Pensword Capital

Mr Bootle, 58, who was then group chief economist at HSBC in London, had gone from a meeting about bonus awards straight to the hospital where his wife was about to give birth, his mind still swirling with the extraordinary sums bandied about.

As he tells BT during a recent visit: 'When you work in the financial markets, I think you get a very warped idea of human nature, and this is epitomised, really, by the whole business of bonuses. Having worked in the markets all this time, for the better part of 30 years, I was very familiar with the bonus culture. I've also seen the effect of bonuses all around me in the bank, and I came to regard bonuses as a sort of drug, really. And the effect wears off pretty quickly.

'In my experience, the beneficial effects of a big bonus lasted no more than a day and, in some cases, not even more than an hour, because when you find out what the Bloggins on the special derivatives desk are earning, you find some reason why your number isn't big enough, and if you set yourself these monetary objectives, there is literally no limit; there is always another nought you can add. It is a form of disease, I think, the obsession with these figures. And looking around at all these people, mostly doing pretty boring jobs - I mean, if you are, as I like to put it, trading options on their volatility in a dingbat, you've got to be a very strange individual to think that this is actually of essential value for the future of humanity. And most of the people who are doing these things do it only, only, only for the money.

'So, anyway, my son was due to be born, and I was in a meeting where all these issues as to what certain people should be earning were being discussed, and these were fabulous sums that were just beyond the imaginings of most ordinary people.

'It's not that liquidity is bad, but it's not the only thing, and we've got a system dominated by financial markets which, in my view, overstresses liquidity. And liquidity's sort of a form of magic, really, that's produced by the financial system. Because if you think about the real world, things aren't liquid. But the system sort of manufactures a way in which, for individuals, that can be done. And in the process, the minds, the focus of business management, is excessively on short-term issues.

'So then I jumped on the train, went to the hospital where my wife was due to give birth later that day, and suddenly, amidst all these, I came across this nice midwife who was extremely helpful and dedicated. And the contrast struck me very strongly because what she was doing was extremely important in some human sense, and there was a woman who was completely in her hands, namely my wife giving birth to a child, and of course there was a child. What could be more joyful than that?

'And of course she was earning a mere fraction of what people in the City were earning. I got interested in this business of motivation, because I thought to myself, if you're a midwife, obviously it'd be quite nice if someone came along and gave you a big bonus, but what actually motivated you, where did you get your satisfaction from? At the end of the day when you went home, did you think to yourself, you know, I've earned another couple of thousands of pounds today. I thought the answer was no, and it really alerted me to questions of motivation, purpose and reward, and I came to think then that there's something profoundly sick about the financial markets.'

Individuals vs markets

Those thoughts, as he wrote, planted a seed that led to the birth of The Trouble with Markets - 'albeit rather more than nine months later'. Published amid a slew of works on the financial crisis, the book (with the sub-head Saving Capitalism From Itself) is not just a provocative critique of the free-market mindset, it questions the basic premises of economic theory, particularly the notion that society is best served when totally self-interested individuals each make rational decisions, and also suggests what might, or should, emerge in the global financial order of the far future - all issues that he digs into with gusto during the interview. He's in town to give a talk on the market outlook, and also to mark the opening of the Singapore office of Capital Economics, the consultancy he set up in 1999 upon leaving HSBC because of his firm conviction - 'one of my big beefs'- that economic research must be independant.

While some bankers profess to be doing God's work, Mr Bootle declares that much of the activity in financial markets 'achieve no good for society at all and, in some cases, may actually harm it'. Obviously, financial activity has its place and worth, but 'if you look, for instance, at the sheer volume of trading that's done in shares by institutional shareholders, who are supposedly acting in the interests of their members, you have to ask yourself whether that actually achieves a great deal', he says.

And one fundamental assumption of economics and economic accounting is that 'if transactions take place between freely consenting adults in a market environment where people aren't being compelled to do something, then the activity must be generating human welfare', he points out. 'And I've come to believe, more and more, that as far as the financial sector is concerned, that's simply not true; a lot of what's going on is just moving stuff from one place to another, one pocket to another.'

But society is obsessed by the business of measurability: 'If it's measured and it's called GDP, then we tend to assume it will be good, and so society is devoted to increasing this thing called GDP but that may not actually have that much connection with fundamental human wellbeing.'

Likewise, basic financial market theory assumes or asserts that if a new market springs up and trading takes place, something 'good' is taking place as the activity is meeting some market need.

'But what I think is becoming increasingly obvious is sometimes new markets emerge, so there is something that's traded, and because it's traded, then other people have to monitor what's happening to the price. Because the price is changing, then other people - mainly executives and companies - get concerned about what's happening to the market price, which makes the need for activity.

'Now if the market wasn't there, probably you would be no worse off than you'd be better off, and there wouldn't be all this activity and the resources would have gone to other things. So the market itself creates a demand which wouldn't have been there otherwise, and the process distracts people from thinking long-term.'

Mr Bootle, who doesn't seem to pause for breath between sentences at times, adds: 'I guess the abiding contrast between Western capitalism and Asian capitalism is time horizons. In the West, typically, business time horizons are very short.' And all this, he says, is intimately connected with the idea of liquidity - one concept he hits out at in particular in his book, noting that institutional shareholders suffer from what John Keynes called 'liquidity fetishism', or an over-emphasis on the ability to access invested capital at short notice.

'It's not that liquidity is bad - it boasts its advantages - but it's not the only thing, and we've got a system dominated by financial markets which, in my view, overstresses liquidity,' he says.

'And liquidity's sort of a form of magic, really, that's produced by the financial system. Because if you think about the real world, things aren't liquid. As I said in the book, resources that have been invested in factories and bridges can't be turned into haircuts and holidays. Can't be done! But the system sort of manufactures a way in which, for individuals, that can be done.

'And in the process, the minds, the focus of business management, is, I think, excessively on short-term issues. They're being measured against short-term performance, they have their own shares, they think short-term in relation to business payoffs.'

In the real world, liquidity is all about flexibility and options, and there are circumstances when it has its value, he says.

'But there are times when you can go too far in keeping your options open and you end up losing things. You might, to put it in personal terms, want to keep your options open with regard to what you're doing on Saturday night, right up until 7 o'clock on Saturday evening, and then it's too late - you end up going nowhere, doing nothing, staying in on your own.'

The contrast to liquidity, he says, is commitment. 'And most things in the real world need commitment. So there's a balance between keeping your options open and making a commitment, and I think in Western society, driven by their own development of financial markets, there's too much emphasis on liquidity and not enough on commitment.'

Asked why the idea that markets are efficient all the time has thrived, Mr Bootle pauses before saying: 'I think that some economists have a great attraction for simple, beautiful ideas. They're not alone. And I've come to think, by the way, that the way you should consider economic theory is as a form of religion.

'There are different denominations and each has its strong adherents. They have profound theological convictions and because they are theological convictions, they are very difficult to argue with and shape by empirical evidence. But the efficient markets hypothesis or theorem is very seductive because it brings a purity to the way that you look on things, and of course it has a profound result - namely, that you leave markets alone, which, for people brought up in that whole tradition, is very important.

'You see, if you don't believe that, what do you believe instead? Now, there's been another religion, which seems to me to again correspond to economists' desires to have intellectually neat solutions - and that religion is called communism. They're both forms of fundamentalism - market fundamentalism and, if you like, community fundamentalism. I mean, that thought - that the individual is actually bad - that's the theology, and of course it collapsed.

'Now, if you don't adopt either of these two extremes and, dare I say, you take an Asian view, or the Singapore view, that markets are good, in all sorts of ways, but actually they're not the be-all-and-end-all, and you need some sort of organising authority ... the problem with that is it's quite difficult to theorise about actually, because, what should you intervene in, who should do it, when, how, to what degree?

'All these economic policy (issues) become a matter of judgement and circumstance, and it becomes not science anymore but an applied practice. It's a bit like medicine - you look at the patient, listen to him, see what's required. It's more like medicine than it's like nuclear physics, shall we say.'

Group psychology

Plus, one must also see the historical context, he says. 'You know, the end of the Cold War, the disasters of the 1970s, leading to that period of American market triumphalism of the 1990s - it's understandable in those circumstances that people should believe all this. Because the danger is, you don't want to move then to the opposite. I don't think 'markets are always stupid', or whatever; I don't believe that either. As many people have said, markets usually do get things pretty much right; it's just that you can't depend upon them always getting things right.'

That said, economics is simply 'a very, very funny subject, very odd indeed', he declares. 'It's psychologically extremely weak. You've got, after all, a whole academic subject called psychology which is all about human motivations, how humans behave in groups, a huge subject and with practical issues on how to deal with people. Then you've got another academic subject called economics that basically says that human beings are quite simple - they're interested (only) in themselves and they just want more and more of this thing called enjoyment or well-being or money or utility, whatever, and they're like a machine, and they just do and do, and of course they're rational in the process of all these.

'It's very odd, really. It's almost like the insides of that other academic subject are just worthless, just thrown away! And now, economists are realising what behavioural finance is all about - the psychological dimension to human beings. Related to that is also the issue of groups. Economists and economics don't really have an understanding about groups - the only concession economists make to groups is they recognise they exist but assume they behave just like individuals and firms. In the process, of course, they're throwing away another academic discipline called sociology!'

The mission of saving capitalism from itself is, in many ways, work in progress, he says. 'But there are several elements where I can point to clear things that got to be done, and within Western societies, I think there has to be a fundamental change with regard to the profit motive and motivation in general.

'That's to say, it has to be broadly recognised that although business is ultimately in the business of maximising profits, the way you do that is by doing something that's socially useful, doing it well and taking pride in what you're doing. And from that, profit flows. Now, for most good businesses, that's actually true. And that naturally brings long-term thinking as a consequence. Once you accept that general principle, then that has consequences for the way company boards are structured, what their legal responsibilities are, and I think we've got to do something about the structure and behaviour of institutional shareholders.'

He adds: 'I think we need a system which quite consciously has a sense of public purpose. I've talked quite a lot to older bankers - you want to talk to them, get their wisdom before they die - and what these people tell you is they had a sense of purpose in the organisation, the sense that the organisations were doing something for the benefit of society.

'If you talk to older merchant bankers in London, for instance, people who worked in London before the Americanisation of the city, again, they had more of a sense of purpose - that the justification for what they were doing was something outside the world of finance. The financial activity was there in order to achieve some purpose outside the financial world. It was that that gave justification to what they did, it was from that they derived their pride and self-respect, whereas we've moved into a system where people derived pride and self-respect from their bonuses. That's not to say that people who do well shouldn't be well rewarded, but it's about values.'

anna@sph.com.sg

ROGER BOOTLE
Economist and author, 57
Managing director,
Capital Economics