History repeating itself (Issue 35, 2010)
Critical lessons relating to causes of the global financial crisis emerge from a new study of the origins of modern capitalism in Victorian England.
One of these, says the book’s author, La Trobe University Vice-Chancellor and economic historian, Paul Johnson, suggests the time may be ripe for a dramatic increase in the liability of company directors.
‘History never repeats itself, but there are often certain similarities,’ he says. ‘We can learn that attempts to counter a boom bust cycle through regulation have consistently failed.’
Instead, one of the most effective ways to regulate the market, he says, is to use market pressures themselves. For instance, a key market signal like price could be used to improve audit procedures and reveal the true financial status of companies by ramping up liability for directors.
Professor Johnson’s book Making the Market says the recent financial crisis and the collapse of many Wall Street investment banks in 2008 has ‘called into question the moral basis of finance capitalism in a manner not seen since the Victorian period’.
‘As today’s commentators pick over the carcass of the global financial system and pose questions that would have been familiar to their Victorian forebears we begin to realise how little we understand what we thought we knew about the market.’
Research for his book, Making the Market - Victorian Origins of Corporate Capitalism, was made possible by a two-year grant from the British Academy in the late 1990s.
With a ‘novelist’s eye for character and incident in the tradition of Dickens and Trollope’ (to quote one reviewer), Professor Johnson explains the Victorian era was a time of huge business and economic growth. It saw the development of financial institutions which have become the foundations of the modern world economy.
‘Regulators and economists have typically viewed markets as evolving to naturally produce efficient and optimal outcomes. That’s a misreading of history that has cost us dearly.’
Despite ‘the huge analytical effort of many generations of economists and historians’, Professor Johnson says, ‘the institutional processes by which market structures were created in 19th century Britain have largely been ignored.
‘This lack of understanding results in surprise and fury when markets fail to produce orderly and anticipated results. In truth, we have been there before. The historical parallels are legion, and disconcertingly familiar.’
He hopes his book will make a small contribution – both in public debate and the economics class room – to the key question: how do you bring personal responsibility into impersonal modern capitalism dominated by global corporations?
Paul Johnson was formerly Deputy Director of the London School of Economics. He holds a doctorate from Oxford University and was a Research Fellow at Nuffield College. His previous publications include the three-volume Cambridge Economic History of Modern Britain (2004); Old Age: From Antiquity to Postmodernity (1998) and Twentieth-Century Britain: Economic, Social and Cultural Change (1994).