed, I believe that a powerful case still exists for a market economy.
And as a result, necessarily, because let's clear be clear, it immediately follows result for accepting non-trivial inequalities,
but that the arguments are more complex, less instrumental and in some sense more fundamental than those which have recently been advanced.
I think five considerations are important. First, some level of economic growth does still matter, even in already rich countries,
because even in rich countries there are some at the bottom of the income distribution for whom
additional income in absolute or relative sense still has the potential to deliver increased well-being.
And it is very difficult to improve their position without growth because redistribution without growth will be very strongly resisted.
People may not gain permanently greater well-being from additional income,
but they may deeply resent having to sacrifice existing already attained levels of income or wealth.
In technical economist terms, the shape of their utility functions is not an absolute given,
but is a function of the income which they have already attained.
Another problem with the way we draw these things in behavioural terms,
people are pitching aid to existing standards of living or wealth and they then end up with deeply ingrained senses of accrued rights.
Growth in classic measured GDP form is almost certainly required to lubricate any desirable redistribution.
Second, and more fundamentally, however,
I think GROSS arguably should be seen not as the desirable objective which justifies the existence of economic freedom,
but rather as the acceptable but not particularly important by-product of economic freedom, which is valuable in and of itself.
The reason why people should be free to start a business, to innovate new products,
to propose new retail formats or closed designs, or to make existing production processes more efficient,
is not that this economic change is good because it will make people permanently happier, but that the human desire to innovate,
to change, to experiment is naturally arising, and that the freedom to express this desire is in itself conducive to well-being.
The Soviet Union, in its final stagnation period, scored low on human happiness as measurable by some pretty absolute measures of human happiness,
such as the propensity to alcoholism or suicide.
And I suspect it did that not only and perhaps not primarily,
but because its production system failed to deliver the consumption goods available in the West,
but because the organisation of production trapped people in stultifying routines,
refusing them the right to develop new ideas, new ways of doing things,
freedom to innovate and change is an end in itself, not an instrumental means to higher GDP.
But if we have that freedom to change and innovate. That will tend to generate productivity growth.
And productivity growth means economic growth unless unemployment rises.
And one thing we know for sure is that involuntary unemployment makes people very unhappy.
Rising GDP per capita is, therefore, I suggest, the unavoidable and acceptable, but not the objective,
the avoidable and acceptable concomitant of two desirable ends economic freedom and full employment, rather than the end in itself.
The third point, however, is that this freedom to innovate, to challenge,
to do new things is likely to be important not only for the opportunities it gives on the production side of the economy,
but for the consumption possibilities that it delivers.
Because even if more and better products and services have decreasing capacity to make people permanently happier,
the potential for change for innovation may in itself be important to human contentment.
If average income doubles in the next 30 years, we have no reason to believe that we will then on average be happier.
But the anticipation that the next 30 years will bring some new products, new services,
new ideas, new fashions and styles may in itself be important to our current contentment.
The journey may be important, not the destination. Clothes, fashions do not, in any objective sense, get better.
They simply change year by year. And every now and then they simply revert to patterns seen decades before.
And there is no reason to believe that in 30 years time people will feel happier because
of the clothes that they are then wearing relative to the clothes that they wear today.
But the very fact that each year brings new fashions with different designers
competing to attract customer approval may be important to some people's contentment,
even while it creates anxieties for others.
The next generation of electronic gadgetry, whatever lies beyond iPods, iPhones and high definition TVs will not make people permanently more content.
But the expectation that the market will create new ideas and products may be important to many people's sense of progress and direction.
And the absence of new ideas and products and styles might generate a sense of dullness and stagnation.
The experience and the expectation of change can be important to current contentment, even if change will not make us permanently more content.
Fourth, it is highly likely that the absence of markets and economic freedom will tend to lead not merely to low growth,
but to complete stagnation and indeed regression.
That was the case in the Soviet Union in the final stagnation years, with measures of GDP growth actually negative and measures of well-being,
as I've said, such as alcoholism or suicide, suggesting an absolute decline.
And one of the reasons for that was relentlessly rising corruption as individuals channelled their natural
human propensity to compete for relative status into corrupt competition for the existing economic cake,
rather than the creation of new businesses or products. And they crucial, though you may find it,
slightly odd justification of market competition and of significant resulting inequality is therefore simply that we are
not going to change human nature and that if people are not able to compete for relative status through the marketplace,
they will end up competing in more harmful ways.
And that thought is actually found like so much other wisdom in Keynes's, the general theory where he noted not not only and I quote,
all that valuable human activities which require the motive of moneymaking and the
environment of private wealth ownership to to reach their full sufficient fruition.
But that quote moreover, dangerous human proclivities can be catalysed into comparatively harmless
channels by the existence of opportunities for moneymaking and private wealth,
which, if they cannot be satisfied in this way, may find their outlet in cruelty,
reckless pursuit of personal power and authority and other forms of self aggrandisement.
As I say, you may think that's a slightly odd argument, but I actually think it may be a real people.
Fifth, and finally, attitudes to inequality, even among the less well-off, are nuanced,
and the impact of rising average income on concerns about inequality is ambivalent.
On the one hand, rising prosperity increases the importance of positional goods and competition for relative status.
On the other hand,
some average earners are likely to be much more relaxed about inequality simply because they have a perfectly adequate standard of living.
Once you have a car, does it matter if someone has a bigger car?
Well, the answer is for some people it matters a lot, and for some other people, it doesn't matter at all.
And as a result, concerns about inequality often relate to its degree, not its existence,
and are often related to concepts of fairness where inequalities are.
Based on factors which people can intuitively understand artistic or sporting talent,
high professional competence, or a wide and obviously owner a span of responsibilities,
all where people feel that business success and high remuneration derives from free choices that they directly have made.
I chose to go to that restaurant. Therefore, the restaurant owner is successful in getting richer.
Even very significant inequalities produce little concern where they are perceived as
deriving from activities whose value people do not comprehend or which they doubt,
as has become the case with some financial services activity. It is deeply resented.
There is, therefore, I believe, a compelling case for economic freedom, for the market economy,
and for treating the economic growth and non-trading the economy which will result as acceptable and inevitable by products.
But I think it is a quite different case from that advanced in the last 50 years
and as a result it may have quite different implications for optimal policy.
Though I have to say, I'm not absolutely sure what the implications of all this are.
And when I sent Robert a copy of my speech in a advance two days ago so that he could respond to it,
I wrote here this section to change, still thinking what the implications are.
And indeed, I was still thinking about them on the way up from London.
But let me suggest a few. First, if GDP growth is not the objective,
we should not treat potentially adverse consequences on growth as arguments against other desirable objectives.
Nick Stern argues that mitigating climate change might only cost one year out of the next 40 years of GDP growth of 2% per annum.
But even if the potential loss was much bigger than that,
the downside in human well-being of sacrificing quite a big slice of GDP growth might be very close to nil.
And therefore, we should take it. The second is that economic stability is probably more important than economic growth.
Radical financial deregulation was justified on the grounds that it would improve the
growth rate and that greater instability risks were acceptable to achieve that end.
But if increases in average prosperity had at best limited ability to foster perceived well-being,
while setbacks to already achieved income clearly harm it and unemployment harms it,
even more so then the bias of policy should be towards moderating fluctuations in growth rather than maximising it.
Third, that while there is a case for accepting significant inequality, we cannot avoid a debate about the degree.
And we don't have a nice, easy metric of saying that the optimal degree is that which maximises growth.
Rather, we are in the difficult space where attitudes to acceptable or desirable inequality
and thus to the degree of progressivity in income or inheritance tax systems,
are inherently judgemental and political. Keynes believed, as I said earlier,
that there was a case for inequality because there were valuable human activities which required
it and because dangerous human proclivities would otherwise be catalysed into harmful activities.
But he also believed that, and I quote, it is not necessary for the stimulation of these activities and the satisfaction
of these proclivities that the game be played for such high stakes as at present.
I have some sympathy with that conclusion as it relates, for instance,
to the stakes for which the game has recently been played in the financial sector.
But it does not leave us with that thought leaves us without a guiding criteria on which to judge how high the stakes should be.
Fourth, and finally, if measured, GDP growth is not the objective but an acceptable by-product.
But if there are particular forms of economic growth which might tend to feed more directly through to human well-being,
ie where we are more confident that there is a relation to well-being,
then we cannot avoid the fact that the pattern and mix of economic growth might be as important or more important than the absolute growth rate.
If, for instance, we do assume, and I quote, that medical advances conducive to well-being,
improving health during life, preventing premature deaths and increasing longevity,
then we might prefer investments that would speed medical advance even if measured, GDP relative to what it would otherwise be,
was slightly less with, for instance, the consumption of other goods reducing as a result.
And in general,
we might logically favour those forms of consumption which were least likely to result in an intensification of relative status competition.
Thus, if, for instance,
we believed that the creation of attractive and shared urban environments was more likely to deliver permanent increases in well-being,
then increasingly ferocious competition to afford branded fashion goods,
then more public expenditure on the former and less private on the latter might be a perfectly sensible choice.
All of which, however, carries great dangers. For once, you no longer have a defined maxim and our social in a.
Atomic decisions lack useful constraints, and each interest group is able to argue that their specific proposal is best for human welfare,
even if, in reality its primary purpose is to serve their narrow interest.
Because even architects of beautiful human space spaces are no freer of the
human proclivity to pursue their own self-interest than any other human being.
Faced with that danger, I know that some may wish to stick to the economic growth target as at least something
objective to hold on to the hand of nurse for fear of finding something worse.
But I think we do have to let go of nurses hand because the narrative that growth delivers human well-being and that inequality is instrumentally
justified because the market economy delivers more growth has lost its power and it has lost its power because of a wonderful achievement,
the attainment over the last 200 years and through the power of the market economy of an average standard of living in most developed countries.
Sufficiently high that further improvement in the average standard of living isn't terribly important.
And again, the thought can be found in Keynes, this time in his 1930 essay on economic possibilities for our grandchildren.
Calculating the long term impact of even quite modest growth at 2% per annum,
he foresaw an early 21st century economy which could entirely banish poverty as his society would have defined it.
Satisfying most human wants beyond the dreams of most people living in his time and do so while also hugely extending leisure hours.
Well, we did it and we're still not satisfied.
And perhaps the key conclusion is that we never will be satisfied that difficult social choices and conflicts
do not derive simply from a scarcity of resources which can be banished by any level of economic growth.
Nor is there some level of prosperity, some end point beyond which the human proclivity to compete for relative status declines.
As Keynes said, we cannot transmute human nature.
But the essence of politics is an endlessly changing, never resolved debate as to how best to manage the implications of that human nature.
That debate should be informed by good social science, to which Ralph's professional life was devoted.
And good social science tells us that it is not true that economic growth will make people on average happier or make social conflict go away.
And the justification for economic and political liberalism lies not in its ability to generate economic growth,
which will make conflicts disappear, but in the celebration of variety, diversity and difference as ends in themselves.
And I think had I been able to send this lecture to Ralph for his comments, this is one conclusion with which he might have agreed.
Thank you very much. Britain is exceptionally fortunate in having such an outstanding public servant as Adair Turner.
The qualities which make him so have just been on scintillating display in this first Darren Gough Memorial Lecture.
The rigour of his thinking, the wide range of his interests, his exuberant curiosity and his passion for ideas and for communicating them.
His lecture sets a standard which will challenge future lecturers in this series.
It attempts to answer the question Why does rising average income no longer deliver a rising sense of well-being?
I accept both the premise and the importance of the question, and that is particularly for rich societies like the United Kingdom.
The question is important because post-war politics in Western societies have been based on the promise of continuous economic growth.
Economic growth was seen as the solvent of social conflict and the generator of social contentment.
In a Des view,
the growth objective led inevitably to the embrace of competitive markets and acceptance of at least a degree of inequality by the left.
As he puts it, the shared assumptions across the political spectrum was that economic growth would feed directly through through to rising well-being,
welfare, happiness, contentment, or whatever word we use.
I want to come back to that whatever word we use, because I think if there is a flaw in the lecture, it lies somewhere there.
The fact the fact that it has for some time failed to do so, that is failed to generate these desirable goals,
has shattered the consensual and philosophic basis of post-war politics.
Well, why? What's his answer to the question?
Why doesn't an increase in average GDP per person translate into a corresponding increase in the average sense of well-being, I think?
Well, he offers two main reasons. The first is the familiar law of diminishing returns.
Extra goods produce diminishing satisfaction. You have a joke, in other words, which was illustrated by the diagram from layout.
But in addition,
changes in consumption and production patterns associated with growth growing wealth have had a flattening effect on on on the happiness curve.
The more discretionary our consumption becomes, the more important A becomes relative income and the struggle for relative income.
And I would add the forces of envy and greed.
And the richer the society, the larger the fraction of GDP made up of distributional rather than value adding goods and services.
And again, this is an area des particularly concerned with as regulator, chief regulator of the financial services industry.
And there also points to the negative for the rise in negative externalities of production.
I didn't know whether this was in his talk, but it was in his in his written lecture, like congestion and pollution.
And what was certainly in his talk, the startling increase in inequality,
particularly in the tendency of the bottom and top of the income distribution to pull away from the median.
Now, I would agree with that. Most of that analysis, I think, is very much to the point.
But I have one major quibble.
Maybe it's only a minor quibble, but and that is that there seems to put too much weight on the declining marginal utility of money.
It's perfectly true that any good taken unit by unit yields progressively less utility.
And as he says, one winter coat keeps you warm.
Two winter coats don't. But there are many varieties of winter coat, and there are many other goods which for which the demand is pretty insatiable,
applied to the consumption of a single category of goods.
It's fine. But you can have you can have too much of one good without satisfying your need for another.
As the Swedish saying goes, you have a separate stomach for dessert.
And the law of forced pieces completely when applied to new or different goods as they are rolled out by the production machine over time.
Since there's virtually only since there are virtually unlimited opportunities for adding to such products,
the urgency of wants is is is remains undiminished.
And so there's no reason to postulate a state of satiation to the extent that economic
growth continually adds to the variety of goods and services offered for consumption.
It's hard to see why you get to J Curve. That argument doesn't lead to one.
I'd like to frame I would prefer to frame this argument slightly differently and to say that the longing for more
and more consumption goods and often trivial consumption goods is a classic case of Marxist false consciousness.
I mean, our society societies set up in a way to encourage one kind of consumption as against
other kinds of goods which are simply not available from the way it's set up.
And those goods include very valuable goods, and they're not consumption goods.
As someone recently said to me and I think this is important.
Access to credit is modern, capitalism's substitute for the welfare state.
So you can use that concept also to explain much of what's what's happened recently.
The key principle of policy, which a dad uses is that I quote him and he said this towards the end of his speech We should not treat
potentially adverse consequences on growth as decisive arguments against other desirable objectives,
objectives like mitigating climate change, beautifying the urban environment, economic stability and and and greater equality.
In fact, he echoes Galbraith in urging us to redress the balance between private affluence and public squalor.
And the real case for economic freedom is not the instrumental one, but that it promotes variety, diversity and difference.
And this can best be appreciated if it's delinked from a purely instrumental rationality.
I think that's an important point worth pondering.
But I have one question here. How far would attack go in limiting globalisation?
It's true there are powerful non-economic arguments for globalisation, but for economists the main argument has always been an instrumental one.
It raises world average GDP per capita through its peer efficiency in allocating resources.
And it's a mighty instrument, as we know, for alleviating poverty in developing countries but applied to rich countries.
The case for globalisation is far from clear. The reason is that it contributes directly to the increased inequality,
which there identifies as a key reason for the flattening of the happiness curve.
For example, immigration depresses the relative wages of the unskilled, the native unskilled.
This is the reason. This is, of course, the reason that employers favour.
Let's try a quick thought experiment.
Imagine what might happen to income dispersion without immigration.
Surely, under conditions of autarky, we would expect the wages of unskilled workers to rise relative to the skilled,
or at least to keep pace as unskilled workers become scarce relative to the demand for unskilled labour
created by the expansion of the retail end of the service sector and the construction industry.
Both. I think. Both. Both of which occur as societies get richer.
In other words, there's no real reason, apart from globalisation, for the wages of the unskilled to decline relative to those of the skilled,
just because the unskilled become scarcer as education expands and tertiary and higher education.
So I think this this is an interesting example and I raise it and not and I raise it just
to make the point that people who are worried about immigration aren't all bigoted.
And my final my final comment is of a more philosophical nature.
I don't want to wean our societies away from excessive reliance on growth.
His method is to point out that beyond a certain point, growth does not add to the subjective feeling of contentment.
But in making this argument, he implicitly accepts that some measure of contentment should be.
A goal of policy. Now, I know he he actually sort of shies away from that.
Rather late in his lecture, he introduced the bill to introduce the concept of justice as as an independent value.
But mostly, he hedges by using the terms happiness, contentment, welfare and well-being as synonyms.
But in fact, they're very, very different from each other.
The language of happiness and contentment has its source in the economist's notion of subjective one satisfaction.
Welfare has an objective correlation such things as life expectancy, health,
years of schooling and so on, which have no direct relationship, just subjective feelings of happiness.
But now we use these things.
We like them because in principle they're quantifiable and therefore they start an argument on a so-called scientific basis.
And it's the only language we really have for conducting this argument.
Well-Being is problematic because that's a moral word, really.
It refers to quality rather than quantity.
It refers to some concept of the good life.
But we can't talk about it because as soon as we start talking about that, we sound like the Archbishop of Canterbury.
And we're not. That's not what. That's not what. That's not, you know, how how scholars should or should talk about these things.
And I just want to I just want to illustrate one little, you know, the strange phenomenon of happiness studies.
A number of economists, notably Richard Layard, have revived Bentham's original project of providing an independent measure of happiness.
Inspiration has come from neurological studies showing a correlation between reported happiness and
certain kinds of brain activity and social surveys recorded recording that beyond a certain level,
increased income doesn't make people happier.
So if happiness has an objective measure independent of consumer choice, then we have a respectably scientific,
value neutral platform from which to criticise the unrestrained pursuit of growth.
And that's exactly what Richard does.
But but of course, it fails this project for reasons that should be obvious to anyone who isn't a relentless utilitarian.
First, you know, the concept shares the characteristic subjectivism of of of the modern world.
For the ancients and medieval thinkers, a happy life was a successful and admirable one.
Today it signifies merely a life filled with pleasant states of mind.
Such a life need to have nothing worthy or admirable about it.
It might be a product of constant drug use, for example, or full frontal lobotomies.
And and of course, the dare no more than I wants to make this a goal of national policy.
But the language he's driven to sort of opens opens this up.
And and also happiness understood in this Bentham Sense can't provide us with a measure
of sufficiency against which to criticise the the the continual expansion of wealth.
We don't really want to substitute the hedonic hedge mill treadmill for the growth treadmill.
So the main message I got from a DES lecture is that some ways of life are intrinsically more valuable
than others and that we should not sacrifice these on the altar of continuous economic growth.
But I am not sure he has yet found the right language for talking about these things,
and I think it is an extremely difficult language to find because we have to at some point introduce moral,
moral considerations, and that's something we shy away from.
But he has opened up a rich, fascinating, important subject, and no one could have done it more stylishly.
I'm an economist. And that's not a not a very orthodox one.
I mean, I have to say, I regard the used utilitarianism as as sort of the ethics of Disneyland and though diminishing marginal utility.
Um, well, I'm just reminded of a cartoon in The New Yorker about,
about businessmen surrounded by piles and piles of money and hovering above the businessmen is the fairy godmother.
And she's saying to him, Remember, this is your last wish.
Are you sure you want just more money? And so maybe marginal utility of money just goes on and on and on and.
Let me start with some remarks. Broadly, within my competence as an economist, but I'm an economist and handyman,
so that the pleasure of that is that you can you can go completely outside your discipline.
And I will I will straight firmly into the range of my ignorance and incompetence.
And but let me start with you first.
Just a remark about about the bottom billion, which I'm going to very much agree with Lord Turner, that the growth is not not at all.
A good measure of of of rising well-being shouldn't be our objective.
But I just want to emphasise what he himself said in his lecture,
that that's not true for the bottom billion and that they are not in the range where further income doesn't raise happiness.
And I'm very worried that often the disc, our discourse gets picked up by these little societies and internalised as their own discourse,
and we must be very careful that that doesn't happen.
Incidentally, let me just have a remark about Ralph here, that the the opening sentence of my book,
The Bottom Billion, is the third world has shrunk to Africa.
That's actually a sentence from Ralph, and it was years ago,
and it turned in my mind over and over for a decade and eventually came out as the bottom billion and you know.
The. Let me start with some with a part of Lord Turner's analysis, which is the the economy of distribution relative to the economy of creativity.
And it's what. It's a it's an idea that's been around in economics for a long time, 40 years or so.
The concept of rent seeking and I think it is very important insight that the there has here that that over
time the proportion the size of the rent seeking economy has got bigger relative to the productive economy.
And and and rent seeking is is all over the place and most obviously within the financial sector, where some of it verges on the criminal.
But but some of it doesn't but is still basically the very high returns to very short run information, which is of no social value whatsoever.
It's just a transfer from one to another. It's rent seeking.
And and that sector has got bigger and bigger and bigger in our economy, not just not just finance.
And let me give you an example that otherwise would never occur to you.
And and it's it's related to schooling in Britain.
And I wrote a little article in The Independent, very controversial.
And it just made this point that in Britain, we, the ordinary household,
actually spends a lot on its children's schooling, on getting a better school for its children.
But the way it spends is through the housing market.
Everybody tries to buy a house in a good area.
Now, that is what economists call a zero sum game. It's entirely rent seeking.
What it does is a lot of money is spent on education, but none of it reaches education.
None of that money actually reaches schools. Hmm.
What we have what we have refused to allow in public policy is that the average parent could put money into schools.
You can't do that. The only way you could do that is totally step out of the public sector.
And the tiny 7% who do that. So the 93% who are in the public sector, they spend a fortune on their children's education.
None of it reaches schools. That's rent seeking or the distribution economy instead of the creative, the productive economy.
Right. That's how we've designed our public our public policy.
So the rent seeking is getting bigger and bigger. Rent seeking shows up in the growth statistics.
But it doesn't show up in people's living standards. It's a sham.
And the last decade of British growth is largely illusory.
What are the big sectors that grew financial sector and estate agency?
The estate agents. The sector became bigger than the manufacturing sector.
I mean. Yeah.
So that's that's as far as my core confidence is going to go today, I want to step really out of that altogether and well,
I'll just make one passing remark which yes, globalisation accounts for some of the increase in economic inequality.
Yes, migration through competition with indigenous low skilled labour widens inequality.
But I don't believe that.
And the reason why the people at the bottom have fallen away from the median, I do not believe that is predominantly caused by economic processes.
It's a measurable economic consequence of much more fundamental social processes.
Having said that, I'm immediately way outside my core competence because I'm not at all about that.
It's not the economy, as it were. It's the social processes that are doing it.
And let me let me try.
What you might well decide is a completely mad comparison.
And this is going to be between what happened over the last 40 years in Britain and in France.
But it's also, I believe it's true more largely for for the Anglo Saxon economies versus the continental economies.
And it's in in both societies.
And they started 40 or 50 years ago with with class war.
The class war was fought on two fronts one on an economic front and the other on a cultural front.
Now, as it says, the class war is largely over, but it's largely over because those battles have been fought and won and lost in each society.
In Britain, the economic battle between the middle class and the working class was won by the middle class.
That's why one manifestation of that is very poor social protection.
Very, very, you know, old age pensions and things like that.
So in Britain, the middle class, when the economic boom in continental Europe, the middle class lost the economic war.
So you've got vastly better social protection. But now the culture war.
And in Britain, the middle class lost the culture war.
By that I mean that. Whereas in the 1950s.
People of modest means would have aspired roughly to a middle class style of life,
or the middle class would have maintained its standards and working class people would have maintained a counterculture.
By now, we all have absorbed the culture of the working class.
We don't say anything else. We don't say middle class culture is superior.
And if you want a trivial example of that, you just look at the rise of football as the cultural norm or celebrity as a cultural norm that.
So in Britain, the middle class won the economic war, but the working class won the culture.
If you look at our newspapers, you look at the decline of our newspaper.
You look at television. The collapse in the quality of public television.
Whereas in France, exactly the opposite happens.
The working class wins the economic war and is very good social protection.
But the middle class wins the cultural. That if you take a an average working class household in France or anywhere in continental Europe,
their aspirations are basically set by the norms set by the middle class.
Now that difference in the outcomes of the of the class wars then has massive repercussions for the collapse of the of the household at the bottom.
They lose the social norms of the middle class in the Anglo-Saxon economies.
That is then compounded by a collapse in social cohesion.
And that collapsing social cohesion produces social breakdown at the bottom.
The lack of unemployment. So you get now in Britain three generations with no member of the net, with no adult who's ever worked.
You got a big rise in single parent families in teenage pregnancies.
A collapse in the as it were,
the standard what was the the the lower middle class norms of of prudence and probity and which which which got mocked out of existence in Britain.
And because of that lack of social cohesion, the real reason for the mistake that the real the dominant reason for the impoverishment.
At the bottom of our society.
The poorest decile is not the economic forces of globalisation, it's the social forces that have broken up the order of the bottom of society.
And because of that, there's less sympathy with the poor than they used to be.
And here I cite a survey last year by the Rowntree Foundation, which surveyed attitudes to inequality in Britain and was amazed by what it found,
because what it found was that most people thought, yes, the poor were poor, they deserved to be poor.
The sympathy with 50 years ago, we'd have felt, is no more.
Because it's seen that the poor deserve their fate.
And of course they don't. But that they are.
They can be, as it were, the reasons for their poverty and not fundamentally the giant economic forces of globalisation.
They are the micro forces of family collapse. So I end with a very uncomfortable note.
That he we have the phrase in law turners the celebration of variety, diversity and difference.
That celebration ends in itself.
But the celebration of variety, diversity and difference are actually synonymous with saying goodbye to social cohesion.
Maybe that is a wonderful, wonderful thing that has made life vastly richer for the middle class,
but maybe it's made life vastly more difficult for the people at the bottom of society.
Thank you. We're now going to go back in reverse order, obviously picking and choosing from this smorgasbord of comments and questions.
Paul, is there anything you'd like to pick up? Very little, I think.
And Dave, a good point that we got sort of convergence and politics, divergence in society,
and maybe maybe the convergence in politics is a is a recognition of the failure
of the sort of market driven economy of the early the eighties and nineties.
I think nobody is really advocating going that's the model to to emulate.
And so the idea that there is a policy convergence,
but it's between statist and communitarian approaches to quality of life rather than to the ideology of the market.
The so pronounced two decades ago. Thank you, Robert.
Well, I just wanted to make two comments.
I mean, first of all, I do think, Paul, as a contrast between the different faiths,
the different faiths of the two class wars on the continent and the United Kingdom is interesting and profound.
I feel that I felt that very strongly. The middle classes have won the economic war but lost the cultural war in this country.
And that's what people mean when they talk about dumbing down and all that.
And I think we have the most horrible media in the world almost.
And that is a direct consequence of of some play playing to a presumed idiocy in in the population, which I don't think is there.
But that's the doubt they're given.
On David's point, David Goodhart And I do I do think your paradox it is an interesting one as, as, as income dispersals increased.
So political convergence has grown. I think it's partly due to the fact that the political parties have declined enormously and
political parties were actually the ways of mobilising opinion and creating arguments in politics.
They don't exist any longer. And in that form, of course, they exist.
The party membership has gone. Interest in political issues has declined enormously.
And what's left is something rather vapid. I mean, in other words, you know, you're in favour of God, an apple pie.
Everyone's in favour of good things, and it's partly reflected in certain trends in policy.
But I think many of the dominant trends have been more in the direction that at
their turn to describe rather than this agreement on on a social democratic state.
I'd like to see that translated much more into policy by whoever wins the next election than than than I think you're suggesting.
Thank you very much, Robert. There's obviously a huge amount to chew on for your next book.
Would you like to pick and choose a few? Well, let me begin with David Good Hart's point.
And one possibility is that this lecture is five years too late to be ahead of the curve.
Right.
That there was a general tendency in the second half of the 20th century of the narrative that I described, which about economic growth in the market,
and that you had this lecture being made in 1997, it would be deeply ahead of the curve, but everybody else is on to it as well.
Right. And, you know, at one level, you could expect that at some stage, reality will begin to come through.
People are aware of the disadvantages of inequality. They're aware of the limits of growth, etc.
And I think there is an element of that. And certainly it is quite startling.
If you were to do a comparison of this election campaign in Britain with the 1997 election, in the 1997 election,
and I know this because I was running the Confederation of British Industry at the time and therefore I was aware of particular issues.
There was huge amounts of focus on things like the UK's growth rate over the previous 20 years relative to the French or German growth rate.
The arguments about point 1% of the growth rate, right.
You know, somebody said we're we're fourth in the growth thing, know, we're at 1.9 and the French are at 1.95.
So, you know, you're complete idiots, you know, because you haven't got.
Is that the Tory campaign in 1997 was heavily about the enterprise centre of Europe, which which Labour would destroy.
But Labour's proposition was very heavily about how they were going to achieve more rapid economic growth.
And that's almost entirely missing now.
And partly I think that maybe because, you know, we've simply moved on.
The question is whether it's really only changed because of the recession or whether the
recession has changed things quite fundamentally and to pick up Alan Turnbull's point of view.
But point a, you know, I think there has been a major shift in attitudes to inequality, which all to do with the perceived fairness of it.
You know, as I say, if people say that person is paid, you know, £1,000,000 a year, and I can understand that in some sense,
they do something, you know, either important or difficult or they have some unique talent.
You know, people accept it. Part of the problem is that they had revealed to them that people were being paid not just a million,
but £5 million a year for things that they perceive have no value whatsoever and indeed which they perceive as a negative value to that.
And that has shifted it. And actually it's shifted the terms of debate quite quickly.
Let's remember. But on this issue of inequality, it's only about three years ago that the Tory party was playing around with ideas of the flat tax.
They never came out in favour of it.
But George Osborne expressed some support for the idea that income tax should be flat, which at that stage, if you had applied,
it would have been bringing down the marginal rate of income tax from 40 to
30% and there were favourable comments about how the Latvians had a flat tax.
We've now in two years got to the Tory Party talking, not at all about that and saying that the increase to 50%,
although they'd like to reverse it at some stage, is very, very low on the risk of priorities.
So I think it's difficult, David, to know whether, you know, what has happened is the slow realisation of the limits of the previous narrative.
And so, you know, I'm not ahead of the game because a lot of other people are there or whether,
you know, the recession and the financial crisis has just produced a crack.
And then, of course, we don't know whether it's a permanent crack or, you know,
maybe in ten years time we'll still be seeing these increases in inequality.
And they will they will come back again. And maybe people you know, the existing narrative will come back.
So that's one. On the point which was made, you know, a status competition is not unique dimension.
I absolutely agree with that. Indeed, I think there's a lot of things that society can do to deliberately encourage multiple forms of status.
Now, this is completely reportable on the before the election, but because it's nice to have a reportable facts but not fact but point of view,
I don't see why we give knighthoods to people who are just successful business people.
I can see why you might give a knighthood to somebody who is a successful business people and has given a very,
very large proportion to charity or spent.
But the idea that you should give a knighthood for somebody for services to business just seems to be flowing,
throwing petrol on the fire of a particular form of status competition.
You know, I mean, if we have a society where for whatever people reason,
people actually attach some status importance to, you know, a things like knighthoods and honours.
We should deliberately use that to lean against, you know,
some tendencies in our status competition which we think we've got over fixated on on the monetary side.
But, but we don't do that.
We've spent the last 20 years basically saying if you're a successful business person, I'll give you a nice life versus successful business.
But, you know, frankly, you've got a couple of million in your bank already. You don't need something else as well.
So, you know, I do think, you know, we have made some of these these tendencies in our society worse.
I mean, finally, I think, you know, I did I think Robert poses a very, very tricky question about globalisation.
I think I think Robert is absolutely right that for rich developed societies,
one of the sort of truths that we don't state is that actually further trade liberalisation has
very little percent potential to increase even the GDP per capita of rich developed societies,
even if we thought that that was, you know, beneficial.
Indeed, it's it's pretty marginal in terms of growth today and I think probably a little bit more than Paul.
I do think that if you look at the American data, one of the drivers of liberalisation of the increasing inequality of the seventies,
eighties and nineties is the complete reversal of the immigration policies after the mid 1960s.
I mean, basically immigration stopped in America in 1925 with the Immigration Act and the subsequent 40 years was damn good for
the American working class and it reversed dramatically back the other way in changes in the sixties and seventies.
And I think this played a non-trivial role in the reduction of the relative status of unskilled workers in America.
Now, you know, this is a tricky area for people who think of themselves as having nice liberal points of view,
but we have to recognise the economic reality as it is.
But I think Paul's points about social cohesion and values are incredibly important.
And I think I'm very aware, you know, all one can try and do in a lecture is throw a partial light and, you know, try and suggest other issues.
And I think this whole issue of what do we mean by values, what do we mean by social cohesion and how,
as Robert does, is well-being the same as happiness is incredibly important.
And and I think also Robert's point of view there about, you know, is happiness the aim?
You know, if we had a dictatorial society, I mean, it may be on Richard Layard measures on his brain scan.
You know, the North Koreans at those big events are happy, but I'm still against that form of society.
So I think, you know, and there's some things that I don't quite know how to resolve there, but I think they're very important issues.
Well, thank you very much. And before I thank our speakers, three quick practical more than practical announcements.
Firstly, for anyone coming to high table drinks or in the senior common room at the top of the best building.
Secondly, if you don't yet feel you know everything there is to know about capitalism.
The European Studies Centre Annual Lecture in this room 21st of May at 5 p.m.,
the distinguished German historian Juergen Koca will tell you more about the history and future of capitalism.
Thirdly, please note in your diaries the date of Friday, the 29th of April 2011 for the next DA and of Memorial Lecture.
Speaker to be announced.
I think we've had an extraordinary premier, I have to say definitely on the creative, not the distributive side of the economy,
in my view, better both in substance and style than the leaders debates on television.
And I can only say to you or Dad, but also to Robert and Paul, I think the greatest compliment I could give to you or anyone,
which is whatever happiness is exactly, and however we measure it, I think Ralph would have been very happy with these two odds.
So thank you both very much indeed.