Capitalism and Virtue: Politicians Do Not Understand the Economy, But Do Managers?

Mr. Claude Bebear does not sit on the board of every major French corporation, but where he does not, friends of his probably do. He is now the most influential man in French business. Entirely self-made, successful, rich, he is a proven practitioner who does not shy away from theoretical reasoning. Shrewdly and boldly exploiting some grossly erroneous valuations, he has traded a small provincial mutual insurance company through a succession of ever more ambitious mergers to end up with an international insurance giant now named Axa, of which he is chairman and a major shareholder. In outlook, he is a manager first, a capitalist second, and equally sure of himself in both roles.

Written in the form of a friendly debate with Philippe Maniere, one of the brightest French economic journalists, he recently published a widely commented book somewhat startlingly titled “They Are Going To Kill Capitalism.”1 Its central idea is that capitalism today is gravely menaced by the often irresponsible, ill-advised or perversely motivated conduct of those upon whom it largely depend—corporate directors, investors, security analysts, fund managers, auditors, rating agents, bankers and lawyers—all of whom are “saboteurs” of the system that nurtures them.

Mr. Bebear thinks that radical socialism that seeks to do away with the capitalist order is no longer a likely threat. But he considers, no doubt rightly, that even right-of-center governments which try to help the system by well-meaning intervention, generally end up doing more harm than good. Politicians do not understand the economy and their clumsy interference cannot help it. The only real remedy is for the unwitting, selfish or even mindless “saboteurs” of capitalism to come to their senses, conform to the dictates of ethics and assume their responsibilities. With the characteristic social piety of the French intellectual, he also calls for a “spirit of solidarity” to ensure that the wealth produced by capitalism should be “equitably shared” (p.2). He wants less opportunism and more virtue.

Lest we forget, let us spell out clearly that of all types of economic organization, capitalism is the most economical on virtue. Its main strength is precisely that it functions, if not ideally well, at least better than its rivals when people are allowed to pursue their individual interests. Systems that need to rely on people being virtuous, “socially responsible” and more mindful of the common good than of their own, will at best bring about mediocrity and stagnation, at worst disappointment and grief.

Politicians have a hard time understanding this, and French ones are more impervious to it than most. But do managers grasp it? If anyone does, a man of Mr. Bebear’s record ought to. Yet some of his critique of the selfish and the foolish must leave the reader wondering whether capitalism is meant to serve managers, or the other way round.

Short-termism, and other vices and follies

Short-termism, we are told, is one of the bad habits leading modern capitalism astray. A quarter is nothing in a company’s life, quarterly earnings statements are irrelevant or misleading and investors who react to them are doing themselves and the market no good. Their folly exposes companies to market shocks, and may force them to sacrifice the future for the sake of prettier numbers in the next quarterly report. Shares should be bought for the long term. Long-term shareholders should be rewarded with more voting rights and higher dividends.

The logic of these suggestions leads to strange conclusions. The stock market could just as well close down. Shares would only be bought when companies wished to raise fresh equity capital, and they would never be sold. Any stray buyer would push the stock price sharply up and any stray seller sharply down. Markets are narrow enough now, but they would be many times narrower if holders reacted neither to earnings news nor to price movements. Improving prospects in one industry and worsening ones in another would not be reflected in relative price movements and would not promote the flow of capital from one industry to the other. Mr. Bebear deplores the growing use of derivatives in fund management, because they “artificially boost” (p.124) the volume of transactions in the underlying stocks. But this is precisely one of their benign side-effects over and above their usefulness in redistributing risk from unwilling to willing takers.

Analysts are rightly castigated for their gullibility, poor judgment and herd instinct. Mr. Bebear recognizes that they cannot have the experience of seasoned business executives, but still blames them for their reliance on mechanistic analytical tools, when they should be backing the quality of management instead. However, while analysts may be a shabby sort of channel of communication between companies and investors, there is not a better one. Without them, investors would be even more in the dark than they are anyway, and more dependent on rumour.

Speaking as a true manager, the senior author is quite hard on rating agencies and bankers. Standard & Poor and Moody’s only look at numbers and ratios, and far too readily downgrade reputable companies when the numbers temporarily swing the wrong way, instead of regarding the solid worth of the men who run them. Bankers no longer use their personal judgment and knowledge of a client’s business in extending credit and setting interest rates, but rely on the rating agencies. Loan agreements may even include a clause of immediate repayment upon a certain downgrading by the rating agency, possibly precipitating a company’s ruin. Here, Mr. Bebear is really protesting against the division of labour between rating agency and bank, while his plea for judging persons rather than just numbers could be read as a plea for special treatment for members of the club that would surely provoke accusations of cronyism.
He does not spare lawyers who are “castrating capitalism” (p.110)—which they probably do. But aren’t corporate officers also to blame for their great deference to the lawyers?—a product of their anxiety about “cover”? It is hard to see how this could be overcome without changing both the managers and the lawyers.

The whirlwind of speculation

Nobody seems to like speculators. A defender of capitalism, however, ought to like them, rather than accusing them of generating vicious spirals. A speculator in stocks or currencies hopes to anticipate what the next man, and the one after that man, will do, and seeks to beat them to it. If he thinks there will be a buying spree, he will buy now, and if he expects a selling spree, he will sell now. He will sell what he has bought before the buying spree is exhausted, and buy back what he has sold before the selling spree is exhausted. If his anticipations were right, he will make money, and he will lose money if they were wrong. Obviously, however, if he was right and has made money, by beating the next man to both the purchase and the sale, he will have lifted the price when it was still low and lowered it when it was already high. In other words, if he was successful, he will have smoothed down the swing in the price that would otherwise have taken place. A market with active and successful speculators will be less volatile than it would otherwise be. Contrariwise, if he anticipated wrongly, he will have accentuated the swing and “destabilized” (forgive the trendy word) the market. As Nicholas Kaldor, no apologist for capitalism, has shown in a famous paper, speculators are benign if they make money and harmful if they lose it; but if they lose enough, they are wiped out and the harm stops. There is no vicious spiral, and the Tobin tax is otiose.

In Mr. Bebear’s book, however, the speculator does not anticipate a movement that is going to take place. Instead, he initiates and causes it. He sells (as a typical manager Mr. Bebear dislikes bears more than bulls), and his selling sets off an avalanche of other selling, driving the price down to a level where he will buy back low what he has sold high. A man of vast experience of the securities markets seems really to believe that speculators, or at least some of them, have this magic power over the expectations of other market participants. However, if even a single one had such a power, his every move would set off moves by hordes of others in the same direction. The more he speculated, the more slavishly would others follow his infallible lead, the more money he would make, and the more powerful would be the next whirlwind he could set off. Before long, he would own the world. But this is not how the economy really works, and Mr. Bebear must know it.

They won’t kill capitalism

The rogue’s gallery of “saboteurs”, fools, cowards, opportunists and other normal specimens of the human race won’t kill capitalism. Perhaps they won’t enhance its reputation, but capitalism never enjoyed a very high reputation in the eyes of the general public. It always deserved a higher one than the one it did have, if only because no rogues’ gallery could ever stop it from performing reasonably well its basic function of delivering the goods.

It would indeed be nice if all whose job it is to keep the capitalist system going became more virtuous, more wise, more competent and more responsible. We may wish and even work for this. But, pace Mr. Bebear and others, let us by no means spread the altogether false belief that capitalism’s survival depends on this wish coming true.