Not long ago it was deeply unfashionable to make moral judgements about the way in which people and companies made their money. Lord Mandelson summed this attitude up in 1998 when he said that Labour was “intensely relaxed with people getting filthy rich as long as they paid their taxes”.

Ten years later Fred Goodwin left the Royal Bank of Scotland with a pension pot worth £8.4m. Given that he’d just posted the biggest loss in UK corporate history, the deal brought a new meaning to the phrase “got off scot-free”. The public were outraged, and rightly so.

Many on the left – and some on the right – argue that such excesses are inevitable in an economic system that is fundamentally amoral. As evidence for the prosecution they often cite the title of Milton Friedman’s highly influential essay The Social Responsibility of Business is to Increase its Profits.

But Friedman, that high priest of deregulated capitalism, made a vital caveat. What he actually wrote was that it is the social responsibility of business to “make as much money as possible, while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom”.

‘Anti-business mood’

One of society’s most basic rules is the principle of fairness. Not fairness as defined by the left in terms of equality of income, but rather fairness in the sense of just rewards: that very British idea that what you get out ought to be commensurate with what you put in. Capitalism, properly laid out, makes this principle real. It ensures that those who prosper are those who work hard and succeed in making other people’s lives – their customers’ lives – better. In this sense the market is a deeply moral institution.

But when the vital link between effort and reward is seen to be broken – whether it’s through LIBOR fiddling or lavish severance packages that reward failure – it’s harder for people like me to defend free markets against those who wish to undermine them. If we want to head off the kind of anti-business mood that would see the engine of our prosperity dismantled, it’s vital that the UK corporate sector gets to grips with its flaws. Only then can supporters of the free market keep winning the argument.

Take the issue of executive pay. The public are prepared to endorse high pay, provided they can see the link to high performance. At his death, Steve Jobs was reportedly worth $8bn, but we’ve yet to see the Occupy movement pitch camp in one of his Apple shops, in spite of the attractions of free Wi-Fi. No one resented Jobs’ success because no one could doubt his entrepreneurial talent. Yet after the crash rewards for failure were all too commonplace.

Moral framework

The problem goes beyond individuals. If executive pay deals need to make closer reference to company performance, the banks need to account for their profits with reference to the whole economy. Banks are as much a part of the economic plumbing as energy and water: we can’t function without them. So why does the banking industry always justify its existence in terms of the tax it contributes and the people it employs, rather than the usefulness of the service it provides? This is the wrong attitude and it must change.

Leftwingers believe that society’s values must be stamped on markets through higher taxes and more regulation, but the reverse is true. Embedding markets in a moral framework requires not less capitalism but more. For example, the owners of businesses – shareholders – need to start exercising their property rights by voting down executive pay deals that reward failure. And it’s already starting to happen. The UK’s large institutional shareholders have woken up to the need for a system of fairer rewards. In the financial sector we need to hear less about the tax take and more about the core purpose of banking: providing credit to businesses and households.

Those who support capitalism are best placed to understand how to make it work better. It’s not just good economics but good ethics.

Factfile

Name Matthew John David Hancock MP
Party Conservative
Seat West Suffolk
First elected 2010
Political compass Centre-right
Current majority 13,050
Parliamentary roles Under-secretary for business (2012-)

Voting record

Increasing VAT rate Strongly for
Student tuition fees Strongly for
Proportional representation Strongly against