From his speech to the Conference on Inclusive Capitalism

May 27, 2014 | London, England

Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations. Different societies will place different weights on these elements but few would omit any of them.

Societies aspire to this trinity of distributive justice, social equity and intergenerational equity for at least three reasons. First, there is growing evidence that relative equality is good for growth. At a minimum, few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined.  Second, research suggests that inequality is one of the most important determinants of relative happiness and that a sense of community " itself a form of inclusion " is a critical determinant of well-being. Third, they appeal to a fundamental sense of justice. Who behind a Rawlsian veil of ignorance " not knowing their future talents and circumstances " wouldn’t want to maximise the welfare of the least well off?

This gathering and similar ones in recent years have been prompted by a sense that this basic social contract is breaking down. That unease is backed up by hard data. At a global level, there has been convergence of opportunities and outcomes, but this is only because the gap between advanced and emerging economies has narrowed. Within societies, virtually without exception, inequality of outcomes both within and across generations has demonstrably increased.

The big drivers of globalisation and technology are magnifying market distributions. Moreover, returns in a globalised world are amplifying the rewards of the superstar and, though few of them would be inclined to admit it, the lucky.

Now is the time to be famous or fortunate…

So what values and beliefs are the foundations of inclusive capitalism? Clearly to succeed in the global economy, dynamism is essential. To align incentives across generations, a long-term perspective is required. For markets to sustain their legitimacy, they need to be not only effective but also fair. Nowhere is that need more acute than in financial markets; finance has to be trusted. And to value others demands engaged citizens who recognise their obligations to each other. In short, there needs to be a sense of society…

We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital.

It is necessary to rebuild social capital to make markets work. This is not an abstract issue or a naïve aspiration. I will argue that we have already made a start with financial reform and that by completing the job, by returning to true markets, we can make capitalism more inclusive…

To build this sense of the systemic, business ultimately needs to be seen as a vocation, an activity with high ethical standards, which in turn conveys certain responsibilities.

It can begin by asking the right questions. Who does finance serve? Itself? The real economy? Society? And to whom is the financier responsible? Herself? His business? Their system?

The answers start from recognising that financial capitalism is not an end in itself, but a means to promote investment, innovation, growth and prosperity. Banking is fundamentally about intermediation " connecting borrowers and savers in the real economy.

In the run-up to the crisis, banking became about banks not businesses; transactions not relations; counterparties not clients. New instruments originally designed to meet the credit and hedging needs of businesses quickly morphed into ways to amplify bets on financial outcomes.

When bankers become detached from end-users, their only reward becomes money. Purely financial compensation ignores the non-pecuniary rewards to employment, such as the satisfaction from helping a client or colleague succeed.

This reductionist view of the human condition is a poor foundation for ethical financial institutions needed to support long-term prosperity. To help rebuild that foundation, financiers, like all of us, need to avoid compartmentalisation " the division of our lives into different realms, each with its own set of rules. Home is distinct from work; ethics from law; the individual from the system.

This process begins with boards and senior management defining clearly the purpose of their organisations and promoting a culture of ethical business throughout them. Employees must be grounded in strong connections to their clients and their communities. To move to a world that once again values the future, bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors…

By encouraging enterprise and rewarding individual initiative, market-based economies provide the essential conditions for economic progress. But social capital must be maintained for that progress to be consistently delivered.

The combination of unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption in some of these markets has eroded social capital. When combined with the longer-term pressures of globalisation and technology on the basic social contract, an unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.

To counter this, rebuilding social capital is paramount.

Financial reform is now helping. Globally systemic banks are simplifying and downsizing. Some are de-emphasising high-profile but risky businesses that benefited employees more than shareholders and society. Authorities are working feverishly to end too-big-to-fail. The structure of compensation is being reformed so that horizons are longer and rewards match risk. Regulation is hard-wiring the responsibilities of senior management. And new codes are seeking to re-establish finance as a true profession, with broader societal obligations. A welcome addition to these initiatives would be changes to the hard and soft infrastructure of financial markets to make them dynamic and fair.

Through all of these measures, finance can help to deliver a more trustworthy, inclusive capitalism " one which embeds a sense of the systemic and in which individual virtue and collective prosperity can flourish.


Mark Carney, Governor of the Bank of England.