Reconnect?

A London (re-)connection

When it became clear last autumn that the Occupy movement were to inhabit a permanent campsite at the the steps of St Paul’s Cathedral, the Bishop of London called Ken Costa. Under the auspices of the St Paul's Institute the Bishop asked Costa, a former senior investment banker in the City of London, to explore how we could “reconnect the financial with the ethical”. Although the choice of a City insider may not have inspired the confidence of those tent-dwellers anxious for some radical out-of-the-box thinking, the subsequent engagement has been constructive and as Chair of the “London Connection” Costa has been a regular and thoughtful participant in the media debate.  What struck me, however, about Costa’s mission was not whether there is a place for ethics in financial markets (there is) but, rather, what he meant by “reconnect”?  It suggests a re-discovery of an earlier era in which financial markets operated within in a different moral framework than they do today. Certainly, to many observers it would appear financial markets don’t operate within any recognisable moral framework at all – they are amoral, if not immoral. But a cynic may claim ‘twas ever thus.

To Costa it wasn’t. He has reminded us that the godfather of free market capitalism, Adam Smith, was first a moral philosopher who wrote The Theory of Moral Sentiments before he popularised the market’s invisible hand and the pursuit of self-interest in The Wealth of Nations.  For today’s staunchest defenders of neo-liberal ideology, Smith’s philosophy remains essentially valid, even as the Occupy movement points to the self-evident failures of egoist ethics in an unsustainable world mired by recession, social unrest, injustice, and impending ecological disaster. They would argue that recent financial history alone suggests that the unbridled pursuit of self-interest is a by-word for immorality. The old tussle between liberty and justice is being fought out in a new arena.

Simple economics

It is doubtful that many high-powered traders and bankers in Wall Street and the City have actually read Adam Smith. They have however inherited a tradition of free-market thinking and a vested interest in its claims. Most will have been taught to believe in an economic creed which places unquestionable faith in markets to deliver wealth and progress if unmolested by the State. They, like many others, are given to believe in strict “laws” of economics which are as established and reliable as the laws of physics. In the words of Oliver Williamson, “in the beginning, there were markets”. It is as if markets evolve naturally according to the same laws of nature from which life itself flourishes. This is the neoliberal orthodoxy deeply embedded in the culture of the financial markets. Markets needn't fail. But governments always do.

But markets do not emerge like this at all. Neither is human society much like homo economicus portrayed in Economics 101. Most of us that have had some education in economics need to be reminded that introductory courses in the principles of economics describe a world in abstract, subject to simplifying assumptions almost to the point of absurdity (anyone know the “assume a tin-opener” joke about economists?). We are taught competitive markets work well if all the assumptions of perfect competition hold true. But they never do. A properly functioning market is a fictional benchmark against to judge the operation of real markets. 

My first economics text book described a market as “a place where buyers and sellers meet”. That’s it. It didn’t have a lot to say about what happens when they do. It had little to say about the relationships between “economic agents”; nothing of the role of trust, of shared values or of mutual obligation. Economics is a social science that really wants to be a natural science.  As a science, there is no place for value judgements, only empirically reasoned inductive method. Economics as a profession became separated at birth from its philosophical forebears in the white industrial heat of 17^thcentury enlightenment thinking that one cannot derive an “ought” from an “is”. Thus, Hume’s “naturalistic fallacy” paved the way for the separation of reason from morality and justified the value neutrality of science. Economics adopted the language and method of science, developed its own cold utilitarian calculus, and refused to be drawn into questions of right and wrong that it felt belong to the (unscientific) realm of politics. According to Betton and Hench (2002), “when this happens, business is left to ‘create value’, divorced from any real sense of values.”

But economics doesn’t have to be like that. Economics can be re-connected with the ethical. My first brush with development economics as a postgraduate student was a breath of fresh air – it was economics with a beating heart. Development economists do not flee from normative judgements. Theirs is a narrative of justice, freedom, quality of life, voice, empowerment, with a moral imperative. Their discipline goes beyond the traditional stream of neoclassical economics and its narrow concerns with allocative efficiency; it necessarily deals with the economic, social, political and institutional mechanisms of socio-economic change. Ethical or normative value premises are central features of what Gandhi called "the realisation of human potential". Similarly, the branch of new institutional economics (NIE) inhabited by Nobel Prize winners Elinor Ostrom and Oliver Williamson starts with a rejection of the simplifying assumptions of the neo-classical tradition. Here markets are seen as institutions, subject to formal and informal rules and duties upheld by the State and impossible without it. Without enforceable property rights there can be no markets. But, equally, alternative communal forms of ownership are possible and with them new opportunities for collective responsibility and action. It turns out the tragedy of the commons is not inevitable.

Virtuous markets

Free market economics is a tarnished brand. That is not to say that free markets are bad – or good for that matter. They are necessary but not sufficient for a just and stable society. We need to abandon the ideological baggage that now hinders any discussion of “free markets” and understand that markets are no more than social institutions – a place where human beings meet to exchange goods (not bads). This is a feature of human society that pre-dates the Adam Smith and the birth of the economics profession, without which human flourishing is simply not possible.

But even though markets will survive the current crisis in confidence, the legitimacy of our unreformed financial institutions may not be so easily recovered. And neither should they. Part of Ken Costa’s quest to connect the financial with the ethical must be to establish commonly-held values in businesses and institutions that engage in socially valuable commercial exchange. Arguably, a strong sense of shared values has long been chased out of our pluralist society by a version of political liberalism which prizes individual freedom and autonomy above all else. At the same time, western liberal democracies have nurtured a postmodern relativism in ethics which frees us each to follow our own moral impulse on matters of right and wrong. Little surprise then that corporate and voluntary industry codes of practice have done so little to change the culture of the financial markets or the behaviour of its individual participants.

Some say the loss of a conception of the common good that accompanied Enlightenment thinking calls for a reaffirmation of much older neo-Aristotelian-Thomist tradition of virtue (Macintyre). But then, how does one actually encourage the development of virtuous moral character? It isn’t enough to change the rules and impose regulations, as necessary as that may be. You can punish bad behaviour – with reference to clear rules – but you can’t legislate for moral virtue. You can, however, dismantle the perverse incentive structures in the financial sector that rewards a disposition towards vicious rather than virtuous behaviour, as Aristotle might say. Hence an examination of the link between bankers pay and risk-taking is a necessary first step.

But to go further than that we need to bring about a reformation in the culture of financial institutions, of the values they espouse as well as the behaviours they applaud. This is a huge challenge of leadership which is only possible if policy-makers, regulators, and those at the very top of these institutions recognise that the business and financial culture needs to change and are able and prepared to critically examine its roots. The world of business and finance does not exist in a social vacuum. There must also be a genuine market for virtue, a source of effective demand for ethical business practices, products and services in the wider society (Vogel 2006).  Government and civil society has a role to play in fostering the market for virtue and associated institutional change, including the informal "rules of the game" by which we all participate in the market economy. Norms, values, and mores are just as important in conditioning and restraining human behaviour as laws and regulations. It is both a top-down and bottom-up process.

The dialogue with capitalism’s discontents is a social learning process which will require the free exchange of ideas in an atmosphere of mutual respect.  Happily that seems to be the happening in a small but meaningful way in an extraordinary piece of deliberative democracy brokered by St Paul’s.