Economics 101 has a lot to answer for. The simplistic view of human nature taken as axiomatic by economists has been adopted by regulators and policymakers with consequences ranging from bad to awful.
Among the stupidest assumptions of Economics 101 is that people make their decisions independently. Economists know this is not the case but the assumption is needed to make their models work. That is OK in the ivory towers but in the real world making this assumption leads to big policy errors.
In reality, people prefer to make the same decisions other people are making. We are lazy and assume they have done the work in figuring out whether it really is a good decision so we do not have to. This worked in the stone age – and in some contexts it still does, as you can see by the way people find the most efficient route across a partly muddy field.
But for this wisdom of crowds to work, it has to quickly narrow down options to a few whose differences are obvious. And that is not what financial markets deliver when they are left to a freefor-all and regulators assume consumers will benefit from having masses of complicated products to choose between.
Behavioural finance says people need to be nudged towards good decisions and one of the best ways to do this is to show them lots of other people like them are making the same decisions.
The Victorians, under the guidance of the greatest good of the greatest number utilitarian philosophy, encouraged people to make collective decisions. They invented self-help based on groups of people helping each other. Burial societies, building societies, friendly societies and housing trusts all embodied these principles. These mutual organisations helped people make good, life-enhancing decisions by making them simple, easy and contagious.
At the start of my working life in the 1970s there were still many building and friendly societies that embodied these values. Today there are only a handful.
Regulation has been harsh to them. When they are told they must have more capital but that can come only from profits or shareholders, mutuals are heavily disadvantaged relative to PLCs.
One in five Germans has an account with a local credit union and can borrow small sums at a fraction of the rates charged by UK banks or, worse still, payday loans or other sharkish moneylenders. In contrast, UK credit unions are hamstrung by laws restricting their activities and by regulation that treats them like commercial banks.
Revisions of banking regulation aimed at improving competition must knock the shackles off credit unions and other mutuals as well as tasering commercial banks.
We have been made resistant to the charms of mutuality by four decades of individualistic brainwashing. Social psychology (and a dispassionate look at our own experience) proves we rarely make genuinely independent decisions, yet advertising and marketing tries to convince us we are only authentic when we do. We overstate the cost of the personal effort that any form of mutuality requires but discount all the benefits of collective decision-making.
A form of mutuality that works in the 21st century will have to be different from its 19th century antecedents. There are smart people working on this but they will need a helping hand from policymakers and regulators.
Chris Gilchrist is director of Churchill Investments and editor of The IRS Report