The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [123]
Another important transaction cost is created by distrust. The corrosion of trust in Western societies, described earlier, has increased transaction costs at the same time that reductions in information and communication costs have worked in the other direction. It isn’t at all clear what the combined implications for governance will be. What shape should institutions take in future? I’ll end this book with some suggestions, but the answer will depend in part on whether the corrosion of trust in our societies continues or can be reversed.
However, it is clear that there is a widespread crisis of governance.
Market failures are pervasive, as we saw in the last chapter. Thanks to the financial crisis, many people have lost confidence in markets, even though over many decades markets have increased prosperity and deliver the everyday miracles of all the bread that’s wanted in New York City and every other product and service, in all their variety, that people in the advanced economies want to buy.
Governments are failing too. Inadequate regulation played its part in the financial crisis. Indeed, I think there’s a strong argument that the financial crisis was much more a failure of government and of politics than a failure of markets. For example, over the years governments permitted banks to reduce the amount of capital they held, and allowed ever-riskier types of lending and trading activity, and in the United States lifted the ban that used to exist on the same institution doing both commercial and investment banking. There may also be a deeper reason why governments’ regulation of the financial sector was so lax. Simon Johnson, the former chief economist of the International Monetary Fund and currently a professor at MIT’s Sloan School—not a natural radical—published an article called The Quiet Coup in which he argued:
Elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. . . . A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true.24
John Kay, another eminent economist, made a similar point about the UK government in a Financial Times column, “Investment bankers had become the most powerful political lobby in the country and there was no vestige of political support for action to restrain City excess. Light touch regulation was not just a matter of policy but a matter of pride. . . . Little has changed. The government continues to see financial services through the eyes of the financial services industry, for which the priority is to restore business as usual.”25
The failures of government go wider, however. Public services are lagging in their productivity and failing to deliver what citizens want. The public sector faces a huge challenge in trying to improve when government budgets will have to be slashed by far, far more than any time since before the Second World War.
Other types of organization have also suffered an erosion of confidence. This is certainly true of big businesses. Although many of the critics of multinationals would lump them in the “markets” category, in fact businesses are a distinct category of social organization. And an important reason for the erosion of trust in business is that many—including business executives—have forgotten their social role and responsibilities. The changing norms of behavior in business have, as we’ve seen, played an important part in making some societies less fair and thus in corroding social capital.