Duly noted: Mark Carney holds a new £5 note with Winston Churchill © REUTERS, Stefan Wermuth/Alamy Stock Photo

Where did capitalism go wrong?

Former Bank of England governor Mark Carney offers an explanation—but refuses to name the guilty parties
July 20, 2021

During the global financial crisis, as economies were dragged down by debt built up in more euphoric times, it struck me that the great religious traditions had understood something about debt that modern economic and financial theories did not.

Behind the packaging, slicing, dicing and repackaging of mortgages were intricate mathematical models that purportedly calculated the risks of non-payment. The idea was to place these risks with those willing to bear them at the right price. In practice these models didn’t do that—but even if they had, they would still have missed a bigger point.

What distinguishes debt from other forms of financing is that it fixes payments in advance. When a debt bubble bursts, a lot of promises must be broken. In contrast, equity financing—raising money by selling shares, for example—comes with a built-in “shock absorber.” The amount returned on the initial investment is expected to vary with how successfully the money is put to work. Share prices may go up or down.

This is why it is so much more painful when a debt bubble bursts than when an equity bubble deflates. Since there is not enough money to cover all the supposedly predefined payments, a debt collapse requires decisions about who should cover the losses. Time and again such decisions have proved tortuous, leading to bankruptcies, defaults and public bailouts (plus the taxes and cutbacks that pay for them), while uncertainty, recriminations and often fury have followed in their wake. The grave commercial, political and sometimes legal difficulties in allocating the losses means definitive resolutions are often delayed. But that only causes further economic harm.

Unlike the bankers, history’s great ethicists and religious thinkers understood the social and moral harms of excessive debt. They all regulated debt finance: from bans on “usury” to calls for debt write-downs, such as the biblical jubilees. All this may seem quaint or irrational to modern financiers. But in 2008, it turned out that much of the economic value that seems to grow in credit bubbles is not real. The failure to respect “irrational” values in the end leads to the destruction of value.

In his new book, Mark Carney does not mention that the great religions are sceptical of debt. But it is an observation which, I think, the former governor of the Bank of England would happily share. Not just because he argues that both financiers and regulators lost sight of the common good in the run-up to the financial crisis, but more importantly because it illustrates his bigger theme: that “value,” or economic performance, is intimately linked to “values,” or moral standards. Focusing exclusively on monetary value may undermine collective values, Carney tells us, whereas sustainable growth must be rooted in an ethical framework. 

Carney wants to bring “value” and “values” closer together. But what does this actually mean? In the early chapters this one-time Goldman Sachs man, who is now back in the asset management business, paradoxically joins the by-now vast chorus of voices lamenting that we have gone from being market economies to becoming market societies, in which the “price of everything is the value of everything,” thereby undermining the social bonds that enable the market economy to work.

“Carney wants to bring ‘value’ and ‘values’ closer together. But what does this actually mean?”

He takes us on a canter through the intellectual history of economics, focusing on the concept of “value.” He does so, first, by devoting several chapters to early “value theory”—how thinkers from antiquity to the late 19th century accounted for the existence of economic value. And then, secondly, by charting the well-known story of how a discipline starting with firm roots in social, political and moral values lost sight of its own origins. Much of economics, in his telling, ended up with a reductive focus on market valuation and efficiency. That left it in denial about the dubious ethical implications of its own supposedly “value-neutral” analysis (namely, a crude utilitarianism). 

In and among all this, Carney weaves a history of money, from the “gold specie standards” of antiquity to digital currencies. This, too, is marshalled to emphasise Carney’s central point that markets, capitalism and “value”—in this case, monetary and financial stability—depend on certain “values” being respected by those in charge: trust, responsibility, accountability, dynamism, sustainability and solidarity.

All this can make Value(s) feel like many books combined into one—and the strands mentioned only make up the first of the book’s three parts. Carney runs the risk of overwhelming the reader, let alone a reviewer trying to capture all of it.

Perhaps the best guide to what Carney aims to do is the lovely vignette that opens the book. He recounts a dinner at the Vatican. Pope Francis pointed out that just as the grappa served after the meal was distilled wine—stronger in alcohol
content than wine but without its many flavours and attributes—so the market was “distilled humanity”: concentrated self-interest devoid of everything else that makes us human. Your job, the pontiff told Carney and the other guests, is to “turn the grappa back into wine, to turn the market back into humanity.” 

Carney has a good stab at this. In his “enlightened economist” mode, he explains that the standard economic model of purely self-interested individual choice is too narrow, because pecuniary motivations can crowd out ethical principles. He cites Richard Titmuss’s 1970 book The Gift Relationship, which describes how blood donations fall when health authorities pay for them; and the experiment from an Israeli nursery showing that late pickups went through the roof when a fine was introduced for offending parents (they took it as a licence to arrive late so long as you paid). This is right but scarcely original. Exactly these examples have been used for decades to illustrate that turning a good or service into a traded commodity changes its nature: when money changes hands, it detaches the good or service in question from the norms that usually govern how it is treated. You will get less of these important goods if you substitute more “efficient” market valuation for an allocation set by social and ethical values.

But on Carney’s home turf of financial regulation, all this seems forgotten. For example, he repeats a standard UK complaint against a rule introduced by the EU in 2014, capping bankers’ bonuses to 100 per cent of their fixed salary. His economic “value” not “values” logic is clear enough: bankers should have skin in the game, or their incentives will be wrong. If you want banking executives and traders to act in the broader interest, don’t offer fixed pay for risking other people’s money, but reward them if they achieve the good outcomes you seek. Implicit in this is that bonuses have to be big when things go well, so there is a lot to claw back in cases of irresponsible behaviour or poor performance. It is this logic that has led some to expect that, now Brexit has happened, the bonus cap will disappear.

2CKWTTP Mark Carney, Governor of the Bank of England, makes a keynote address to launch the private finance agenda for the 2020 United Nations Climate Change Conference (COP26) at Guildhall in London, Britain February 27, 2020.  Tolga Akmen/Pool via REUTE 2CKWTTP Mark Carney, Governor of the Bank of England, makes a keynote address to launch the private finance agenda for the 2020 United Nations Climate Change Conference (COP26) at Guildhall in London, Britain February 27, 2020. Tolga Akmen/Pool via REUTE

Carney has made green finance a central pillar of his career—but can he stave off scepticism about corporate greenwashing? © REUTERS, Peter Nicholls/Alamy Stock Photo

The logic may be correct. But what happened to values-based motivation here? Carney should recognise—if only for consistency’s sake—that the dependence of “value” on “values” that he asserts in other contexts may also hold here. The bonus culture in banking, by instilling a view that what matters is to make as much cash as possible, could undermine any principled motivation. 

Similar tensions turn up when we are asked to consider what a “values” over “value” approach would mean for the carbon transition and Covid-19, the two social challenges to which Carney devotes considerable attention.

Stepping very gingerly—the former Bank of England governor does not seem to want to single out any individual for blame—Carney criticises the anti-lockdown tendency ostensibly motivated by prioritising the economy. As he says: “Covid decision-making cannot be reduced to the optimisation of the mathematical expectation of some objective function.”

What does Carney propose, though? His own words are not quite as mellifluous as the pope’s: “ultimately, authorities need to… achieve the fundamental, base objective of R0 [the virus’s reproduction number] less than 1 but then optimise across a range of objectives in order to value truly what society values… the overarching objectives of Covid policy should be centred on health and social outcomes—minimising the risks of death and ensuring that the sick have adequate treatment and that the burdens… are shared fairly… Once these objectives have been reasonably achieved, policymakers should seek to maximise the benefits to the economy and minimise the threat of a resurgence of the disease by selectively opening up [and] pay particular attention to distribution. Authorities need to pursue a risk-management approach: optimising expected outcomes, after having first limited the possibility of extreme negative events… weigh a series of externalities.”

To me (and all those italics are mine) this sounds precisely like an economist’s “objective function”—and precisely not like a more pluralistic and qualitative form of ethical reasoning. He does admittedly apply the “social welfare” calculus to a highly sophisticated function. (Those with economics training may faintly recognise weighted expectations of outcomes nested within a lexicographic or “maximin” preference order here.) Instead of rejecting the economist’s approach, Carney seems to double down on the old methodology while saying: don’t be dumb about the goals we as a society want to achieve, and don’t be simplistic about the impacts and interactions between our policy choices. Do the same calculus—but do it better.

That is no bad thing, perhaps. Carney’s advice is a lot better than what we got from the UK government, especially early on in the pandemic. (Although even an ultra-narrow economic focus would have told you to lock down early and hard once the contagiousness and lethality of Covid-19 had been understood—witness the economic success of countries that chose a policy of suppressing the virus right away.) 

But is that really all it means to reconcile value and values? To make the “objective function” more comprehensive? Holding it up against the papal test, this dilutes the self-interest, to be sure. But turning grappa into wine this isn’t. 

The same can be said about his climate change solutions, the focus of a big chunk of the book. Climate is at the heart of Carney’s new endeavours, both his day job at Brookfield Asset Management—where “he is focused on the development of products for investors that will combine positive social and environmental outcomes with strong risk-adjusted returns,” according to the company’s website—and his role as Boris Johnson’s finance adviser for the COP26 UN Climate Change Conference.

“At times Carney warns against a corrupted system without anyone corrupt in it, and laments moral failure in a landscape devoid of villains”

Green finance is a field in which Carney has already made lasting contributions. He was the first major central bank governor to zero in on “stranded assets”—investments such as untapped oil and gas reserves, whose value on company balance sheets only makes sense on the assumption that the world will fail to curb carbon emissions. As Carney recounts, this attempt to bring climate change inside central bank analysis met with a lot of resistance, including criticism that green politics was none of the central bank’s business.

Carney is evidently right both that climate policy makes stranded assets an important financial issue and that central banks should care. But is this really to supplement “value” with “values”? Or is it, again, simply about not being stupid by relying on a blinkered valuation? The stranded assets argument was surely of the second kind: Carney pointed out that if governments meant what they promised when they signed up for the Paris agreement, oil and gas companies would never be able to commercialise most of the reserves that underpinned their stock prices. Investors and creditors, in other words, faced a risk they needed to manage.

This was certainly a clever move, perfect for fending off accusations that he was straying off the reservation by pushing green politics. Overvalued balance sheets, and the risks their revaluation can cause, are clearly at the heart of central banks’ responsibilities. Again, however, it is a less bold—and less disruptive—way of aligning economics and finance with widely professed values than one might expect from Carney’s sweeping opening discursions on value.

Likewise, while Carney leavens the analysis with anecdotes from the centre of the action, this is a surprisingly bloodless account. Almost nobody is criticised by name. There are two mentions of Donald Trump and one of Jair Bolsonaro in the context of not taking the pandemic seriously enough, and a mere arched eyebrow at Michael Gove’s infamous judgment that the country has had enough of experts.

Why does Carney’s book not inflict any severe judgments—as Bank of England governors famously do—on miscreants among financial industry leaders? They surely exist. It feels at times like Carney warns against a corrupted system without anyone corrupt in it, and laments moral failure in a landscape devoid of villains.

Again this need not be a bad thing. There are many good reasons to avoid being unnecessarily threatening. One is realism. Demanding less might sometimes end up getting you more than holding up an impossible ideal. Another is the virtue of forgiveness—the pope, after all, may have something to say about casting stones. Carney is silent about whether his current employer stands to do well from his doing good (or indeed vice versa), and about the more general accusation that money men “greenwash” their industry through green finance. The word, so common when outsiders discuss corporate positions on climate, does not once appear in the text.

There could be one more reason to avoid giving offence. Carney may be on the side of the angels; in my opinion he is. Yet he has not got to where he is by pointing accusing fingers at those who fell short. And he may have further to go. There is a venerable tradition of Canadians who have done well in the world returning home to enter high political office: think Michael Ignatieff, the historian and broadcaster who became leader of the Liberal Party, and Chrystia Freeland, the onetime globetrotting journalist who is now Canada’s finance minister and deputy prime minister. Surely the country could accommodate a Mario Draghi-like passage from major central bank governorship to the top of national politics? Perhaps we can most usefully read Value(s) as a politician’s book: part manifesto, part ideological statement, part honing of arguments, and part a public presentation of the writer.

If so, it could soon be up to Canadians to judge if they find enough to like in the book and in the man. Whether they would find him fitting is their business. But one way or another, the world at large would benefit a great deal from having more politicians adopt the sort of thinking Carney presents here. This reader, at least, wishes him luck.

Martin Sandbu is an economics writer for the Financial Times. He is the author of “The Economics of Belonging” (Princeton)