We need to talk about rentier capitalism (why work doesn’t pay)
By Tim Thorlby
10 min read
This blog explains how the UK has become a world-leader in rentier capitalism over the last 40 years, how this is fuelling inequality and why it is urgent that we reverse this systemic process of injustice.
Rentier capitalism may sound like an obscure academic idea, but we need to talk about it. It is the reason why oil and gas companies are making historically unprecedented profits, why your water bills are so high, why work doesn’t seem to pay any more and why a small minority of people seem to be getting richer each year whilst the rest of us are switching off the heating.
It turns out that ‘owning assets’ is more lucrative than ‘working for a living’. Understanding this, the core of rentier capitalism, is the only way we will ever make our economy operate more fairly – for all of us, not just a few. A biblical perspective also provides a clear and urgent route-map out of the mess.
We all need to become economists, even if just for a while.
1 – Who is eating all the pie?
In January, whilst the world’s wealthy elite put on their snow shoes at Davos in Switzerland for the World Economic Forum, Oxfam published its annual report on global inequalities. ‘Survival of the Richest’ is an extraordinary read[1].
It shows how, during the pandemic, the world’s richest 1% continued to enrich themselves faster than the rest of the world. From 2019 to 2021, the top 1% took nearly two-thirds of all of the new wealth created, whilst the poorest got poorer. It means that a small wealthy minority helped themselves to an even bigger slice of the world’s pie.
The UK plays a world-leading role in making this happen. Here, the richest 1% own as much as the bottom 70% of our nation’s population. No, it is nothing to be proud of.
What is most mind-boggling is that this has been going on for 40 years. Every year, Oxfam release a report saying much the same thing and….well, not much seems to happen.
But this is not inevitable. It is not how it used to be. It is something we have constructed, so it is something we can change.
But first, we must understand the root cause of this problem. And that means we need to meet the Rentier.
2 – Meet the Rentier Capitalist
A blog about rentier capitalism may seem a little niche perhaps but it is the key reason why a small number of people in the UK have become very wealthy in recent decades and why the rest of us have not. It is impossible to understand the UKs economy without grasping the role of the rentier. It will also be impossible to fix the UK’s enormous disparities of wealth without addressing it.
So, here goes.
Rentier capitalism in a nutshell
It was Professor Thomas Pikkety’s enormous 2014 book ‘Capital in the Twenty-First Century’ which influenced the world’s economists to take a closer look at the role of the rentier capitalist. Don’t worry if you have never read this book, most economists haven’t either, even if it sits on their bookshelves behind them in zoom calls.
Rentiers are not new by the way – the term was first used in 19th Century France to describe a wealthy landlord who lived off the rent from their properties; hence the French word, and hence (perhaps) a French academic taking a closer look.
The core argument of Pikkety’s enormous tome is that r > g.
Yes, you can drop that one into conversation at your next team meeting; you will sound even smarter than usual.
In other words, over the long term (and unless governments act to influence the outcome), the rate of return on capital (‘r’) tends to exceed the rate of economic growth (‘g’), leading inevitably to wealth inequality.
Capital means ‘assets’ – land, buildings, money, investments, etc – and so the rate of return on capital (‘r’) is the income that asset owners make each year from their assets – the interest, the rent, the dividends. You can earn a lot of money from assets.
Economic growth (‘g’) is the overall rate at which the national economy grows each year – the size of the national pie, if you like, and how fast it grows.
Pikkety crunched a lot of historic data over a long time period and observed that, all other things being equal, the owners of capital tend to grow their wealth faster than the surrounding national economy grows overall.
This means that as the national pie (“economic growth”) slowly grows each year, the owners of capital take a disproportionately larger slice each year. At whose expense, you might ask? Who else is eating this pie? Well, the other slice (there are only two pie eaters by the way, so only two slices) is ‘labour’ – i.e. anyone who works for a living earning a wage or salary. So, as the ‘capital’ slice of the national pie grows each year, the ‘labour’ slice gets smaller and pay stagnates. In other words, all those pay rises each year (in %) add up to a bit less than the income rises (in %) that the asset owners secure each year.
It’s a race that workers in the UK have been losing for 40 years. It’s why most of us are currently experiencing the worst pay squeeze for two centuries but the FTSE 100 recently hit an historic, record, high (Feb 2023). The fortunes of capital and labour are now on very different trajectories.
Hence, r > g. Our economy currently tends to reward capital (asset owners) more than labour (workers).
You are now an economist. Congratulations!
And merci beaucoup, Professor Pikkety.
Twas ever thus? No
Is this just how it is, then?
No. During the 20th Century, successive UK governments actually did a reasonable job of ensuring a balance of returns between capital and labour – sometimes labour even won out. Which just goes to show that rentier capitalism is not inevitable.
But in the 1980s, this truce was shattered and capital has been slowly but surely taking more of the national pie again. We have seen both the growth of rentier behaviours and the consequent growth of wealth inequality in the UK over the last 40 years.
Today, the rentier is not an individual but a company.
The rise of neoliberal economic policies, pursued by Mrs Thatcher, created the circumstances for rentierism to thrive, and thrive it has. Enabled by multiple privatisations (expanding the range of assets on offer to the private sector) and by a raft of monetary and fiscal policy changes, rentierism has become a lucrative way of doing business.
So, how does rentier capitalism work?
A rentier is a company earning ‘rental’ income from the “ownership, possession or control of scarce assets under conditions of limited or no competition.”[2] Fundamentally, the business makes most of its money not by doing or making something, but by owning something. Its scope for making significant (and often excessive) returns is enabled by a degree of monopoly in whichever sector it happens to be – limited competition from others. It is sometimes called ‘balance-sheet capitalism’, as its profits come from its assets (recorded on the balance sheet).
A classic example is the owner of a piece of land, who earns rent simply by owning the land; income derived primarily from an asset, rather than work per se. Even better if the land is in great demand and its value keeps rising each year, and the rental income keeps rising – without the landlord having to do much extra work. What a lucky chap. The greatest returns accrue to those asset owners who have a monopoly on them, or at least limited competition, as this enables prices to rise. John Stuart Mill, the 19th Century politician, economist and thinker said this of landowners:
“They grow richer, as it were, in their sleep, without working risking or economising. What claim have they, on the general principle of social justice, to this accession of riches?”
(John Stuart Mill, The Principles of Political Economy, 1865)
Another classic example is the complex and growing array of financial assets which investment banks have built up over the years, earning quite staggering incomes each year from being able to earn interest from loans. The lack of serious competition between these consolidated banks has helped them to maximise their returns.
Assets can also be more than just land – they could be any assets, licenses, intellectual property rights, exclusive contracts, permits to mine natural resources like oil or gas or web platforms which have value and which have limited competition in their market. Where a company can exploit an asset, with limited competition to stop it raising prices, then you have rentier behaviour – the extraction of income well above anything that could reasonably be understood as ‘earned’ through work.
But does this matter? I think it matters a great deal; let’s look at why.
3 - Why does it matter?
Firstly, just to be clear: enterprise is a wonderful thing. Investment can be a force for good. There is nothing wrong with owning assets and nothing bad about profits, when made honestly.
The issue with rentier capitalism is that assets are not evenly owned and that within monopoly situations they can be exploited to deliver enormous profits for the owners at the expense of many other people. Rentiers love monopoly situations and endeavour to protect them.
There are four main problems with rentier capitalism:
A position of power is being abused – Rentierism thrives where competition is limited and so is fundamentally an abuse of power; in this case, the power that comes from being the only supplier in a ‘market’.
Excessive profit is not merited – The excessive profits often earned by asset owning rentier companies are not earned by hard work nor derived from great innovation but are the ‘lucky’ outcome of having an advantageous monopoly position and (usually) few, if any, competitors to keep them on their toes. An element of rentier income and profit may be earned through work, but the rest of it (which can be substantial) is neither earned nor merited but a windfall.
The outcomes are unfair – Rentier capitalism has victims. In the case of the water companies, for example, (see the next section) it is the customers with higher bills to pay and the fish killed in the polluted rivers and the home owners washed out by the floods from old leaking pipes. All while the owners of the company make significant profits.
The playing field is not level to start with – On the day we are born, some of us have the great luck to be born into asset-owning families and some of us do not. Given that assets essentially convey an advantage in the marketplace, it means that the playing field is very uneven indeed. Any approach to economics which does not take into account this Great Unfairness, is implicitly endorsing inherited advantage.
Thomas Pikkety’s book (where we started the blog) highlights how this kind of capitalism drives both income and wealth inequality at a national level. Over time it enriches a few at the expense of the many; it has an in-built tendency to concentrate wealth in fewer hands. It has big long-term consequences.
There is also plenty of evidence that an economy in the grip of rentiers has depressed investment and productivity, limiting long-term national economic growth. Capital investment in the UK has fallen significantly since the 1970s[3]. Monopolists don’t tend to be the most innovative producers or the best investors; after all, they don’t need to innovate or compete or invest to earn their income, they can just sit tight.
In other words, rentier capitalism is both slowing our economy down and making it more unequal.
4 – Case study: England and Wales’ Water Companies
As one example of rentier capitalism let us consider the privatised water companies of England and Wales. (Scotland and Northern Ireland’s water industry remains in public hands).
In 1989, Mrs Thatcher’s Government parcelled up and privatised the ten water companies covering England and Wales. This was part of a wave of privatisations of state enterprises and infrastructure from 1983 to 1996 (with a handful since). It was one of the largest programmes of privatisation in the world.
Our water companies supply fresh water and deal with waste water. This includes everything from managing reservoirs through to maintaining the national network of pipes, pumping stations and sewage disposal plants.
The physical infrastructure represents the ‘assets’ owned by each water company and is what was sold to the new investors in these newly privatised companies. In a real sense, the millions of customers for each company were also effectively ‘sold’ to these companies – a captive market for each company and their main source of income.
Each water company has a natural monopoly in its area; there are no competitors. We all need water and there is only one water distribution network in each area – there is no other supplier of water for our houses or businesses, just the one regional provider in each area. In my case, this is Thames Water, serving 15 million people across London and the Thames Valley.
As a result of the monopoly ownership of these assets, these private water companies have been able to increase prices significantly since privatisation. The evidence suggests that they have also underinvested in the infrastructure, investing less each decade since privatisation, according to a 2021 FT analysis[4]. Monopoly providers with no competition have little incentive to innovate or invest in improvements. Instead, their owners have preferred to ‘sweat their assets’, which means to extract financial profit from them.
A recent study[5] has shown that since privatisation in 1989 the water companies have also borrowed a staggering £53.9 billion of debt and paid out £65.9 billion of profits in dividends to shareholders. The two numbers are related, as much debt is actually used to finance dividends rather than invested in fixing pipes. Debt and prices are rising, whilst capital investment in infrastructure is falling – all so that profits can be maximised and extracted. Customers are today paying an estimated 20% of every bill to cover the debt interest payments (according to the Competition and Markets Authority).
The scale of the debt and the fact that much of it is in the form of complex financial derivatives has caused concern by the regulator (and others) about the financial stability of these companies.
Such are the financial prizes on offer in the water sector that investors come from far and wide seeking to buy shares. This is why our water companies are now 70% owned by foreign investors[6]; investors often travel some distance to buy them.
As a customer of Thames Water, I will briefly use them as a close-up case study of rentier capitalism in action. Look and marvel.
Thames Water
Originally floated on the stock market and publicly listed (with shares openly traded) in 1989, Thames Water is now entirely in private hands. It is 32% owned by Omers Infrastructure, an investment company based in Canada, 10% by the state of Abu Dhabi and 9% by a Chinese state investment fund. Thames Water has changed hands countless times in the last 30 years.
An investigation by the FT in 2017[7] found that Thames Water had paid out £1.16 billion in dividends to shareholders (its owners) from 2006 – 2015. At the same time, it had borrowed huge amounts of money (from 2007 to 2016, it ramped up debt from £3.6bn to £10.2bn), paid its senior executives big salaries and managed to avoid paying much corporation tax (it paid none at all from 2011-2015).
As the former head of Ofwat (the water regulator), Sir Ian Byatt, noted in 2017:
“Nearly everyone on the [Thames Water] board are investors and one cannot resist the idea that they are more concerned with money than with serving the public. The public interest is so easily forgotten and consumers are paying more for their water bills because of it.”
If the company was making huge investments in tackling pipeline leaks, improving water quality in rivers and lowering prices, it might possibly be forgiven its extravagant extraction of profits. But its record looks poor:
Customer complaints - In 2021-22, Thames Water received over 40,000 complaints from its customers, accounting for nearly half of all water company customer complaints in the country[8]
Pollution – Thames Water is regularly fined for missing its service delivery targets and also fined by the courts for pollution. For example, in October 2022, it was fined a huge £51m by Ofwat for failing to meet targets on water quality and pollution[9]. This means more polluted rivers and beaches.
Pleading poverty - When the company decided to build a huge ‘super sewer’ under London (the ‘Thames Tideway Tunnel’), it persuaded the regulator that it couldn’t pay for it, so the Government is underwriting the risks and the customers will pay for it (whilst the company continues to pay out dividends).
Regulator criticism - in 2022, Ofwat ordered the company’s shareholders to invest £1.5bn “to get their house in order”[10]. It also talked about the need for a “turnaround”.
The usual argument to justify significant profit making by a private company is that it is engaged in some great innovation or entrepreneurial risk-taking that will benefit people in the long run. But here we see a company with a dismal record, not obviously taking risks or innovating and yet extracting a fortune in profits for its owners.
Like many rentiers, the company uses its ownership of assets to charge high prices to customers whilst underinvesting in its service so that it can maximise profit extraction. The assets which it owns, and the monopoly situation which it benefits from (aided by weak regulation by Ofwat), are together used to maximise profits for the owners. And the customers pay for it all. The deep irony is that the customers used to own these assets as they used to be public infrastructure; now they don’t own them, are unhappy and pay more.
This is a terrible way to run water companies.
Yes, it should make you angry.
The UK has been a world-leader in privatising public infrastructure and it is time to recognise that much of this experiment has failed.
5 – A biblical perspective
The core issue with rentier capitalism is the way that assets are owned in a monopoly situation that conveys significant power onto the owners of those assets. Many choose to use this powerful situation to enrich themselves.
The Bible is positive about enterprise, risk taking and investment, even marketplaces. (See a previous blog for more on this). It is a normal and healthy part of a society’s shared life. But the Bible does not accept the abuse of power as a natural, inevitable and acceptable consequence of how the marketplace operates. It recognises the abuse of power as a problem.
The Old Testament Law sets out practical ways to prevent situations arising where one person has excessive power over another because of their wealth. For example:
The Law famously bans the use of interest on loans (Exodus 22). That’s right – it banned using money purely to make more money.
The fascinating, and very countercultural, Jubilee laws required the cancellation of all debts every seven years (Deuteronomy 15) and the return of all land to its original family owners every 49 years (Leviticus 25). This may seem odd to us, but its intent was to prevent families from becoming permanently disenfranchised from the land and the means to earn a living. There was to be no underclass in this society. There is an explicit recognition here that this has implications for the ownership of assets – they need to be shared out, not concentrated.
Repeatedly in Leviticus the people are told ‘do not take advantage of each other’. The marketplace has always generated winners and losers but this is not to be exploited to the detriment or impoverishment of our neighbours.
The core biblical principle therefore is the need to avoid the excessive accumulation of money and power in a few hands and the exploitation of others that usually flows from this.
Some businesses are too powerful; they have too much power and we must not be afraid to take on monopolies, even if they are global and complex. This is an important area for further thought and imaginative policy making. There are many tools at our disposal – taxation, regulation and even nationalisation.
There is a complementary principle in here too; that ‘risk and reward should go together’. Companies and investors which are in privileged positions therefore, if in near-monopoly situations, which by definition have limited risk, should not be able to exploit this to make great rewards for themselves.
Underlying these principles is also the broader idea that land, people and money are too important to be just considered as ‘assets’ to be traded. In the Old Testament Law, it is clear that there was never meant to be a free market for these things. Land, for example, is not just something to buy and sell, but is someone’s home and a unique place. The Bible calls for perspective and a consideration of values that go well beyond money.
6 – Speaking truth to power
Rentier behaviour is only possible in economic sectors where the laws, regulations and taxes enable it. Such spaces of super-profit are enabled by Government, sometimes deliberately, sometimes unwittingly. They are man-made. Which means, of course, that they can be un-made.
At the start of this blog, I referenced the recent Oxfam report on global inequality. Their solution to the problem we have just looked at is to tax the super-rich; a one-off wealth tax followed by higher annual taxes. This kind of wealth redistribution may well be part of the answer but it does not address the underlying problem; those who continue to own lots of assets will continue to earn more income than everyone else.
The question as to who owns and controls major assets needs to be addressed; the truth is that in the UK today we need less monopolies, less oligopolies and more distributed ownership.
What does this mean in practice?
Stronger regulation – There is undoubtedly a case for much more robust regulation of some sectors where competition is limited (e.g. financial services). Some of those big companies need dismantling into smaller enterprises, or regulation needs stronger teeth to bring some competition back into the cosy rentierised sectors.
Rewired taxation – The greater taxation of unearned wealth is also a reasonable response – for example the windfall taxes currently imposed on the oil and gas companies, or a land value gains tax to recoup rises in land values that have not been earned. A wider rethink of what is taxed and what reliefs are offered could go a long way to correcting some of the most damaging rentier behaviours and incentivising the more productive use of capital. This is not necessarily about ‘more taxes’ but about ‘different taxes’.
Wider asset ownership – Who owns the nation’s assets is at the heart of what we have been looking at. Part of the challenge here is to broaden out the ownership of some of these assets – either through creating more private entities (breaking up a monopoly into smaller enterprises) or taking the assets back into public ownership (the water companies being a great example) or perhaps, in some cases, moving assets into community ownership. The broader ownership of assets, closer to the people whose lives they affect, is a crucial part of building a fairer and more hopeful future.
For any free marketeers reading this and feeling a bit agitated, it is worth noting that the result of these changes would, on the whole, be more enterprise, more innovation and more competition, not less. The wider and more distributed ownership of assets is far more likely to unlock the talents and energy of this nation than their concentration into the sclerotic hands of an unimaginative few.
These are big issues, big ideas and big challenges. We need national vision and leadership to turn the tide in favour of the majority – but it has been done before, and it could be done again.
In the meantime, there is an urgent role for individuals, civic institutions, churches and responsible businesses – as well as aspiring MPs – to grasp the nettle and agitate for change.
If you want to know more, there are a growing number of reports and books to read, as well as various charities researching and campaigning on these kinds of issues – including Common Wealth (campaigning for wider ownership), We Own It (campaigning for public ownership) and the New Economics Foundation (developing initiatives to rewire our economy) amongst many others. I’m not endorsing everything that these charities do, but they are a good start for more information.
Vive la revolution?
This blog was written by Tim Thorlby. With thanks to Dr Mike Horswell for helpful comments on the draft. If you would like to be alerted to future blogs, you can easily subscribe for free alerts.
Notes
[1] Oxfam (2023) Survival of the Richest | Access here: https://www.oxfam.org.uk/media/press-releases/richest-1-grab-nearly-twice-as-much-new-wealth-as-rest-of-the-world-put-together/
[2] Quote from page xxiv in Christophers, B (2020) Rentier Capitalism: Who owns the economy, and who pays for it?, Verso
[3] For more in-depth analysis of the impact of rentier behaviours on the wider economy, see Brett Christophers (2020, ibid) or Tily, G (2023) From the doom loop to an economy for work not wealth, TUC: London
[4] Gill Plimmer & Ella Hollowood (28 Dec 2021) Sewage spills highlight decades of under-investment at England’s water companies, FT | Access here: https://www.ft.com/content/b2314ae0-9e17-425d-8e3f-066270388331
[5] Sandra Laville & Anna Leach (1 Dec 2022) Water firms’ debts since privatisation hit £54bn as Ofwat refuses to impose limits | Access article here: https://www.theguardian.com/environment/2022/dec/01/water-companies-debts-since-privatisation-ofwat-refuses-impose-limits
[6] Anna Leach, Carmen Aguilar García & Sandra Laville (30 Nov 2022) Revealed: more than 70% of English water industry is in foreign ownership, The Guardian | Access article here: https://www.theguardian.com/environment/2022/nov/30/more-than-70-per-cent-english-water-industry-foreign-ownership
[7] FT article: https://www.ft.com/content/5413ebf8-24f1-11e7-8691-d5f7e0cd0a16
[8] Jon Ungoed-Thomas and Justin Stoneman, (16 Oct 2022), Thames Water tops league table for highest number of complaints, The Guardian | Access article here: https://www.theguardian.com/environment/2022/oct/16/thames-water-tops-league-table-for-highest-number-of-complaints
[9] Ofwat Press Release: https://www.ofwat.gov.uk/11-water-companies-to-reduce-bills-by-almost-150m-because-of-missed-targets/
[10] Quote from Ofwat, 30 June 2022 | Access press release here: https://www.ofwat.gov.uk/ofwat-comment-on-thames-water-announcement/