Little, Brown, 448pp, £20
WILL Hutton has an exceptional and unerring gift. It is an ability to engage and infuriate in equal measure. I do not think I have read another book on the financial crisis and its aftermath that has so quickly ignited a desire to send it hurling across the room. Yet, in Them and Us, when he steps clears from the parallel world he inhabits, I can find myself in some agreement.
The centrepiece of this book is the concept of fairness. Now that's a word that gets everyone going. Its springboard is the lack of it: inequality, especially pay inequality and most especially of all, the stratospheric pay and bonuses of the bankers who led us into the greatest financial crisis since the 1930s.
"Fairness" - one of the most subjective, elusive and divisive terms in political economy - opens up searching questions on the way we live now. All major parties have pledged to tackle inequality, Labour in particular. But the gap has widened. Pay inequalities and the corporate-speak of target-driven bonuses and long-term incentive packages have spread into the public sector, with super-pay and bonuses now widespread in its upper echelons. Even council chiefs now remunerate themselves as if they carried all the risks of a quoted company.
How can such yawning inequality be justified? Do stratospheric pay packets promote an efficient and dynamic capitalism, or is it inefficient and socially toxic? In the post-crash world, should there not be another way, with the pursuit of profit harnessed to social responsibility and values other than the pursuit of individual self-interest?
Hutton poses these questions and many more in a richly informed and challengingly written analysis of the meaning and importance of fairness. And it is hard not to be stirred by the evidence on inequality he lays before us. It is never, however, quite so straightforward, even in this analysis. What is also striking is the difference in attitudes towards the more egregious inequalities. We are more tolerant, for example, of the stunning pay packets of football players and top sports people. We do not grudge the fortunes earned by self-made entrepreneurs such as Sir Alan Sugar, or those of best selling authors or inventors. On the role of luck, we are ambivalent.
So it is not inequality per se that gets us going. It is the massive accretions of income by those we do not perceive have earned it and that are off the Richter scale of reasonableness. When we look at the pay packages of multi-national company chief executives or investment bankers, how could anybody's efforts be worth 81 or 300 times the pay of an ordinary worker - the current relationship in contemporary Britain and the United States, respectively?
How can Bart Becht, chief executive of Reckitt Benckiser, possibly be worth the 36.8 million he collected in base pay, bonuses and share options last year - and this before exercising his rights to more millions of share options on top? This, on one calculation, is 1,374 times that of the average worker in his company. Even the great US tycoon banker JP Morgan decreed before the First World War that his chief executives should not be paid more than 20 times the wage of his lowest workers.
But Hutton is stirred by much more than individual examples of excess. His is a broader sweep. His thesis is that the upsurge of free market thinking in the 1980s and 1990s, exemplified by Margaret Thatcher and Ronald Reagan, followed by the it's-OK-to-be-rich pragmatism of New Labour, brought an ever more unequal and dysfunctional economy.
But time and again the case is spoilt by sweeping over-statement. In fact, it's not just time and again. It's there from the off. The book opens thus: "The problem with capitalism is that most of its proponents genuinely believe that it is an immutable force of nature. They think that, like the rest of nature, it works by itself and is best left alone. Very few capitalists doubt that they deserve their fortunes. They unapologetically conceive of themselves as winners ... There is only a very limited role for the social and the public in all this. Capitalism is about economic hunter-gatherers being allowed to follow their primeval instincts."
Having set up this straw-man caricature it is little wonder Hutton has to devote 375 pages to its demolition. Over-statement so weakens the case. The denunciation is blind to the fact that raw capitalism began giving way 100 years ago to an evolving mixed economy. It has survived, not by avarice and oppression but by continual adaptation to an ever growing involvement of government in the economy. Its chief characteristic, as Joseph Schumpeter brilliantly grasped, is its amphibian nature - the ability to survive hand-in-hand with an explosive growth in government and state-organised social welfare: a world inconceivable to the 19th century money barons. This adaptive nature of capitalism is its most striking characteristic, and most recently and most ably set out in Anatole Kaletsky's book, Capitalism 4.0.
And the broad private sector today is far removed from the world of cigar-chomping ogres or even investment bank boardrooms. There are some 4.7 million registered businesses in Britain. By far the majority are sole traders or tiny companies employing less than ten people. In financial terms most of them lead lives, not of mind-boggling excess but of quiet desperation. Most, I would say, loathe the bankers as much as Will Hutton. And we know, from Adam Smith and Schumpeter, that for many the appeal of private business is not hedonistic bonus-chasing and profit at all costs but the enjoyment that comes of doing work that is fulfilling or leading a life in which you are your own boss. And almost all I know are modest enough to admit that luck played at least some part in what good fortune they have enjoyed.
Nor does the Hutton view of a benign social democracy subjected to a rapacious spasm of Thatcherite neo-liberalism in the 1980s and 1990s, with slashed taxes and government in retreat, accord with the facts. Throughout this period of abandonment of the collective good, government spending continued to rise - from 330 billion in 1979-80 to 368bn in 1989-90. It continued to rise through the John Major years and under New Labour so that by 2006-07, just before the Debacle, it hit 581bn. As a percentage of GDP, government spending has never fallen below 38 per cent of GDP since 1979-80 - high in post-war terms.
As for tax and national insurance, there was no flight from social support to raw individualism. The tax take stood at 33.5 per cent at the start of the Thatcher era and never fell below that level until 1992-93. In the Blair era it oscillated between 34 per cent and 36 per cent. These are the facts. Government spending was not cut. The state did not shrink. And the vast majority of households enjoyed a real rise in living standards.
Hutton despairs that the coalition - to which he is now an adviser on fairness in public sector pay - has set itself against Keynesian economics. This, he argues, is "surely a strategic error".
This is a truly breathtaking assertion. It leaves you gasping at its most obvious and glaring blind spot, like listening to a tour guide in the Himalayas bemoaning the flatness of the terrain and forgetting to mention Everest. The UK has never been more Keynesian. Government spending this year will hit 670bn, or more than 47 per cent of GDP, the highest outside of wartime. It has a budget deficit of more than 10 per cent of GDP, one of the highest in the G20. And it has net debt of 932bn, on course to rocket to 1.3 trillion or 80 per cent of GDP.
The bare fact is, not that we have spurned Keynes but, on the contrary, we have embraced him more than ever, and so totally that we are now "Keynesed out". We are up to our neck in debt. This is why we now face a painful budget deficit programme. That we have got to this programme without being frogmarched into it by the IMF or suffering a Greek-style bond market nervous breakdown is little short of a miracle. But Hutton ignores or underplays this central feature of our economic landscape, for which the previous government bears some responsibility. No wonder it feels like a parallel universe, like London without Big Ben or Brighton without the pier.However, every so often Hutton eases up on the bolts of lightning. He descends from the sulphurous clouds, clutching his tablets of fiery denunciation and declares that in attempts to build a theory of fairness upon due and proportional desert for individuals' discretionary effort, "I have wrestled with this in the writing of the book and ended up as the English pragmatic".
Bravo! For it is here that, doubtless as he sees it, the apologists of neo-liberalism emerge from their primaeval slime, clutching their volumes of Schumpeter steaming with malevolence, and converge to find common ground. A financial world more prudently regulated and caviled towards more reasonable benchmarks in pay and bonuses? Yes. Banks reformed without jeopardising business lending? Most certainly. A business world more attuned to corporate social responsibility and sustainable growth? Yes, too. A norm for public sector pay so that its higher echelons are paid no more than 20 times the average wage? Amen. Here is common ground, arrived by different routes: thus, as Hutton comes to recognise, does "the system" change and adapt. But he could have spared us the ear-bashing.