View From Oxford

Regulation is the job of policy makers – not of investors, bankers, and managers

It seems that asset managers and central banks are suddenly in charge of rescuing us from climate change and other social challenges. That won’t go over well. Better solutions rely on market competition.

The climate keeps changing. Large corporations rake in record profits. Real interest rates fall, and inequality increases. Those are defining challenges of our time.

Culprits are easy to find: greedy managers and investors, seeking ever-increasing profits, without regard to workers, environment, and social cohesion.

Simple solutions are also around the corner: we need a corporate social “purpose,” for all firms why not? Or more governance and control by the large asset managers! Those, so the story goes, are “universal investors” and therefore have a stake in the overall economy. (Hint: they don’t.) Investors should buy sustainable, so-called “ESG” funds – often issued by the same asset managers. If that’s not enough, central banks should just buy green bonds as part of their large-scale quantitative easing (“QE”) experiments. Also under the auspices of BlackRock & Co, of course. The common theme is: no regulation!

This won’t end well.

What is clear is this: the combination of egotistical, profit-seeking individual interests and the existing rule book doesn’t work as well as we’d like. But if history is a guide, we can be sure: the approach to ignore individual self-interest and bet on altruism as the solution to our problems will also fail.

Outsourcing regulation to not democratically legitimized central banks, lobby groups of managers (such as the Business Roundtable), or asset managers is politically easy. But it leads, at best, to what sociologists call “diffusion of responsibility”. In other words: nobody does anything to help address the challenges we face. The more probable outcome is that things get even worse, because these actors’ incentives are not aligned with society’s interests.

I worry that many economists lend credibility to the confusing discourse about these third-best solutions, simply by participating in the debate without saying clearly what we all know to be true: that all the nudging, green finance, and asset manager capitalism in the world is not a perfect substitute for good market rules. By doing so, we provide a convenient excuse to politicians and regulators. They can lean back while we debate what may seem to the public like fine substitutes to them doing their job.

I therefore believe it is time for a counterpoint. The alternative to blunting profit motives is to regard individual self-interest not as the problem but as part of the solution. Changing the rules so as to channel self-interest via complete and competitive markets is what leads to the “Wealth of Nations.”
Pricing carbon is the best solution to incentivize firms and individuals to innovate. Competitive labor and product markets prevent exploitation of workers and consumers. Investment increases, the economy grows, real interest rates rise, and asset prices fall.

To get back to this time-proven recipe, we first need to rid ourselves of the pleasant and popular idea that climate change can be stopped equally well by buying a few more green funds for the portfolio, or the idea that central bank policies are cost-less because they don’t consume resources. (Because they do.)

What we need instead is pressure on politicians and regulators by civil society, not by lobbyists. If we do that, markets will work for the people again.


  1. It seems to me that one should not give up on individual altruism since only such altruism will lead citizens to choose the appropriate leaders and accept the adequate policies (such as carbon pricing). The question then becomes how to best organize society and markets to achieve the common good and let altruism express itself whether in civil society or in business affairs.

  2. Dear Martin,

    Under perfect competition, a firm which would accept to use a more expensive (green) technology would just lose market share, thereby achieving nothing.

    When one bank divests from coal, two banks invest there. It is right to say that a government which imposes more penalties to brown industries faces physical carbon leakages (physical dismantling of plant to be rebuilt on the other side of the frontier). Banks which want to penalize brown industries face much more challenging financial carbon leakages (substitution of funding sources by a click).

    There are obvious reasons for the weakness of political will to face climate change. These reasons are even more obvious for capitalists, investsors and consumers.

    Christian Gollier

  3. Dear Martin,

    My views are very similar to Luigi’s (no surprise).

    In an ideal world the government would solve all externality problems.

    In the real world it doesn’t happen–not least because there are many governments and they need to coordinate; but they don’t.

    In the real world I give to charity. In an ideal world I wouldn’t because government would have internalized everything.

    I think that, in the real world, I will want companies to act in a socially responsible manner too.

    I agree that we should push for better government but I don’t think it follows that we should stop pushing companies to do better: these are complementary not substitute activities.

    Hope you are keeping well during these crazy times!

    Best, Oliver

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