Last year’s banking crisis raises fundamental questions about the brand of tooth-and-claw capitalism that ruled the world for 30 years. This hard-edged model, characterised by the relentless pursuit of profit, the prioritisation of shareholder value above other objectives, laissez-faire government, deregulation, and financial engineering, was most pronounced in financial services but affected thinking and behaviour throughout the business world, seeping into society at large.

There is still a lot of work to be done to restore the banks to health but if, as seems likely, the tailspin has levelled off, it is now time to contemplate changes to the governance model that brought about the mess in the first place. There are three alternatives to consider. 


The European social markets model, which at one time appeared to be getting trampled by Anglo-American free market capitalism, is once again back on the table. French President Nicolas Sarkozy has proclaimed that ‘the all-powerful market which is always right is finished’; Peer Steinbrück, the German finance minister, has questioned the role of Anglo-American finance in redesigning the very monster it created. Whether these radical comments will go beyond rhetoric remains to be seen, but they are getting more attention than would have been conceivable two years ago when the free market was in its pomp.


But President Barack Obama and Prime Minister Gordon Brown, the leaders of the two countries that encouraged the rest of the world to adopt the Anglo-Saxon financial model, do not seem interested in alternative systems. Although they accept the need for a thorough overhaul of banking rules and regulations, their focus appears to be on fixing the stricken financial services industry, not rethinking capitalism. 


However, the rise of Asian economies such as China and India and the continued importance of Japan means this is no longer a debate between European social market ideas and Anglo-American free marketers. The Asian countries have different business cultures and governance structures to those of the West. Prior to the credit crunch they had been moving towards free market economics but the recent setback may cause them to review their commitment to Anglo-Saxon market capitalism in favour of more patient, less institutional models.


The past provides a clue as to how these differing views will be resolved. The last redefinition of the global economic system during the final quarter of the 20th century occurred as a result of the collapse of the post-war Bretton Woods system of fixed exchange rates in 1971 and the progressive failure of capitalism’s socialist and communist rivals over the next two decades. The Chicago school of economics, which persuaded the Reagan and Thatcher administrations to follow free market economics, filled the vacuum; at the same time, other academics identified shareholder value as the primary objective for business, while management consultants developed all this into a coherent strategy for the corporate sector. Investment bankers, liberated by deregulation and with an eye for an opportunity, picked up the whole package and sold it hard to chief executives who were newly incentivised by share options and performance-based compensation. 


Thus the free market revolution occurred when a busted predecessor model stimulated a wave of innovative thinking from the academic sector, met receptive governments looking for alternative ideas and was seized on by a recently incentivised and liberated private sector. If there is to be a similarly radical response to the 21st-century banking crisis we would expect most, if not all, of these conditions to exist this time round; in fact, this is only partly the case.


Acceptance that the old model is fatally flawed is an essential prerequisite to change; however, while there is a general acceptance that the deregulation of finance has gone too far, there is no consensus that free market economics is a busted system. In fact, most governments, central banks, regulators and global financial institutions appear not to 
be looking much beyond the narrow issue of fixing finance.


Nor are there any signs of radical thinking in mainstream academic thought. This sector led the Washington Consensus in late-20th-century economic theory and comparatively few academics dissented from the prevailing wisdom. Even now, business schools and universities remain heavily involved with the financial services industry, relying on it to employ their best graduates, to help endow their institutions and to buy their services 
as consultants. The financial services downturn will weaken these ties but it will take time for the academic world to reassert its independence, analyse what went wrong and formulate a response. 


The third catalyst in the free market revolution was the private sector, particularly the emerging professional services industry, which found itself the beneficiary of the new economic theories and encouraged their spread. This time around it is more likely to be a force for conservatism as it has vested interests to defend. New ideas do exist in the form of the swelling ranks of ethical banks, micro-finance lenders and social value venture capitalists but it is hard to see them having a mainstream effect in the short term.


So it seems that the 21st century will bring an evolutionary rather than revolutionary change to the system. However, it will be regrettable if the banking crisis leads to no more than tighter regulation. The recent past has shown that shareholders need to behave as owners not traders; corporate executives need to be encouraged and incentivised to think of shareholder value as a consequence of a whole series of actions not a short-term objective to be recklessly pursued; and non-executive directors need to consider the interests of the company as an entity and detach themselves from executive management. Such a change will not come out of thin air, and the challenge now for the business community, governments and academics alike is to throw off the shackles of finance and to encourage independent thinking. Only then will alternative models to the one they have so long evangelised reveal themselves.

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