What’s very striking about much of the pro-free market literature, it seems to me, is that it tends to present organisations in a way that doesn’t quite work out in practice. We can illustrate this through the work of Ayn Rand, amongst others.
Rand is interesting not only in terms of her huge influence and readership, but also because of her influence on figures like Greenspan, who was part of reading and study group. Rand was heavily in favour of individualism, and heavily pro-market. There’s a great deal to admire about what she says; she talks about the responsibility of achieving intellectual independence, of continuing to learn throughout life and rightly in my view, that capitalism is the economic system most likely to achieve these things.
However, for capitalism to work properly, then consumers need to take on a great deal of responsibility that they often struggle to deal with, and employees of producers, those that we actually have do deal with, have to have their futures far more aligned with their employers than is often the case at present. I’ll try and deal with each in turn.
Being a consumer is a heavy responsibility. By choosing products which aren’t the best, you reward firms that aren’t the best, running the risk of institutionalising mediocrity. By taking poor customer service rather than complaining, poor service gets rewarded and no-one acts upon it. Being a consumer in capitalism is hard work. But it gets to be even harder work when you start dealing with complex products like financial services. At present there are arguments going on about the extent to which individuals got themselves into trouble by borrowing too much money in the financial crisis. From Rand’s perspective, they got themselves into this mess, and we shouldn’t feel sympathy. There is at least some sense in this – no matter how sorry we might feel for people losing their homes, they did sign mortgage agreements they had no way of being able to service. If we trust people to vote in elections, surely we can also trust them to understand the contracts that they sign? Capitalism begins to fall to pieces pretty quickly if we can’t be relied upon to make contracts competently.
However, most of us don’t always choose the optimal product, and don’t always complain when we get bad service. In the UK we are substantially worse than people in the US – we don’t like to make a fuss. I do also wonder how many people over here really understand their mortgages either. We are pretty flawed consumers much of the time. We have to hope that we are doing a good enough job to make capitalism work reasonably, and when products and services get complex, as they do in the case of financial services, there is certainly scope for things to go wrong rather quickly. You can take that as a wake-up call for consumers to get on and educate themselves, or a major flaw in the market system. I would prefer to think of it as the former.
The problem is arguably bigger on the producer side however. Rand’s work tends to assume that poor producers will suffer in a marketplace, and that producers providing a poor service will go out of business. However, this tends to conflate those working within institutions with their institutions – they are not the same thing. I am not my University, and neither is it me. The person who sold me my mortgage is not the bank that they represent. The problem with all of this comes when individuals perform badly but their organisations either don’t know, or are unwilling to do anything about it. A firm of mortgage brokers might have the best intentions at the managerial level, but end up employing one broker who mis-sells and gets the whole firm into a mess. That’s a managerial problem, sure, but it’s one that might be very difficult to pick up.
The problem gets worse when those working for organisations are able to move on to another job before they have to take responsibility for what they have done in a previous one. If we have someone who mis-sells mortgages, they might be able to move on before the problem is discovered, leaving behind a firm with massive problems, and with the individual responsible no longer accountable for what they have done. Something that particular bankers involved in the financial crisis spoke of was an ‘IWBT, YWBT’ situation – where an asset was sold from one organisation to another which both parties knew was of dubious quality, but earned them both bonuses. Why did they do it? Because ‘I won’t be there, you won’t be there’. If the individuals responsible for bad behaviour aren’t held accountable, then that creates a significant problem for capitalism.
I don’t want to advocate a situation which involves lawyers more than it need to, but perhaps they are the only way out of this. If industries were to set up self-policiing bodies that went after malfeasants regardless of whether they had moved on to other firms or not, then people might think twice before setting up the IWBT, YWBT situation. That would surely be a good thing. What worries me, however, is that we seem to have still awarded bonuses to people who created deals fully in the knowledge that they weren’t doing anything of value either individually for their firm or collectively for the financial system as a whole. If self-policing in capitalism, especially in financial markets, is to work, it needs to have more teeth than at present.