US Managing Editor, Financial Times
Ask a financier today in the City of London or Wall Street to name the founding father of modern capitalism, and they will probably invoke the words "Adam Smith." After all, three long centuries ago, Smith laid out a vision of the political economy where the 'invisible hand' of supply and demand drove economic growth - and where free enterprise was the driving force for vibrant capitalism.
But these days, a certain irony hangs over Smith. In the places where free market capitalism is most frequently venerated - namely Wall Street and the City - many of the core ideas behind Smith's vision are frequently ignored. And unless these are restored, it will be hard for bankers (or anyone else) to create an effective capitalist system, let alone one that is 'inclusive'.
So what are the elements from Smith's 18th century writings that need to be relearnt? Essentially there are four. Firstly, markets work best when as wide as possible a group of people are involved. This sounds obvious, but it is astonishing how often it has been ignored in modern finance. Most notably, if you look at the areas of finance that have produced scandals in recent years - such as credit derivatives, LIBOR and so on - these are invariably dominated by a limited clubby circle of actors (most notably large banks) which is anything but 'inclusive'.
Secondly, markets work best when prices are transparent to a wide circle of buyers and sellers, be that 18th century butchers or 21st century bankers. Again, this seems an entirely obvious point, and in some corners of finance this principle is respected. But in the parts of the banking world where a clubby mentality has ruled, prices have a nasty habit of seeming to be opaque; at least to 'outsiders'. Little wonder that mistrust and scandal have been pervasive.
Thirdly, managers must have a personal stake in private enterprise - and a true responsibility if something goes wrong. Smith took this concept for granted when he wrote about free markets since he lived in an 18th century world dominated by small family-owned firms, where management and ownership naturally overlapped. But modern 'owners' of banks, namely shareholders, often have little idea what is happening inside companies - and the managers running the companies often limited skin in the game. Little wonder, perhaps, that irresponsibility has often prevailed.
Fourth, Smith did not consider the economy or market to be a self-contained phenomenon, separate from other areas of human existence; on the contrary, he assumed that humans lived interconnected lives, where money was embedded in morality and social relations. Again, this point sounds obvious, but it is often ignored in the modern financial world, where bankers devise mathematical models of the markets that appear detached from real humans - and operate in an intellectual and social ghetto that is often disconnected from wider society.
What is really needed in finance today, in other words, is a joined-up vision of the world, that restores capitalism to the original vision of Smith. This requires a big change in mindset. It will not be easy. But it is essential if we are to build a sense of inclusive capitalism that truly works.