I went to see Dr Eve Poole talk about her book, Capitalism’s Toxic Assumptions, at the Christian think tank Theos in November. She is an engaging speaker who described herself as a “theologian who has got into capitalism.” She endeared herself to me early on by saying to the Thursday evening audience that she was going to use props instead of powerpoint to illustrate each of the seven toxic ideas she identifies. I have bought her book but I haven’t read it yet, although I did dip into it a couple of times for clarification while writing this.

I should stop for a moment and explain what she meant by “toxic”. A toxic idea is one that used to serve a purpose but has now become counter-productive. If I were looking at it through a Three Horizons lens, I might say that it was a Horizon 1 assumption that has outlived its usefulness and is now getting in the way of change. Such ideas can be found all over the business literature, and Eve Poole is a lecturer at Ashridge. The example she gave was of Encyclopedia Britannica rejecting approaches from digital publishers (CD ROM at the time) because it believed it was in the book business.

Her starting point was that, “The economy is broken and we need to know how to fix it,” and she acknowledged that her ideas were not new. But she has pulled them together into a coherent critique. So here we go for a quick canter through the seven toxic assumptions in capitalism’s toxin cupboard.

#1: Competition

For which the prop was a cup, because the idea of competition has been normalised through sport (although the idea of competitive sport is itself arguably a product of the post-industrial revolution period in 19th century England). Adam Smith talks about competition quite a lot, and the legacy is bodies like anti-trust law in the US and the Competition Commission, as was, in the UK. But maths tells us a different story, when we look at game theory or the story of the Nash Equilibrium. Through this lens, competition starves a situation of the information it needs to solve it. Sharing information gives you better outcomes.

The second story under the ‘competition’ heading is about gender. Some of our assumptions about competition are based on the idea of ‘fight and flight’, which is how adrenalin affects men when they experience stress or danger. But when UCLA re-ran the experiment with women, stress triggered the release of oxytocin, which is associated with peer bonding, affiliation and bonding. Not so much ‘fight or flight,’ as ‘tend and befriend.’

As she put it, talking of the financial crisis,

“If you’d had a lot of women running the banks, they’d have gone down the gym and talked about it.

#2 The invisible hand

By Poole’s account, Adam Smith’s notion of the “invisible hand” was a piece of “psychic balm”, designed (as I understood it from her presentation) to reassure people in a religious age that his notion of the market wasn’t designed to usurp God. Instead, the language wrapped His works around the market. In a sense, in a less religious age, the notion still has enough metaphorical power to disguise what markets are. In fact, markets are some supply, some demand, and some law or other social agreements to enforce good behaviour. The “free marketeers” version is that, “we optimise utility and the invisible hand fixes it.” In fact, markets favour the rich unless they are tightly controlled, since markets respond to those who are able to spend more; in other words, we get the market the rich prefer, wrapped in some metaphorical mumbo-jumbo “to put the rest of us off the scent.”

#3 Utility

One of the things that is wrong with capitalism, and, come to that, with economics, is utilitarianism. When utilitarianism becomes a feature of public decision-making, “it crowds everything that doesn’t have a business model.” But as the theologian John Hughes has pointed out, the notion of utilitarianism is an “empty shrine” at the heart of capitalism because it neglects purpose: useful for what? One of the consequences of utilitarianism, as she described it, is external costs (costs of a product or service that fall outside of the business, its customers,and its operating model) and which aren’t factored into the price. External costs can include loss of habitat or species: she linked utilitarianism to “the tragedy of the commons.” Her prop for this one was a fish, to represent the destruction of the huge shoals of cod that were once found in the waters off Newfoundland through over-fishing.

#4 The nature of man

A lot of ideas about getting the capitalist firm to work come down to a principal/agent problem. More exactly, they come down to the “problem” of how the principals (or owners) gets the agents (or workers) to work. For most of the 20th century, this was done through surveillance, which broadly assumes that people are going to skive and steal unless they’re closely watched. (She didn’t mention it, but there is a classic Johnny Cash song about this). You can draw a line that runs from F.W. Taylor to Amazon that joins these particular dots. But in practice, businesses that start from a positive view of the nature of mankind do better.

#5 Shareholders

Once you have shareholders, you have “shareholder value”, which assumes that the main function of business is to return wealth to shareholders. There are a couple of problems with this. The first is that legally, shareholders aren’t owners: their share “certificates” give them some restricted rights to have a say in the running of the business in certain aspects of it. Sitting behind this is some notion that shareholders hold shares for a while, that they are actual investors with an actual interest in the long-term health of the business. In practice, in a world of high frequency trading, shares are held on average for between 11 seconds and 22 seconds. She conjured a striking image of an AGM in which shareholders rapidly vanished into thin air and then were replaced by newly materialised shareholders as the shares in the business were bought and sold.

#6. Market pricing

Cost pricing is about what something costs to make, plus a mark-up for profit. Market pricing is more about what the market will bear. One of the things that’s got lost in this lexicon is the old idea of ‘just pricing’: what is the fair price? This discussion got lost because it was assumed that markets delivered a fair price, but this is only true if they are not oligopolies and if supply and demand are genuinely independent. Another thing that gets lost in this is a question about the real price: if a dress costs £6.99, what are the other costs and on whom do they fall? The third thing that gets lost is a discussion on the idea of ‘usury‘. Interest is seen now instead as the price of money. Yet Judaism, Christianity and Islam all have a formal ban on charging interest, and this also goes back to Aristotle.

#7. Limited companies

The idea of the limited liability company, in which all that an investor put at risk in the event of default or bankruptcy was what they had paid for their share or bond was a brilliant idea at the time; in effect, it was this social innovation that made possible the industrial revolution, and especially the infrastructure of the industrial revolution. But the LLC now represents—she said—98% of all companies in the UK, which creates a monoculture that is bad for the ecology of the overall business system. It means that there’s no professional support for other business models, such as co-ops or community interest companies. (Will Davies said on a podcast I listened to around the same time that in the days when he used to research co-ops there was only one law firm in the entire UK that could do the legal work for every co-op in the country.) Different processes and methods don’t get the chance to be tested and developed, or to float to the top.

What to do?

I was persuaded by the analysis, but a bit less so by her suggestions about what to do about it. But let me walk through it; you can be the judge. Eve Poole suggested that “public policy is not the best way to change the market”: the best way is through consumer action. Your bank statement, she suggested, is “your report to St Paul” (which maybe needs a reminder that she is a theologian and the event was held at the Christian think tank Theos).

So, you should score your bank statement with red, green and amber, starting with where you bank and why, and where your money is coming from. After that, ask the same questions about your utility bills, where you bought your groceries, and so on, asking, “is this the best choice I could have made?” For example, she suggested, it would be red for Hamleys or Burger King.

Part of the rationale for this approach is that “money travels when you spend it, and you need to know where it goes.” If you spend it at Tesco, 36p stays in the area; if you spend it at the local florist, that figure goes up to £1.75. That’s one reason why some councils have started buying local, so as to keep money in the area. (Guess what: some economists don’t approve.) And so, she almost concluded, “if we all had green bank statements, capitalism would be fixed.”

One of the interesting elements of this was her suggestion that it doesn’t take many “green bank statement” consumers to turn the economy. There are agent-based simulations that suggest that it takes only 10% of such well-behaved consumers to turn the economy for the better, which is interesting if true.

Politics and regulation

The reason I was sceptical of her remedy of a cadre of committed activitist consumers was that at least half of the problems she identified were structural systemic problems that are found in actually existing markets, and some of the others are economics objects that have been reified in our existing regulatory institutions. For example: Changing the rules on limited liability companies to refashion that social agreement for the resource-scarce world isn’t a consumer proposition, it’s a political fight (shareholders, ditto); pricing externalities into markets is—at least—a regulatory shift, and probably a legal one; re-fashioning the purpose of the Competition and Markets Authority so it doesn’t measure the health of markets through consumer utility is also a political intervention. And so on.

I wasn’t the only person to have this thought. In the questions we ended up talking about the emergence of corporate coalitions for change, such as the B Corps (which put a purpose into the legal description of the business, but tend still to be profit-seeking businesses often requiring growth, with the issues that generates.) Another discussion was about the role of activist groups such as Living Wage and Citizens’ UK which have campaigned fairly successful to change the narrative about appropriate business behaviour towards workers. (The success of the cleaners’ campaign at LSE is another example of this.) Perhaps, rather than better consumers, we need better citizens.

The image at the top of the post is The Wealth of Nations, by Samuel Fogel, via Wikipedia, and is used with thanks.

It seems that the rumbling story about HSBC’s Swiss branch has achieved what political pollsters know as “cut through” – meaning that it’s of interest to voters as well as to those reporters who are sentenced to watch Prime Minister’s Questions each week.

The story reminded me of a passage in Wolfgang Streeck’s 2014 article ‘How Will Capitalism End?’ in which he explores the drivers of change that could bring about, well, the end of capitalism. The article deserves more space here on another occasion, but for the moment I just wanted to quote what he writes about his fifth driver, corruption:

Finance is an ‘industry’ where innovation is hard to distinguish from rule-bending or rule-breaking; where the payoffs from semi-legal and illegal activities are particularly high; where the gradient in expertise and pay between firms and regulatory authorities is extreme; where revolving doors between the two offer unending possibilities for subtle and not-so-subtle corruption; where the largest firms are not just too big to fail, but also too big to jail, given their importance for national economic policy and tax revenue; and where the borderline between private companies and the state is more blurred than anywhere else, as indicated by the 2008 bailout or by the huge number of former and future employees of financial firms in the American government.

So far, fairly familiar, if admirably concise. The more important element here is that what this has done is broken the moral story about capitalism – work and the Protestant ethic and all that – that writers such as Max Weber spent so long trying to assemble at the end of the 19th century and the beginning of the 20th.

Capitalism’s moral decline may have to do with its economic decline, the struggle for the last remaining profit opportunities becoming uglier by the day and turning into asset-stripping on a truly gigantic scale. However that may be, public perceptions of capitalism are now deeply cynical, the whole system commonly perceived as a world of dirty tricks for ensuring the further enrichment of the already rich. Nobody believes any more in a moral revival of capitalism. The Weberian attempt to prevent it from being confounded with greed has finally failed, as it has more than ever become synonymous with corruption.

Of course, the idea that capitalism has a moral purpose still floats around in political discourse such as “wealth creators,” a lost signifier loking for something to signify.

Flavours of vanilla

This issue – about how we understand the “story” of capitalism – is why scandals such as HSBC are so damaging. In particular, they remind us that the rich do live in a different world from the rest of us. And Lord Fink’s entertaining spat with Ed Miliband on the precise level of his tax avoidance demonstrates precisely this (and is actually more damaging, not less, because it was only – as the good Lord put it – “vanilla” tax avoidance).

Because what Lord Fink said, when he got round to explaining himself to the Evening Standard, was that he’d “set up some simple family trusts” while on a posting in Switzerland between 1996 and 2000.

Really what I was trying to do was, not like a living will, but to allocate a very small shareholdings to each of my children so they could pay deposits on houses in London one day after we returned,” he told the paper. “There was nothing complex, and they weren’t aggressive tax planning.

My family and I paid tax on all the dividends, both in Switzerland and the UK. They were done because my children were under 18 and I wanted them to have something to help them make their way in the wider world.

A whole lot of things jump out of that. Most people in the UK wouldn’t know about a “simple family trust” if it fell on their head. And Lord Fink’s idea of “very small shareholdings” is probably askew if they’re also substantial enough to pay deposits on houses in London. (The average London house price went past £500,000 last year.)

And just to put all of this in perspective, half of UK households – households, not individuals – had “gross financial wealth” of less than £8,400 in 2010/12, accoridng to the Office of National Statistics. Now there’s a number that Lord Fink would probably think was “very small.” It would barely cover the accountant’s fees.

Indeed, the cartoonist Martin Shovel summed up this gap in comprehension on Twitter:

Rich boy

Back in 1926, just before the The Great Crash, F. Scott Fitzgerald wrote in his story ‘The Rich Boy‘:

Let me tell you about the very rich. They are different from you and me. … They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.

And banks, clearly, like the money of the rich better than they like ours because (as in Hemingway’s literary riposte) they have more of it. Oddly, the Swiss tax avoidance story has resonated more than, for example, HSBC’s money-laundering of funds belonging to Mexican drugs cartels, which led to a fine of almost $2 billion by the US authorities.

And I think the reason is in that line of Fitzgerald’s: that when the rich appear and explain that it is normal to avoid doing something that the rest of us do as a matter of course, they’re also telling us – on 24-hour news – that they still think that they are better than we are. But once the idea that capitalism has a moral order is broken, they’re just a huckster in expensive clothes.

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The image at the top of the post is from Channel 4 News, and is used with thanks.