Time for another quiz. Which famous thinker held the view that business people in general are selfish and greedy, and that their main motive is to line their pockets at everyone else’s expense?
A lot of people will answer Karl Marx; a few will go for more obscure leftists like Fourier or Proudhon, and those close to the British Labour tradition might venture home-grown names such as Robert Owen or Keir Hardie.
Not many, I think, will guess that the correct answer is Adam Smith, the sage of Kirkcaldy, guru of free market capitalism and hero of laissez-faire libertarians.
The reason why this little teaser question matters is that there is a very relevant link between Smith’s views and the mess we have got ourselves into about corporate misdeeds in general and the controversial behaviour of some members of the banking profession in particular.
Smith wrote two great works. One – The Wealth of Nations – is famous but largely unread, while the other (The Theory of Moral Sentiments) is largely forgotten and completely unread. In the former he sets out his argument that the economic efficiency and material well-being of a society is best served by competition between self-interested individuals and groups; but in the latter he emphasises how that self-interest needs to be constrained not just by competition but by moral and legal limits.
To paraphrase Smith, we owe our bread not to the benevolence of the baker but to his need to make money out of us; yet that need itself is channelled not just by the fear that if he sells us a bad loaf we will go to a competitor, but also by the feeling that selling underweight or adulterated bread is shameful, and by the fear of being caught and punished.
That is why the reaction of many people to news of dirty deeds by men in suits is to call for humiliation and punishment. It is not enough that if Bank A slips up, its clients will go to Bank B; apart from client inertia Banks B, C, D and all the others are felt to be no better.
In recent months we have seen a number of institutions previously untouched by scandal dragged into the firing line over issues such as rate-fixing and money-laundering. In the circumstances it is tempting (if unfair) to condemn the entire banking industry – sometimes it really does look as though “they’re all in it together”.
The baker’s motive is to make money, but his function is to bake bread; likewise, the motive of banks and bankers is to make money for themselves and their shareholders, but their function is to bring together savers and borrowers for the general good. If the shelves are bare or the bread is mouldy, bakers are not going to be popular.
If savers get pitiful returns while creditworthy borrowers struggle to find affordable finance, the sense of public outrage when bankers get caught with their pinstripes down is understandable.
What seems to have happened – and what Adam Smith would have understood very well – is that all three mechanisms for controlling private greed and turning it to public benefit have turned out to be more or less defective. Apart from the dominant position of a tiny number of banks in many markets, what really annoys people is the feeling that some of those involved in the worst examples of bad behaviour seem to have had any sense of shame surgically removed. Equally disturbing is the revelation that some of the best brains in finance have been trying to find ways of avoiding the law while not technically breaking it.
For the banks, the path to recovering their public standing is long, uphill and rocky, but it is at least clear. The boards of these institutions need to hammer home at every opportunity two stark messages. First: making a profit is fine, but crass and offensive behaviour and ripping off the client are not.
Second: the most reliable and sustainable way to make profits in the long term is not to try and max out on every deal, however marginal, but to remember the watchword of the eponymous JP Morgan – “the aim of my bank is to do first class business in a first class way”.
There are a lot of good, honest, decent people in the banking industry who deserve not just a fairer hearing from the rest of society, but better leadership from the top.
• Gareth Howlett is fund manager director at Brooks Macdonald