Why we are suffering for decades of free-market business fundamentalism

Britain’s Royal Courts of Justice, London
Photo: Wikimedia

One of my favorite columnists is Simon Caulkin, management editor for Britain’s Guardian and Observer newspapers. Not only is he a powerful writer and iconoclastic thinker, he has the knack of getting to the heart of many of the problems that are currently screwing up the global economy.

One such is the current financial crisis: a product of more than a decade of corporate greed and regulators unwilling to intervene to prevent the kind of boom and bust that enriches a few and leaves the majority paying the bill (“Capitalism’s too important to be left to capitalists”).

Here’s Caulkin at his best, fulminating against injustice like a hell-fire preacher weighing in against sin:

What do the following have in common: sub-prime mortgages; collateralised debt obligations and other instruments by which those mortgages are sliced, diced and sold on; and excessive leverage, whether by banks, private equity or hedge funds? They are all reckless and conscious mis-selling, the product of an amoral, deterministic system that expects and gives individuals the incentive to maximise their gains, while barring them from taking into account the costs their profit-making imposes on society as a whole.

I suspect he’s right about this. The so-called free market is out of hand. By demanding total freedom for the strong to benefit, even if it means the weak will suffer, it offends against just about every tenet of civilized behavior. Worse, it seems bent on destroying the very basis of all commerce: trust.

If there’s no trust, business cannot operate

You have to be able to trust people to stick to contracts, pay their bills, negotiate honestly, and stay within reasonable bounds in competitive situations. The only alternative is continual economic warfare.

Image any sport in which contestants constantly cheated, evaded or re-interpreted the rules of the game, then bribed the judges and umpires to allow them to get away with it. With no rules being followed, the strongest, most competitive and most dishonest would win every time. How would this differ from war, since no one involved would feel any need for restraint? It would only be a short time before the ‘game’ became a no-holds-barred fight.

Caulkin quotes Indian business guru Sumantra Ghoshal, who describes the current management model as based on a ‘win-at-any-cost’ mentality, reinforced by a mixture of authoritarian structures and command-and-control impulses. What sustains this model? “. . . half a century of agency theory, transaction-cost economics and game theory — as taught in business schools, solemnly embodied in corporate governance codes, reinforced by consultancies, aped by the public sector and duly absorbed into the executive bloodstream,” Caulkin concludes.

If he is right, perhaps the current mess will end by doing us some good after all — if only by focusing people’s attention on the way regulators stood aside and governments sustained a mess of foolish theories out of self-interest and blind, political dogma.

Great freedom requires great responsibility

In a truly free market, the only boundaries on acceptable behavior are the ones the players in that market impose on themselves. As I said a little earlier, one source of such boundaries is the need for enough trust to make it possible to do business at all. Contracts must be honored, information given must be near enough to the truth, and agreements reached by negotiation have to be maintained by both sides. If any of these break down — as all have in the current financial mess — you are left with contracts signed without any intention of being bound by them, decisions taken on false or deliberately misleading information, and the exchange of assets that cannot be valued because those who sold them mislead the buyers about what they contained.

We don’t have a credit crisis; we have a crisis of trust. Banks can’t trust the valuations of their assets, so they don’t know how much they can lend. Lenders don’t trust those who ask for loans to be honest about the risks involved — too many mortgages and similar loans have been found to be based on false or incomplete information. There has been so much deliberate mis-selling that whole markets have become paralyzed.

Freedom without responsibility is anarchy.

There are only two alternatives for going forward

One is the imposition of far stronger legislative and regulatory requirements on all sources of finance. On the basis that those who cannot exercise reasonable self-control must be controlled from outside, such a move would turn back the clock to the days before the financial markets were largely deregulated. It would then be the province of government to ensure that there was sufficient trust to move business forward again. If everyone is held to strict standards by fierce penalties for abuse, the system becomes rigidly predictable.

The second choice is this. Instead of counting only the short-term profits, shareholders and executives should accept that limits are necessary to keep the capitalist system from collapse. Rather than accept potentially heavy-handed control by government, corporations could choose to maintain the required ethical standards amongst themselves. That’s the way many clubs and groups have worked for centuries. They require certain standards of behavior from members and eject (or worse) those who refuse to comply.

We can only hope it isn’t too late for sensible views to prevail and to curb corporate excess. Nothing else will cure our addiction to boom-and-bust cycles in industry after industry. Religious fundamentalism tends to impose strong codes of behavior. Sadly for us, the most recent brand of business fundamentalism, mostly derived from Milton Friedman’s monetarist ideas, has behaved in a similar way — and its most fundamental beliefs include total ethical blindness.

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