Exploring the capital gains economy: the case of the UK
By Dirk Bezemer, Michael Hudson, and Howard Reed
New Political Economy, Vol. 31, Issue 1
February 20, 2025
The Democracy Collaborative funded the research resulting in the article “Exploring the capital gains economy: the case of the UK”, published by the New Political Economy journal on August 1st, 2025.
Two of its authors - Michael Hudson and Howard Reed - are TDC Fellows. You can find links to their bios in the byline.
Abstract
Much wealth is not the accumulation of saved incomes, but capital gains spurred by debt growth. The difference is widely neglected, yet central to our understanding of the sources of wealth and the functioning of contemporary capitalism. This paper connects to the literatures on financialisation, rents and critical macrofinance to make three contributions. A conceptual framework of the capital gains economy is developed, contrasting it to the conventional System of National Accounts. The framework is applied in an empirical analysis of the UK over 1995-2020. The UK economy changed from needing four Pound Sterling in liabilities to needing 7.5 Pound Sterling in liabilities to produce one Pound Sterling in value added. Earned incomes doubled but house prices quadrupled and the valuation of financial assets rose fivefold. Third, empirical proxies for macrofinancial capital gains and for the sustainability of the attendant growth in liabilities are suggested.
Introduction
Since the turn of the century, global assets and liabilities have been increasing 50 per cent faster than global income, which is the global Gross Domestic Product (Woetzel et al. Citation2021). Apparently, there has been much balance-sheet growth that was not reflected in income growth. However, the public debate about the economic system’s performance is focused on GDP growth. The problem is not just that this metric leaves out unpaid activity, pollution, emission, depletion and inequalities (Coyle Citation2019). It also omits the role that wealth, debt and capital gains play in the increasingly skewed distribution of economic gains (Assa Citation2016, Steindl Citation1992/1998).
“This paper presents an explanation for this decoupling of ‘finance’ – the economy’s structure of assets and liabilities – from incomes, measured in the GDP, and its consequences in terms of increased inequality of wealth and incomes.”
We do this using three analytical methods: a conceptual discussion building on the System of National Accounts framework; an application of this in a statistical case study of the UK economy over 1995-2020; and a political economy analysis of the changes in UK institutions, policies and social relations leading to these outcomes.
A key claim will be that to the extent that capitalism is about the pursuit of wealth, contemporary capitalism can be conceptualised as a ‘capital gains economy’. Much wealth is not the accumulation of saved incomes. Net worth gains do not necessarily reflect increased production, saving and prosperity. More often, they mirror growth of liabilities and valuation changes (capital gains) in bloated asset markets.
Explaining this distinction and tracing it in the data adds to the literature, for the difference between saving and capital gains spurred by debt growth is under-appreciated. Even widely cited research (Piketty Citation2014, Citation2015) and popular work critical of capital and finance (Faroohar Citation2016, Shaxson Citation2018) is often focused on capital income rather than capital gains and the growth in liabilities that sustain them (but see Standing Citation2016, Lindsay and Teles Citation2017, Mazzucato Citation2018, Adkins et al. Citation2021a, Citation2021b). Yet this difference is central to our understanding of the sources of wealth and the assessment of an array of macroeconomic policies, from quantitative easing to credit guidance policies to wealth taxes. This paper is part of efforts to remedy this neglect, connecting to three strands of the political economy literature, as we elaborate in section 2.
To bring out the role of capital gains in contemporary capitalism, in section 3 we view the economy in the way a financial investor would. In a visual model, we introduce the distinction between the GDP-centred System of National Accounts (SNA) that underpins official statistics and the wider remuneration measure which is total returns. Macroeconomic total returns includes incomes (profit, wages and capital income) connected to production as in the SNA, but also capital gains linked to asset ownership (Hudson Citation2021). Our analytical model connects and contrasts in one framework earned and unearned incomes, nonfinancial and financial assets, saving and capital gains. This clarifies how capital gains from assets partly replaced profits from production as the motive force of capitalism – or ‘assetization’ (Christophers Citation2019), a dimension of the financialisation process.
Total returns include both actual financial flows and ‘unrealized’ asset value increases, which constitute wealth. Total returns help explain why incomes have grown more unequal over time: rising wealth, even if it consists of unrealised, notional asset values, induces more borrowing and larger payment flows out of earned incomes. These payment flows (dividends, interest, fees and debt repayment) raise the cost of production as well as the cost of living. They do so more for those in lower income brackets, increasing inequality.
In section 4, this is complemented with a political economy of capital gains in Britain. Initial macrofinancial changes in the 1970s and 1980s led to changing views, changing policies and changing relations between government, industry and finance. These led to changes in five policy domains, which created both the expansion of liquidity and of marketable assets that produced vast capital gains over the subsequent decades. There were positive policy feedbacks through time, causing institutional lock-ins and capital gains persistence into the 2010s.
Section 5, which is empirical, complements the conceptual and institutional sections 3 and 4. For the UK over 1995-2020, we trace statistically the capital gains-driven dynamic across asset classes (shares, land, and real assets) and in earned incomes. This charts the divergence between earnings and GDP, between the nonfinancial sector’s GDP and total GDP, between total GDP and nonfinancial asset values, and between nonfinancial and financial asset values – which show the largest gains. We show that while the rise in capital income (dividends and interest) and in household debt – common measures of financialization – were over by 2008, this misses the large and ongoing rise of capital gains. The data also show how much larger the growth of inequality in total returns is than the growth in inequality in incomes, and how the former induces the latter. Showing these trends and making these linkages helps explain processes of economic polarisation. The analysis also suggests a (un)sustainability measure for the buildup of debt and other liabilities. Increases in asset wealth were multiples by a factor of 5–15 of the growth in annual income, which ultimately serves the rising liabilities that sustain capital gains.
We develop a novel proxy for sector-level macrofinancial capital gains, exploiting accounting identities in the UK’s national balance sheet. Capital gains in many years add a substantial part to UK earned incomes, e.g. about half as much again in 2020. This proxy also suggests a periodisation of financialisation into a ‘great mortgaging’ phase until 2008, with large capital gains in the household sector. In the second ‘quantitative easing’ phase, nonfinancial corporations’ capital gains rose.
We reflect on our contribution in the concluding section 6. Our paper supports the discourse on the logic of contemporary capitalism, which, we suggest, can be thought of as a capital gains economy.
