Anthony Hilton: People feel the system works to serve an elite and that has to change

The most popular thing Miliband has done is to attack energy companies

We smugly say in this country that we don’t do corruption but perhaps we just don’t define it properly. Corruption is about paying money to get the system to work to favour one interest group over another.

Lobbying may not be thought of as corruption, but in the United States and to a lesser extent in Britain it is the use of money to buy influence and direct power. It is not always open and transparent, but even when it is it favours those with the money.

At a conference in Madrid this week organised by the Corporate Research Forum, the noted economist John Kay observed that when corporations use their power to manipulate politics in their favour it is potentially as damaging as corruption of the conventional brown-envelope kind.

This is because economic efficiency and fair outcomes depend on the market being able to function properly.

Anything which dilutes the requirement that corporations only survive by satisfying the needs of the market undermines the efficiency of the economy and the fair allocation of rewards.

Once companies are no longer in thrall to their customers and held to account by them, then they can quickly exploit the economic system to their advantage.

Coincidentally this theme found echoes in a just-published book by Andrew Smithers* in a section in which he described how banks have used their contacts borne of a history of political donations and social contacts to persuade politicians to water down regulations which would have forced them to change their behaviours.

The result is that the regulatory drive against them has been blunted. They still receive a vast explicit subsidy via the guarantee of the security of bank deposits, which means they pay significantly lower interest rates to attract money than they otherwise would.

They receive even larger implicit subsidies because they know the state will rescue them if they get into trouble and this allows them to take excessive risks, which in turn make excessive profits from which management derives excessive bonuses.

As Mr Smithers says in this book…“we are therefore in effect currently subsidising bankers to make political contributions aimed at both preserving their subsidies and their industry’s ability to obtain excessive profits through inadequate competition.

“It would be hard to invent a more absurd arrangement and one more obviously contrary to the interests of taxpayers and more likely to bring both banking and politics into disrepute.

“Excessive rewards for finance mean lower rewards for the rest of the economy. The distortions which result mean it is both unbalanced and unstable, and with a high propensity to crash again. Even if it doesn’t crash it will not prosper.”

In the book Why Nations Fail, published a couple of years ago, the authors said that countries divided into two. There were those in which the institutions and levers of power were inclusive, meaning they acted in the interests of everybody and economic rewards were reasonably shared among all society’s different groups; and there were countries where the institutions were exploitative, meaning they were controlled in a way which funnelled a disproportionate share of the rewards to a select few, an elite.

The authors’ conclusion was that the nature of these institutions determined whether nations flourished or failed. Lasting economic growth could only come from the open, fair societies.

Countries with alienated and excluded populations can have short-term success but they will not prosper in the longer term because they cannot mobilise and motivate all the population. This surely is a danger for this country. It is still obviously a long way off but the seeds are there.

The banks are despised; polls say more than half the population would like the railways to be renationalised; the most popular thing Ed Miliband has done since becoming leader of the Labour party is to attack the energy companies and attitudes to business generally have been poisoned by the excessive pay of directors.

Rightly or wrongly, the popular view is that the system is being manipulated for the benefit of the few.

Separately in London on Thursday evening, at an awards dinner focused on building trust in business, PricewaterhouseCoopers senior partner Ian Powell said… “there is an increasingly pressing need for a new settlement between business and society – a common understanding founded on trust, shared honesty and integrity and an embedded culture of doing the right thing”.

He is right. But it is not going to happen unless more people at the top of business share Mr Powell’s sense of urgency. Sadly, too many think this storm will pass and don’t see the need to change.

* ‘The Road to Recovery: How and why economic policy must change’ by Andrew Smithers