Sabotage by Anastasia Nesvetailova and Ronen Palan review – the business of finance

A decade ago the global economy was emerging from the biggest financial crisis in decades. Major financial institutions only survived thanks to a torrent of liquid capital, government deficits ballooned as they tried to manage the fallout, millions of jobs were lost and billions of pounds’ worth of value vanished from global asset prices. It was an epochal disaster, comparable only to its predecessor in 1929, and its effects are still with us. The political convulsions of Donald Trump, Brexit, Viktor Orbán and the gilets jaunes, among other phenomena, can all be seen as aftershocks of this great earthquake, and we are very much not done yet.

We might have expected some serious soul-searching in politics, finance, economics and among the electorate about how this could have come about but, in Britain anyway, precisely the opposite has happened. A good example was one of – for me – the lowlights of last year’s general election campaign, when the chancellor of the exchequer, Sajid Javid, blamed the Labour party for the economic crisis and resulting rise in homelessness.

Clearly Labour has questions to answer about its role in regulating the financial sector during its time in office, but for Javid to be the one asking those questions was bizarre. During the crisis, he was on the board of Deutsche Bank, which was not only at the heart of much of the mis-selling that capsized the global economy, but which had to pay $7.2bn to the US Department of Justice, for having “contributed directly to an international financial crisis”. The poacher blamed the village bobby for the declining rabbit population, and Britain went ahead and voted for him anyway. If that’s where we’re at, it’s clear a lot more needs to be done to explain what happened.

In the 1930s there were public inquiries into what went wrong, there were academic examinations of the disaster, there were concerted legislative efforts to prevent it happening again. But in the 2010s, there seemed to be little of that. Instead, we continued with the same flawed approach as before, just with a few more boxes for the banks’ compliance departments to tick.

The political economy scholars Anastasia Nesvetailova and Ronen Palan have sought to fill the gap with this brief, provocative and radical examination of the flaws in regulating and conceptualising finance. Sabotage is a demand for an entirely new way of approaching this crucial industry, which could be summarised in the slogan: make finance boring again. The point of finance, according to basic economic theory, is to deploy capital where it is most useful. Sometimes people have more money than they need, and they save it; and sometimes people have less than they need, so they borrow it. Finance connects those two groups together, making its living from the commissions it earns for doing so. That might be important, but it’s definitely not glamorous. All of the fun bits of the economy happen elsewhere.

Also, according to economic theory, finance should be barely profitable. There are dozens of financial institutions, all offering pretty much precisely the same services. Competition should drive down their fees to a level barely above break-even, which means bankers should be bracketed together with conveyancing solicitors, quantity surveyors and other unglamorous professions, just like they used to be.

But that is not how things are. Banks are prestigious and profitable, able to pay their employees far more than companies in the productive economy that they supposedly serve. These employees come up with ever more elaborate innovations for moving money, earning their employers profit margins far in excess of companies that actually make something. Economic theory says one thing; reality is different, so what is going on? This is the question that Palan and Nesvetailova set out to answer.

For guidance, they go back to the 19th century, to the original gilded age, and the work of Thorstein Veblen, the American economist who looked at the way businesses made profits. His work was highly empirical, rather than theoretical, and thus avoided the politics-in-scientific-clothing “mathiness” which has rather blighted economics in the last half-century.

By inquiring into how those in business and deal-makers actually behave, rather than how a rational economic actor should behave, Veblen found innumerable examples of cheating. There was so much cheating going on, in fact, that he gave it a whole term: sabotage. Businesses used their superior knowledge to sabotage their clients, their competitors and their regulators, all in pursuit of bigger profits. It wasn’t that these businessmen didn’t believe in free, well-regulated, unrigged markets – they loved them. They just didn’t want to obey the rules themselves.

Nesvetailova and Palan comb through the behaviour of banks and other financial institutions in the years up to the financial crisis and identify similar patterns of behaviour to those found by Veblen. This, they conclude, explains the paradox of how banks can make such huge profits in such a competitive market: they sabotage everyone else. We all depend on finance; it is all but impossible to live as a citizen in a modern economy without access to the financial system. That gives employees of financial institutions priceless insights into how we behave, and what we will tolerate.

The examples quoted are enraging, such as the allegations of how the employees of RBS deliberately drove family businesses into bankruptcy in order to make money for themselves; or an internal memo that suggested staff should let clients “hang themselves”. RBS subsequently admitted that it had made some mistakes.

The ultimate aim of any finance house is to become too big to fail. Once a company has the implicit guarantee of the state behind it, it can borrow more cheaply, act more recklessly and behave worse, knowing that taxpayers will bail it out if its bets go wrong. “Sabotaging rules and regulations is big business. So big in fact that it has become probably the biggest source of profits for some of the largest banking houses in the world,” the authors conclude.

Why do regulators let them get away with it? Here Nesvetailova and Palan get a little speculative for my taste. They argue that we are essentially dependent on financial institutions’ willingness to lend for our continued prosperity, so governments connive in rule-breaking in order to ensure banks continue to earn profits. The world economy is a huge pyramid scheme; governments know it, but would rather let it continue than have to deal with the fallout of its collapse. It makes logical sense, but nothing in the recent behaviour of governments in Britain or elsewhere suggests to me that they would be capable of maintaining such a giant conspiracy for such an extended period of time without it failing through simple incompetence.

The authors’ proposed solutions, however, are rock solid. Their core idea is that regulators need to ditch their focus on ensuring financial stability, and instead recognise that financial institutions’ core business model is to game the system, and always will be unless regulators stop them. This idea involves abandoning the traditional divide between right and left in politics, as if free markets and regulation are opposite poles, and recognising that truly free markets, ones which are not sabotaged by their most powerful participants, require robust regulation.

If you’re a progressive, in Britain or elsewhere, and if you think the movement needs fresh ideas, read this book, it’s full of them. Then get to work.

• Sabotage is published by Allen Lane (RRP £20). To order a copy go to guardianbookshop.com. Free UK p&p over £15.