In the second of a three-part series on the precariat class, a growing social demographic with no occupational identity and little economic stability, Guy Standing debunks the cornerstones of free-market capitalism. Read the first article here.

Languishing at the lower end of the global labour system is the precariat, a social class whose condition of economic precariousness has been ascribed to the rise of neo-liberal capitalism around the world.

The precariat can be divided into three further groups – atavists, who look back to a lost past; nostalgics, who look forlornly for a present, a home; and progressives, who look for a lost future. The last consist largely of those who go through university only to emerge with large debts and little hope of a career or personal development.

It is the first group, the atavists, who have been on the political rampage, supporting Brexit, the triumph of Donald Trump, the Northern League in Italy, Marine Le Pen’s National Front in France – and other nationalist populists elsewhere in Europe. Everywhere the populist right seems to be winning politically, basically.

But the progressives have also revolted, standing shoulder to shoulder with the likes of Podemos in Spain, Bernie Sanders in the US, Jeremy Corbyn in Britain, the Alternativet in Denmark and new left-wing movements in Germany, Portugal and Scandinavia.

Meanwhile, the minorities, migrants and refugees who make up the nostalgics are smouldering, and surely cannot go on much longer without hope.

The age of anger

There is clearly a lot of anger out there, a seething discontent over perceived establishments and elites that is fuelling considerable political energy. All three groups of the precariat are reacting in their different ways to the growth of inequality and economic insecurity over the past three decades; all have seen the dismantling of the 20th-century income distribution system that linked incomes and benefits to jobs.

In the interests of competitiveness in a globalizing world economy, governments of all complexions introduced labour-market reforms that promoted flexibility, but accentuated the precariat's insecurities. They weakened regulations for banks and financial companies, enabling financiers to gain more income while pushing the precariat into greater debt. They strengthened property rights of all kinds – physical, financial and intellectual – that gave an increasing share of income and wealth to asset holders at the expense of everyone else. And they granted tax cuts for the rich and generous subsidies for corporations, while demanding reductions in public spending to balance budgets, cutting benefits for the precariat and lowering relative and absolute incomes.

In each case, the argument was that the measures would boost economic growth, expanding the pie for all to share. Instead, almost all the gains have gone to a small global elite – who have, not surprisingly, pushed for ever more of the same. There has been no quid pro quo.

And the longer this fraudulent prospectus is presented, the angrier all parts of the precariat will become. The ugly political consequences should by now be clear to everybody.

It is not too late for liberal democracies to introduce transformative reforms that would respond to the woes of the precariat while promoting sustainable economic growth and development. But so far only lip service has been paid to the need to do so. Liberal elites must make real concessions or find the values they claim to cherish – tolerance, freedom, economic security and cultural diversity – at grave risk, particularly when it comes to the wrath of the Atavists.

The first thing to do is confront today’s system of rentier capitalism. This is where a growing share of wealth goes to already privileged owners of assets (rentiers), while income from most jobs dwindles in value. John Maynard Keynes predicted in 1936 that the development of capitalism during the 20th century would result in “the euthanasia of the rentier”, as rent-seeking became harder. The reality has been the reverse. Corporations and financiers have used their growing influence to induce governments and international organizations to construct a global framework of institutions and regulations that enable elites to maximize their rental income.

Modern capitalism is based on five falsehoods:

1. The first lie is the claim that global capitalism is based on free markets. Without hyperbole, it can be said that what has been constructed is the most unfree market system ever. Thus, intellectual property has become a prime source of rental income, through market power created by the spread of trademarks (crucial for branding), copyright, design rights, geographical indications, trade secrets and, above all, patents.

Knowledge and technology-intensive industries, which now account for over 30% of global output, are gaining as much or more in rental income from intellectual property rights as from the production of goods or services. This represents a political choice by governments around the world to grant monopolies on knowledge to private interests, allowing them to restrict public access to knowledge and to raise the price of obtaining it, or of the products and services embodying it. Not for nothing did Thomas Jefferson say that ideas should not be the subject of property.

2. The second lie is that strong intellectual property rights are required to encourage and reward the risks of investment in research and development. Yet it is the public, ordinary taxpayers, who bear the cost of much of that investment. A lot of corporate cash cows derive from publicly funded research, in public universities or institutions, or through subsidies and tax breaks. Moreover, most innovations that yield large returns in rental income to companies or individuals are the result of a series of ideas and experiments attributable to many individuals or groups who go unrewarded. And many patents are filed to block competition or head off lawsuits, and are not intended to be exploited for production.

3. The third lie is that strengthening property rights is good for growth. On the contrary, by increasing inequality and distorting consumption patterns, it has hindered growth and made the growth that has occurred less sustainable. Slow and unstable growth builds up economic frustration for millions, not to mention the political risks that come with it.

4. The fourth is that rising profits reflect managerial efficiency and a return to risk-taking. In reality, the increased profit share has gone mainly to those receiving rental income, much of it linked to financial assets.

5. “Work is the best route out of poverty.” This is the fifth and politically most important lie. For millions of people in the precariat, it's a sick joke.

A war on wages

This is the key. The income distribution system has broken down. Across the OECD, real wages have been stagnating for three decades. The share of income going to capital has been rising and is much higher than it used to be. And high-income earners are taking a greater share of the income going to labour, further hurting the precariat.

Three economic relationships illustrate what is happening to wages. First, it used to be the case that when productivity grew, wages grew in parallel; now, in the US and elsewhere, wages do not budge. Second, it used to be that when profits rose, wages rose; now, wages do not budge. Third, it used to be that when employment rose, average wages did so too; now, average wages can even fall, because the new jobs pay less.

However hard those in the precariat work, they face slim prospects of escaping from a life of economic insecurity. And the longer that remains the inconvenient truth, the greater the danger that they will listen to post-truth authoritarian populists offering to turn back history. The only way to escape this “politics of inferno” is to build a new income distribution system suited to the 21st century.

This will be the subject of the third article, leading up to what should be a serious debate on the precariat in Davos, at the World Economic Forum’s Annual Meeting in January. Along with climate change and the impact of the fourth industrial revolution, there is no more urgent matter than that.