INET at the Trento Economics Festival: Values: Building a Better World for All

INET at the Trento Economics Festival 1: A dialogue between Mark Carney and William Janeway, coordinated by Robert Johnson Our world is full of fault lines—growing inequality in income and opportunity; systemic racism; health and economic crises from a global pandemic; mistrust of experts; the existential threat of climate change; deep threats to employment in a digital economy with robotics on the rise. These fundamental problems and others like them stem from a common crisis in values.

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Rob Johnson:

Hello. This is Rob Johnson, the president of the Institute for New Economic Thinking. It’s a great pleasure to be back working here with the Trento Economic Festival, though I do wish that I was in the opera house with you all, with my guests at this time. And I do miss being there in person. I also want to pay tribute to the person who inspired me originally to come to Trento, the great scholar, Axel Leijonhufvud, who has taught a summer school there for many years that INET co-sponsors.

Today, we embark on a series of panels that the Institute for New Economic Thinking has put together based on the work of our Commission on Global Economic Transformation. It’s co-chaired by Micheal Spence and Joseph Stiglitz. And it focuses on technology, climate, finance, and the notion of globalization and its threat to the control of the nation state. We also look at the induced type of threat that leads to migration when a system of development, particularly in the global South, is not sustainable.

Today, I have an extraordinary opportunity to put forward a discussion with two men who I have known for many years and greatly admire and am inspired by. First is Mark Carney. He’s from Canada. He’s currently the vice chairman and head of impact investing at Brookfield Asset Management. As you probably know, he was the governor of the Bank of Canada from 2008 to 2013, and the governor of Bank of England for the following seven years, through 2020. He was the chairman of the Financial Stability Board between 2011 and 2018. And previously, he had worked at Goldman Sachs, done graduate work at Oxford, and was an undergraduate at Harvard University. Mark was recently appointed as the United Nations special envoy for climate action and finance just as he stepped down from the governorship of the Bank of England. And he has also been appointed the finance advisor for the UK presidency of the forthcoming COP26 United Nations Climate Conference in November of this year, which I believe is in Edinburgh, Scotland.

Our other speaker, William Janeway, is the founder of INET, along with George Soros and Jim Balsillie. And he has been an extraordinary venture capitalist, scholar, a PhD from Cambridge, has nurtured and nourished places like Princeton University, University of California Berkeley, particularly Cambridge University in England. And Bill has written a book, I believe in now its second edition called Doing Capitalism, and he has just made a multi-part series course that I would encourage you all to look at. That’s Venture Capital for the 21st Century. And without foreshadowing or revealing too much, Bill understands, coming from a father, Elliot Janeway, who wrote the book, The Struggle to Survive, about the war preparation of Franklin Delano Roosevelt before World War II. And Bill’s experience in venture capital, with an academic and governmental awareness, has taught us all how transformation in society is facilitated by the state. And he directs that in the later portions, in the final episode, to embracing the future challenge of climate change.

Mark Carney recently gave us a gift. In May of this year, he produced an extraordinary book. It’s a book that I was not surprised, because I’ve known Mark for many years, but his book entitled Value, Value(s), with the S being framed, Building A Better World For All. And Mark goes into the relationship between market value and values. I thought you were the reincarnation of the Earl of Lauderdale, who criticized Adam Smith about the difference between use value and exchange value when I read it. But it’s a beautiful book because it’s historical. It’s deep. It’s philosophical. It’s then brought forward to financial crisis, the COVID crisis, and on the horizon, where he’s working now on climate.

Thank you both for joining me today. And I want to just kick off with a comment from this morning’s Green Swan conference by Christine Lagarde. She talked about why she had left the private sector for these larger causes. And she said, “Our planet is burning, and we central bankers could look down on our and pretend it is for others to act and that we should simply be followers. If we did, we would be failing on our mandate, and we would be missing in action.” Well, to fill that void, these are two men of action and intelligence that I’m very excited to hear what each of you have to say today.

Mark, why don’t we start with you. I heard a very, very inspiring conversation you had with Tyler Cowen, I believe just a couple of weeks ago. And you talked about what you learned from creating your book, in light of your experiences and the challenge on the horizon, about what you call flattened values and hierarchical values. And this conference, which is called The Return of the State, focuses on what can the state, or governance, or world governance, what institutions of governance can do in light of your discovery about hierarchical values.

Mark Carney:

First, Rob, thank you for having me. Bill, it’s an honor to share the virtual stage with you. And here’s to being in Trento this time next year, together with all the wonderful citizens and the extraordinary talent that this unique event attracts. Secondly, I’ll just make one small correction to your introduction. The COP26 will happen this November in Glasgow.

Rob Johnson:

Oh. I’m sorry.

Mark Carney:

Rather than Edinburgh. And of course, that’s fitting because Glasgow is where Adam Smith wrote his magisterial works, both The Wealth of Nations, which is about the market, and The Theory of Moral Sentiments, as you know, which is about, in many respects, the social conventions which are necessary to underpin the market. You’ve asked a more fundamental question, which is how do we use the market to achieve social goals, and what are the necessary circumstances for that to happen? In other words, how can we move out of a situation, which is the natural resting point for economists and financiers, of a trade off between short term and long term, or in the case of the environment, between planet and profit? How do we move to a situation, as I believe we are beginning to do, a situation where the social objective, which is sustainability, to address climate change, to stop the planet from burning, to quote Christine Lagarde, and use the market as part of that solution?

Now, in the book, I go through this in some detail. But I will summarize. And one of the experiences, I think we all know those who engage with politics, who observe it, are subjected to it, is politics very often, in fact usually follows people. So the first thing is social movements and the strength of those social movements, and then gathering momentum. And I just commend the work of the great scholar, Cass Sunstein, on this issue, and what are the conditions that bring a social movement, which seems very improbable in advance, to that tipping point, something that has happened long ago in Europe on climate, but is spreading now throughout the world.

The question is how does that translate then into the political sphere, creating the social objective, sustainability, as the ultimate objective, and organizing the market in order to proceed, to achieve that? And we have that organizing principle now. It has come out of Paris, and is finally being realized, which is that a very simple equation that to get to sustainability we need to get to net zero. And that’s to stabilize the temperature at 1.5 degrees, which is the core objective. But quite frankly, if we’re going to stabilize the temperature at 3 degrees, we still have to get to net zero. The challenge is to drive that path.

And what is happening in various countries is that objective is being locked in at the country level, indeed in Europe obviously at the level of the European Union first, but then at the country level. In many cases, legislated, in the best cases, being made clear with transparency, objective assessments of how well the country is doing in the path to net zero, and then it’s being brought down the level of companies, and very importantly, financial institutions themselves. And the question that we are asking, emboldened by those social movements, by what people want, underscored by the objectives, the legislated objectives of countries to get to net zero, the question that we are asking of financial institutions and businesses is what is your plan?

Are you on side with this move to net zero? Or are you sitting this one out? Do you think you are, to use English, are you a part of society, or are you apart from society. In other words, are you separate from society? And I’ll finish by saying what we’re looking to do for COP26, and I go through this in the book, is to bring together what I would call three technologies. At the apex, at the top, is the political technology we just discussed, this hierarchy of values, this core objective. The second is the financial technology, which is transparency, information, markets, and plans for net zero so that citizens can judge whether their money is being invested consistent with their values, consistent with this objective of net zero.

And then thirdly, we obviously need the engineering technologies to make it happen, the wind, the solar power, that are currently economic, the hydrogen power, the carbon capture and storage technologies that are close to being economic but need more investment. And it’s the combination of those three, and the power the market, properly situated, the power of the market, that will get the investment into those engineering technologies and deliver the sustainability that people have demanded.

Rob Johnson:

Bill Janeway, your thoughts?

William Janeway:

Well first of all, I actually have two, as it were, thank yous to Mark Carney, from his book, from his wonderful book, Value(s). The first was the proper reference for a phrase that over the last 40 years, we’ve all come to kind of use and recognize without thought. And that’s that wonderful phrase, “Trust but verify.” And Mark in his book documents that that was not what President Reagan said. That’s what the Secretary of the Communist Party, Gorbachev, the last great leader into the end of the Soviet Union, what he said mobilizing an old Russian proverb when considering how to deal with a problematic partner, or contestant, or enemy. So I thought that was really an eye-opener for me.

The second, I will not forget, it must now be two … I think it was pre-pandemic. So maybe a full two years ago, walking down Fifth Avenue, listening to a podcast, and listening to Mark effectively make an extraordinary initiative, which was to mobilize the accounting profession on the side of those who are responding, who are to response actively to our planet burning, to mobilize the accounting profession to evaluate balance sheets, private sector balance sheets, with respect to values on those balance sheets that were exposed to climate change, not just the … Well, though it’s the classic example, the oil reserves that will never be pumped, and that were carried on the oil company balance sheet, but much more broadly than that.

I think it’s an enormous contribution of creating an institutional innovation in pursuit of valuable, literally valuable goals. Now, turning to Mark’s book, and to the values he identifies, he identified four pillars of the market economy, four pillars on which we need to be sure that a market economy does not become a market society: resilience, solidarity, connectivity, sustainability. Now, for anyone trained in economics at all, there’s one value that is missing, that is not identified at all, and that of course is the value of efficiency, what one might call the virtue of economics, at least economics since the marginalis revolution 140 to 150 years ago.

Where is efficiency in this context? It happened that this morning, this very morning, Brad DeLong of Berkeley, one of the most creative economists and commentators going, in his amazingly continuous flow of thoughts in his newsletters and blogs, has a very, very interesting reference to the forgotten, but once upon a time the most significant economists in the world, Henry George. And he said in talking about Henry George, he referred to the fundamentalist, hard line position that economists had adopted some 50 to 75 years ago.

“What is that position,” he said, “It’s that questions of distribution are questions of value that are beyond economics’ scope. That economics is concerned only with efficiency, and after things that hobble market efficiency are taken away, then all the economist can say is, ‘The market giveth, the market taketh away. Blessed be the name of the market.’” I grew up, as Rob pointed out, as the son of a political economist, deeply engaged in the latter stages of the New Deal, through the Great Society. And one of the things I learned from my father, Elliot Janeway, was that if efficiency is the virtue of economics, fairness, perceived fairness is the virtue of politics. And where they meet, sooner or later, as Karl Polanyi point out in his great work, it’s likely that fairness will offer an alternative that can become the most politically powerful, more powerful than the appeal of efficiency.

In my own work, in my own experience during my 35 year sabbatical from Cambridge University and from the discipline of economics, I learned that efficiency is not just the enemy of fairness. It’s also the enemy of innovation at the frontier, where progress is made by trial and error, and error, and error. And where waste, necessary, inescapable waste from failed projects, from failed experiments, is absolutely essential. Now, the challenge that that presents to relying on the market for technological innovation, including innovations Mark just referred to that are necessary for effectively addressing climate change, that challenge was pointed out no less than 50 to 60 years ago by two great, very different economists, Ken Arrow and Dick Nelson.

Why the market economy, competitive firms, operating in the market economy will never invest enough in research and development because they can’t capture all the returns, because they can’t know what the returns are going to be, because they’re operating under conditions of radical uncertainty. And that’s where the role of the state, the role of the state as funder of research and development, but also as the first customer mobilizing the procurement function, becomes historically, observably so important. It radically … The Department of Defense in the United States arguably accelerated the Digital Revolution by at least a full generation. And mobilization of those resources from the state are clearly just as important in creating the Green Revolution on which we are all going to depend.

Arguably, I would say, in fact I think it’s not arguable, in all of the discussion of how China has gone through this incredible, revolutionary transformation, in part by as a good follower, appropriating existing intellectual property. No appropriation has been more important than its appropriation of the model of public/private collaboration at the frontier of technology that the United States government demonstrated in the generation after World War II. But the state is not the only force that’s needed. And I’ll close by referring to, and again, drawing on Mark’s book, referring to the relationship between the financial markets and the real economy.

I, as a Cambridge economist, I think of myself as a paleo-Keynesian, have always remembered the great sentence from the general theory, “Speculators may do no harm as bubbles on a steady stream of enterprise, but the position is serious when enterprise becomes the bubble on a whirlpool of speculation.” And yet we can observe how speculation can mobilize resources beyond what rational, prudent, conservative managers might do in funding investments at scale at the frontier of technological possibility. The railroads in Britain and the United States were funded in the first half of the 19th century by massive waves of speculation. The 1920s were not just about bathtub gin and flappers and the Charleston. The great bull market of the 1920s funded the electrification of the American economy, fundamentally transformed economic possibilities and productivity growth there going forward, and in my own personal experience, and those of virtually everybody over the age of let’s say 35, the great .com, internet tech bubble of the late 1990s radically accelerated the deployment of the technologies that enable the digital world that we are all now living in.

So taking speculation seriously as a historical phenomenon, that can be, can be, but most often isn’t, can be productive, is important. The bubbles that burst without funding that kind of productive investment, particularly and typically focused on financing, trading in existing assets, like the real estate credit explosion of the early 2000s that led to the global financial crisis, of course, on the other side. So I want to close by asking, in effect, a question of Mark Carney. And that is the impact of monetary policy. In his book, he spoke about how speculative spikes, and we certainly have been living with one as monetary policy has faced the zero lower bound, and real risk-free interest rates have effectively been negative for the better part of 10 years, spoke about how a speculative spike can lead to more inequality.

And on the other hand, he has this wonderful phrase, which is a lesson for everyone listening here. “If it doesn’t make sense, it doesn’t make sense,” as he perceived what was going on in that global speculation that culminated in 2008. What, Mark, you didn’t speak about there was whether the response to 2008, which did provide much greater resilience in the financial system, as we have been witnessing. But it did not deliver what had been, in previous occasions of speculative excess that collapsed at the expense of many, many people, both people in the markets of finance and the markets of the real economy. Were the institutions too big to jail? I think you refer to Goldman Sachs’ Abacus, a $550 million fine of Goldman Sachs, but no criminal charges. Countrywide, which effectively was a fraudulent machine for generating the fuel for infinite leveraging through derivatives, no criminal charges filed when it went bust.

This was not what happened in just what historically was the kind of trivial, SNL crisis under a Republican president, George H.W. Bush, when some 200 people went to jail. Or after 1929 to ‘33, when the president of the New York Stock Exchange, Richard Whitney, went to jail. Has there been a failure in the political process that should worry us as we consider, if you like, capitalism semi-bounded by capitalists exonerated, or at least not held to account when speculative access, excess spills over to real human damage?

Mark Carney:

Right, well first, that was magisterial, Bill. I enjoyed it immensely. And I want to make three points, just two related to what you said, and then third to try to answer your question, which is a very good question. The first, you quote Brad DeLong’s blog, and I’ll go to it today. And I commend it to anybody who doesn’t read it regularly. I quote in the book a theorist of a few decades ago, a fellow by the name of John Fagg Foster. And he says that value theory in economics is efficiency, nothing more, nothing less. Same point as Brad. And of course, as you know, and many listening know, the history of value theory in economics is anything but that simple because the innovations, the changes that come with value theory over time come with technological change, come with the nature … Because one of the core questions is the distribution of value.

So you have this new theory emerging for the mercantilist, and trade becomes important. For the physiocrats come when agriculture is important. The classicists, like Smith, and Marx, come when manufacturing and industry becomes important. The subjective marginal revolution is the consumer becomes dominant, and value is in the eye of the beholder. And the point I draw from that, which is part of the reason for the, I think, the importance of this discussion and the broader discussion about value and values, is of course we’re going through two revolutions right now, a digital revolution as a shorthand, and a sustainable revolution. And so fundamentally, these will change the distribution of value in quite enormous ways. And we need a conversation about that, and to adapt value theory to what society wants. So that’s the first question, first point.

The second, thank you for quoting. The lesson, I learned this lesson from one of the partners at Goldman Sachs. It was the only thing I really learned at Goldman Sachs, but it was a useful lesson, which is yes, if it doesn’t make sense in finance, it doesn’t make sense. And what that means, for those listening, is if someone explains something to you and it doesn’t feel right, get them to explain it to you again. And the reality is, if it doesn’t make sense after the second explanation, there’s one of two possibilities. One is the person themselves doesn’t know what they’re talking about. And Rob and Bill, we know that this is all too often the case in finance, which is how we end up with speculative bubbles, and excess, and big mistakes. Because people are going along with the crowd.

And of course the second possibility, they can’t explain it because they’re not telling you everything. And that leads to your third question. If they’re not telling you everything, and they’re guilty or culpable, willful negligence, do they pay the price? And did enough people, as well as institutions, but people in power pay the price after the financial crisis? And I think I would agree with your conclusion, your premise of your question, which is the answer is no. That the rules, the regulation, the criminal rules were not in a position so that that would be the case. And one of the things that was done in the United Kingdom after the financial crisis was to tighten those rules, and make it much clearer where there was criminality, where there was market abuse, and the consequences that would come from that.

But I think even more immediately, or more immediate and impactful, because it also starts to affect values, the way people behave, two things were put in place, and I’ll finish with this. One is that for the senior-most managers of financial institutions, all financial institutions in the UK, their bonuses can be clawed back up to a decade after they’re paid. So even after they’re paid, it’s not just a question of them vesting and becoming eligible, and they’re pulled back from the individual if evidence of criminality or real abuse has been found.

The second thing is to make it much clearer what their responsibilities are as managers. Now, it’s not necessarily realistic that you know everything that tens of thousands of people who might work for you are doing. But it is realistic that those people are trained, that they’re given the tools, that they are monitored in a way to ensure that they are acting, or best as possible, that they’re informed and they know what they’re supposed to do, how they’re supposed to behave consistent. And if it’s found that you have not done that, then that’s on your head, as well as the head of the individual who did the wrong.

So I’m going to accept your question reluctantly, with remorse maybe is the better way to put it, because I think the premise is right. There has been tightening, but we’ll only really know when we find out, and I’ll finish on this. Next time we find out that something didn’t make sense, not because the person hadn’t done their homework, because they were actively crating a situation, miss-selling, abusing the system, and the individuals underneath.

William Janeway:

Agreed very much on. I think that … Well, I can’t resist citing one of the books, a book with arguably the best title of all of the books, the enormous library that has been published since Lehman Brothers went bankrupt. It’s a book by a higher journalist named Jesse Eisinger. The title of the book is The Chickenshit Club. And he draws on the moment when Comey, notorious from the early days of the Trump administration. Comey became the US Attorney for the Southern District of New York, which is what oversees Wall Street. And he called together all the many, many, the scores of lawyers in the Southern District US Attorney’s office, and said, “Every one of you who has never lost a case raise your hand.”

And virtually all the hands went up. And he said, “Congratulations. You’re all members of the chickenshit club. You’re scared to bring a case that you might lose.” And then the book goes on to detail with full documentation how the … You might say the really almost overkill, but powerful response, at the end of the great tech bubble, in 2000, 2001. It was found that two of the iconic companies of the mobilization of advanced technology to transform the economy, Enron in the energy trading world, and WorldCom, a leader in laying down the pipes through which the internet flows, that those two companies had been fraudulent enterprises.

And in each case, the CEO went to jail with terms … Bernie Ebbers of WorldCom is still in jail. His term was 25 years. Now, that may be excessive, but if you want to address issues of moral hazard, that’s a pretty definitive way to do it. But he went on to … The book goes on to demonstrate how in response to that, and in response to what was arguably the most powerful countervailing assault. And remember, this is in what you might think of as the peak neoliberal moment. But the Justice Department went after the accounting firm of Arthur Andersen because Arthur Andersen had been warned again, and again, and again over letting its clients get away with all those things they didn’t disclose to their clients, to their stockholders, to the regulators.

And Arthur Andersen was confronted with a criminal indictment, which closed the firm. And then the response back was we can’t ever do that again. We now only have four global accounting firms. If we go after Ernst & Young, or any of the firms on a Greensill, or a Wirecard scandal, we’ll be down to three. But that that really backed off the regulators at the same time as the major law firms began to recruit out of the US Attorney’s Office, and develop white collar criminal defense practices at a scale far beyond what they ever had before.

It may sound like a distraction, a kind of set of anecdotes that aren’t terrible relevant. But I think there’s a very strong case to be made here that values are not self-reinforcing. That values are embedded in institutional sanctions. The great historian of the City of London, David Kynaston, whose four volumes, from 1815 to big bang 1986, cover the intimate detail, the culture of the City of London, and how through the first 100 years that he’s writing about, the institutional sanction was to a member of the stock exchange who lied, cheated, or stole, was just crushing.

At that point, yes, the city was a club, and you were subject to the sanctions of the club. The state, almost never involved. But if we’re talking about the return of the state, it does seem to me that these issues of the enforcement of values are absolutely critical. But of course, it also goes the other way. And this is where maybe I’ll turn it over to you, Mark. It goes the other way of how those in the market can effectively take control of the instruments of sanction, as we may have seen in the last four years in the United States.

Mark Carney:

Okay, again, there’s a lot there, Bill. And thank you for that. So the first thing I’d say is let’s think about institutions in the sense that Douglas North, the Nobel laureate, thinks of institutions. So there’s the formal institutions, but there’s also institutions in terms of the customs, ethics, norms of a society. And to keep with my Glaswegian theme, my Glasgow theme, of course that is what moral sentiments are. It’s esteem that we hold for each other. What values do we esteem as a society and how is that reinforcing? And so this is the … To mix terms, but this is the soft form of institutions, as opposed to the hard rules that are wired into a stock exchange, a firm, a set of regulations around compensation and sanctions, and other elements that are there.

And of course what you’re describing in the club, so to speak, or this way of doing things, is both elements. You have the formal institutional strictures, but you also have expectations of how one behaves as a market participant, how one behaves as a financier. And I want to build on that on something we have tried to do when I was governor, with the other regulators in the UK, was to reinforce that soft element, if you will. So you need the hard, you need the soft, and the state plays a role in both. But of course, society is filling in on the soft.

Which what we did was we looked to the market to come up with rules, standards, in the fixed income markets, so think, you know this, but for those who fortunate for them, they don’t spend all their time thinking about finance, what I mean is the bond market, the derivatives markets, the series of very professional markets, but that can be subject to quite serious abuse, and then have enormous consequences, such as with the financial crisis. Much of it did come out of these fixed income markets, derivative markets. These markets are changing all the time. New products are coming up all the time, new ways of doing business.

But of course, there’s certain principles, and certain frauds, principles that should be constant, and certain types of fraud that stretch back over the centuries that repeat over and over again. And I’ll commend, there’s something called the FICC Market Standard Board, F-I-C-C Market Standard Board, which has a history of financial fraud, going back 250 years, which documents these types of things. Anyways, the point is we had these market participants to come up with the types of rules, and for those who are market participants, I’ll give an example, which is do you provide a, “Last look,” on a swap?

So how do you give your client a last look before you execute the price? How do you to that fairly? Okay, sounds esoteric. It’s important. You come up with these rules, and what we did as regulators is we tied behavior consistent with those rules to what I just talking about a moment ago in terms of the responsibility of senior managers and their compensation. So if they violate against these rules created by the market, then it undercuts it.

But we tried to do one other thing, which time will tell whether it gets embedded. In I’m sure it’ll be trial and error, is we’ve tried to instill a principle in market participants about what constitutes a real market. Because I think it’s a little unrealistic, with all due respect to the people who work in the City of London, not all of them will respond to an appeal to Aristotelian virtue, or some high level code of values. But there’s certain things that are consistent with a real market: transparency of information, not manipulating a price, not colluding with others to manipulate a price, good execution, faithful execution, not front-running your clients. All these things are consistent with a good market.

And we try to build up that understanding of what is a real market, a fair market, so that when individuals in these fast-moving, fast-changing markets, always-innovating markets, see something that violates those principles, they know it’s their responsibility to put up their hand, because one thing they’re supposed to do, to believe, is in the market. That’s why they’re working in the financial markets. They believe the market is a force for good. And of course, on this my last point, to be consistent with the spirit of the discussion, and the themes of the discussion over these next few days, it’s of course the market within the context of the state, and the state ultimately in the context of serving what people want. And that’s how we’ve tried to get that balance, and use those institutions, as I said, in the broadest sense of institutions, including very much ethics, norms, customs, values.

William Janeway:

Mark, let me take you from the most professional set of markets to, I think we would have to say, the emergence, the least professional, but with an enormous impact. I take you to the world of Reddit and Robinhood, of GameStop and AMC. I take you to the world of the retail mob, mobilized online, using the game-like vehicle of the Robinhood brokerage to have access to trading at enormous volume in pieces of paper, or tokens that would appear to have no or minimal real economic value, any application of the capital asset pricing model, to AMC, or to GameStop as it was, or to that New Jersey deli that had a $20 billion valuation for awhile.

It’s not … Okay, this is a phenomenon that’s happened, happened for from the South Sea bubble on, from tulip bulbs on. We’ve seen these kinds of waves of amateur speculation. But what should the regulator’s response be? Is it the regulator’s response, at some point, to protect individual players in the game from themselves? This of course gets carried further, much further, in clearly the ongoing debate in the US Securities Exchange Commission, I don’t know what’s going on in London, over whether tokens issued by blockchain-based players in the great post-Bitcoin, or Bitcoin squared world, whether those tokens are securities subject to the full range of regulatory ecosystem that’s developed since 1929. What’s your take on this phenomenon?

Mark Carney:

Well, let me start with the second bit. My take is very simple. These are securities. I start from the initial point of defense of these tokens, which is that they are currencies, they’re money. And they’re not money. Fulfill all the roles of money, again, we’re going to go back to Adam Smith to go through those. But I’ll save time by not. I’ll just refer to those. Means of payment, unit accounted, medium of exchange, and these crypto assets, as we prefer to call them, do not fulfill all of those. Therefore, the distribution of those assets is a securities offering, and it should be subject to the prospectus disclosure requirements, and the know your customer, and the appropriateness regulations in the jurisdiction that’s consistent with that.

And the Securities Exchange Commission in the US has been very, I think, consistent with this, and it’s diligently pursuing that. I think we should be that way everywhere. I further would say, just on the subject, that that whole crypto ecosystem, by which I mean there’s the crypto asset, the Bitcoin, or whatever the tether, the stable coin or other element, it exists because it is part … Pardon me. It exists because it is part of a broader ecosystem which connects to an exchange, a crypto exchange, and moves in and out of the formal financial system. And it’s important that that crypto exchange itself is regulated with the same standards as an exchange. And it’s a loophole at present. And open disclosure, the best exchanges want to be regulated in those standards, but that should be done as well. And that will improve resilience, and fairness, and elements in this market. It will also reduce the scale of trading in the end, because there’s much of it that is undesirable.

On the question, though, of concerted, coordinated, and to some degree, in some extent, market manipulation, through social media, again, this is a loophole that is in the system, hasn’t been recognized, needs to be pulled in, and subject to the same treatment as formal financial markets. I think it’s a case, as is often we see, where you have a fast-moving innovation, in media in this case, that gets around the rules, but the rules eventually catch up. But it needs to catch up quickly.

And that’s not anti-democratization of finance. That’s to go back to something I was saying earlier. That’s the state acting in a way that ensures we have a proper market, not a market that I organize on Reddit so I can pump up the stock, and then I can get out of the stock, and then move out of the way. And maybe just last point I’ll make while I have the floor. And that’s not a market that I organize in crypto because I was one of the founders of the currency. And I’ve got a big stake, and I want to ramp it up, and then dump as much of my initial holding as possible so that others are left realizing that it doesn’t make sense. Because in most cases, when you really listen to what people’s explanation is of these crypto assets, it doesn’t make sense.

William Janeway:

I’m reminded of a gentleman I know many, many years ago who was one of those professional, non-executive, outside directors of the sort of company whose headquarters is in the Cayman Islands. And he used to say meditatively, “Had God not made them sheep, they would not have been born to be shorn.” Speaking of the minority public investors in the companies of which he was a director. That’s also goes a long way back in the history of capitalism.

I guess my final thoughts here, thinking about this relationship between markets and the state, overlapping with the relationship between efficiency and fairness, power of values, takes me back to a transformational experience in my own intellectual growth, that in a sense, echoed and resonated with my study before and after my first time in Cambridge of Keynes’s work. And I think it’s a great reference. The French historian, Fernand Braudel, three volumes on the history, he called Capitalism and Civilization, in which I found myself absolutely astounded that as he was writing about the birth of capitalism in that mercantilist context of international trade in early modern Europe, and how capitalists found their super profit opportunities in the arbitrage available from long distance trade, markets completely independent from each other.

The market for pepper on the island of Java, and the market for pepper in Amsterdam, how this was a kind of illustration of how before coherent states in the absence of sort of the any kind of broadly engaged, any kind of technological base for economic life in the west for sure, though maybe something was stirring in China already by the 16th century. How the capitalists, as he put it, and I’m paraphrasing now, they didn’t grow up out of markets, and they weren’t regulated by the state. They used markets. They used the state in the pursuit of super profits, just as the great trading engines, the long distance traders of the East India Company, both the Dutch and the British versions used both markets and the state in their pursuit of capitalism.

And I find, and this is my, I guess I’ll have to say just about my last point. One of the threats, challenges, risks associated with this phase of our post-neoliberal capitalist environment is the very limited extent to which those who are the engineers of the world in which we’re living, the world that we are challenged to shift from the digitalization of economic life, that’s clearly a done deal, towards the sustainability of economic, social, political life in the context of a planet that’s now burning. How those people at the frontier, and I am speaking about the founders of the great digital giants, and some of their outriders, from Mark Zuckerberg to Elon Musk. How ignorant of history they are. Often, how many times I found in conversation with icons of Silicon Valley a sense that since we know that we’re inventing a new world, why should we waste any time learning about how this world that we’re disrupting came to be?

Until occasionally, say with the deployment of Uber in different cities, and Airbnb in different cities, the world that exists turns around and bites them in the ass, and they find out that they’ve got to have a crash course in why transportation services have been regulated wherever they have been deployed at any sort of scale, in every city, for 500 years. Or why, in fact, it’s not rent-seeking by hotel owners that there are regulations that require that if you’re renting out rooms for money, you better have a fire extinguisher available. So that is a kind of appeal to this audience of ours to take seriously why you, Mark Carney, and your book, began with this history of value theory, from the mercantilist, through the physiocrats, to the classicals, to the marginalists. And how important reading that history is, to be able to engage with the world as it is now evolving at such a rapid pace.

Mark Carney:


William Janeway:

That’s my appeal.

Mark Carney:

Fantastic question. Rob, if I can just make a few comments on that. The first is let’s go to that age where the companies used the markets, and you gave this lovely example of the market for pepper, and the arbitrage of the pepper, and of course, the monopoly that would have been given to the Dutch East India Company in that example. And of course, this is the age of mercantilism, which we would, in many respects, look back and just on an objective basis would say, “Oh, mercantilism is a fancy word for crony capitalism.” Because it’s certain individuals, institutions underneath them, but individuals who have captured a monopoly of a market.

So they become defacto monopolists, reinforced by the state, reinforced by the military might of the state, and the foreign policy of the state, and intertwined with the state for personal gain, but a belief of the state, at least those at the top of the state, that as long as the trade was in surplus, wealth was being built. And of course, that’s the essence of it. And that very important point is that is not pro market. That is not a pro market world. That’s a pro business world, or a pro monopolist world. And that’s something we always have to remember when we’re judging as citizens, or as policymakers, a policy. Am I promoting the market? Am I promoting competition? Am I promoting service for citizens? Am I promoting, as you said the outset, innovation, and waste that comes with innovation, quote/unquote waste.

Of course, it’s waste to a purpose, trying to come up with new ideas. This is the world of venture capital, one of the worlds that you have been so successful in, to everyone’s benefit. This is what we want to promote, as opposed to reinforcing the positions of the dominant players. And of course, this is one of the issues we have with the rise of the dominant players in technology, that success bringing to reinforcement of creation of these monopoly’s positions, and is that in the interest of all citizens.

So that’s the first two points that I wanted to make. The third is that, and the book goes into this, not just on the history of value theory, but the history of industrial revolutions, or technological revolutions better said. And one of the lessons of those, and you know this well, Rob knows this well, is that what happens with those revolutions is there is a huge displacement of wealth. There’s creation of wealth, but a huge displacement of wealth, and increase in inequality, for a long period of time. Certain skills become much more valuable, and those with capital realize out-sized returns relative to general labor.

And this tends to exist for generations. There’s this lovely phrase, not so lovely to live through, but it gets the essence of it. Engels’ pause, which is the lag which is measured in decades before average wages start to match productivity gains that are being made in the economy. And the argument, and the reason, and the importance of the discussion we’re having in Trento, virtually in Trento, is that this is what we’re living through. We’re at the start with this digital revolution, with this sustainable revolution. And what the lesson of the previous three big technological revolutions is is that what society eventually does is to change all institutions, who we educate and how much we educate them.

Our labor market institutions, the way our financial system is organized, all of those elements change. And we have a choice. We can wait several decades. Actually, I’m not sure the three of us can wait several decades. We won’t be around in several decades. But as society, we shouldn’t wait. And why don’t we, and I put it this way, why don’t we digital by design, not digital by default, let’s not let the technology lead us, but let’s lead the technology in service of all. And I’ll finish with this, because you added it to the question which is, of course with the sustainable revolution, what we need to do to achieve what society wants to be very deliberate around that to ensure that the steps we take are building out a just transition, that they’re magnifying the job impacts that are necessary.

And there’s much experience in this, and I’m finish, because we’re virtually in Italy, my heart is very much in Italy. But I want to finish with this, with commending what the Italian government is doing, what Prime Minister Draghi is doing with … Intends to do at least with the European recovery funds, and a recovery package, a 200 billion not recovery package really, a recovery and growth package that leads to greater sustainability, but very much in a way that leads to huge job gains and opportunity for all. And it’s that type of forward thinking, and action-oriented forward thinking which is pro market, is the state being pro market for the service of the people, and the service of the people in both ways.

William Janeway:

And that’s why the debate right now in the United States over what constitutes infrastructure? Is infrastructure just roads and bridges? Or is it the infrastructure that supports human beings in their education at the early stages of their life, renewed in their later stages of life, and then the care at the end. Is investment in that infrastructure just as important, and perhaps even more important today, than the physical infrastructure renewal that we obviously need around the world. Rob, thank you so much.

Rob Johnson:

Well, I want to commend you both. And I want to say that Mark, with your book, and Bill, with your continuous explanation, I still feel we’re at the beginning of opening a can of worms. What I would say is that capitalism has always derived its moral legitimacy from being embedded in something like a responsive, democratic government. The concerns about the social, the commodification of social design and enforcement are very dangerous right now. And the idea that Mark has brought up about where values come from, and where desperate people, no longer seeking education, but seeking vocational skills, is a response to a market that sometimes is driven by despair.

Our advertising, our media organizations have a hard time being watch dogs when they’re beholden to concentrated wealth and corporation. And our government in itself, when it’s so dependent upon fundraising, we’ve had courts tolerate super PACs. We let rich donors appoint judges. We are on an unsustainable trajectory. I will refer to the first INET conference, the closing speech by the Italian, Tommaso Padoa-Schioppa. He referred to, in the final paragraph of his Per Jacobsson lecture, which was an outgrowth of his INET speech about we need environmental sustainability, he called resource sustainability, financial sustainability, which was in question then, and social sustainability. He talked about the battle between Croesus and the Emperor, and he sat down and he said, “Rob, all of this will flow into social sustainability as you build INET.”

I very much am grateful for what you guys have brought to the surface, and it’s my practice, I’m always listening and inspired by some musical lyric. And this time, ironically, I will invoke a band called The Police. “Mephistopheles is not your name. I know what you’re up to just the same. I will listen hard to your tuition. You will see it come to its fruition. And I’ll be wrapped around your finger. Devil in the deep blue sea behind me, vanish in the area you’ll never find me. I will turn your face to alabaster. When you’ll find your servant is your master.”

The market is a device. It’s a tool. It is not a deity. Technology is not God. It’s not deliverance. These are instruments for human beings. The two of you, with all of your wisdom and success, have brought these things to the table. And I celebrate your courage and your insight. And I do worry about, as I mentioned to you in our preparation, Mark Wolfe’s forthcoming book underscores the dangers of authoritarian despondency, which we got a taste of in the United States over the last few years. But you are on the healing path. And I look forward to the next time we can get together.

And I want to say one closing thing about Trento. Adair Turner came and he spoke at the opera house as a keynote one year, as a senior fellow for INET. And as he walked off the stage, he looked at me and he said, “The dismal science, economics festival. I never thought those words fit together.” They did then, and they do now. Thank you to the Trento festival, Tito Boeri, and particularly thank you to you both. I hope to [crosstalk 01:05:06]

Mark Carney:

Thank you very much, Rob. Thank you, Bill. Peace. Bye. Bye.

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