Fast Track
Speed Read
More than a decade after the global financial crisis, the relationship between finance and wider society remains fractured, and social solidarity (the social cohesiveness on which human wellbeing depends) is under strain. This is just when financial firms are being called upon to help humanity address some of its most pressing challenges, from climate change to environmental and social sustainability more broadly. The break is serious. It inflames wider mistrust of business activity and political regimes. Capitalism in one form or another is the only realistic option for organising and sustaining much of the economic activity on which society relies, but it rests to a large degree on social solidarity. The need to heal the relationship is therefore urgent.
Relationship strain has been framed by narratives of fracture, promoted by public figures from Donald Trump in the US to Jeremy Corbyn in the UK. These narratives cast financial sector greed as a major source of social ills and feed off the experience of the financial crisis and subsequent austerity. They also build on another set of stories about greed in financial life: stories of The Wolf of Wall Street genre. That basic message of relentless financial self-interest is echoed in key economic models used to understand and influence economic life: the idea of āeconomic manā as a rational maximiser of his own (usually financial and material) utility; shareholder value (the idea that the purpose of a company is to maximise financial return to its shareholders); and the idea that an āinvisible handā guides self-interest in markets to the most beneficial outcome for all. Little wonder that people have concluded that finance is about the conflictual pursuit of money, and little wonder if sometimes it is.
But there is a big problem. At best, models of this sort only capture half the truth. They leave out the significant extent to which regard for the interests of others is at work in financial life. If that sounds odd, it is evidence of how powerful the narratives are. The reality gap is highly problematic because models and narratives like these are more than ājustā stories. They impact perceptions and shape behaviours. Perhaps they lie behind some of the behaviours that have lent the narratives of social fracture their credibility.
A re-evaluation is under way, and gathered pace following the 2008 crisis. Among other things, it has involved attempts to adjust or supplement these key economic models to reflect the other-regarding aspirations people really bring to markets. Yet, we still lack a framework within which to navigate the systemic challenges before us. Current work on culture in financial firms and sustainable finance is promising, but seems to struggle to break free of the assumptions behind the old economic models. Too much funding continues to flow to economic activities that are not sustainable, and not enough to what is. Meanwhile, social fracture remains in spite of one of the most intensive regulatory reform processes the financial world has ever seen. Reform has achieved much, but the usual regulatory tools have not yet healed the fracture.
This is the context for growing attention to what Mark Carney, then Bank of England Governor, has suggested could be lost: the āsocial licence for financial marketsā. Can the observation that financial markets operate under a social licence help in tackling the multitude of challenges? This book answers, āyesā. It also explains why. It takes a narrative to beat a narrative. The recognition of a social licence advances a radically different account of financial markets: one much closer to reality; one with the potential to engage with a deeply held human desire for justice and to displace the damaging delusion that finance is about little more than a conflictual pursuit of money.
Social solidarity, on which the wellbeing of financial markets and everyone else depends, is based in large part on a broad-based mutuality āa generalised mutual regard in social relationsāamong those in the relevant society. Financial market relationships can contribute to this where they display positive reciprocity and damage it where they do not. The expression āpositive reciprocityā is used here not in the conventional sense to describe a situation where the immediate parties to a relationship are mutually regarding of the needs of each other, but also where reciprocity is orientated in a way that is positive for those affected by their relationship more widely. It involves a balancing of needs that can be thought of, like the social licence, in terms of justice. Those who cooperate to manipulate a market may display reciprocity, but the wider impact is not positive. That is not positive reciprocity.
There is already positive reciprocity in financial markets. However, strengthening it in a way that can help to address current challenges goes well beyond ābusiness as usualā. It requires fundamental behaviour change. Financial market behaviour takes place within and emerges from chains of relationships. It is never āneutralā. At some level, each act either advances or undermines aspired ends. If behaviour is to change, it needs to happen in the way these multiple relationships are lived, felt and understood in practice. There is a need to transform their very character and that involves influencing the way the parties to them relate. You cannot micro-regulate for that.
What is the role of the recognition of a social licence for financial markets in that? This book gives an answer in three stages.
- Part I does important groundwork. Since the objective is behaviour change, it looks at how individuals, firms and markets come to behave as they do and what motivates them.
- Part II unpacks the substance of the social licence for financial markets, also looking at its relationship with law and regulation, some of the main tools for influencing financial market behaviour.
- Part III explores the potential for greater recognition of the social licence to make a difference in practice by influencing the substance of market relationships. It also gives examples of how policy can help.
The principal focus is financial markets. However, the need to look at their social context is never far behind. To put the point at its sharpest, when financial markets go wrong, is that no more than at least some of those in the wider societies in which they operate deserveāfor example, because of the social expectations placed on markets? It is equally important not to lose sight of the enormous contribution that financial markets already make to social wellbeing, from savings to payments, and from insurance to investment.
So What?
Responding to current challenges requires a more realistic way of seeing and talking about finance because that, in turn, impacts how finance is done: one more closely aligned with reality and the aspirations that people have for financial activity; one that recognises the presence of positive reciprocity in financial life and can help to strengthen it; one that can provide a framework within which to approach the task of addressing current challenges, and a language to use in doing so; one that can inject a greater sense of urgency; and one that reaches beyond rational calculation, to how relationships are experienced in practice.
The observation that financial markets operate in some sense subject to a social licence has the potential to provide a basis for that, as this book goes on to explain.
āFew trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.ā1
The foundations of our free society look less than stable at present, but it is not clear that the reason was an outbreak of social responsibility. Milton Friedman, who originally issued this stark warning, has nonetheless been making a celebrity come-back. His first appearance was as the high priest of what is often called āneoliberal economicsā. His second is as its chief whipping boy. Writing the preface to the 2002 republication of his book, Capitalism and Freedom, Friedman could celebrate the advance of the free market and the decline of centrally planned economies. The first edition, written in 1962 in a world polarised by the Cold War, called for economic freedom as a basis ...