The coalition’s lack of purpose has ruined our freedom to fail or thrive

A SOCIETY must provide its people with certain basics, including security, food and shelter. A civilised society should also provide freedom. There is no precise definition of the term, but it is basically a status that allows people to do what they want, provided they do not interfere with the freedom of others. A market economy, with restraints to prevent abuse, is a necessary basis for this to work.

Freedom is not synonymous with an easy life, however. It includes the freedom to fail, as well as to succeed. It incorporates the necessity of making choices and living with the consequences. It is not necessarily fair. Some individuals are born with greater ability. And while freedom may be consistent with equality of opportunity, it is not synonymous with equality itself.

The possibility of failure is important. If we compensate those who deal with businesses that fail because they are badly run, others will bear the cost of failure. Worryingly, governments are now progressively curtailing freedom by a process of salami slicing. They give way to pressure groups by imposing regulations, with the incidental effect of restricting the freedom of others.

Any organisation seeking to avoid mistakes like this must have a sense of purpose. In other words, if it is to succeed, it needs an ideology. Freedom of the individual should be that ideology. You can see the need for purpose in the contrast between the Olympics, where the organisers had to take thousands of decisions but with a single clear goal, and the present coalition, which has no visible ideology and has made numerous blunders and U-turns. Its appetite for inquiries – into banking, Heathrow and the media – is just one sign of this ideological vacuum.

This is also reflected in current banking regulation. A clear identification of ideology would make things simpler. There is an overriding need to ensure the health of the financial sector as a provider of vital services, as an earner of foreign exchange, and as an employer. But this has to be reconciled with the need to keep banks as safe as possible to protect the taxpayer.

There is an inconsistency automatically built into this – banking is never without risks and badly-run banks can fail. For this reason, some regulation to limit excessively risky conduct is always needed. But the search for safety can be carried too far. Too many restrictions, and demands for much greater capital, are liable to damage efficiency. We have this problem now. Without an overriding principle – the promotion of the health of the economy and the freedom of our citizens – it is a difficult inconsistency to resolve. To do so requires judgement, and this judgement should be based on the need to preserve as much freedom as possible.

Unfortunately, the approach to bank regulation taken since the financial crisis has been directed entirely to restriction. There has been no attempt to incentivise prudence. The damage done to the flow of credit has been great, and it has also damaged London as a financial centre.

The current approach stems from the idea that depositors must not lose their money, and the view that some banks are too big to fail. However, if depositors do not worry about which banks are safe, they will be tempted by better returns from riskier banks. The incentive to run a bank prudently falls. An increase in risky behaviour follows and brings with it the need for restrictive regulation. But the large cost of all of this, and the enormous cost of bank failures, falls on the innocent public.

If those in authority had had the foresight to stick with the principle of preserving as much freedom as possible, to allow buyer beware to prevail, and to let badly managed banks fail, a great deal of waste would have been avoided and rewards would have gone in the right direction. Preserving freedom would have provided the guideposts.

Clearly some regulations are necessary. But the test should be to restrict the ambit of regulation to the minimum needed to prevent abuse. The idea that a purely pragmatic response can work is misguided. The practice of responding to problems with reference to populist opinion will never lead to good government. Indeed, it is frequently the cause of misguided regulation.

Monopolies and cartels must of course be controlled. And when two unequal parties contract with each other, there have to be rules to safeguard the weaker party. But the right approach should be to ensure that regulation does what is necessary but no more than that.

Sir Martin Jacomb is chairman of Share, former chairman of Prudential, former deputy chairman of Barclays, and author of Some Reflections on Freedom for the Centre for Policy Studies. www.cps.org.uk