Does more regulation provide the answer to greed?

An article by Ian Harper which discusses this subject was published in the Australian Financial Review of October 18-19. I have reproduced the article below (with the author's permission) because I believe it deserves to be widely read.

There’s a poignant moment recorded in the New Testament when the Jewish leaders bring a woman caught in the very act of adultery to Jesus. They point to the requirement of the Jewish Law that such a person be stoned to death and demand to know what he thinks. He famously responds that those who have never sinned should be the first to throw stones at her.

It’s all too easy to blame our present troubles on the unbridled greed of high-flying bankers and their financial accomplices. After all, like the hapless adulteress, they too have been caught red-handed. Some people might not even flinch from stoning the perpetrators if they had the option. Absent that, calling for tougher sanctions against greed and recklessness will have to do.

But as Jesus of Nazareth pointed out long ago, it’s impossible to punish sin without condemning every one of us. Who wants to say they’ve never been greedy or behaved recklessly with their own or someone else’s property? It’s one thing to identify greed and imprudence as the basis of the behaviour we decry but quite another to think it can be eliminated by decree. King Canute was wise enough to know the limits of his power over the elements, let alone basic human nature.

So do we just shrug our shoulders and splutter or sigh according to our temperament? Of course not. There will be punishment aplenty as the law slowly sifts through the ashes of this particular bonfire of the vanities. We haven’t even begun to see the class actions mounted by dispossessed shareholders let alone the retributive justice of corporate regulators. Some of the behaviour responsible for the mess we’re in will be shown to be illegal and some people will go to jail. But stupidity is not illegal, nor is making the wrong call on the future growth of house prices.

The law can only protect us from our darker selves up to a point. There is clearly a need, once the dust has settled, to review carefully and dispassionately how various financial rules and regulations failed to protect us from the worst of what we are experiencing and what might be done to avoid a repeat performance. There is a danger, however, in thinking that more and better regulation is the obvious and only answer. How are we better served by rules limiting the earnings of bank executives? Is the fact that senior bankers are paid so much more than the rest of us really at the root of our financial problems? How are we better off if people capable of earning such sums choose to do so outside of banking or outside of Australia? Surely it’s not what they earn that matters but what drives them and restrains them in the decisions they make.

Passing more laws makes little difference if the people making decisions lack the basic virtues of moral courage, prudence and self-control. If you can’t legislate against greed, you also can’t
legislate for moral courage. These virtues must be inculcated through instruction and experience.

Somewhere along the line, virtuous behaviour fell out of fashion. Rather than reaching for a
legislative response, we have to think long and hard about how to refill the wells of basic virtue in commercial life which have so evidently run dry. It’s not that there’s no scope for tightening rules and regulations. Rules play a vital role in helping us to make virtuous decisions, often by keeping temptation at bay. Incentives favouring prudence in financial decisions are entirely appropriate and may well need to be strengthened. There is much good sense in the rule applied by one large financial institution in Melbourne that being caught in the casino during work hours carries a penalty of instant dismissal.

But no set of rules can ever completely prevent imprudent decision-making. If decision-makers lack basic self-control and a well-calibrated moral compass, they will not be contained by rules or even threats of severe punishment. It was Paul of Tarsus, another New Testament figure, who lamented that the very thing he detested - the thing he knew was wrong - was the thing he found himself doing. That’s what we’re dealing with here.

Greed, like the other vices, is a perversion of something good. We actually want to encourage
people to look to their own interests and improve their material circumstances. Innovation, risktaking and entrepreneurship are good things. They make us all better off. We must strenuously avoid confusing the underlying virtues with their perversions. In our efforts to ban greed, we will inevitably overreach and obstruct the virtuous behaviour of prudent risk-taking. In our rush to rail against “obscene” incomes, we run the risk of besmirching legitimate reward for effort and the courage, commitment and fortitude that true enterprise entails.

There is no reason why an enterprise based on virtuous choices can’t make money. Equally it is far from obvious that someone who earns a very large income by community standards is ipso facto immoral. In any case, banning people from earning large salaries is no way to make them moral if they’re immoral to begin with.

Ian Harper is a Senior Consultant with Access Economics and was a member of the Wallis Committee.