Why two former central bankers are talking about trust

AFTER THE global financial crisis, people asked whether economists had not misunderstood something important about markets. The trying experience of recent years has some figures broadening the question, to ask whether economists have not failed to grasp something crucial about people. In a new book, “Value(s)”, Mark Carney, governor of the Bank of England from 2013 to 2020, argues that within profit-obsessed market economies self-interest crowds out other motivations, making the world a more selfish place—and potentially a less resilient and prosperous one, too. The notion is disconcerting, not least because the dominance of orthodox economic thinking leaves leaders poorly equipped to assess and respond to such claims.

Parts of Mr Carney’s argument are echoed in another new book, by Minouche Shafik, director of the London School of Economics, who served as one of Mr Carney’s deputies at the Bank of England. Baroness Shafik’s book, “What We Owe Each Other”, examines the role of the social contract and considers how changes in the global economy have undermined the function of the institutions societies rely on to keep the world a reasonably just place. Fixing up and modernising the social contract is necessary, she writes, “if we are not to witness a destructive fracturing of the mutual trust on which citizenship and society is based.” People have become too disinterested in their obligations to other people and to society as a whole, Baroness Shafik says; they owe each other more.

Such notions would not have been out of place in the work of the classical economists. Indeed, both Mr Carney and Baroness Shafik cite Adam Smith’s work, “The Theory of Moral Sentiments”, which investigated how people come by their values, beliefs and preferences. They do so, Smith argued, through “mutual sympathy”—by imagining how others feel, essentially. This informs the public’s sense of right and wrong and establishes a social foundation for other institutions, including markets. Smith saw markets as “living institutions, embedded in the culture, practice, traditions and trust of their day”, writes Mr Carney. Modern economists rarely write about markets in such terms. The innovations of the neoclassical economists of the late 19th century shaped the profession into one in which utility, value and market prices are all treated as more or less the same thing. In an effort to become more rigorous or scientific, economists stripped from their analysis the difficult moral questions that interested Smith. Economics “simply doesn’t traffic in morality”, writes Mr Carney, quoting “Freakonomics”, a popular economics book.

But if economists have lost interest in questions of morality, and prefer instead to model worlds in which people act strictly in their own self-interest, moral forces still matter for economics. Baroness Shafik reckons that the solidarity that underpins social stability has a moral rationale—that it is wrong to deny people the ability to meet their basic needs—as well as political and economic ones. If the social contract breaks down, and people do not adequately look after each other, then crises (of finance, public health or the environment, for example) will threaten prosperity.

Mr Carney, for his part, worries that market activity and market incentives crowd out important social norms. Private vices like greed or ambition, which can help raise social welfare when exercised within a perfectly competitive market, are often socially destructive in other, less ideal circumstances. As money becomes the primary or sole measure of value, society loses the ability to distinguish between acts of wealth creation that deserve to be heralded and those that do not. People who pass up the opportunity to make money for other more selfless activities come to look more like suckers than model citizens. The loss of interest in doing good for its own sake leaves society less able to meet serious crises like climate change. (Mr Carney himself worked at Goldman Sachs, a bank, early in his career, and recently drew criticism for using dodgy methods to claim that the portfolio of the asset manager for which he now works emits net-zero carbon.)

Mr Carney provides some support for his argument. Studies show that monetary incentives can crowd out pro-social motivations in ways that prove counterproductive. (In experiments, for instance, student groups paid to do charitable work contribute less to the community than those given only a motivational talk about serving a good cause.) But the events of the past year provide lots of corroborating detail, in the struggles governments have faced persuading citizens to wear masks or be vaccinated, and the human and economic costs that have followed.

Maximised futility

It may seem strange that central bankers—who can be a dispassionate and humourless bunch, even for economists—should be among those to raise the alarm about the fraying of the social fabric. But it makes a certain kind of sense. As Mr Carney writes, trust is central to maintaining the stability of a currency or a financial system. Humourlessness itself can be a signal to the public, a mark of seriousness meant to provide assurance that the money and the bank accounts in which people hold their savings can be relied upon. Few public officials will be more aware of the risks from a breakdown in mutual trust and regard for others than those charged with fending off runs on the financial system.

Yet their writing illustrates just how difficult change will be. Their solutions—to make capitalism more inclusive and shore up safety-nets—are built around technocratic tweaks to policy, not a moral awakening, and understandably so. The analytical tools relied upon by top economic policymakers do not include mechanisms for quantifying the importance of social norms or cultivating ethical behaviour across the population. Indeed, Mr Carney’s argument poses a fundamental dilemma: today’s powerful figures are those that thrived within the current system. If society needs new moral leadership, it may need to look somewhere else. ■

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