It is said of King Solomon that he had a servant whisper to him repeatedly – when things went well and when things went badly – “this, too, will pass”. Crises do pass, even the most intense ones. But after the current global economic crisis, there will be no return to the status quo ante. For the world has looked into an abyss. The experience of the 1930s led to the process of building a new world order: one that began at Bretton Woods in July 1944, even before the end of the Second World War. Today, the manifest failure of market fundamentalism and the need for a rebalancing of the world’s economy will inevitably be the starting point for a new new world order. There may be some hardcore faithful who continue to believe that business as usual will resume, but it is already clear that society the world over has demanded remorse from the practitioners of capitalism and action from its politicians.
Banks have been at the epicentre of the storm of public outrage. The sins of arrogance, greed, untrustworthiness and callousness are hard to forgive. But what is clear is that there are many lessons to be learned – not just by banks, but also by governments and regulators, rating agencies, investors and borrowers. All succumbed to the temptations of short-term profit at the expense of the creation of real long-term value.
So, what should it look like, this new new world order? Whatever the eventual shape of things, there are four key realities that will have to be taken into account.
First, there is no alternative to capitalism. At its worst, the market is unjust, abusive, destructive and crisis-prone, as we are all now painfully aware. Yet, at its best, the market is a highly efficient allocator of capital and has delivered huge advantages to humanity. The role of capitalism in creating wealth is evident in the way it has revolutionised the Chinese, Indian and other Asian economies after they introduced market-based reforms. Even if the financial crisis leads to the first fall in world GDP since the Second World War, the past two decades of globalised market capitalism have brought extraordinary gains to hundreds of millions in previously poor societies. Churchill’s defence of democracy – “the worst form of government, except for all those other forms” – applies equally well to the market as an economic system.
Second, we cannot turn the clock back. We cannot go back to the 1970s, to the time before globalised capital markets; the sorts of controls that were then in place, even in developed countries such as the UK, would no longer be considered compatible with an open society. Nor can we go back further to some “golden age” of simpler, more communitarian, less-connected living; this is unrealistic in a densely populated, urbanised, communicating world. There is no alternative to progress and reform. China, for example, is perhaps halfway through an internal reform process. It has a rapidly growing economy in which the private sector probably accounts for about half the total output. But there is a long way to go, and one of the economy’s major challenges lies in the Chinese domestic capital market, which is as yet embryonic. There is no evidence that a modern, increasingly complex and sophisticated economy can rely on banks alone to finance development. Sustained economic progress requires the development of a capital market. China will certainly want to ensure that it learns from the crisis: but it is also certain that it will not conclude that it can do without a capital market. And what is true of China is true for all economies, developed or developing. Lessons need to be learned in order to make the markets work better, not to dismantle them.
Third, government oversight, regulation and, at times, intervention are essential. Markets cannot be relied on to be stable and self-regulating. Nor are markets alone sufficient for balanced social development. It is clear that a new global order will need stronger institutions which preserve the dynamism of market forces while taming their excesses.
Central to this, finally, will be an acceptance that the global balance of economic power is shifting from west to east and that the framework of international institutions needs to be redrawn to reflect the new realities of globalisation. It would be ridiculous to ask Asian societies to play a part in rescuing the world’s financial system from collapse – to provide funds for the IMF, for example – without expecting to cede voting power to them in recognition of their new strength. And it is not at all surprising that they should begin to argue, as China has done, that we must move away from the US dollar as the reserve currency of the world.
The debate over how a more tempered capitalism should operate is under way. Some have pointed to an opportunity to turn relatively unfettered “Anglo-Saxon” capitalism towards a Continental-style harnessing of free markets, with tighter rules and provision for generous welfare systems. Even supporters of the Anglo-Saxon model have argued that shareholder value creation should not be the supreme goal, as it has been in the past 20 years or so. It should, rather, be the result of business well done. And business well done means the profitable provision of good-value services to customers.
The Nobel Prize-winning economist Amartya Sen has questioned the standard perception of capitalism as market-driven, profit-motivated and ownership-based, noting that all the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – depend on transactions that occur largely outside the markets, such as unemployment benefits, public pensions, social security and the public provision of education and health care. For all their differences, these countries have in common a socio-economic approach which does not and cannot rely solely on the market.
Many others – the premier of China, for example – have argued that the new capitalism should encompass the control of overspeculation, and elevation of values such as mutual trust and confidence. The sense that these elements are crucial to socio-economic well-being owes much to Adam Smith’s Theory of Moral Sentiments.
It is clear, in short, that capitalism for the 21st century needs a fundamentally renewed morality to underpin it. To achieve this we must ask ourselves again what progress really is. Is it the accumulation of wealth, or does it relate to a broader, more integrated understanding of well-being and quality of life? Surveys consistently show that economic progress has not been accompanied by the expected increase in happiness, and that the price paid by many has been in the quality of human relationships. On average, people do not think of themselves as happier or better off than their parents were – even though their material standard of living is, in so many societies, unquestionably higher.
There has, in particular, been a marked decline in people’s perception of whom they can trust. The collapse in perceived trustworthiness is most marked in relation to the banking sector, but applies to the business world more broadly, as trust has declined generally within family life and social relationships. As such, it is not surprising that, in the public mind, free markets are in the dock.
Trust is central to the workings of the capitalist system and, if we are to restore people’s confidence in the market, the moral dimension of what has happened has to be recognised. We have come to accept the idea that the value of what we do in business is completely delineated by the market and that no other test of rightness need apply. Yet we would not – or should not, at least – live our private lives this way. We have succumbed to the sin of compartmentalisation.
The truth is that the value of our business is dependent on the values with which we do our business. Better risk management, enhanced regulation, codification of directors’ responsibilities in company law – all these things are necessary. But they are not, nor can they be, sufficient without a culture of moral values. As individuals, we do not regulate our behaviour simply by what is allowed under the law. We take responsibility for our actions. The organs of capitalism – businesses, banks and other financial institutions – have to do the same. This is the sine qua non for the restoration of public trust in the market. It is also essential for the overall health of society.
Stephen Green is group chairman of HSBC Holdings plc and a priest of the Church of England. His book “Good Value: Reflections on Money, Morality and an Uncertain World” is published on 2 July (Allen Lane, £25)
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