So most developed countries these days rely overwhelmingly on the service sector for the bulk of their economic activity, and especially for employment. There are a few exceptions to this rule, however. Canada and Australia, for example, have large mineral-extracting industries, and the German economy still has a substantial manufacturing base. And it just so happens that these three countries were less affected by the crash of 2008, because they earn more real wealth. Germany exports high-value goods such as cars and machine tools to the booming economies of China (where there is new wealth from manufacturing) and Russia (which has wealth from oil and gas).
Figure 6
I would suggest, therefore, that the economic problems affecting most developed nations today are primarily a result of the decline in the primary and secondary sectors relative to their overall economies. Too much reliance has been placed on the service sector for employment, and, although during the boom years the service sector created millions of well-paid jobs, the wealth still had to be created originally by the primary and secondary sectors. We lost sight of this fact.
We came to believe that the financial services ‘industry’, for example, created wealth, when all banks really do is take wealth that has already been created in the real economy, much of which is now held in large investment funds (in other words, other people’s savings and pensions), and try to profit by lending that money, or by borrowing more money against it (leveraging) and speculating in things like derivatives, in the hope of making still more money. But this whole business, which according to GDP figures adds around five trillion dollars a year to the global economy, does not actually create a penny in real wealth. The nature of derivatives, which form the bulk of financial trading these days, is such that when one trader gains, someone else must lose. This is comparable to the more obvious forms of gambling, only worse, because the loser might not be another gambler, but rather an innocent investor, or pretty much anyone (more on this in later chapters). Does the betting shop or the casino create wealth? Of course not.
So that five trillion dollars wasn’t really new wealth at all – it was a combination of wealth that already existed and credit that had been artificially created by leverage. A lot of that existing wealth will have crossed international boundaries, so in that respect nations such as Britain and Switzerland gain, but, from a global perspective, financial services don’t create wealth. What they create is debt.
As the proportion of actual wealth creation in the economy declines relative to wealth that has accumulated from past industry, as it inevitably must do, the dynamics of the global economy change with it. The influence of the financial sector grows at the expense of the productive sector, with unfortunate consequences for the majority of the world’s population.
Yes, banks provide a useful service to industry, and have done for thousands of years, but since the 1970s, after money lost its link to gold, the bulk of banking activity has been increasingly detrimental to the economy. If it weren’t for the rapid growth of the financial sector, the last recession would not have happened – or at least it would have been a lot less severe, and the Eurozone wouldn’t be in the mess it’s in now. The credit bubble gave us artificial growth, and now we must return to reality. The value of the dollar, and currencies generally, has been falling, and will have to keep falling until the amount of supposed wealth in the world corresponds to the amount of real wealth that’s been created. This has serious implications for the global economy over the next decade or two, as the long-term trend for falling prices, as shown in Figure 7, goes into reverse.
I’ll return to the issue of rising prices later, but first I want to think a bit more about the balance between the productive and non-productive sectors.
Figure 7
Different kinds of wealth
Perhaps I should clarify this point about wealth creation, because although in some respects it might seem obvious, I have a feeling that some politicians and economists might disagree with me when I suggest that what amounts to almost 80% of the British economy, according to GDP figures, doesn’t create any wealth. Is it really possible that 20% of the workforce – around 10% of the population – is supporting the rest of us?
Well, no, it isn’t. For one thing, Britain imports wealth from other nations via the City of London, and for another thing, as I’ve already mentioned, GDP figures give the wrong picture.
Let’s think for a minute what service jobs involve. Whether you’re a shop assistant, a hairdresser, a bus driver, a waiter, a banker, a marketing manager, you aren’t really creating wealth. All you are doing is taking money from your customers in exchange for a particular service. Even if you’re a doctor or a lawyer, a police officer or a judge, the same principle applies – you are paid for providing a service. That service enriches the economy, certainly.
A teacher, for example, provides an invaluable service. Perhaps more than any other worker, a teacher adds a great deal of what I referred to earlier as ‘intangible capital’ to the economy, and therefore to the nation. But the reason we call it intangible capital is that teachers add a kind of value that we can’t see or touch, and therefore can’t really measure. The whole nation – business especially – benefits from a good education system, which is one reason why we shouldn’t begrudge paying for it in taxes.
But it should be clear enough that, to pay those taxes, there must be some real wealth entering the economy. If everyone worked in education or the health service, or any other service, where would the wealth come from?
A more obvious example still is the army. For as long as there have been city states and other organized societies, there have been armies to protect them from attacks by ‘barbarians’ or rival armies. But armies had to be equipped and soldiers had to be fed, which meant either a raid on a neighboring state’s gold supplies or a tax on landowners, or possibly both. One of the first forms of taxation was the demand by Persian emperors and other ancient rulers for a portion of the harvest to feed the army. And effectively, this still goes on today: the produce of the earth, and of industry, is still the source of all government revenue.
That isn’t what the figures will tell you, of course. A breakdown of UK economic output as measured by GDP suggests that less than 1% of the nation’s wealth comes from agriculture, 16% from manufacturing and over 30% from financial and associated services. Most of the rest comes from other services. So if Britain is a nation of shopkeepers and bankers, where does the real wealth come from?
Investment banking is totally dependent on large funds of accumulated wealth, all of which must have come from industrial activity of some kind. It’s not easy to trace the source of private wealth, but there are enough clues around to give us a general picture. A lot of the money that finds its way into the City of London, for example, originates in Middle Eastern oil or Siberian gas fields.
In fact, as I will explain in more detail later in this book, more than half of all wealth in the world today has come from oil.
For most of the world’s population, the accumulation of wealth is something that happens only to other people: rich people. Even the prospect of buying a modest home is way beyond reach for the vast majority of the global population. Day-to-day existence is the best that can be hoped for: another meal for the family, another week’s rent paid to the landlord, another shirt for a child.
According to a United Nations report from 2006, half the world’s adults had assets