Greedy Bankers: A Critque on the Shortcomings of Neoliberal Capitalism and the Thatcher Legacy

Hopefully I at least win points for the most pretentious title.

The recent history of the world has been one of a struggle between two predominant economic theories – Capitalism, and Communism / Socialism.

Capitalism is a system in which the means of production and the capital (hence the name) required to finance such things are held by a small sub-set of the population, whilst the rest of the population are employed by this sub-set to work the means of production for profit – i.e. for the benefit of the holder of the means of production. The various elements of this sub-set compete amongst each other on the free market to produce the most profit.

Socialism is a system in which the means of production are owned by everyone, worked by everyone, and the profits of the labour are owned by everyone.

For a good proportion of the 20th century the world was engaged in a grand experiment to see which of these two opposing ideals would win out, and ostensibly Capitalism came out victorious. Purists would argue that the “Communism” on display was false, and was essentially Capitalism in disguise – the subset owning the means of production was now the Party, not the Rich, but in almost all essentials it was exactly the same as the Capitalist system, apart from the lack of the anarchic effects of the free market having a detrimental effect upon the Soviet economy.

Along with the fall of Communism and the Iron Curtain came the rise of Thatcher in the UK and Reagan in the US, who eliminated every vestige of socialist thought and ideology wherever it could be found, and raised the Cult of the Free Market in their place. In this country, Thatcher presided over the castration of the unions and the dismantling of British state industries; replaced with private companies, they are now bound to deliver profit to their shareholders, instead of delivering the best for the British public.

This tendency has followed through all contemporary Anglo-American policy, on both sides of the Left/Right divide. The Cult of the Free Market is everywhere – an absolute belief that if the market will always find the right way, the most efficient way, the best way; if only government cuts out red tape, if only the government kept out of the market’s affairs. To some degree, this liberalising tendency (hence the name neoliberal) has worked over the past two decades. As bonuses of the bankers in the City of London have inflated, so has the prosperity of the country. The bankers’ benefit was our benefit, so it seemed.

It doesn’t take much of an analysis to see that the myth of the free market is essentially unsound; it’s based upon a simplistic application of the idea that local optimisation leads to global optimisation. In short, the hypothesis of the free market is: if everybody does what is best for themselves, then the outcome will be what is best for society. This can be shown trivially to not necessarily be true for all cases with a simple counter-example.

Consider panic buying of some finite resource, say, petrol. Assume for the sake of this argument that there is enough petrol for everyone’s needs for a week, after which the petrol is replenished. It is in the interest of society that each individual continue to buy exactly how much they need, then everyone will have enough for their purposes. However, in a condition where future replenishment becomes uncertain, or is perceived to be uncertain, it becomes in the interest of the individual to buy as much petrol as they can; to stockpile it. This means that some people will now potentially not have enough if they do not also panic buy. The best strategy in this situation is obviously for everyone to continue buying normally, then everyone will have enough for at least the week. Panic buying will ensure a lot of people have to little or none, whilst the others have too much. The natural “market”, if you will, behaviour creates a sub-optimal situation.

It’s a metastable equilibrium situation, i.e. there are two equilibrium states, and the system can easily decay from one to the other. The perfect scenario can exist under the system, but it requires only a small perturbation to throw it into a very undesirable state. This isn’t a particularly contrived example – a very similar one could be constructed that approximates the credit crunch, where the metastable state is economic prosperity, and the stable state is economic depression.

Essentially, the individual greed of the bankers creates something approximating a successful economy only under carefully controlled conditions, inside their little metastable box. Perturb the economic parameters too far, and all hell breaks loose as each of them tries to save their own skin, dropping the system into the stable state.

This is ignoring the other poisonous effects that such an accumulation of wealth has on society. It’s like throwing fertiliser into a lake; you get huge explosive growth that covers the surface of the water and starves the plants below of light and oxygen. Wealthy London bankers go out and buy second homes in the country, causing a property boom that prices people out of the towns and villages they’ve lived all their lives. These second homes that lie empty most of the year, choking the life out of these places. Wealth that can afford the best education for their children – practically a guarantee of a good university place, statistically speaking – and all the money and support needed to set their children up in anything. There is gradual ghettoisation as those who can afford to move out of “poor” areas into “rich” areas do. I could go on, and on, and on.

The sums that these kinds of people receive are phenomenal, but are they of any more value to society than teachers, nurses, police, doctors, or scientists? I would say they’re worth a great deal less, but because they handle the capital, the dominant force in our society, they are elevated above the more socially worthwhile professions.

The really sad part is that these greedy banks cannot be allowed to fall, as the misery inflicted on the general public would be too great. So these bankers must be rescued from their own folly by the governments who condoned, allowed, and supported their actions.

It’s a damned shame that a government that calls itself Labour is committed to helping these scum prosper, not wiping them from our nation entirely.

However much I may have condemned it above, there will always be a place for the free market, this is true. It does encourage many positive competitive instincts, but it must be viewed for what it is; one tool in the box for solving a complex problem, the principal-agent problem; that is, making it so that one body (the agent) working on behalf of another (the principal) does what the principal wants them to. Turns out it’s pretty hard to solve in a general manner. The free market is not the be all and end all.

As an example, take the principal to be a bank offering mortgages, and the agent to be a mortgage salesperson. The bank wants to sell a lot of mortgages, so they offer the salesperson a commission on each mortgage sold. The salesperson’s interest is not in the general health or wellbeing of the bank – he’s not here to debate about if selling a mortgage to Mr & Mrs Redneck is a good idea – he just wants his commission, so he’ll shift as many dodgy mortgages as he can. This is, excuse the pun, a pretty sub-prime solution to what the bank was looking for.

Idolising free-market capitalism is a mistake. There are roles to be played by socialist thinking instead – obviously the scope of what could be done is well beyond this blog post! Mostly because this is really long already, I’m not an economist, and I don’t have the real world to compare it to like I can with the vast free-market experiment. The alternatives include democratic control of institutions, for instance I would posit that transport in London has been improved since being under the control of a democratically elected Mayor. It’s so much better than the rest of the country, it’s really not even funny.

Anyways, I’m sure that many of you reading will think I’m wrong. That’s cool. I mean, you’re the ones who are wrong, but we can’t all be right, can we? Feel free to make your case heard in the comments, though.

7 thoughts on “Greedy Bankers: A Critque on the Shortcomings of Neoliberal Capitalism and the Thatcher Legacy

  1. I'd say that the means of production are capital, hence the term 'capital investment' or 'capital goods'.

    Free Market Capitalism has two key components allowing private ownership of assets, and allowing market forces (the collective action of market participants) to determine allocation of resource (be it capital assets, such as machinery, labour, etc.), with the idea that the profit motive of market participants promotes efficiency by rewarding success. It's also import that failure is punished in a truly Free Market.

    Where you have private ownership, but no free market you get Fascism or Corporatism, where the owners see the profits, but are protected by the state from losses. This leads to the problem of Moral Hazard, wherein increasingly and excessively risky behaviour is rewarded, that is there is an assymmetric payoff.

    The UK has a very mixed economy in that we have a combination of free markets, but many areas are socialist, such as the NHS.

    Arguing that certain professions are more socially useful such as nurses, doctors, teachers and scientists is purely a matter of opinion, particularly when you consider the example of workers who produce medicines in a factory, or the engineers who designed the machinery or even the managers who manage those workers, or the other administrative staff, or those who produced the raw materials, or those who perform services for those people, or those who grow their food.

    In our society we have complex interdependencies between each other. The problem with centrally planned economies is that they usually have problems with over and under production in different areas and massive inefficiency. Also, a centrally planned economy offers little incentive to participants for improvements in efficiency. Centrally planned economies, or perverted capitalist economies such as our own have the significant problem that special interests can and will campaign or lobby for their own welfare at the expense of others.

    I think blaming Thatcher for the current situation about as logical as blaming Churchill or Scargill. None of them have been active in politics over the low interest bubble formation which has led to a genuine misallocation of capital. The massive liquidity in the system has distorted markets by making it exceptionally cheap to borrow, thus creating inflation of the money supply with no corresponding increase in actual wealth. This is the true cause of the housing bubble, and it's borne out by the correct assertion by Austrian economists that those who have first access to the money supply (the banks, the bankers, those involved in finance, etc.) were able to price others out of the market for capital goods, such as housing.

    I find it hilarious that you assert that transport in the capital is vastly improved. The price increases for tube fares are consistently above inflation. A larger proportion of people's income in the capital is spent on transport with no significant improvement in amenity. The tube is in my experience vastly more expensive and at least as crowded as it was historically. I'd love to find a hard source for prices and measures of services, such as congestion, delays, closures etc. I'm not sure what makes London any better a city than say Brighton or Manchester myself.

    There are genuine situations where individuals acting to seek the best possible situation can lead to inefficiencies however, such as those studied by Nash, lest you think I idolise markets. I'm not a follower of Ayn Rand, or of Thatcher. I am an Austrian Economist. I support solid asset-backed currencies rather than fiat currencies that allow governments to slowly rob the citizens and transfer liabilities between generations by spending money that they do not have; each generation should balance their incomes (production) with their expenditure (consumption). This policy would also have the beneficent side effect of disincentivize war by forcing governments to issue unpopular taxes to pay for the ruinous cost of these incredibly unproductive enterprises. Money-as-debt (which is all fiat money is) seeks to enslave us all to debt, instead of building everyone up to enjoy both the free gifts of nature and the products of human labour.

  2. Doesn't happen too often, but I'm in complete agreement.

    The sad thing is that when a bank does badly, it's everyone else that pays the price (either directly through poorer rates as they try to recoup some loss, or through taxes being spent on propping up banks).

    The problem with most organisations is that they're scarily short-sighted. I hate to pick on the banks again (he lies), but the bonus culture there is a good example. They get bonuses for making a deal, and they get that bonus immediately. So if it turns out in 5 years to be a bad thing, why should they care? They've already got their Ferrari/second house/whatever; no-one's gonna take that away from them. Examples of it working the opposite way are the BBC and London Transport, as you said. I'm of the opinion that privatising the infrastructure in this country was a complete clusterfuck – all of it seems to have gone down the tubes since privatisation.

    “The bank wants to sell a lot of mortgages, so they offer the salesperson a commission on each mortgage sold… he’ll shift as many dodgy mortgages as he can”
    Seen this sorta thing happen first hand. Not necessarily “dodgy” mortgages, because it's not down to the salesperson whether Mr & Mrs Redneck get their money. They've got to pass the bank's assessment (although those assessments were clearly far too lax, otherwise the banks wouldn't be in half the mess they are in now). But I bet there's lots of people who are sold debt they don't want or need, just because the salesperson wanted to hit their target. Banks are fuckers, anyone who says otherwise is desperately naive.

    “physics applied to finance but not like a sell out”

  3. Wow are you ever better at this than me. I wasn't so much arguing for any particularly better system, just that the one we have is hideously horribly broken, for a bunch of the reasons you mention. I know that's a pretty weasel-like way of arguing things, but I don't know enough about economics to say anything more sensible.

    Just on the transport thing, I'm going on anecdotal evidence (which admittedly is no evidence at all, really) that the transport in the rest of country sucks a heck of a lot worse. The buses around Birmingham cost £1.50, and they're infrequent, filthy and vandalised. And there's no night service. I doubt they will ever find any reason to improve because it's a private monopoly – one of the textbook instances where a government's knee-jerk impulse to privatise was not a good one, I would say.

    Thatcher is culpable in that her deregulation of the market was what caused the explosion in the financial services sector, and started this whole ball rolling. It's the “greed is good” culture as much as anything.

    I wasn't making an exhaustive list of socially useful jobs – people who keep the floors and toilets clean are really equally important – I was more making the point that bankers are paid disproportionally to their social worth. It's a tired cliché that a lot of the best and brightest from places like Imperial are creamed off by the huge salaries available in finance, but it's a true and unfortunate one.

    Anyways, like I said, I'm a fairly poor economist :)

  4. Infrastructure is just one of those things that just cannot and should not be privatised. For privatisation to even start to work, you need competition. Competition doesn't really go together well with efficient infrastructure. Do you really want to lay twice the number of railway lines, gas pipes, etc.? It really is a complete clusterfuck, I agree.

  5. …and at least Birmingham HAS buses that go anywhere vaguely useful. Seriously, you don't know how good you've got it in London! And bloody hell, the rail network.

    As another non-economist, I can only nod and agree wholeheartedly, both with Andy and, erm, Dickie. Unfortunately short-sightedness and greed seems to be part of human nature, and that is no less present in most governments than it is in the big financiers of the free market so an exhaustive solution to the problem simply does not exist. That is where I would hesitate to term Communism and Socialism as one at the same – to my mind, Socialism at least acknowledges the need for pragmatism.

    I will conclude my comment by echoing Dickie's sentiments on “physics applied to finance but not like a sell out” – love it!

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