Book club: Masters of Nothing

Lucy Mair reads a work that looks at the financial crisis from the perspective of behavioural economics

Masters of Nothing: How The Crash Will Happen Again Unless We Understand Human Nature

Matthew Hancock and Nadhim Zahawi

Biteback Publishing, 2011

If one thing has boomed since the onset of the financial crisis, it's books written about the subject. Bookshops are stacked full of titles that claim to tell the full story of what happened and why, but Masters of Nothing by Matthew Hancock and Nadhim Zahawi is one that deserves a place on your shelf. The authors, both Tory MPs, search for the causes of recession neither in raw numbers nor elaborate spreadsheets, but in the kinds of behaviour found as often on the school playground as on the trading floor. By focusing on behavioural economics, they argue that a failure to understand human nature, and the irrational and reckless culture fostered in the City, are responsible for the current economic turmoil.

The first three chapters of the book provide an engaging chronology of the financial crisis from the first signs of its coming in 2004. The pages are filled with creative examples and colourful parallels to explain the inner workings of the economy, from Shakespeare's King Lear, to Channel 4's Deal or No Deal. To argue their case, the authors use a combination of established psychological theory, original polls of British opinion (Zahawi is a co-founder of YouGov), and simple behavioural metaphors.

The most perplexing question about the recession is not how it happened, for history reveals both the cyclical nature of capitalism and the dangers of economic bubbles, but why nobody saw it coming. With an example we can all relate to, Hancock and Zahawi provide an "aha" moment that is characteristic of the book: "If a friend is infatuated with someone, the awkward conversation where you try to tell them their beloved is absolutely wrong for them is inevitably ineffective." Likewise in the City, starry-eyed bankers clung to their beloved assumptions about perpetual boom despite evidence to the contrary, and believed that a fairytale ending was inevitable.

The structure of the early chapters begins to unravel towards the middle and the second half of the book reads more like a collection of political essays, yet each is brilliant in its own right. As the book has been written by two members of the present coalition government, its criticisms of the previous Labour government's handling of the crisis don't come as a surprise. But Gordon Brown gets off lightly, and the criticisms of his economic worldview and restructuring of the regulatory responsibilities of the Bank of England and the Financial Services Authority are well considered and objectively argued. The authors' wrath is reserved for the poster boy of the financial crisis, former CEO of RBS, Sir Fred Goodwin, who is hanged in effigy by Hancock and Zahawi as a representation of the failings of the City and bankers' lack of accountability. They also paint a damning picture of sexism in the City, and make a compelling case in favour of female quotas to improve performance on the trading floor and to combat the phenomenon of economic bubbles, which they see as testosterone-fuelled. The authors attack bankers' bonus packages and, as politicians, predictably ally themselves with the disgruntled taxpayer and against irresponsible and immoral financiers.

The book concludes with some thoughtful proposals for reform, from the changes to banking regulation already underway at Westminster, to more creative solutions such as co-CEOs and annual salary and bonus audits broken down by gender. Overall, the book's message is somewhat demoralising: the way in which the best and brightest in the City behave is not governed by logic or reason, but is like "the flocking of wild animals". However natural instinct, conformity to social norms, and reaction to fear are what make us human, and are therefore inevitably the very principles that govern the economy.