Translator: Robert Tucker
Reviewer: Helene Batt Thank you. Now, I’ve been asked to talk to you
about regenerating capitalism, and I wanted to start with this picture
of the occupying movements, because I wanted to draw attention
to the banner they have up there that says: ‘Capitalism is Crisis’. And I think it’s important
to acknowledge this concern, because there are
a lot of people out there, a lot of the general public, who, in light of the financial crisis,
now believe this. So, now think
that the phrase ‘good capitalism’ is just frankly a bit of an oxymoron. Now, I want to caveat my presentation
by saying that I used to work in a bank. So, I now work on financial reform
in a think tank, but I used to work on the trading floor
of Goldman Sachs. So, I don’t subscribe to the view
that’s put forward in a lot of newspapers, that just because somebody
works in a bank that means they’re automatically
a Disney villain. And obviously this is an event that’s been organized
by the London Business School, so, I imagine lots of people
in the audience here are business students, or perhaps members of the public
who are involved in business themselves. And I imagine the reason why all of you
got interested in business wasn’t just because you see it
as a means to an end, i.e. a way to make a lot of money. I imagine that lots of you
got interested in business because we think business is exciting,
because we think it can be innovative, and productive,
and I would absolutely agree with you. I think there are tons of things that business and the market
does really, really well. So, the question is more:
Where have we gone wrong? And in my talk I wanted
to point out a few areas where I thought capitalism
could be tweaked, so to speak, to make it a bit more of a force for good. But before I do that I just wanted
to debunk a myth. Because at the moment the Wrights
have very successfully rebranded the Eurozone government crisis
as a crisis of government spending. So, this is a warning to all of us
of the perils of too large a state. I would just like to say
that that’s absolute rubbish. Now, for a country like Greece
there’s a kernel of truth in that, but for the other countries,
no, absolutely not. And to illustrate that, I just want
to show you this graph which is of Irish government debt
as a percentage of GDP. And what you can see from it is, before the crisis,
so going up to 2007, there was nothing really that wrong
with this debt ratio. And it wasn’t actually
until the financial crisis hit, that, as you can see,
it starts to skyrocket. Now, why was that? Because when the financial crisis hit,
the property bubble collapsed. They had to bail out their banks. They had a recession, so more people
fell into unemployment and needed unemployment benefits. Similarly, the recession caused
a collapse in tax revenues. Be under no mistake the Eurozone crisis
and the 2008 financial crisis are not two separate events,
they are the same event, and we are very much looking
at a crisis of capitalism. Now, what sort of things can we do
to restore people’s belief in business and people’s belief
in capitalism? Well, firstly we need to deal,
and I mean actually deal, with the too-big-to-fail problem. Now, I know a lot of you are probably
sitting there thinking: ‘Oh, but we’ve had
the big banking reform consultation. In 2019, in the UK, we’re going to have the retail parts
of banks ring-fenced away from the investment banking parts
of those banks. So, you know, mission accomplished.’ Well, no it’s not. I mean we can look
at banks like Lehman Brothers, to see that a bank
that’s purely an investment bank, can still be too big
and too interconnected, and can still be too big to fail. Now, of course, Lehman Brothers did fail but its collapse sent shock waves
around the global economy. Now, what’s interesting
is that the commission who proposed this ring-fencing actually acknowledge that ring-fencing
isn’t going to be enough to tackle the too-big-to-fail problem. So, it will mitigate the problem,
but it’s not going to eliminate it. And their response to this is to say, ‘Oh, but there’s lots of other initiatives
that are coming in, and that’s going to mop up
the rest of the mess.’ Now, I don’t have much time,
so, I don’t have time to go through all those different
initiatives that are coming in, and explain why I think
they’re not substantial enough. But I will say one thing,
and that’s if anybody tells you that in 2019
the investment banking part of Barclays, if it gets into trouble,
it will be allowed to fail, then they’re either lying
or completely deluded. And we really need, if anybody is going
to have any faith in capitalism, then we have to get away from this bizarre
sort of socialism-capitalism hybrid we have at the moment,
where massive institutions are so big they can essentially hold
the rest of the economy to ransom, are effectively backed by the state. And I’m not just talking
about RBS and Lloyds, that had direct money injected
into them by the government, I’m also talking
about banks like Barclays, because all these banks benefit
from the implicit government backing. So, the fact that
they can go out and borrow in the markets at lower rates of interest
than they could do if the market didn’t believe
they were government-backed. And this isn’t something
that I’m just making up. The Bank of England
have done a lot of research into this and think this is worth billions of
pounds per year to banks like Barclays. So, we have to deal with this
and I want to show you one more graph, because a lot of people make the claim that banks have to be as big
as they are now, if we’re going to be able
to enjoy the products and services that we do currently,
at reasonable prices. And I’d just like to say,
historically, that’s absolute nonsense. So, the graph I’ve got up at the moment, it starts in the 1880’s, and you can see
that up until about the 1970’s banks asset’s as a percentage of UK GDP, remain roughly around 55%, roughly steady. And then you hit the 1970’s,
and you hit deregulation, and, as you can see,
everything skyrockets. So, this idea that we have to have
these giant megabanks, is absolutely rubbish
and we shouldn’t be afraid to tackle them. I’d like to take a step away
from banks for a moment and talk a bit more generally. And if we’re going to start getting people
to believe in capitalism again, then we need to be better at recognizing
what capitalism is good at, and, like I say, I do think it’s good
at a lot of things, and what it’s less good at. And we need to start
recognizing its limitations, and not just religiously
applying it to everything and believing religiously that the market is the best way
to solve every social problem. And I want to give you
one example of this, and that’s international developments,
or more specifically microfinance, I want to talk about. Now, microfinance is when banks
and other companies give out small loans
to people in poverty, people generally in developing countries, with the idea that they’ll then
take this loan and go off and build a business
and lift themselves out of poverty. Now, when I was at university,
when I was doing my master’s degree, loads of my fellow classmates were
so excited, so excited, about microfinance because it was the market solving poverty,
it was entrepreneurism solving poverty, but what’s really interesting about this, is when you actually look
at the empirical evidence. There isn’t the empirical evidence
to back up this claim. But no one was looking for that.
I mean academics were, academics look at microfinance
and look and see and say, ‘Ooh, this relationship
isn’t really there.’ But the people who wanted to go
into the field didn’t even stop and look. There was just this blind faith,
this automatic assumption that this absolutely must be
a great way to solve poverty. And it’s that sort of mentality
that we really have to move away from, because a belief in the markets like that
is just as ridiculous as a belief that a centrally planned
communist state is a good idea. I mean they’re both extreme, like I say,
almost religious values to hold, and clearly, you know, some are good
at some things, some are good others, recognize where they work
and where they don’t. I’d like to talk also a little bit
about short-termism, because if we’re going to have
a good capitalism, we’re going to need an incentive structure that encourages people to think about
generating long-term value, and not just making
as much money as possible in a shorter period of time, even if what you’re doing
is fairly unsustainable. And I think one of the reasons
why we have such a problem with short-termism at the moment, is because in the UK and in the US, we’ve once again religiously embraced
something called shareholder capitalism. And what this means is that most
of our large companies are floated on stock exchanges and
are owned by myriad investors remotely. And the problem with that system
is that that means that all these businesses
and those managers are then susceptible
to the pressures of the markets. Such as things like
maximizing quarterly earnings, because that’s what the stock markets and stock investors care about. Now, I’m not suggesting for a second that we should get rid
of stock markets completely; I don’t think that at all. I think once again
there are lots of things that stock markets are good at. But we need to diversify
our economy slightly, we need other types
of ownership structures, and I think we should look
to countries like Germany where they have something called
stakeholder capitalism. And what this means is,
the ownership of businesses, and the supervisory boards of businesses, have representation from all sorts
of different people. From owners, from creditors,
from customers to employees, so a much wider range of input. And this might sound like a relatively
trivial change that I’m suggesting, but changing the corporate governance
structure of a company like that, really does make a big difference
in how that company behaves, and really does give it much more
of a long-term outlook. And it can also help do things
like reign in managers’ pays when they’re their excessive. And having mentioned pay,
I want to talk obviously a little bit about something that the Occupy movement
keep bringing up, which is this whole 99% versus the 1% — the idea that all the wealth is held
by a very small number of people. And I think if we’re going to restore
people’s faith in capitalism, then people need to feel
that differences in wealth reflect things and truly reflect things,
like differences in hard work, or differences in skill,
how innovative you are. And at the moment,
I think most people would agree, there are a lot of people out there
who are severely overpaid in comparison to their contribution,
to what they add to society. Now, I think one of the ways
that we could help bring this wealth gap back down slightly, and in addition restore people’s faith
in big business, is to get businesses to start to behave
like corporate citizens. And what do I mean by that? I mean I think they should pay tax
in the places where they work. Now, I’ve been horribly populist here
and I’ve picked on the banks, but all multinational companies do this. So, what I’ve shown here
is the number of subsidiaries that our large banks have in tax havens. Now, a lot of you are probably thinking: Well, you know something like
the Cayman Islands is a sovereign state, it’s entitled to set its tax rates
at whatever it wants. And, similarly, if a business wants
to locate in the Cayman Islands, it should be allowed to do that. Now, I would 100% agree
with both of those things. The problem is that the situation
we have at the moment, is that those businesses aren’t really
located in places like the Cayman Islands. So, I’ll give you an example of the sort
of thing multinational companies do. So, let’s take a business
based in India, say, with lots of factories in India,
and all their staff are employed in India. Now, what that multinational corporation
can do, is it can set up a subsidiary company
in, say, the Cayman Islands, where it books something like
the property rights to its logo. Now, who knows how much a logo is worth, but it’s a very good way
for multinational companies to be able to transfer enormous sums
of money from where they actually work to somewhere where they just
have an address and a postbox. And the way they do that, is the subsidiary with all the companies
in India that’s actually doing something has to buy the logo rights off
the subsidiary in the Cayman Islands, and thus transfer huge sums of wealth. Now, you might say: Well, that company
is just expressing a view about the fact that the taxes
are way too high in India. And I would say: It’s absolutely valid to have a discussion about
the optimal tax rates, and the optimal size of the state, but the correct place to do that
is at the ballot box. What we don’t want is companies
competing against each other for advantages based on who has
the slickest accountant. Because that’s not competition based
on the exciting innovation you’re doing, or why your product is so good,
or because you’re working so hard; that’s innovation based on what to me
looks like free loading. Because we’re turning around
to all the people who can’t afford an army of accountants
and lawyers and saying, ‘Thanks for picking up
my share of the tab.’ So, I want to leave you
with one final thought, and that’s that capitalism
should be about balance, and I’m going to make the perhaps
somewhat tenuous claim that capitalism is
a little bit like a dog. (Laughter) So, if you tame it and you control it
and you have a firm hand, it can dramatically add
to your quality of life. But if you let it just run amok, then it may very well savage
both you and your neighbours. Thank you. (Applause)