Who Runs Britain? by Robert Peston
Hodder & Stoughton, £20

FOR MORE than a century writers and politicians on the left have been predicting that the capitalist system would shortly collapse under the weight of its own contradictions. Again and again, capitalism has proved these prophets of doom wrong. However, the start of the 21st century has coincided with a financial crisis every bit as great as any that has gone before. If things go on as they are, Karl Marx may be proved right after all.

There is a paradox here. The Labour government which took power in 1997 seemed to mark the final victory of capitalism. The new prime minister, Tony Blair, and his chancellor, Gordon Brown, both explicitly repudiated the socialist system which all previous Labour governments had embraced while acknowledging the victory of free market ideas.

Indeed, they went far further than any previous 20th century administration in forming an alliance with what George Orwell used to label the boss class. As Robert Peston demonstrates in horrifying detail in this extremely important book, a small group of super-rich businessmen effectively dictated large tracts of government policy.

Corporate buccaneers were allowed access to Blair and Downing Street and Brown at the Treasury in a way that was entirely new. Nothing like it had occurred even under Margaret Thatcher.

In return for comparatively derisory financial contributions to the Labour Party, these businessmen and entrepreneurs received what amounted to a general exemption from the obligation to pay taxation. The effect of this decision was the creation of private wealth on a scale that has not been seen since before World War One and probably not even then.

New Labour’s decision to cultivate the super rich – a class which is now lavishly repaying Tony Blair in kind as he jets first class around the world from boardroom to corporate jamboree – has not been without a terrible cost.

The thesis of Robert Peston’s book is that the losers have been the ordinary, middling people who benefited from the restrained shareholder capitalism which flourished in Britain from the end of World War Two. This capitalism was based around large, accountable public companies – Marks & Spencer, ICI and so forth. By the late 20th century these were no longer owned by private individuals, but overwhelmingly by large and seemingly impregnable pension funds.

Senior management in these companies were paid generously (perhaps a quarter of a million a year), but not lavishly. The real beneficiaries from the profits made by these large public companies were not private individuals, but members of the final salary schemes which guaranteed security in retirement to millions upon millions of ordinary employees.

These large corporations were socially responsible and financially conservative. Above all, they were strongly biased towards financing investment through equity rather than borrowing – a prudent approach which helped guarantee long term survival at the expense of short term profit.

Peston quite brilliantly shows how the fiscal changes introduced by Gordon Brown in his early budgets destroyed this relatively benign system of shareholder capitalism. Acting on the self-interested advice of a small group of corporate marauders from the private equity industry, Brown systematically put in place the conditions for the emergence of a novel and highly destructive kind of finance.

This structure was based on debt rather than equity. It was designed to create giant private fortunes rather than the even distribution of wealth. Brown’s changes actively disadvantaged the prudent and careful public companies that preferred equity to debt finance. Within a short space of time it completely destroyed the British pension funds that were until very recently indeed the envy of the world.

One of the great merits of Peston’s book is that he knows the hedge fund managers, private equity moguls and politicians involved intimately. He has talked to them, and he understands their points of view. Some of them are certainly friends of his. But he has something very rare in any kind of journalism: the ability to write with the insight and understanding of a genuine insider – and the dispassionate clarity of an highly intelligent observer.

This is why I do not believe that anybody else apart from Peston would have been able to write this unique guide to our contemporary predicament. It shows how Tony Blair and Gordon Brown’s New Labour government has hollowed our public domain, unthinkingly destroyed it and created in its place a barbarous new economic and social structure.

New Labour’s structure is not merely unethical, however. It is also desperately unstable. The shameful surrender by the state to an untrammelled capitalist class has destroyed large parts of the public domain and created genuine conditions for a crisis in capitalism in the months and years ahead.

The most important of these is an explosion of public and private debt. Numerous public assets – ranging from hospitals and schools to great businesses – can only survive through huge debt repayments. This kind of financing works in boom times but is destined to fail when an economy turns sour, as ours is starting to do.

The second has been the destruction of large parts of the public domain and the creation of a tiny class of the super rich at the direct expense of a broad mass of ordinary people. As a result many of the institutional protections against social and political instability have vanished.

There are, unfortunately, too many lazy mistakes in this book. A volume as significant as this ought to be footnoted. It is poorly designed, occasionally giving the impression that it is a collection of essays rather than a coherent and rigorously argued document. The chapter on Marks & Spencer, for example, while well-informed, has little thematic connection with the remainder of the text.

And Peston never seriously tries to answer the question – Who Runs Britain? – posed in the title. It is hard to tell whether his editor at Hodder & Stoughton has done a wretched job or the whole thing was produced in a tremendous hurry. This is a pity because Peston has produced a truthful guide to our times. It deserves to become essential reading as we slide deeper and deeper into an economic, political and moral morass.

Peter Oborne