In remarkably few words Nick Silver gets to many points in his biting analysis of the global financial system, Finance, Society and Sustainability. It’s all good – more would be welcome.
Review by Alan Druckman
Nick Silver’s book is a clear and damning diagnosis of why the financial system does not work for the economy, people and planet. He defines the relevant terms and structures, and then proceeds to outline succinctly how and why the current shareholder capitalist system, controlled in large part by the US and UK governments, does not serve our interests. It is extremely effective at creating a sense of urgency, but such is the breadth of topics covered, and number of thought- and debate-provoking points made, that the final chapter seems insufficient and I hope he will write a second volume.
Silver first lays out the anatomy of financial markets, and then proceeds to de-bunk the myth that free markets (in the shareholder capitalism model) are indeed free. He follows this with three chapters which, even with a broad business education and background, I found somewhat shocking. His arguments are compelling, backed up with clear data points and references and clear logic and he tears apart, in turn: the savings system (particularly pensions); the role that banks play in the economy (particularly the way in which they allocate capital); and the tools that the finance system (which he refers to as the helminth) uses to maximise its own revenue.
To give a flavour of this, here are a few examples.
Firstly, in his take on the role of pensions in generating economic growth through investing in equities, he explains how equity is an expensive form of finance, or “only used as a last resort by companies”. On an annual basis, only 0.7% of the London Stock Exchange’s capitalised value is used for productive investment to help the economy grow. The stock exchange is really not a way in which our pensions are used to drive growth in the real economy – it is the domain of share buy-backs, not real investment.
Secondly, the investment by pension funds in bonds. Almost 80% of the bonds owned by pensions are government bonds. Since the pensioners are receiving the interest payments from these bonds, and the interest is paid by the government (meaning citizens), we are really just “paying pensioners interest rather than a pension”. This, of course, generates fees for the financial intermediaries, – a recurring theme of the book.
Thirdly, the incentives of the individuals with the power to allocate resources in the system, particularly investment consultants and asset managers. While the impact of short-term (particularly quarterly) incentives are now a high profile topic for debate, Silver brings clarity to the issue and presents familiar data – such as the chief executive-to-worker compensation ratio – in a new and darker light.
Silver’s diagnosis of the state of banking and its role in society is not as sharply defined, but this is inevitable as it’s a large and complex topic to cover in a single chapter. However, it’s equally damning, particularly in its outline of the overwhelming lending against real estate, which is both non-productive and exacerbates inequality.
Later in the book Silver talks through the values embedded in the current financial system and then some of the values that he thinks would serve us better as a society. He neatly summarises the growth that has been delivered by shareholder capitalism. In short: more debt is in the finance system’s interest, but creates mental and physical suffering and makes the system less stable; all growth goes to the top 20% and most to the top 1%; and the growth is helping to destroy our ecosystem.
In the penultimate chapter, Silver outlines at a high level a series of solutions to some of the problems that he has posed. Of these, his analysis of pensions is probably the most compelling. He praises the Scandinavian pension system, but then proposes that perhaps we’re asking the wrong question when looking for the best pension system. Why, he asks, do we need a pension anyway?
It’s only a small part of the book – I would love to see more on areas where Silver is evidently well-informed and highly opinionated, such as universal basic income.
Finance, Society and Sustainability is one of the most compelling and thought-provoking books that I have read. It does a fantastic job of explaining why the financial system is engineered to produce outcomes which are destructive for all key stakeholders, despite the players within the system behaving (often) rationally and in good faith. Silver brings to life the architecture of the financial system, the key players, the stores and flows of money, and the incentives that are at play. This book creates the case for change, and I hope that he continues with this mantle and explores in more detail how to make the system work for the economy, people and the planet.
Alan Druckman has acted for a number of years as an adviser on strategy to companies in a range of different business sectors. He holds a Natural Sciences degree from Christ’s College, Cambridge, and an MBA from UCLA Anderson.
