Greed isn't good– it's dangerous

Greed isn't good– it's dangerous
In today's extract from his new book, Roger Bootle looks at the future of capitalism

By Roger Bootle
Published: 3:45PM BST 15 Oct 2009

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The free-market vigilantes are already rushing to defend the unfettered market system. Their defence is based on one or other of three arguments. First, the market solution is to let failing financial firms fail. If the state intervenes to stop this, the blame for the resulting mess cannot be laid at the door of the market system. Second, banking has been a heavily regulated activity. The regulators have failed in their job. Third, the monetary policy authorities should have paid more attention to the growth of money and credit and the resulting inflation of the property market bubble.

In this way, they try to argue that what seems on the face of it to be a failure of markets is in fact a failure of government. So the solution, they say, is not less freedom for markets but more.

These people are dangerous. The idea of letting the financial system implode and then waiting for the market to bring spontaneous, healthy revival out of the wreckage might read well on the pages of a book, but in the real world it would bring human misery on a gigantic scale. In today's society, people simply will not tolerate it. If that is what the market system is about then they will have none of it; and rightly so.

Certainly there were mistakes made over regulation, but the answer surely involves not lighter regulation but for it to be tougher and tighter (although not more extensive). Similarly, on monetary policy major mistakes were made, but that was because not enough allowance was given for the ability of the markets and private financial institutions to get things horrendously wrong. That redoubles, not reduces, the weakness of unfettered financial markets.

What is needed now is not a rejection of capitalism but rather a radical reform of some of its institutions and practices. In a way, this is nothing new. What we now think of as capitalism did not emerge fully formed in an act of creation, but rather evolved. So why should it have stopped its process of evolution now?

We have been trying to live comfortably in a completely new era with a system of controls fashioned for an age long past. This is not the end of capitalism but the beginning of a new phase of it, a phase in which it is not controlled or suppressed, but channelled and marshalled, rather like a great river whose course is managed.

Such a thought will offend those who tend the flame of the free market ideal. But an effective market system is like democracy: how it operates in practice can be very different from how it works in theory. Effective market systems and effective democracies are fuzzy. In both cases there is a theoretically pure version that appears to embody the essence of the thing, whereas in practice the presence of this thing alone often sees the essence escape.

The essence of democracy, you might think, is free elections. Yet it is comparatively easy to establish elections that are free in a system that is democratic in only the most tenuous sense. For markets, it is a similar story. Paradoxically, markets need the state to keep them on the straight and narrow. They even need the state to keep them competitive.

Capitalism always throws up problems and failings. This is neither surprising nor a fatal criticism. Society has to find a way of either living with them or correcting them. However, as capitalism evolves, so the nature of its failings and problems changes. So too must be the way in which society copes with them.

The Great Implosion has laid bare several different sorts of failing. First, it has revealed just how fragile the financial system is. Second, it has demonstrated the markets' excessive risk-taking. Third, it has shown how bloated the financial sector has become. Fourth, it has exhibited a failure of the market with regard to the setting of executive remuneration in general, and pay in the financial sector in particular. Fifth, it has uncovered a deep-seated failure of the corporate system, arising from the separation between owners and managers and the weakness of institutional shareholders in influencing corporate policy.

It is no wonder that these problems have emerged only recently, since it is only since the early 1970s that the financial markets have grown to such size and importance in the economy, that markets have been given free rein, and that large-scale institutional shareholders have become dominant. Moreover, the serious problems for society that would be unleashed by blatant self-interest only burst forth once the combination of deregulation and the doctrine of "greed is good" released them in the 1980s.

But now we know. Greed is dangerous, and the encouragement of it is stupid. In order for society to work efficiently, never mind fairly and cohesively, there has to be a balance between the competitive and co-operative parts of the system. This balance goes right to the heart of human nature.

In many areas, such as health care, education, pollution control and road usage, we need more of the market, not less. But in finance, although we need the market, it must be restricted.

Moreover, financial markets do not offer a blueprint for the whole of society. Society cannot live by greed alone. Even if it can cope perfectly well if some of its members are motivated in this way, it needs millions of people to be motivated by duty, responsibility, and a sense of public purpose. These are feelings that the triumph of unbridled greed in the financial markets threatens to overwhelm. The market was made for man, not man for the market.

Roger Bootle is managing director of Capital Economics and economic adviser to Deloitte. The Trouble with Markets (Nicholas Brealey £18) is available from Telegraph Books for £16 plus £1.25 p&p. Call 0844 871 1515 or go to books.telegraph.co.uk

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