Banking royal commission: Ken Henry is wrong to blame capitalism - The Centre for Independent Studies
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Banking royal commission: Ken Henry is wrong to blame capitalism

Ken Henry has joined the cavalcade of prominent figures trying to scapegoat capitalism for the failures of governments and individuals. That’s akin to blaming democracy for voter fraud.

The NAB chairman’s comments to the Banking Royal Commission — criticising capitalism as a system that seeks to maximise shareholder profits at the expense of consumers — simply detract attention from those true culprits.

Certainly, Henry is not alone.  Blaming capitalism for every modern woe has become the stock script for many.

Even the elected leaders of prosperous market economies, like New Zealand’s Jacinda Ardern and Britain’s Theresa May have condemned it, and Pope Francis has also berated the “absolute autonomy of markets.”

The scapegoating is absurd. First, capitalism is nothing more than allowing individuals the freedom to trade with each other. In capitalism’s simplest form, businesses succeed and make profits when they give customers what they want.

Henry’s statement that the capitalist model is that businesses have no responsibility other than to maximise profits for shareholders is too narrow a definition.

Businesses make profits when they satisfy consumers in a competitive market. The problem — as we are seeing with the Royal Commission — is that banks don’t operate in a competitive market.

Further, many forget that a large proportion of banks’ shareholders are the ‘hidden’ ones: the vast numbers of ordinary Australians who (possibly unknowingly) own banks shares as part of their industry or retail superannuation investments.

But the other crucial point to remember is that capitalism does not operate in a moral vacuum. That is why we have corporate standards, anti-monopoly laws, and consumer protections. However, there is little point in blaming capitalism when these laws are broken or not enforced properly.

The Royal Commission has rightly exposed serious law-breaking by financial institutions and laid bare the failings of the regulator, ASIC, to properly enforce these laws.

These attempts by the banks to pin the blame on capitalism for their own bad behaviour are truly indefensible when you consider that banking is one of the most heavily regulated sectors in Australia. The banks are certainly not a bastion of free market capitalism — especially as explicit and implicit government guarantees mean they can rely on a taxpayer-funded bail-out in a financial crisis.

We should hold these institutions to account for their actions and failures, not to let them off the hook by blaming the economic system we have — the system that has worked so well to make Australia the prosperous nation the rest of the world envies.

Successive governments between the 1980s and early 2000s — on both sides of politics — understood the crucial benefit of the free market to Australia; that’s why they introduced market-oriented reforms. Floating the Australian dollar, abolishing trade tariffs and strengthening competition policy, along with other reforms, were essential in driving productivity and real wage growth.

Consequently, Australian households — including the poorest — have enjoyed income growth and huge improvements in living standards over the past three decades.

Moreover, the benefits extend far beyond ‘rich’ countries like Australia. It is truly ironic that capitalism, a system derided as one that fails the poor and benefits the rich, has produced the greatest fall in global poverty in human history.

Two centuries ago, 94% of people lived on less than the equivalent of $2 (USD) per day. Now, less than 10% do. In fact, the United Nations reported that global poverty fell more in the second half of the 20th century than the preceding 500 years.

In fact, for the first time in recorded history, over 50% of the global population (some 3.8 billion people) can now be classified as middle class or wealthier.

And if we need further convincing of the benefits of capitalism, then we only need to compare with the human misery caused by socialism — as witnessed right now in Venezuela.

The mass nationalisation of industries and utilities has been catastrophic, resulting in an emerging humanitarian crisis, hyperinflation and the mass exodus of three million Venezuelans — 9% of the population — fleeing the socialist ‘paradise’.

Clearly, Venezuelan-style socialism is not a system that Australia should wish to emulate.

Despite this, some Australians are still losing faith in capitalism — with a recent survey by the Centre for Independent Studies showing that 58% of Australian Millennials are in favour of socialism.

Yet, is this really surprising when they read about institutions like the major banks attempting to blame capitalism for their own law-breaking and unethical practices?

Attacking our successful economic system is not only a bid to shift blame for wrongdoing — it is biting the hand that feeds all Australians.

Eugenie Joseph is a Senior Policy Analyst at The Centre for Independent Studies, and the author of Why We Should Defend Capitalism, released November 29.