One obvious result of this economic paradigm has been the denationalization of UK manufacturing industry which - unsurprisingly - now accounts for only 12% - 14% of GDP, down from over 30% in 1970.
Expenditure on R & D - handmaiden of industry and catalyst of innovation - has likewise fallen dramatically compared with other industrialized countries - and so has the UK’s trade balance in goods.
R & D has faded at least in part because we no longer own most of our major manufacturing base. Innovative effort tends to take place at headquarters - not in foreign-owned assembly plants or in the offices of wholesale importers. Japanese plants in the UK, for example, conduct almost no R & D. With the sale of so many significant UK manufacturers, much of our work force has been deskilled, while politicians blithely ignore the evidence - demonstrated in the above table - of our poor performance.
Both Labour and Tory soothsayers dismiss the decline of UK-owned manufacturing by claiming that the service sector and the ‘knowledge economy’ will henceforth be our main engines of growth.
Large parts of the service sector, however, like hair-dressing, road-sweeping, nursing etc. do not generate wealth in economic terms, but merely redistribute existing resources; and service jobs are often low-paid, and rely on government expenditure to survive.
The ‘knowledge economy’ equation rests on the fantasy that somehow we will be able to compete through excellence in design and innovation while the rest of the world remains content to manufacture products for our consumption. Keen-eyed readers will spot the contradiction. An economy dependent on low-grade service jobs is unlikely to have the wherewithal to command the heights of technological innovation. Nor are countries like China and India going to cede the territory to us, just because our politicians say so. On the contrary, with the manufacturing base at their fingertips, they will be almost inevitably become innovators as well. Given the current commitment of our politicians to the neo-liberal economic model, it is not wholly irrational to wonder whether we might be in the first stages of progressive underdevelopment of the kind that happened to other centres of excellence in the past, like ancient Egypt, Greece and Rome.
What has been the effect of UK economic policy on incomes? At first glance, the statistics seem reasonably positive. With the exception of 2008 - 2009, real wages appear have risen over the last decade
But if that is true why do so many people feel they are treading water? The answer is slightly complex. Inflation was certainly kept in check during most of the past decade - largely through the importation from low-cost countries of cheap food, clothing, footwear, electronics and other modern ‘essentials’. This, by the way is the source of Gordon Brown’s famous boast about the end of boom and bust.
Where inflation showed itself, however, was in ‘goods’ that couldn’t be imported, of which the most important and obvious is property. House prices where I live in South London, for example, have risen five fold over the last dozen years - against an average wage increase of about 15%. That is a staggering difference.
How can it be that house prices rose so much faster than wages? The answer lies mainly in the amount of money available to buy them. It is not wages that have risen astronomically but debt.
During the boom that led to the current crisis, many will recall receiving countless offers of loans through their electronic or physical mail box. We should remember that under a Fractional Reserve Banking System - which is what we have - every time a bank makes a loan it effectively creates new money and thereby increases its own assets. Granting loans was good business for the banks, and securing one became scarcely more arduous for the applicant than buying a sofa. Many people took the bait. Private indebtedness soared, and with so much debt money sloshing around in the economy, property prices shot through the roof. Other “unimportable” costs rose as well, like education and health care, though health costs were partly attenuated by the “importation” of nurses from elsewhere and by contracting out cleaning and janitorial services to companies using low-cost migrant labour. In other words, the underlying inflationary pressures in the economy only showed up in certain “immobile” sectors. Elsewhere they were disguised by cheap imports both of goods and labour.
Who has benefited from the UK’s neo-liberal version of globalization? Answer: bankers, financiers, major business owners, commodity brokers and corporate executives. News that the UK’s richest people enjoyed a massive increase in their wealth last year should come as no surprise. The present economic system foments the concentration of wealth at the top. Mega profits are the wages of a system in which capital is free to go where it will regardless of the effect on national economies and on the local labour force.
Let’s return for a moment to those loans. On both sides of the Atlantic we have long been sold the idea that a dignified life includes ownership of our own home. To borrowers who couldn’t muster an initial deposit, many of whom were unemployed or in low-paid employment, lenders - particularly in the Unied States - began offering mortgage loans of 100% or more of the value of the property. They knew these loans were risky, so they charged borrowers a high rate of interest to reflect the risk level - thereby making monthly payments even more difficult and unlikely.
Then they bundled these risky loans up with others that seemed a little less risky, tied them with plenty of string, and sold them as solid “securities” to other organizations with the promise of a steady income stream from the very attractive rate of interest being charged. All entirely legal - and fundamentally corrupt. Then began the chain reaction. Borrowers defaulted because they couldn’t keep up with their payments, and when the banks repossessed the properties they found that the market for them had shrunk and their value had plummeted. Meanwhile, the organizations left holding those parcels of high-value securities - RBS was one - suddenly discovered that the contents consisted of nothing but cool air.
How easy it is to forget that behind every loan default and property repossession are impoverished lives, people made homeless because they bought the dream of economic independence and discovered that the system itself made the dream impossible. The current financial crisis is not an aberration that can be addressed by a few changes in the banking regulations. It is a precise function of the neo-liberal model.
How have other countries approached the issue of western-style globalization? Many have taken it with a large pinch of salt. German nationals have retained ownership of a substantial proportion of their manufacturing base - and as a result Germany has remained an important source of technological innovation as well as one of the world’s largest exporters of manufactures.
In France, government regularly intervenes to prevent foreign takeovers of key industries. Denmark and The Netherlands have put substantial resources and effort into horticulture and agroindustry - sectors not conventionally associated with high-tech but which demand as much scientific, engineering and managerial know-how as many of the more glamorous ‘knowledge’ activities. Selective protectionism has remained a part of economic policy.
China meanwhile, has taken a different route - ignoring the western neo-liberal model altogether and conducting a highly-managed industrial and trade strategy that includes exchange-rate manipulation as well as State oversight of foreign investment in China and Chinese investment elsewhere.
What does all this mean for the UK? That is precisely the question that our three main parties have studiously avoided in the run-up to the election. Both Tories and Labour are irrevocably wedded to neo-liberalism, while the Lib Dems watch placidly from the sidelines apparently afraid to comment. None of them seems inclined to question, let alone reverse, the laissez-faire trajectory on which we are embarked.
Yet if we are to avoid a future of ineluctable decline, we will have to tackle the issues of re-industrialization, R & D, and the need to start making things once more for ourselves. We will also have to face the implications - as even Peter Mandelson has finally understood - of allowing our industrial base to fall into foreign hands.