Funding the Future

John Kenneth Galbraith was one of the great economists of the twentieth century. In The Culture of Contentment, published in 1992, he offered a warning about what happens when prosperous people use democracy to protect their own economic security while ignoring those excluded from it.

More than 30 years later, that warning deserves another hearing.

In this Funding the Future podcast, John Christensen and I discuss why Galbraith’s analysis remains so powerful. We look at the rise of the home- and asset-owning democracy under Thatcher and Reagan, the political importance of rising asset prices, the mythology of individual self-reliance and the extraordinary willingness of the economically contented to accept government support for themselves while condemning support for those in poverty.

We then ask what has changed since Galbraith wrote.

The financial crash, climate crisis, cost-of-living pressures and housing crisis have weakened the old economic settlement. Younger generations have largely been denied access to the property and financial wealth that created security for many older people. Meanwhile, those who remain contented depend increasingly upon asset values that may prove vulnerable to another financial crisis.

Galbraith knew that apparently stable political systems could unravel remarkably quickly.

The question facing us now is what comes afterwards. Can we create an economy that provides security for everyone rather than preserving privilege for those who already possess it?

Inequality is about much more than the difference between what one person earns and another. It is about income, wealth, opportunity, security and, ultimately, power.

In this episode of Understanding Economics, I explain what inequality is, why wealth is distributed much more unequally than income, and how inequality can become self-reinforcing. Someone who has enough income to save can accumulate wealth. That wealth can generate further income through interest, profits, investments and rents. That additional income can then create still more wealth. Meanwhile, someone without savings may be paying part of their income to someone who already owns assets.

As a result, inequality can reproduce itself, including across generations.

But inequality is not simply an inevitable feature of economic life. The rules governing wages, employment, ownership, inheritance, housing and public services all influence how unequal society becomes. Tax and social security can further alter the distribution.

And that is important because inequality wastes human potential. People with talent and ambition can be denied opportunities simply because they lack the resources, security or connections available to others.

Inequality is therefore not just about money. It determines who has choices, who has security, who gets opportunities and who has power.

The question is: how much inequality are we willing to accept?

We need a revolution because nothing seems to be working as it should.

People have lost confidence in the government, the NHS is under strain, utilities and many private companies deliver dire services, charities don't seem to be solving the problems they have been set up to address, and universities aren't meeting students' needs, and yet the organisations responsible continue to survive while those they should serve are deeply dissatisfied. 

That is no accident. Too many institutions in the UK, whether in the public, private, voluntary or other sectors, have forgotten their purpose. They no longer face the people they were created to serve. Instead, they serve their funders, shareholders, managers, and internal processes. Balancing the books, protecting reputations and securing the next grant have replaced delivering for people, customers, students and those in need.

Institutional survival has become their apparent purpose, and failure has no consequence for those at the top.

The revolution we need then is not about barricades. It is about turning all these failing organisations around. They need to face the people they are meant to serve again. If meeting people's needs becomes the measure of success again, then spending, strategy and management action must follow that redefined purpose. People must, then, come before organisational preservation.

If we put people first, we can make institutions work again and rebuild an economy that actually serves the country it is supposed to support.

Is that too much of a revolution to hope for? 

Has capitalism failed? Or is the real problem with the particular form of capitalism that has dominated Britain and much of the Western world since the 1980s?

In this video, I argue that we need to distinguish capitalism from neoliberal capitalism. The post-war form of capitalism existed alongside strong government, organised labour, public services and regulation. It was constrained by institutions that prevented economic power from being entirely concentrated in the hands of those who owned capital.

Neoliberalism changed that. From the time of Margaret Thatcher and Ronald Reagan onwards, governments promoted privatisation, deregulation, weaker trade unions, financialisation and the idea that markets should determine ever more aspects of our lives, not least by undermining government itself.

The result has been an economy increasingly focused on making money from money rather than on creating the goods, services and public infrastructure that people actually need.

As a result, house prices can soar without creating another home. Privatised utilities can extract wealth without improving services. Financial wealth can increase while real prosperity declines.

The consequences are inequality, a failing real economy, failing public services, financial instability and growing political anger.

Neoliberalism sought to weaken government. But government may ultimately be the only institution capable of saving capitalism from itself.

So has capitalism failed? Or has neoliberalism destroyed the conditions that once allowed another form of capitalism to survive?

What makes a successful Prime Minister? Britain has had plenty of political leaders in recent years, but how many have really understood what governing the country requires?

I argue that a successful Prime Minister needs three essential qualities.

First, they must understand the country they govern. They need to recognise why people are dissatisfied, what they fear, what they hope for and what they expect the government and a Prime Minister to deliver.

Second, they must understand how government actually works, including government finance. The UK government is not a household or a business. It creates the currency that everyone else uses. Money is not therefore the fundamental constraint on what government can achieve. The real constraints are people, skills, energy, materials and other available resources.

Third, a Prime Minister must have the determination to deliver change. Understanding what needs to be done achieves nothing if a political leader cannot withstand opposition from vested interests, the media, business, the City and even their own party.

Neoliberalism has hollowed out our idea of political leadership. Too many politicians now see government as something that should stand aside rather than actively shape society.

Could Britain once again have a genuinely transformative Prime Minister? I think so. But first we need political leaders who understand what government is actually for.

The Great Discomfort is coming. A financial crisis could expose just how fragile middle class security has become.

For decades, millions of people have been encouraged to believe that a professional job, a growing pension fund and an increasingly valuable home would provide lasting economic security. But what happens if all three assumptions fail at once?

Stock markets are at extraordinary levels. The AI boom has many of the characteristics of a financial bubble. Yet even if that bubble bursts, businesses will continue adopting AI, potentially threatening professional employment. Meanwhile, falling confidence, insecure jobs and financial turmoil could put further pressure on house prices.

The consequences would go far beyond economics.

A generation that believed following the rules would guarantee prosperity could discover that the system never provided the security it promised. Pensions could fall in value. Careers could disappear. Housing wealth could evaporate. Expectations of inheritance could prove misplaced.

That could produce a profound political reaction.

Some people may respond to insecurity by looking for scapegoats and embracing authoritarian politics. Others may conclude that neoliberal capitalism itself has failed.

The question is what happens when a comfortable middle class suddenly discovers it isn’t secure at all.

I am calling that process the Great Discomfort, and I expect it to start soon.  The question is, are you ready for it? Now is your moment to be so. 

Poverty is not a fact of nature. It is a political choice.

The UK considers a person to be living in poverty when their income is below 60% of median household income, after tax and housing costs. On that measure, at least 14.2 million people, including 4.5 million children, are in poverty today. That is about one in every five people, according to the Joseph Rowntree Foundation's most recent estimate.

The proof that poverty is a choice sits in our own recent history. Between 1997 and 2005, a Labour government cut poverty from around 25% of the population to 20%. Then progress flatlined: the global financial crisis of 2008 and the austerity that followed froze it for two decades. Poverty did not become harder to solve. We simply stopped trying.

Poverty is not only a lack of money. It damages health, holds back children's development, disables people by restricting their choices, and wastes human potential on a colossal scale, which in turn reduces national income itself. And every tool to end it already exists: more progressive taxation, better regulation, better housing law, more social housing and, of course, a much fairer social security system. What is missing is not the tools. It is the will.

This video is a part of my Understanding Economics series. Understanding poverty is therefore essential to understanding economics, inequality and the choices governments make.

Why has buying a home become so difficult for young people in Britain?

In this Funding the Future podcast, I talk to my son James about the extraordinary generational divide in housing.

When I was 25, I bought a three-bedroom flat in London for £28,500 with a deposit of just £250. Young people today can face house prices approaching £300,000 or considerably more, while being expected to find deposits of many tens of thousands of pounds.

At the same time, high rents make saving increasingly difficult. Student loan repayments reduce disposable income and can also affect mortgage affordability, and for those without access to the bank of mum and dad, home ownership can seem impossibly distant.

But this is about much more than house prices.

James argues that young people need permanence, independence and somewhere they can genuinely call home. Housing insecurity affects relationships, decisions about having children, careers and people’s ability to build independent lives.

We discuss social housing, affordable rents, shared ownership, rent controls and whether government should help provide long-term, predictable housing finance.

The housing market my generation entered no longer exists. Telling young people simply to work harder and save more does not address that reality.

If the market cannot provide affordable, secure homes, government must act, and we discussed what it might do. We hope Andy Burnham is listening.

In this latest video in my Understanding Economics series, I look at an idea economics has been missing for the last forty years, and it is one of the ideas that matters most: resilience. The big deal is not growth, nor efficiency. It is, instead, the ability to withstand shocks and adapt when things change.

Resilience means preparing for hard times while things are still going well.

It means knowing what to do when circumstances change, and having the resources ready when you need them.

Without it, income and wealth are temporary: they can evaporate within a day or two.

For individuals and companies, resilience is largely about money or savings, and access to borrowing. But for a country like the UK, which issues its own currency, money is not the problem. The government can always create it. The real constraint is physical, and is whether we actually have the resources, the spare capacity and the backup systems to solve a crisis when it arrives.

That is what "redundancy" means: the spare tyre in the boot, the generator in the hospital, the second water supply. It is keeping extra capacity available even when it feels wasteful in the good times, because that is what keeps things running when something goes wrong. And it is exactly what neoliberal “just-in-time" thinking destroys. Just-in-time is a trick to minimise cost, and it delivers systems that are completely unsustainable.

The US has just proved it. It burnt through vast stockpiles of missiles in its fight against Iran, and discovered the lead time for replacement is too long to sustain a war.

Governments have to invest in infrastructure, energy, skills and public services, and build in spare capacity before a crisis strikes. Without resilience, an unexpected problem becomes a full-blown crisis: supplies run out, systems fail, companies collapse, and people suffer. Resilience is not a luxury. It is the difference between weathering the storm and being destroyed by it.

October has an extraordinary history of sudden financial crashes.

Six of the eight largest falls in Dow Jones history happened in October, including 1929, 1987, 1997 and 2008.

Couple that fact with Bank of England Governor Andrew Bailey warning this week that markets face a high risk of a disorderly correction.

His concern is not abstract. Valuations are stretched, meaning markets are priced far above what fundamentals justify, and that correction is overdue.

The danger is amplified by debt. Bailey thinks too much borrowed money is being used to buy shares through Exchange Traded Funds and hedge funds, and so when sentiment turns, losses might intensify. 

Concentration makes this risk worse. Seven giant tech companies, above all those tied to frontier AI, now dominate valuations while cross-investment between AI models and data centres ties their fates together.

Bond markets are already in panic and stock markets are swinging sharply, and the upside for staying exposed is shrinking.

Bailey's message, echoed here, is to head for safety while you can. Choosing the safest option for your finances is not pessimism but prudence when stretched valuations, debt and concentration collide in the most dangerous month.

History shows October does not forgive stretched markets when debt and concentration have already made them fragile