LAST WEEK we launched Ray Perman’s Hubris on the rise and fall of HBOS. I will leave it to others to review but it made me pause and think about how business works now in the UK and Scotland.

One of the curiosities of HBOS (and indeed banking) is that just as lending spiralled out of control and the fundamental rules that had governed this world for years were being torn up, the Bank was placing at the end of its Annual Report a statement of risk management strategies, a statement of such length, with so many relevant committees and controls that one would doubt that even the Sultan of Brunei might get a £1000 overdraft. Yet these boasts about procedures went hand in hand with a culture that was careering wildly towards collapse. Perhaps in the modern world our instinct to regulate is not in fact the solution to a problem but its creator.

A rule book is merely a prosthetic appliance where once there was a human being. It represents the removal of responsibility from the individual and its replacement by a system into which the individual can relax in the knowledge that he is protected by the rules, provided he follows them. There is nothing the Scottish public sector loves more than rules of procedure, of procurement, of process and with their removal of individual responsibility there is little more corrupting or debilitating of initiative or original thought.

The second core point of a rule book is that it is derived from past events. So, protected as one believes, one ceases to predict the future. If every other business around you is doing the same then like a lemming one marches towards a cliff in the comfort of all jumping together.

And the third core aspect of a rule book is that it is progressively reinterpreted as it feeds down a system. Rules which the top might wish to see used as guidelines with imagination and flexibility are, by a process of second guessing down the chain, turned into a leaden and utterly defensive culture of resistance to change. When the entire banking culture had changed to one of suicidal risk then a poisonous cocktail of a system incapable of challenge reinforced an out of control culture of sales at all costs.

As the HBOS revolution happened another key element changed. Those we dealt with in the bank, those who operated with us because they knew us and trusted their instinct, were replaced with a revolving door of committees and reporting. On the way up there was no trouble getting money – they had their targets to meet and were shovelling it out of the door. On their way down any proposition – however reasonable – was turned down in their urge to haul in lending. Indeed it was precisely those businesses with seasonal overdrafts and with substantial cash flows, the engines of the economy, that were targeted. As one ‘Relationship Manager’ confessed ‘I am just a messenger’.

My first inkling that there was something going wrong with the Bank of Scotland was the Hornby makeoever of the old banking halls. Out went the traditional feel and the old counters, in came a set from the Starship Enterprise, a style which now looks a curiously dated throwback to ‘The Bonfire of the Vanities’. In its contempt for tradition, in its fake humanising of the old system not only did it remove all respect and boundaries but it was actually alienating to its customers. Lloyds HBOS have made little change. Staff have still to wander round like grim automata wearing badges scored with ‘excellent’ or ‘good’.

As the business pursued meteoric and impossible growth targets so the achievement of these targets became impossible with natural organic growth – simply providing a better service and being content with a steadily increasing return through stable micro improvements or tested innovation. Essentially the business had to grow through cannibalising market share. This it did through taking on higher and higher risk propositions at lower and lower returns with less and less vetting. Bank and customer became complicit in this process. For large businesses cannibalism is a far easier proposition than the high investment in generating new market. Their size and scale means they can do so by crude price fixing and dominance of their supplier base, which itself has its own return on capital reduced to virtually nothing, thus crippling its own ability to reinvest.

But one of the most frightening things about the banking collapse is that every one of the above processes has taken place in the book trade, and across our entire world of business. A brash new sales and acquisition driven culture destroyed the historic regional book chains and gobbled up small imprints in the belief that takeover was easier than growth. An endless expansion of space, a belief that price was all, has resulted, as in banking, in the complete destruction of a major UK industry. Aside from Penguin, the major UK trade publishers are now owned entirely by French, German or American titans. The UK book trade is a queasy hegemony of a Russian oligarch (Waterstones), an American behemoth (Amazon), WH Smiths and the supermarket business. Competition has largely been ripped out of it and conglomerates simply remove innovative smaller businesses by buying them. The ‘solution’ to the banking crisis has of course been the reinforcement of monopoly and its cast iron guarantee with taxpayer support.

Ever more state regulation, ever more legislated complexity favours the big businesses and penalises the innovative and dynamic smaller businesses. The state prefers fewer actors in its cast – it's easier to manage and treat – and soon these friendly players become too big to fail, located as they invariably are in important constituencies, literally or metaphorically.

Having cleared the landscape the next area to reinforce profit is to get control of government contracts and regulation of business. Step forward state procurement, Amazon, Capita, News International, supermarkets and the whole queasy mob of monopolists who claim they are for competition while rigging it to their own advantage. Capitalism, true capitalism in the sense of localism, real competition and real choice is the only way out of this morass. And capitalism with the state as its iron defender and not as a complicit and corrupt partner in its destruction.

The free market? Perhaps we ought to try it.

Hugh Andrew is Managing Director of Birlinn publishing