Then they made corrections for such things as the cost of commuting, traffic accidents, water, air and noise pollution, the loss of farmland, the depletion of non-renewable resources, and long-term environmental damage including that to the ozone layer. Up to 1974, the total deduction the pair had to make to each year's figures to cover these items grew roughly at the same rate as consumer expenditure with the result that the residual, their Index of Sustainable Economic Welfare, grew at much the same rate as GNP per head. For example, between 1950 and 1960, the GNP per head grew 23.3% and ISEW by 21.0%. In the next decade 1960-70, the figures were 26.3% and 27.5% respectively. After 1974, however, the required corrections grew faster than GNP per head with the result that ISEW began to fall and by 1990 it was only 3% higher than it had been in 1950, having dropped by over a half. Attempts to calculate ISEWs for other countries have produced similar results. In the US, Clifford Cox and Ted Halstead have produced¹⁵ a 'Genuine Progress Indicator' which shows that economic welfare began to decline there in 1968 and had fallen by over 40% by 1992. The decline in Germany began in 1981 but has been much more rapid and the index calculated by Hans Diefenbacher¹⁶ fell by 40% in just seven years.

I've gone into this degree of detail about ISEWs because they throw an important light on the proposals I make in the next chapter. What the UK, American and German indices clearly show is that the world economic system is now running backwards and although it is producing more goods and services each year, all the increase and some more on top is required to keep the system functioning and to compensate for the damage it does. In other words, as the system gets more centralised and supplies our needs in increasingly indirect ways, using more and more packaging, advertising, capital equipment and transportation, it is becoming much more inefficient. Indeed, it has not just run into diminishing returns, but negative ones.

Part of the reason the UK ISEW changed direction in 1974 is that this was the year the distribution of national income began to become less equal and of the reduced proportion of it going to wage and salary earners, a smaller fraction found its way to those at the bottom of the social scale. In the two decades after 1974, British wages fell sharply in comparison with those elsewhere, in part because of the government's efforts to boost competiveness, in part because new technologies reduced demand. So, although UK pay rates were much the same as those in Italy in 1980, by 1990 they were 25% lower and, according to European Commission's 1993 Annual Employment Report, only 5% above those in Ireland and Spain. As a result, the poorest fifth of the population, the group with the weakest bargaining position in a jobs market which no longer had much use for unskilled or physical labour, saw its share of the fraction of national income going to households fall from 9.6% to 6% during the 1980s¹⁷. The richest 20% of the population , by contrast, received 43% of total household income in 1991 compared with 35%. in 1979. Similar income shifts took place in the US and other countries, and when Loic Wacquant, a scholar at the Russell Sage Foundation in New York compared urban poverty in Europe and America, he found that the economic system had started behaving differently. "Roughly until the 1970s, the expansion of the economy translated into improvements at the bottom of the class structure" he told The Economist¹⁸. "Now, when the economy goes into a downward spiral, neighbourhoods of exclusion get worse. But when it goes into an upward progression, they don't join in."

Despite the grave social consequences of these massives shifts in the distribution of national income away from payments for work and away from the worst off, the British government felt able to boast of its supply-side achievements in a glossy brochure Britain: The Preferred Location published in 1992 by the Department of Trade and Industry's Invest in Britain Bureau to attract overseas investment. "Labour costs in the UK continue to be low - significantly below other European countries..." the pamphlet says. "The UK has the least onerous labour regulations in Europe, with few restrictions on working hours, overtime and holidays...there is no legal requirement to recognise a trade union."

But despite the fall in labour costs, British unemployment levels remained persistently higher than the EC average, which, while it fluctuated according to the trade cycle, was itself on a rising trend as each member state sought to increase its competitiveness in relation to the others by introducing the energy- and capital-intensive technologies which enabled less labour to produce a larger volume of goods. In the early 1990s, unemployment began to rise sharply among EFTA countries too, as they began to align their economies more closely with those of the EC in preparation for eventual membership. In 1993 Professor Sten Johansson, a former director of the Swedish Central Statistics Bureau, told a meeting in Copenhagen shortly before the second Danish referendum on the Maastricht treaty, that Sweden had started aligning its economy with that of the EC three years previously and the changes had proved very harmful for groups like the old, the young, women, public employees and those living in rural areas.

After the meeting Johansson told me that the Swedish social welfare system had run into trouble because economists had advised the government to remove the remaining controls on currency movements on the grounds that they were having little effect anyway. However, once this was done, large sums of money had left Sweden and the monetary system had become extremely unstable. Public sector spending had had to be cut sharply to restore market confidence, undermining the cradle-to-grave social welfare system which had been the envy of most of the rest of the world for almost forty years. "We need to find another system of controlling monetary movements which does not involved locking everything rigidly together and thus causing even more problems" he said.

Hallvard Bakke, a Labour member of the Norwegian Parliament, told the same meeting that politicians in Norway and Sweden were pushing for EC membership although a majority of people did not want it. "The Nordic welfare model puts people at the centre. It ensures they can live a good life without moving their homes. EC policy is the exact opposite. It is that people should move to wherever the work is" he said. The Nordic countries had always been dependent on overseas trade, which made up the same proportion of their national income 100 years ago as it did today. "Despite this high level of trade, we have been able to build up our own welfare model. The market is good for many things but not for employment and the good life" he added.

He was right: when a country with generous social welfare provisions such as Norway or Sweden is forced to compete in an uncontrolled way against dozens of other countries which leave the poor, the sick and the old to fend for themselves, it will inevitably lose markets to them because its traders are carrying overheads its rivals do not. In the past it was argued that the industrialised countries would be able to protect their welfare systems, wage levels and working conditions by keeping several technological jumps ahead of their Third World competitors. Now, however, it is hard to find anyone who believes this because, on the one hand, the technologies used in South East Asia's export factories are little different from those used in the west, while, on the other, western countries are competing ever more fiercely for market shares among themselves, each of them cutting wages and welfare in an attempt to get an edge. The only western industrial enterprises which can hope to remain relatively unaffected by Third World competition are the manufacturers of sophisticated aircraft and armaments - and then only for as long as the huge public R&D subsidies to these activities continue.

In principle, then, John Major was quite correct when he repeated his opposition to the social chapter of the Maastricht Treaty at the EC summit in Copenhagen in June 1993 on the basis it would impose higher costs on European manufacturers and make them less competitive in world markets. He was also right to say that social welfare benefits throughout the Community would have to be cut if it was to trade successfully around the globe. "Long-term unemployment is higher in the European Community than in either Japan or the United States" he wrote later that year ¹⁹. "There is now increasing agreement that these problems stem from the inflexibility of European labour markets, from the tangle of regulations, from wasteful systems of welfare, from the burdens of too high systems of taxation, which Europeans have imposed on themselves in the last 40 years.

"European labour costs rose by 4% a year during the 1980s while barely changing amongst our major competitors" he went on. "Europe spends proportionately nearly twice as much as the Japanese on public social security and health care, and over 60% more than the Americans. The problem will be compounded as the proportion of old people in our population increases. Unless we take action to contain costs, Europe's taxpayers will be paying 30% more for social security and health in real terms by 2020. Unless we act to deregulate our economies there will be too few earners in Europe to pay those tax bills."

No-one was in a position to dispute his argument that the EU countries needed to cut their taxes and their labour, health care and social security costs because, largely as a result of the economists' failure to admit that the case for free trade collapsed in conditions of unemployment, no alternative strategies less reliant on competing internationally had been worked out. Even on the political fringes, very few people pointed out that free trade was not compulsory and that countries need not trade on externally-dictated terms because they could trade on their own, exchanging goods and services with the rest of the world only when, and to the extent, that they found it beneficial to do so.

In Europe, only France, which has had only five years in which the level of unemployment dropped since the mid-1960s, has seriously discussed alternatives to free trade, largely because of the work of Maurice Allais, who won the Nobel prize for economics in 1988. Allais believes²⁰ that free trade will lead to a surge in imports from low wage countries and cause many companies to shift their factories there. As a result, he says, Europe will experience mass unemployment, huge wage inequalities and a social explosion. His thinking gave France the intellectual confidence to oppose the limitations on agricultural subsidies sought by the United States as part of the Uruguay GATT round and for President Mitterrand to tell a TV interviewer at the EC's 1993 Copenhagen summit that the EC should adopt rules to enable it to protect its industries against imports from low-wage countries.

However, France is the exception and unless a trade war breaks out it is impossible to envisage a generation of European leaders which has devoted a large part of its working life and prestige to turning the EEC into the European Union making a 180-degree turn and calling for trade restrictions until unemployment is conquered. If there is no trade war, an entirely new generation of politicians will have to emerge before policies which give preference to people rather than mistaken concepts of economic efficiency are adopted. In this event, we are likely to have to wait at least ten years for any national or international restructuring to begin.

In the meantime, the outlook for many people is grim. In a state of increasing desperation, our present political leaders and their immediate successors will try ever harder to make their collapsing creation work, hoping rather than believing that the world economy will suddenly start to work perfectly and a more general prosperity will return once the few remaining trade barriers have been brought down, the burden of tax and social spending cut and the intensity of competition heightened further. This is a forlorn hope. All that will happen is that more and more people will be excluded from full participation in the mainstream economic system. Unemployment will mount rapidly and generate even more crime and misery as social welfare payments are whittled away. Too lazy or complacent to seek alternatives, politicians, academics and commentators will cheer this immiseration on, arguing that the more rapidly a country adjusts to world market conditions by getting its wages and other costs down, the brighter its future will be.

"The most worrying aspect of the present crisis is that, for the first time in history, the rich no longer need the poor" Pierre Calame, the president of the Foundation for the Progress of Man told a conference I attended in Paris in June 1993. He went on to explain that, in the past, the rich had always needed the poor - as servants, to grow food, to build their houses and to make the goods that they required. Now, however, many of the jobs that the poor had done were performed by machines and, as far as the rich were concerned, it was unnecessary for as many people as previously to be retained within the economic system. The surplus was therefore being expelled and maintained in limbo at the lowest level of public support possible without them becoming a serious threat to the well-being and equanimity of the better-off.

But if the rich can manage without the poor as a result of technology, can the poor manage without the rich? I believe they can, and the ways in which they can do so are what the rest of this book is about.

Chapter 2: Creating enough Elbow Room

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