FSA chief Lord Turner, interviewed recently in Prospect magazine, calls much of the banking industry “socially useless", attacking its “excessive activity and profits." The City’s response to these criticisms has been sensible, but bankers have been afraid to make explicit the crucial counterargument: that making money is, in itself, socially useful.
The argument is so simple as to be trivial: firms, provided they are subject to laws preventing theft and violence, can only gain revenue by selling things that people want; they can only make a profit if they sell these things for more than they cost to produce; and in the process of production they employ people who prefer that job to any other they could find. That is, profit-making firms create wealth (in the broadest sense of the word) for their customers, owners, and employees. They take wealth from no-one.
Turner talks vaguely of the banks failing to be ‘socially useful’. The truth is this: any industry that makes money is ‘socially useful’, in the very concrete sense that it makes all those involved better off. Banks made enormous amounts of money over the last decade because they promised something extremely useful: the efficient distribution of capital and risk. The wealth they created was found in the share prices and dividends of banks, the welfare of their customers, the pockets of their employees, and the coffers of the exchequer.
This is not to say that the usefulness of an activity should be judged solely by the profit it makes, nor that people never behave recklessly and make costly mistakes. It’s true that bankers’ remuneration packages were ill-designed, some financial instruments were poorly understood, and the financial sector grew larger than proved to be viable. But the problem with the banks was not that they sought income, nor that they made profits, but that they made poor decisions, and eventually suffered huge losses. In regulating the banks, the government will make a huge mistake if it sees profits as the enemy rather than the goal. The government should ignore Turner’s suggestion to “reduce the size of [the banking] sector or apply special taxes to its pre-remuneration profit," and instead allow it to seek profit, through intelligent regulation, disposal of nationalised firms, and minimal taxation.
The desire to generate profit has long driven men and women to find mutually beneficial trades, to innovate, to compete, to generate wealth and to better the lot of society. We must harness this desire, not constrain it. “The point is," in the memorable words of Gordon Gekko, “that greed -- for lack of a better word -- is good." This fact lies at the heart of capitalist society, its truth is evidenced by our prosperity, and we must not shy away from defending it in these difficult times.