Capitalism’s toxic heart

I went to see Dr Eve Poole talk about her book, Capitalism’s Toxic Assumptions, at the Christian think tank Theos in November. She is an engaging speaker who described herself as a “theologian who has got into capitalism.” She endeared herself to me early on by saying to the Thursday evening audience that she was going to use props instead of powerpoint to illustrate each of the seven toxic ideas she identifies. I have bought her book but I haven’t read it yet, although I did dip into it a couple of times for clarification while writing this.

I should stop for a moment and explain what she meant by “toxic”. A toxic idea is one that used to serve a purpose but has now become counter-productive. If I were looking at it through a Three Horizons lens, I might say that it was a Horizon 1 assumption that has outlived its usefulness and is now getting in the way of change. Such ideas can be found all over the business literature, and Eve Poole is a lecturer at Ashridge. The example she gave was of Encyclopedia Britannica rejecting approaches from digital publishers (CD ROM at the time) because it believed it was in the book business.

Her starting point was that, “The economy is broken and we need to know how to fix it,” and she acknowledged that her ideas were not new. But she has pulled them together into a coherent critique. So here we go for a quick canter through the seven toxic assumptions in capitalism’s toxin cupboard.

#1: Competition

For which the prop was a cup, because the idea of competition has been normalised through sport (although the idea of competitive sport is itself arguably a product of the post-industrial revolution period in 19th century England). Adam Smith talks about competition quite a lot, and the legacy is bodies like anti-trust law in the US and the Competition Commission, as was, in the UK. But maths tells us a different story, when we look at game theory or the story of the Nash Equilibrium. Through this lens, competition starves a situation of the information it needs to solve it. Sharing information gives you better outcomes.

The second story under the ‘competition’ heading is about gender. Some of our assumptions about competition are based on the idea of ‘fight and flight’, which is how adrenalin affects men when they experience stress or danger. But when UCLA re-ran the experiment with women, stress triggered the release of oxytocin, which is associated with peer bonding, affiliation and bonding. Not so much ‘fight or flight,’ as ‘tend and befriend.’

As she put it, talking of the financial crisis,

“If you’d had a lot of women running the banks, they’d have gone down the gym and talked about it.

#2 The invisible hand

By Poole’s account, Adam Smith’s notion of the “invisible hand” was a piece of “psychic balm”, designed (as I understood it from her presentation) to reassure people in a religious age that his notion of the market wasn’t designed to usurp God. Instead, the language wrapped His works around the market. In a sense, in a less religious age, the notion still has enough metaphorical power to disguise what markets are. In fact, markets are some supply, some demand, and some law or other social agreements to enforce good behaviour. The “free marketeers” version is that, “we optimise utility and the invisible hand fixes it.” In fact, markets favour the rich unless they are tightly controlled, since markets respond to those who are able to spend more; in other words, we get the market the rich prefer, wrapped in some metaphorical mumbo-jumbo “to put the rest of us off the scent.”

#3 Utility

One of the things that is wrong with capitalism, and, come to that, with economics, is utilitarianism. When utilitarianism becomes a feature of public decision-making, “it crowds everything that doesn’t have a business model.” But as the theologian John Hughes has pointed out, the notion of utilitarianism is an “empty shrine” at the heart of capitalism because it neglects purpose: useful for what? One of the consequences of utilitarianism, as she described it, is external costs (costs of a product or service that fall outside of the business, its customers,and its operating model) and which aren’t factored into the price. External costs can include loss of habitat or species: she linked utilitarianism to “the tragedy of the commons.” Her prop for this one was a fish, to represent the destruction of the huge shoals of cod that were once found in the waters off Newfoundland through over-fishing.

#4 The nature of man

A lot of ideas about getting the capitalist firm to work come down to a principal/agent problem. More exactly, they come down to the “problem” of how the principals (or owners) gets the agents (or workers) to work. For most of the 20th century, this was done through surveillance, which broadly assumes that people are going to skive and steal unless they’re closely watched. (She didn’t mention it, but there is a classic Johnny Cash song about this). You can draw a line that runs from F.W. Taylor to Amazon that joins these particular dots. But in practice, businesses that start from a positive view of the nature of mankind do better.

#5 Shareholders

Once you have shareholders, you have “shareholder value”, which assumes that the main function of business is to return wealth to shareholders. There are a couple of problems with this. The first is that legally, shareholders aren’t owners: their share “certificates” give them some restricted rights to have a say in the running of the business in certain aspects of it. Sitting behind this is some notion that shareholders hold shares for a while, that they are actual investors with an actual interest in the long-term health of the business. In practice, in a world of high frequency trading, shares are held on average for between 11 seconds and 22 seconds. She conjured a striking image of an AGM in which shareholders rapidly vanished into thin air and then were replaced by newly materialised shareholders as the shares in the business were bought and sold.

#6. Market pricing

Cost pricing is about what something costs to make, plus a mark-up for profit. Market pricing is more about what the market will bear. One of the things that’s got lost in this lexicon is the old idea of ‘just pricing’: what is the fair price? This discussion got lost because it was assumed that markets delivered a fair price, but this is only true if they are not oligopolies and if supply and demand are genuinely independent. Another thing that gets lost in this is a question about the real price: if a dress costs £6.99, what are the other costs and on whom do they fall? The third thing that gets lost is a discussion on the idea of ‘usury‘. Interest is seen now instead as the price of money. Yet Judaism, Christianity and Islam all have a formal ban on charging interest, and this also goes back to Aristotle.

#7. Limited companies

The idea of the limited liability company, in which all that an investor put at risk in the event of default or bankruptcy was what they had paid for their share or bond was a brilliant idea at the time; in effect, it was this social innovation that made possible the industrial revolution, and especially the infrastructure of the industrial revolution. But the LLC now represents—she said—98% of all companies in the UK, which creates a monoculture that is bad for the ecology of the overall business system. It means that there’s no professional support for other business models, such as co-ops or community interest companies. (Will Davies said on a podcast I listened to around the same time that in the days when he used to research co-ops there was only one law firm in the entire UK that could do the legal work for every co-op in the country.) Different processes and methods don’t get the chance to be tested and developed, or to float to the top.

What to do?

I was persuaded by the analysis, but a bit less so by her suggestions about what to do about it. But let me walk through it; you can be the judge. Eve Poole suggested that “public policy is not the best way to change the market”: the best way is through consumer action. Your bank statement, she suggested, is “your report to St Paul” (which maybe needs a reminder that she is a theologian and the event was held at the Christian think tank Theos).

So, you should score your bank statement with red, green and amber, starting with where you bank and why, and where your money is coming from. After that, ask the same questions about your utility bills, where you bought your groceries, and so on, asking, “is this the best choice I could have made?” For example, she suggested, it would be red for Hamleys or Burger King.

Part of the rationale for this approach is that “money travels when you spend it, and you need to know where it goes.” If you spend it at Tesco, 36p stays in the area; if you spend it at the local florist, that figure goes up to £1.75. That’s one reason why some councils have started buying local, so as to keep money in the area. (Guess what: some economists don’t approve.) And so, she almost concluded, “if we all had green bank statements, capitalism would be fixed.”

One of the interesting elements of this was her suggestion that it doesn’t take many “green bank statement” consumers to turn the economy. There are agent-based simulations that suggest that it takes only 10% of such well-behaved consumers to turn the economy for the better, which is interesting if true.

Politics and regulation

The reason I was sceptical of her remedy of a cadre of committed activitist consumers was that at least half of the problems she identified were structural systemic problems that are found in actually existing markets, and some of the others are economics objects that have been reified in our existing regulatory institutions. For example: Changing the rules on limited liability companies to refashion that social agreement for the resource-scarce world isn’t a consumer proposition, it’s a political fight (shareholders, ditto); pricing externalities into markets is—at least—a regulatory shift, and probably a legal one; re-fashioning the purpose of the Competition and Markets Authority so it doesn’t measure the health of markets through consumer utility is also a political intervention. And so on.

I wasn’t the only person to have this thought. In the questions we ended up talking about the emergence of corporate coalitions for change, such as the B Corps (which put a purpose into the legal description of the business, but tend still to be profit-seeking businesses often requiring growth, with the issues that generates.) Another discussion was about the role of activist groups such as Living Wage and Citizens’ UK which have campaigned fairly successful to change the narrative about appropriate business behaviour towards workers. (The success of the cleaners’ campaign at LSE is another example of this.) Perhaps, rather than better consumers, we need better citizens.

The image at the top of the post is The Wealth of Nations, by Samuel Fogel, via Wikipedia, and is used with thanks.