How capitalism can get itself off the naughty step
‘The Cartel’, ‘the Mafia’, ‘the A Team’, ‘the Three Musketeers’: the top traders on the global foreign exchange markets had quite a collection of nicknames for their loaded little gang. But they were wealthier than they were wise — ‘cartel’ isn’t a great word to throw around these days, even in jest. Last week six banks were fined £2.6 billion for collusion and manipulation of the £3.4-trillion-a-day forex market. I’m sure you can come up with a few new nicknames yourself.
It’s now six years since the financial crisis knocked the crowns from the heads of the princes of Wall Street and the City, and the consequences continue to play out. We remain mired in debt. The phone-number cheques written to those strutting alpha-males as they merrily went about wrecking the global economy has thrown into sharp focus the income inequality between those at the very top and the rest, and the link between performance and reward.
Meanwhile, economists and politicians still wrestle with mending the system. As with forex, each time another corner of the rug is lifted a new set of bugs comes skittering out. Mark Carney, governor of the Bank of England, last week used his position as chairman of the international Financial Stability Board to announce the latest proposals aimed at taming the ‘too big to fail’ banks, by forcing creditors as well as shareholders to bear losses. The UK looks likely to hold a referendum on EU membership in 2017 largely because the events of 2008 have forced us to confront our uneasy relationship with the Continent.
The rise of Ukip, the SNP and similar rejectionist movements across the West is in response to a growing public feeling that elites have created a system that is largely to their own benefit and no one else’s. A UK Cabinet peopled by wealthy scions of privilege hasn’t helped – and nor will a dynastic Clinton-Bush battle for the American presidency in 2016. In short, democratic capitalism is stuck on the naughty step.
Something new has to come out of this – the contract between capital and society is broken and must be remade. As a believer in competition and free markets I think it would be a disaster were we to go down the path of price controls and clumsy state interventions proposed by Ed Miliband. Creating vigorous new laws for every foreseeable problem would be the equivalent of standing on the economy’s cape and expecting it to fly. It’s also, let’s face it, not very British.
What is the solution? Well, I’m not much of an economist — but then the evidence suggests that neither are the economists. I do wonder whether we’ve all become a little too hung up on numbers, formulae and logarithms. An economy isn’t just an arid set of figures on a spreadsheet, it’s a cultural thing, too. It helps set a tone, speaks to our priorities and motivations and how we relate to one another. Therefore it stands to reason that the behaviour of major players within it matters.
Which brings me to another story that caught my eye last week, though this one didn’t receive anything like the attention paid to the forex scandal. Standard Life, the Edinburgh-based savings and investment company, was named a social mobility ‘champion’ by Nick Clegg. And deservedly so. In 2011, with the economic slowdown at its peak, Edinburgh City Council found that more than 500 school leavers – more than 17% of the total – were going straight into unemployment, unable to find a job or secure a college or university place. It came up with an idea, the Edinburgh Guarantee, which brought private and public sector together to tackle this blight.
Standard Life, discovering it didn’t employ a single person in the UK under the age of 21, signed up. Since then, it has brought 20 school leavers into the business every six months, and has expanded the programme to include London, Glasgow and Dublin. The newbies are given a six-month internship on the living wage, assigned a mentor and put through development modules. At the end of the process most find themselves kept on in full-time jobs, while 100 per cent of those who have left have gone into employment elsewhere or further education. There is a focus on finding disadvantaged children with untapped potential, and the exercise has been such a success that different parts of the business have started their own apprenticeship programmes. The company says the injection of youth has transformed its culture for the better.
For two decades or so before the crash, when Western economies were booming, it was fashionable to throw around the phrase ‘corporate social responsibility’. But it was usually accompanied by a sneer – you might pay lip service to the idea that commerce should be about more than the bottom line, about something beyond simply securing the maximum possible gain for shareholders, but that’s all you’d do.
Lip service is no longer enough if the reputation of capitalism is to be repaired. The permissive political climate that has existed for business since the Thatcher reforms of the 1980s is under attack, a revolt led not by politicians but by voters. Horrified by the corruption and incompetence shown from Westminster to the Square Mile to Fleet Street – and this under a system that was said to be the settled will of humanity: remember the End of History? — they are increasingly lured by the siren voices of extremist parties that promise something different and better. Unrealistic, yes, but also idealistic, optimistic and romantic.
There is a deal to be struck, and it would be better done voluntarily than by force. We’ve seen what happens when all that matters in an economy are numbers; can we instead construct a sustainable settlement that more closely resembles how we view ourselves as a society, that embraces its spirit? Will capital willingly step up without feeling the snapping jaws of law?
Some thoughts as to how it might do so. Pay the taxes that are reasonably due rather than nickel and diming your way to public infamy. Knit yourself into the communities where you’re based – pay for a community centre, sponsor a school, follow the lead of Standard Life and take a chance on poor kids with potential. Be transparent to the maximum degree possible: it is anyway difficult to keep secrets in our insta-connected world and it looks sinister if you’re seen to try. Do not involve yourself in cartels and monopolies but pursue genuine competition and innovation.
Treat workers fairly; if you can, pay the living wage. Keep an eye on the executive-to-employee pay ratio and ensure the rewards for those at the top are tied to sensible, sustainable incentives and can be justified under critical scrutiny. Put your customer first, whether you’re an energy company or a bank or whatever: don’t leave them with the feeling they’re being conned.
The most famous phrase coined by Adam Smith, the Fife-born moral philosopher known as the founding father of modern economics, is the ‘invisible hand of the market’ — the idea that free markets are self-regulating. But although Smith applauded commercial society for its contribution to prosperity, justice and freedom, he also spent a great deal of time worrying about the moral character of merchants and manufacturers, and what could be done to keep them in line.
‘Concern for our own happiness,’ he wrote, ‘recommends to us the virtue of prudence, concern for that of other people, the virtues of justice and beneficence — of which the one restrains us from hurting, the other prompts (us) to promote that happiness.’
It’s increasingly clear we’ve reached an inflection point in the moral and economic organisation of our society. Old bonds are fraying and long-settled ideas are being torn up at the roots. It still seems to me that the best route to a ‘Good Society’ is a mature and responsible democratic capitalism in which business is seen as a willing partner rather than a fugitive to be hunted down. The thing is, we can’t get there unless capitalists decide to join in.
(This article appeared in the Scottish Daily Mail on November 17, 2014)
