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Thursday, December 04, 2014

'Maths and Morals, Economics and Greed'

Tim Johnson, "a mathematician who works on financial problems":

Maths and morals, economics and greed: ... Mathematics has always been part of finance but with the re-introduction of derivatives markets in the 1970s and their growth in the nineties, ‘quants’, trained in engineering, physics and mathematics, came to dominate the ‘casino banking’ that is widely criticised. My concern is that the quants are not amenable to questions of morality, and so the problems of finance are going to be difficult to resolve without finding the right way of communicating with the bankers who see themselves as scientists. ...

The Chartered Institute of Bankers are working on Professional Standards but are struggling to engage with the quants, who operate the casino branch of banking, because the quants believe science is value neutral; it delivers truths beyond morality. ...
This brings to mind Alasdair MacIntyre's ‘disquieting suggestion’ that modern society has completely lost the ability to make moral judgements and I see it as the brick wall that most attempts to reform banking will crash into.

I believe the brick wall can be dismantled relatively easily: by recognising that many of the practices of contemporary finance associated with ‘casino banking’ were widespread before the eighteenth century. Unlike today, they were undertaken in the context not of consequentialist or deontological ethics, but of virtue ethics that focuses on good practice. It might seem surprising that I suggest this is a relatively easy approach. What make it easy is that rather than criticising modern finance on the basis that it is degraded from a mythic golden age of finance, the starting point is the doux-commerce thesis that finance is civilising. Rather than characterising bankers as amoral spivs, they are presented as paragons of rational morality and the approach gives the bankers the opportunity to carry on their activities while, critically, reconstructing their own ethos.  I developed this representation in my paper Reciprocity as a Foundation of Financial Economics.

The hurdle this approach needs to cross is that of the dominant ideologies of markets. The market ideology holds that the market mechanism will deliver optimal solutions to society, while anti-market ideology argues that profits are degrading and markets are destructive. The hurdle can be crossed by ignoring both these ideologies and analysing the role that money and markets have played in forming both Western science and democracy. We need to represent markets as centres of communication and deliberation, not as competitive arenas driven by profit maximisation. The clue is in the word forum, which defined both the market place and the political centre of a Roman city.

As I noted after a speech by William Dudley on the same topic, I am not so sure this will work, but it's interesting how much of the recent commentary on the problems in financial markets are focused on changing the ethics of the financial industry. I'd rather focus on regulation and enforcement -- real regulation and real enforcement, not what we had before the financial crisis -- and more importantly putting circuit breakers in place that will limit the damage should problems reoccur, as they surely will at some point now matter how much we regulate or what ethical structure is in place (e.g. limits on leverage and interconnectedness).

    Posted by on Thursday, December 4, 2014 at 09:44 AM in Economics, Financial System, Regulation | Permalink  Comments (67)


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