26 September 2018

Jeremy Corbyn, Gordon Gekko and the morality of markets


In his speech at Labour Party Conference this afternoon, Jeremy Corbyn said, “Ten years ago this month, the whole edifice of greed-is-good, deregulated financial capitalism, lauded for a generation as the only way to run a modern economy, came crashing to earth, with devastating consequences.”

As every pedant knows, “Greed is good” was not a sentiment expressed by the 1980s Conservative Party or some City figure of the day. Rather, it is a misquote from Gordon Gekko, the villain of the 1987 film Wall Street. It’s not clear why using a 1987 movie villain to label capitalism is any more legitimate than using a 1987 movie villain to label socialism. It seems to me to be equally as absurd to use Gekko as defining a “Greed is good” capitalism as it would to use Skeletor (villain of 1987 film Masters of the Universe) to define “KNEEL BEFORE YOUR MASTER!” socialism.

There are supporters of capitalism who would try to urge that greed is in fact good. I am not one of them. But I do urge this. It is true that in a market economy we need some basic underpinning ethical framework for the market to function well.

Specifically, we require a general commitment, amongst market participants, to truthfulness, promise-keeping, law-abiding, and perhaps also some vague desire that agreements should be to mutual benefit rather than the harm of one party. But that is pretty much it, and that is one of the great unsung strengths of a market economy — namely that it works with the grain of human imperfection and diverse motivations and turns all to the common good.

Markets don’t deny that people are greedy, impatient, selfish, covetous and avaricious. But they do not depend for their success upon the virtue of economic agents. They don’t require that we all adhere to the same religion, that we all have the same political beliefs, that our interpretation of history or science is the same, that our goals for ourselves and society are similar. Markets are celebrators of diversity. They tame desires such as greed and steer their results so they serve the common good instead of threatening it.

Markets don’t “fail” (if they fail at all) because of immorality. Greed cannot bring down a market system — unless by “greed” you mean to allege illegality, promise-breaking, an attempt to defraud those trading with you, or some other violation of the required market virtues.

Be careful, Corbynites! For in the grand collectivist utopia you hope for, in which commerce only flourishes if people are virtuous, it will suddenly become very important — central to collective economic success — that we are all good and all similar. Toleration of differences in ethical outlook, in religion, in attitude to history, in personal motivations and goals — these things must pass in such a system, as indeed they were not permitted in the pre-capitalist systems of the medieval era. I hope you enjoy the world you seek to create.

Later in his speech, Corbyn said that since 2008, “instead of making essential changes to a broken economic system, the political and corporate establishment strained every sinew to bail out and prop up the system that led to the crash in the first place.”

On this point, of course, he is attacking Gordon Brown’s government. He’s right. It was immoral and economically destructive to have a system in which when returns were high, private investors in banks and high-risk financial instruments got rich, but when banks went bust wider society (i.e. taxpayers) bailed them out. But the error here is not that economic agents responded naturally to the incentives the system offered them (what Corbyn calls “greed”). The error was having that economic system at all.

Corbyn is right to attack the bailouts and the economic system that included (and still includes) them. But the solution is to re-structure the financial system so that it is credible that banks will not be bailed out. (Not that they will not fail, but that when they fail they will not be bailed out.)

That requires depositors to have places to put their money that do not use those deposits to support risk-taking activities (such as commercial loans or mortgages). Such deposits used to exist until the 1970s – they were called “savings banks” and in the 1920s and 1930s held around one sixth of the country’s total deposits. They vanished as a result of the bank bailouts of the early 1970s, the inflation of the mid to late 1970s and the EU’s 1979 deposit insurance directive. We should have restored them after 2008 and the system will not be stable and ethical until we do.

Corbyn’s characterisation of capitalism as assuming “greed is good” is silly, and he is quite wrong to suggest that greed was something to do with the 2008 crisis. But he is right to condemn the bailouts. The solution, however, is not to replace capitalism with mass worker/government ownership and control of firms, as Corbyn proposes.

That will simply make bailouts more certain, destroy workers’ control over the fruits of their labour (called “private property”), and create a society where the economic and social model requires the crushing of dissent and diversity of ethical and religious outlook. It replaces an ethically flawed economic model with an ethically disastrous and deeply oppressive one.

Financial capitalism still needs deep reform. But don’t take Corbyn’s path. He may be right in his criticism ,but his answer would be a disaster.

Andrew Lilico is an economist and political writer.