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«Global TrusT and EThics in FinancE Innovative Ideas from the Robin Cosgrove Prize Carol Cosgrove-Sacks / Paul H. Dembinski Editors Trust and Ethics in ...»

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We would like to finish this article by looking at the question of dependency. When we begin to conceive of a methodology for solidarity finance we have to ask ourselves whether these individuals, communities and organisations will remain dependent on an entity that will finance and support them indefinitely. Our position is that it is vital to channel the maximum amount of energy into creating mechanisms that will lead to autonomy. And since that is our goal, we should not just be making use of economic and financial tools, we also have to be able to count on education and community organisation experts who can foster the process towards independence, autonomy and liberation. And at that point, finance needs some extra help and needs to dialogue with other disciplines set up to help people broaden their lives. So we can imagine a future where in all primary and secondary schools and universities, irrespective of the faculty and main subject of study, all young people would be encouraged to think about their relationship with money, how it circulates, its role as a means of payment, and the identity of the movers and shakers of the economy, which is an inescapably social phenomenon and so ought to be run in a spirit of solidarity. In the same order of thinking, we also believe that scientific and technological proSolidarity Finance 295 gress ought to be harnessed in order to help create a financial system that is ethical and transparent.

Throughout this article we have tried to highlight and explain the relationship between solidarity finance provided by community banks and a financial structure that can be supported by an ethic that promotes life, diversity and care for our fellow human beings. “No society past or present has ever been able to live without a code of ethics. As social beings, we need to develop a consensus, to discourage certain kinds of actions and create community projects which give direction and align us with the march of history. Today, at a time of globalisation, we see lots of ethical projects begun but which are not all mutually compatible. In this new era of globalised humanity we feel the urgent need for an ethical base which can win the acceptance of all and thus make possible coexistence between peoples (…). A caring ethic provides, preserves, heals and protects. By its very nature, such an ethic is not aggressive and when it intervenes in the real world, it stops to think about whether the consequences of that intervention will be beneficial or malign. In other words, this kind of ethic takes responsibility for all human actions. Care and responsibility always go hand-in-hand.”7 Solidarity finance is an ethical form of finance because it helps to reforge the social and human links that are being damaged on a daily basis by an increasingly aggressive capitalism that puts forward the accumulation of assets as a development model for communities, promoting concentration instead of fair distribution of wealth.

Community banks create a space where entrepreneurial women from vulnerable communities manage their savings autonomously, in full security and transparency, helping to repair that shaken trust. In this way, a group of neighbours can give new sense to values and principles that are closely bound up with one another. Thus the ethic put forward by soliBoff, Leonardo, Ética para la nueva era (Ethics for the New Era), article published on website: www.servicioskoinonia.org, 3 July, 2009.

296 Trust and Ethics in Finance darity finance is an ethic based in experience that rejects cold, abstract precepts. The word “solidarity” ought never to be separated from concrete facts and day-to-day situations where you need to bring together the best of each individual in order to achieve the common good.

In conclusion, we believe that ethical finance and solidarity finance are synonymous when it comes to deciding which way to go in order to reconnect ourselves with the riches that each and every community has the ability to create, manage and share in order to propagate life, in all senses of the word.




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The recent crises remind us of the serious consequences that financial ills can bring upon a society: recession, unemployment, bankruptcies, poverty, greater inequality, loss of trust, breakdown in social cohesion, etc. The disconnect between ethics and finance is mostly to blame for these ills. The purpose of this dissertation is to show that finance can contribute in a sustainable way to the common good as long as ethics can be permanently integrated into its theory and practice. This will require a profound paradigm shift, a humanisation of finances at both personal and institutional level. We will explore here the origin of the current disconnect between ethics and finance, analysing the theoretical foundations and how these impact on social trust and the common good.

We will also look at the challenges faced by financial ethics in the context of globalisation, corporate social responsibility and education.

The financial system has helped the economy to reach levels of productivity and growth in terms of riches and consumption that could never before have been envisaged. However, the recent crises demonstrate once again the disastrous consequences that flawed finance can 298 Trust and Ethics in Finance wreak on society: recession, unemployment, bankruptcy, poverty, greater inequality, loss of trust and a breakdown in social cohesion, to mention just a few. The disconnect between ethics and finance is to a large extent responsible for these ills.

In this paper, we will show that finance can contribute in a sustainable way to the common good (by which we mean the good of mankind and the objectives of all men) only if we succeed in introducing ethics into both theory and practice. This necessitates a profound paradigm shift, a humanisation of finance at the individual and institutional levels.

We will start by looking at the origins of the current disconnect between ethics and finance, starting with an analysis of their theoretical foundations and how these impact via the financial sector on social trust and the common good. We will then formulate some proposals to help meet the challenges of globalisation using ethical means and a more efficient approach to corporate social responsibility. Finally, we will touch on the importance of teaching financial ethics.

Ethics in modern economic thought

The problems of moral hazard in principal-agent relations, “free rider” behaviour, the increase in speculative finance (e.g. speculative funds, the Ponzi scheme conceived by Bernard Madoff and sub-prime loans) are examples of a real divorce of ethics from finance. However this divorce is not only confined to the financial sector, but involves the whole economic sphere. Finance, as a branch of the economy, has inherited its ethical stance.

In a context of total separation

We can cite three stages in the modern history of economic thought:

first, where finance and ethics were united; second, where they were rubbing shoulders; and third, where the separation was complete (Ferullo, 2010).

Ethics vs Finance? 299 Adam Smith is considered to be the father of modern economics. In his time – the late eighteenth century – this professor of moral philosophy at the University of Glasgow succeeded in conferring scientific status on knowledge of economics.

Today it is wrongly believed that Smith created an economic theory for business that was entirely removed from any ethic. But if you read his works in depth, as did the Nobel prize winner Amartya Sen, you can see that in his Inquiry into the Nature and Causes of the Wealth of Nations (1776) there is a practical application of ethics that follows on from his earlier book The Theory of Moral Sentiments (1759). Stemming from this overall moral view, it is no surprise that the Scottish professor saw moral values as being intimately bound up with human behaviour.

For Smith and his contemporaries it was superfluous to write about ethics in business because ethics were already implicit in business.

Commerce based on self-interest was mutually advantageous as long as neither party tried to cheat the other.

The stage where finance and ethics were juxtaposed began towards the end of the nineteenth century when Alfred Marshall, a Professor at the University of Cambridge, succeeded in separating economics from the department of moral philosophy. Writers started to talk about “economics” rather than “political economy” to try to avoid the behavioural questions traditionally linked to political science.

But these economists continued to recognise that although the economy was an independent science, ethics still played an important role in practical questions on the economy.

We come to the third stage towards the middle of the twentieth century, when the “neo-classicists” brought a total separation between ethics and the economy into mainstream economic thinking. Economists such as Friedman and Stigler preached that all value judgements should be taken right out of economics if it aspired to being a predictive science. If there were any moral obligation, it would only be that of acting 300 Trust and Ethics in Finance in accordance with the criteria of “rational choice”, which would guarantee optimal results through efficient market forces. It made no sense to distance oneself from logical-mathematical rigour and discuss ethical values, they argued.

Basing itself on a superficial reading of Smith and influenced by liberalism and positivism, the mainstream of contemporary economic thought today runs counter to the deepest convictions of the first classical economists. The aim of creating a science that is ethically neutral and predictable has led to the use of models that, although elegant from a mathematical point of view, have deprived people of any motivation other than that of self-interest. By taking equivalent exchange as the only valid means of contributing to rationality and the common good, we seem to have adopted a system that has removed human beings from centre stage.

Theoretical foundations The theory of modern economics is based on two pillars: Homo economicus as an anthropological view of the human being; and the mechanism of the free market as the regulator of relationships. While recognising the contributions of these two pillars to the development of the science of economics, we will see the ethical problems that arise when we try to exaggerate their virtues.

Self-centred anthropology Homo economicus is the representation of Man that economics uses

as a unit of analysis. This theoretical construction has two main characteristics:

• Rational instrumentalism: the individual uses available resources efficiently in order to achieve his objectives

• Self-interest: this is the driver of economic behaviour that contributes to social well-being, through the market mechanism.

Ethics vs Finance? 301 Individual choices are exogenous and not to be questioned. The individual seeks to maximise his profit using the goods he consumes.

This view only takes account of the profit that the individual makes from his relationship with objects. Happiness in the sense of Aristotle’s eudaemonia – self-fulfilment – is achieved through relationships between people. However, according to the “Robinson Crusoe” model, an individual can maximise his “utility” – a proxy for happiness – even when he completely alone.

If one believes that Man can be happy on his own, this implies that there is no incentive to act in the interests of another person or to feel part of society. The social benefit becomes the sum of individual utilities and is based on individual choices. According to this way of thinking, social well-being may increase even when, for example, inequality increases – which is of course socially unacceptable.

Some more recent models, such as game theory, recognise that the fulfilment of individual preferences depends on how others act. However, these views still continue to be biased towards merely selfish motivation whereby it is perfectly rational to take the other person into account and to cooperate, but solely in one’s own interest. The other is seen as a means while in reality he is an end in terms of achieving happiness. The famous prisoner’s dilemma reminds us that to behave selfishly is not always the most efficient way to behave.

A model is useful when it sacrifices some aspects of reality in order to isolate those that are key to the analysis. The problem with Homo economicus is not the theoretical abstraction in itself but the aspects of the human being that economists see as necessary to isolate.

Here we have a first ethical challenge regarding the choice of model.

To postulate that an individual’s sole motivation is his own self-interest, and that reason is only to be found in the means and not the ends, seems to be a very limited view that does not explain the mechanisms (such as 302 Trust and Ethics in Finance donations and voluntary work) through which human beings build fraternal relations.

The free market The state, the market and civil society bodies are the three elements that, in line with their relative sizes, can give rise to different types of socio-economic organisation.

In the orthodox model of the economy, what counts is the market, which uses the exchange of value – contract – to govern interpersonal relationships. The state should play the smallest role possible and should only concern itself with the defence of private property, the creation of the conditions for the market to function freely, and the fair distribution of the efficient production of the market. The economic organisations of civil society – also known as the “social economy”, not-for-profit companies or the “third sector” – are outside the usual domain of economic study. They are an exception to the rule whereby companies maximise their profits, as they pursue different objectives.

The free market posited by this school of thought is always perfectly capable of channelling individual interests, quite free of the sheen of ethics or motives of social solidarity, towards the common good. The “invisible hand” described by Smith allows this as long as there is no interference hampering the market’s functioning.

Neoclassical liberalism proclaims that the market is ethically and socially neutral. Its objective is efficiency in the sense of the Pareto principle, i.e. to increase the size of the pie as much as possible. Social solidarity begins only later when time comes to cut the pie up. As a result, any intervention in the competitive functioning of the markets, even with noble objectives – such as the Tobin tax – ends up being harmful.

We know that one of the great virtues of the market is its capacity to generate egalitarian and voluntary cooperation between individuals. This helps to eliminate conflicts, a “dependency” society, and oppressive relationships. However, believing that the market is an automatic mechaEthics vs Finance? 303 nism that leads inevitably to the common good has generated excessive confidence in its workings. Thus economic agents thought that they were exempt from moral judgement of their actions and so exonerated from any responsibility for their actions on the markets.

By analogy with Gresham’s law where “bad money drives out good”, bad intentions, such as unconditionally seeking profit, end up by driving out good intentions, such as charity. If human exchanges are only motivated by price, other positive forms of human relationships are excluded. This will end up by shaking the very foundations of the market, such as trust and willingness to cooperate. (Zamagni-Bruni, 2007).

Is finance ethically neutral?

Ethics is linked to free human action from a moral point of view – good or evil – because such action is Man’s ultimate objective. Action in the financial sector stems from a human activity so this action is therefore subject to moral judgement. And it follows that if this action is liable to moral judgement, then finance cannot be ethically neutral.

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