The ‘publicness’ of banks

Wake up to the latest Rhianna single playing on your iPod through a Bose docking station. Go to the bathroom and brush your teeth with a Phillips Sonic Rechargeable toothbrush. Have a shower using Molton Brown Shower wash. Moisturise. Then go to your kitchen and have some Rice Krispies Multi-Grain Shapes with B Vitamins and Iron. Open The Guardian app on your iPad and think, “isn’t it terrible that banks have sold products to people that they don’t actually need”.

Why do we expect banks to operate in a moral way for the public good? Since when was making a profit for shareholders not enough? Anyone who has ever worked in sales or marketing will know the emphasis that is placed on ‘upselling’ – selling extra products or services to people that they don’t actually need. As Milton Friedman said,

…there is one and only one social responsibility of business – to use resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competitions, without deception or fraud.

(Friedman and Friedman, 1962, p. 133)

Of course, management thought has moved on somewhat since the 1960’s and I am not advocating a Friedman style of capitalism. It also cannot be ignored that action must be taken when businesses commit fraud or other illegal acts. But the question for me is what has led to such moral outrage?

And why is it, at a time when public services are being expected to operate more like businesses, politicians seem to be expecting businesses to act more like public services?

In 1986, the brilliant economist, Susan Strange highlighted the many flaws in the global financial system and in many ways predicted the financial crash of 2008. Strange also noted that it is governments and policy-makers, often misled by neo-liberal theory, who set the framework which enables such behaviours to take place. Anyone who has read either Casino Capitalism or the follow-up Mad Money would not be surprised at the behaviour of bankers at Barclays, RBS or any other bank. What is surprising is the extent to which politicians, who have allowed such behaviour to continue unchecked for so long, appear so shocked and outraged by the whole affair.

What seems to be going on here, at least in part, is that banks are becoming, in effect, a public service. In 1953 Paul Samuelson set out what he described as a collective consumption good. These are now refered to within economics as ‘public goods’ and consist of two characteristics: 1) Non-excludable; 2) Non-rivalry in use.

1) Non-excludable

According to the Collins English Dictionary a bank is,

an institution offering certain financial services, such as the safekeeping of money, conversion of domestic into and from foreign currencies, lending of money at interest, and acceptance of bills of exchange

It would be right to point out that access to banking services is a choice that consumers make. You are not compelled to have a bank account and banks are there to serve the interests of customers and shareholders. They do not serve a public purpose in the same way as national defence or national vaccination programmes.

But today to be included in society increasingly you need a bank account. State pensions and benefits are paid into bank accounts, mortgages are paid from bank accounts, wages and salaries are paid into bank accounts. To stop someone having a bank account is increasingly to exclude them from society. Of course, it is possible to exclude people from having a bank account. And people may choose themselves not to have a bank account (what is known as the power of exit). As such banking services are not a pure public good.

However, the importance of access to financial services was highlighted by the former UN Secretary-General, Kofi Annan, in launching the 2005 International Year of Microcredit when he said,

The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. The International Year of Microcredit offers a pivotal opportunity for the international community to engage in a shared commitment to meet this challenge.  Together, we can and must build inclusive financial sectors that help people improve their lives.

What is more, is that the effects of a banking collapse, such as witnessed in 2008, are non-excludable. A banking failure does not just impact on shareholder and customers – it impacts on the entire economy. Banks are now such an important part of the economy, in a way they were never designed to be, that they are too big to fail.

2) Non-rivalry in use

The second key feature of a public good is non-rivalry in use. In other words one persons use of the good does not detract from another persons use. Compare, for example, a private good like a Mars bar, with a public good like street lighting. There is no rivalry in the use of street lighting, similarly my use of a bank account or mortgage does not detract from the benefit you may received from having a  bank account of mortgage. And such is the interdependency within the whole bank system, if my bank fails the impact of that is not just going to affect me but it is likely to cut across all banks.
Of course it is important to note that not all public services are public goods. Many are ‘merit goods’; where it is seen that there are significant benefits from public ownership of the product or service, or significant risk from private ownership, for example the UK National Health Service.
So we come back to the purpose of banks. If they are there to provide a return on investment to shareholders we should not be surprised or condemnatory when they use underhand tactics (which are legal) to meet that purpose. If the government are so concerned about ethics then why not speak out about the general rise of unethical business practices? And if we are coming to expect higher ethical standards from the private sector perhaps we should start with the arms industry? Or oil industry, food industry, alcohol industry, cosmetics industry…….
If, however, we recognise that banks are in fact delivering a valuable public service this raises much more fundamental questions about the organisation, ownership and delivery of banking services. An interesting perspective here might be taken from Bozeman’s (1987) book “All Organizations Are Public“. In relation to the banking sector perhaps the German system is worthy of some serious consideration as alluded to by Vince Cable. Moving beyond the current chatter about legislation and inquiries these structural issues are, I think, much more interesting.
References:

Bozeman, B. (1987) All Organizations Are Public: Comparing Public and Private Organizations. Jossey-Bass, San Francisco.

Friedman, M. and R. Friedman (1962) Capitalism and Freedom. University of Chicago Press, Chicago.

Samuelson, P.A. (1953) ‘The Pure Theory of Public Expenditure’, The Review of Economics and Statistics, Vol. 36, No. 4, pp. 387-389.

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