The rentier economy

There has been some useful analysis on the state of the UK economy following the release of the Q4’2012 GDP figures last week (see my last post, Britain deep down).  In my last post, I dealt with the apparent conundrum of the UK unemployment rate falling while the economy stagnated in real terms in 2012.  I argued that the employment data hid the reality that more temporary and part-time jobs had been created to replace the loss of full-time, permanent jobs.  And this was part of the explanation for the decline in unemployment and the disappearance of any productivity growth in the UK.   The other key factor is the lack of sufficient investment growth as profitability remains well below the previous peak, particularly in the productive sectors of manufacturing (see my post,

UK business investment and net return on capital

Now the International Labour Organisation (ILO) has come with a new definition of what it calls ‘broad unemployment’.  This covers people seeking work but not immediately being  available and underemployed part-time workers, which is closer to the  U-6 unemployment series used in the US.  For all capitalist economies, this unemployment rate is much higher than the official definition of unemployment.  On the broad measure, the UK experienced a rise in the unemployment rate in 2012, not a fall, reaching over 17% in 2012, with only the distressed Eurozone states having higher rates.  Core European unemployment on this measure is way lower.

Broad unemployment in Europe

That’s because core Europe still generates more proper jobs, permanent full-time jobs, not temporary part-time short contract jobs, that the likes of Spain, Italy, the UK and the US have resorted to in the last 20-30 years.

Erin Hatton, an assistant professor of sociology at the State University of New York, Buffalo has just published a book, The Temp Economy: From Kelly Girls to Permatemps in Postwar America that shows one-third of American adults who live in poverty are working but do not earn enough to support themselves and their families.  A quarter of jobs in America pay below the federal poverty line for a family of four ($23,050). Not only are many jobs low-wage, they are also temporary and insecure. Over the last three years, the temp industry added more jobs in the US than any other. Temporary employment skyrocketed from 185,000 temps a day in 1970 to over 400,000 in 1980 — the same number employed each year in 1963.   In the economic boom of the 1990s, temporary employment grew from less than 1 million workers a day to nearly 3 million by 2000.

Uncertain, temporary contract work with low pay has become the norm for millions in many modern capitalist economies – of course this was the norm in the early days of industrial capitalism of the 19th century.   The ‘golden age’ of ‘full employment’ in the 1950s and 1960s was a brief one.

Another issue is: what has caused the UK economy to stagnate rather than recover like the US (even though the recovery there is weak, as I have shown)?  The semi-Keynesian Olivier Blanchard, chief economist at the IMF, has suggested that it is because austerity has been applied too much and too quickly in the UK compared to the US.  And the fiscal multiplier shock has turned out to be higher than previously thought, so hitting UK economic growth (see my post,  As I noted in a previous post, one study found that the relatively tougher fiscal adjustment in the UK compared to the US has contributed slightly less than half the 5% pt difference in real GDP growth between the two countries over the last three years (see G Davies, J Antolin-Diaz, Why is the US economic recovery stronger?, Fulcrum Research, November 2012).  That suggests that fiscal austerity has damaged the UK economy by as much as 0.7% pts of real growth per year in the last three years – not enough to catch up with the US recovery, but enough to put the UK out of stagnation.

However, apparently not everybody in the IMF agrees with Blanchard or Davies on the effect of UK austerity.  Last month the IMF published a working paper by three of its economists, Anja Baum, Marcos Poplawski-Ribeiro and Anke Weber, showing that the impact of tax increases and spending cuts on Britain’s economy, the so-called fiscal multipliers, is very small.   As they put it:  “we confirm the sizeable spending multipliers that have been found in the previous literature for the United States. For Canada and the United Kingdom  … spending multipliers have decreased significantly since the 1980s.  … And we find that revenue multipliers in the United States and the United Kingdom are very small and not statistically significant. In those countries where spending impact multipliers are found to be statistically significant and sizeable (Germany, Japan, and the United States), spending shocks have a significantly larger effect on output when the output gap is negative than when it is positive. In the United Kingdom, spending multipliers are small under both positive and negative output gaps.” (IMF on fiscal multipliers)

As David Smith has pointed out his blog (,”The UK economy has grown by roughly 0.5% a year since the coalition took office. In the absence of austerity, it would have grown only a little more strongly, perhaps 0.75%, the research suggests. The unemployment rate would have been a fractional 0.1 points lower annually.”  So the UK’s austerity measures has not had much impact on economic growth after all.

Smith goes on to ask the question: so why is GDP growth so weak?  And he brings to our attention a paper by economists from Liverpool and Manchester universities, The Impact of Stock Market Illiquidity on Real UK GDP Growth, by Chris Florackis, Gianluigi Giorgioni, Alexandros Kostakis and Costas Milas.  These economists argue that the cause is really Britain’s heavy reliance on its financial sector for growth.

As Smith explains it, the drying up of liquidity in 2007, when the financial crisis hit, was a key factor in the severity of the recession. By the same token, it has been a significant constraint on recovery.  The Bank of England, responding to the crisis by providing liquidity to the financial system, and through quantitative easing, has tried to offset the liquidity drought and credit crunch. It has not, however, been able to eliminate the ‘financial hangover’, to use Smith’s phrase.  In Marxist terms, this amounts to saying that the sheer size of financial leverage in the credit boom before the crash, i.e. the increase in fictitious capital that was generated, in a ‘rentier’ economy like the UK, meant that a financial crash hit the productive sector harder than others.  And while financial deleveraging goes on, economic recovery is stunted.

The ‘rentier’ nature of the UK economy is something that I and many others have noted about the British capitalism. I forecast back in 2006 that it would make the UK’s contraction in GDP in the Great Recession greater than most (see my book, The Great Recession). That turned out not to be quite right, as real GDP fell more in the manufacturing and export trade centres like Germany and Japan.  But it is clearly having an effect on the pace of recovery from the Great Recession.  The failure of British capitalism to preserve and develop a productive sector and instead rely on an old imperial financial capital sector, expanded by a North American ‘big bang’ in financial and other ‘business services’ in the 1980s and 1990s, as the way to growth, has now become a serious handicap.

In 1952 UK manufacturing contributed a third of national output, employed 40% of the workforce and made up a quarter of world manufacturing exports. Today UK manufacturing is just 12% of GDP, employs only 8% of the workforce and sells 2% of the world’s manufacturing exports.   Every advanced economy has been affected by the shift from manufacturing to services, but the sheer scale of the industrial decline in Britain is staggering. After all, Germany has kept a much larger manufacturing capacity and its workers work fewer hours. France, too, has maintained world class manufacturing companies.

As, the leading Keynesian historian, Robert Skidelsky, says in a recent review of a book on Britain’s economic history (, “there cannot be a single explanation of the British economic experience. But we can suggest two important ones. The first was the imperial overhang. Until well into the 1960s most British companies expected to go on earning their living from the Empire – that financial, industrial, and military complex making up the imperial system.   Maintaining the sterling area – not finally wound up till 1977 – required high interest rates and an overvalued exchange rate which hit manufacturing. But it was part of a system of sterling loans tied to orders for British exports, a British government procurement system for imperial defence, a resource-extraction system from imperial primary producers. The British aircraft, shipbuilding, railway, motor vehicle industries were under no pressure to modernise their plant, upskill their managers and workers, or reform their archaic labour practices when they could rely on captive domestic and imperial markets. Complacency ruled; entrepreneurship was at a discount. Globalisation put a stop to all that.”

Also, there was a belief that UK capitalism would remain a major economic power by developing finance capital even if the surpluses from North Sea oil ran out – as they have done.    Sure, British capitalism has developed a comparative advantage in world trade in financial and professional services and, as a result, there there is a surplus on UK trade for financial services.  But the deficits in manufacturing and other service sectors are even larger and so ensure that British capitalism can only pay its way by attracting ‘hot money’ into its banks from abroad or from corporate investment from Europe and the US.  The British economy lives off the productive development of other countries – a rentier economy.

As Skidelsky points out, “the financial sector, as the experience of 2008 showed, is particularly prone to boom and bust. Financial volatility affects all incomes, including the income of the government. Because of its disproportionate reliance on the inflated taxes from the financial sector, the British government’s revenues collapsed disproportionately when the financial sector failed. This helps explain why the our government’s ‘structural deficit’ was greater than those of countries with more balanced economies.”

Skidelsky goes on, “Finally, services of all kinds are less good than manufacturing in securing high employment, and progressive increases in median incomes. In the long run, of course, automation is bound to reduce manufacturing employment, but as long as manufactures are such a large part of international trade, they are important for maintaining employment in a trading economy, because most services cannot be exported. A country which loses its industrial base will thus experience rising structural unemployment apart from automation.”  But, as we have seen at the beginning of this post, that structural unemployment can be hidden behind temporary and part-time work.  Investment in this sort of labour does not raise productivity.  So UK productivity growth has stumbled.

UK labour productivity

11 thoughts on “The rentier economy

  1. Micheal,

    Thanks for the excellent analysis on the UK and for showing the limits of Keynesian anti-crisis policy (fiscal multipliers) in a rentier-economy….

  2. Relating to your last important post Michael on job numbers. Thanks very much for digging down and reporting on why the numbers of unemployed, although scarily high, are not as numerous as some thought they would be. It’s a tragedy that so many are under or unemployed, when it’s obvious there’s so much work to do. Not on making yet more essentially useless crappy commodities, but, for example, building shelter for the growing numbers of homeless people we all see, and repairing the damage that this economic system has done to the world. Thanks again Michael for the important work you do.

  3. Michael

    Can capitalism go on denying the populations of its world subsistence levels of income without the means to actually reproduce labour in any useful – ie healthy, educated and biddable – way?

  4. “Maintaining the sterling area – not finally wound up till 1977 – required high interest rates and an overvalued exchange rate which hit manufacturing.”

    I’m curious as to why ‘maintaining the sterling area’ should require high interest rates and an overvalued currency. Or was the overvalued currency merely the unwanted result of the high interest rates, in which case why were the ‘high interest rates ‘required’?

    1. Paul
      The UK capitalists tried to sustain a sterling area for trade ie. carve out a part of the global economy where the UK could set the terms for trade and investment using the pound. But the UK economy was too weak to maintain this as it ran trade deficits with those in the sterling area. They wanted a strong sterling, otherwise their sterling reserves would lose value against other currencies. So the UK had to raise interest rates to keep these reserves in sterling, thus crucifying further UK manufacturing exports. It could not last.

      The US had a similar problem and could not maintain the fixed rate for the dollar against gold (the gold exchange standard) after 1971 as it built up deficits with Europe and Asia. However, the US economy was way bigger and many surplus nations continued to keep their reserves in dollars (even as the dollar lost value). So the US maintained its position as the world’s reserve paper currency and thus a degree of hegemony, unlike sterling.

  5. So the difference between the UK and US in terms of recovering GDP is probably down to two factors: austerity policies and the proportionally larger financial sector in the UK.

    Are ‘total hours worked’ figures available for the UK, as they are I believe for the US?

    1. Graham

      Yes, plus the poor profitability since the slump keeping companies from making sufficient new investment.

      The ONS does publish total hours worked for the UK. Take your pick of the data from here: Total hours worked are now back to the same level as at the peak before the crisis, but real GDP is not. So productivity is down. The increase in hours worked in the last two years has been higher in part-time work than full-time work.

      1. Thanks for the ONS link. Labour productivity in output per hour is a better measure than output per worker but doesn’t solve the “puzzle” because, as you say, it has still fallen – though less than by using employment figures.

        I guess it’s possible that part-time or temporary workers are less productive then full-timers, but the main factors are labour hoarding, substituting labour for capital, lack of finance (for SMEs) and lower investment/replacement. The first two are the direct consequence of the fall real wages.

  6. I’m not sure where you’re getting your info, but good topic.
    I needs to spend some time learning more or understanding more.
    Thanks for fantastic info I was looking for this information for my mission.

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