There is one great flaw in economic analysis and that it that it has no theories that explain generalised wrong doing within the economy. Instead it recognises that there may be individual wrong doers but that wrong doing can be systemic throughout a particular sector the economy. Unlike Christianity it lacks a devil, Christians can account for wrong doing by referring to the malign influence of the devil, whereas in economics the assumption is that there are only occasional examples of wrong doing. There is on earth an economic Garden of Eden that is the free market system ensures no evil practices will prosper. Competition will force all businesses to adopt the highest standards of conduct through fear of losing sales to more ethical competitors.
Christians would have no difficultly in understanding that the greed of bankers was a key factor in precipitating the crash of 2008/9. It was their desire to accumulate larger and larger bonuses that encouraged them to undertake increasingly risky investments, investments that offered the possibility of greater and greater profits and bonuses. Self restraint was a characteristic absent from the traders and bankers money in the City of London. When it is phrased in these words the Christians seem to have a better explanation for the crash of 2008/9 than do economists. Fundamentalist Christians might suggest that the devil who had corrupted the behaviour of bankers and that this corruption directly led to the crash. Faust sold his soul to the devil in exchange for the love of Helen of Troy and as such was committed to a life of sin. It could be argued that the bankers sold their souls to the devil in exchange for untold wealth. Certainly there behaviour in that time suggested that they were little more than the servants of the devil.
Fortunately economists don’t have to re-invent the devil to explain the wrong doing that takes place within the economy. The corruption of the spirit comes from the belief that the main purpose of all human activity is the accumulation of wealth. It is the quest to maximise income and profit that will lead to the adoption of unethical behaviour. Adam Smith (The Wealth of Nations 1776) stated that when a group of businessmen are gathered together their purpose is not to promote the common good but to further their own selfish interests. He was familiar with the practices of 18th century merchants who would divide a market between themselves; where each would be guaranteed a local monopoly so they could charge the highest possible price for their goods without having to worry about being undercut by a low cost rival.
Today there is a report in the newspapers that house builders are restricting the supply of houses so as to force up the price of houses. The former Mayor of London Ken Livingstone produced a report that claimed that house builders in London made a profit of 26% on each house sold at a time when the average company profit was 10%.
While there is no devil in economics but there is the devil like ethos which is summed up in the words profit maximisation. Any behaviour is deemed acceptable if it results in increased profits for the business. A practice demonstrated when international firms operating in the developing countries hire mercenaries to eliminate local politicians and trade unionists that might campaign for better wages or environmental protections that would increase their operating costs.
Bad behaviour amongst business executives is not unknown to economists, its just that the current generation of economists assume that such behaviours have only a small impact on the economy and its host society. Yet a recent writer on the Italian mafia asserted that London was responsible for facilitating the activities of the various Italian drug cartels through money laundering, which gave the gangs clean money with which to finance their corrupt practices in Italy and other European countries. The very opaqueness of the banking system makes it impossible to know the extent to which such bad practices are common in the London financial markets, whether it is one or two bad apples or the whole barrel that is rotten.What evidence there is suggests the latter.
What I am arguing for is a recognition that there is a devil in the economy, there is an ethos that perverts its workings so as to favour the selfish interests of small groups at the expense of the majority. I would suggest that Gresham’s law needs updating, in its original form it states that bad money drives out good. Gresham was thinking of Henry VIII and his constant debasement of the currency. A contemporary Gresham’s law would state that bad economic practices drive out the good. I do have some experience of this as when I worked in the City of London in the 1960s, new sharp practices began to creep into the city. At first the old established city firms resisted employing these sharp practices, but when it was clear that these new practices were very profitable the old ethical behaviours were soon abandoned.
The old city insurance firms were very conservative in their practices they never employed aggressive selling techniques, such as cold calling. New comers to the market employed much more aggressive tactics and took an increasing share of the insurance market forcing the old established insurers had to follow suit. This had one unfortunate consequence as life insurers competed with each other by offering more and more generous end of term policy benefits. To finance these generous payouts the insurers had to raid their cash reserves. This had two effects the first was to reduce the viability of the company forcing a wave of mergers as these firms sort tried restore their viability through consolidating into a few large companies so building up their depleted reserves. The second was that the life insurance industry was unable to pay such large end of policy benefits and were guilty of overselling their products. This led to the pensions scandal when it was revealed that the many millions who had on exchanged their occupational pension for one provided by an insurance company believing that their promises of a much higher pension, discovered that their private sector pensions generated a pension far less than that offered by their former occupational pensions. What has happened is that the old conservative but financially sound companies of the past have been replaced by more aggressive but less viable businesses. The trusted figure of the man from the Pru is now a figure from the past as he has been replaced by the salesman eager to win your custom.
Christianity has another lesson for economics, according to Christianity mankind is tainted by original sin and only an outsider untainted by human corruption can save them, that is God. Similarly the market system is tainted by an original sin, greed or perhaps more accurately original greed. The economic devil an integral part of the free market, this devil is ever ready to corrupt the participants in the market with the promise of riches. The business ethic, that is the desire to maximise profits is all too often little more than a disguise for this primal greed. Personalising the faults of the market system in form of the devil (even if it’s a metaphor for greed) has one important role it will constantly reminds politicians that the free market is not the solution to all problems, but is yet another flawed human creation that is corrupted with all the sins of its makers. The unregulated free market is a threat to social order as all manner of unethical behaviours are made possible, if there are no laws or regulations to prohibit them. The behaviour of the bankers and traders in the financial markets in 2008 and since demonstrates the folly of leaving the market and its members to set their own rules. Once this is accepted the government will return to its former function of legislating to stop powerful players in the market from abusing their power at the expense of other members and outlaw the most undesirable of economic behaviours. What politicians fail to realise just are there are crimes against the person and property, there also the economic crimes, which are also a threat to the person and property.
Note. A more sophisticated version of the threat that an unregulated market poses to the social order is to be found in Michael Polanyi’s ‘The Great Transformation’.