Money and Monetary Policy in Early Times: Volume 38 (The History of Civilization)

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A similar thought is picked up by Marx, who argues that capitalism replaces the natural economic cycle of C—M—C commodity exchanged for money exchanged for commodity with M—C—M money exchanged for commodity exchanged for money. A second variation of the criticism concerns the character, or more precisely the vice, that the profit motive is thought to exemplify see also virtue ethics. To have a love for money is typically associated with selfishness and greed, i. Another association is the loss of moral scruples so that one is ready to do anything for money.

The financial industry is often held out as the worst in this regard, especially because of its high levels of compensation. Allegations of greed soared after the crisis, when financial executives continued to receive million-dollar bonuses while many ordinary workers lost their jobs Piketty , McCall A third variation of the criticism says that the profit motive signals the absence of more appropriate motives. Kant argued that actions only have moral worth if they are performed for moral reasons, or, more specifically, for the sake of duty. Thus it is not enough that we do what is right, we must also do it because it is right Kant Both of these principles seem to contrast with the profit motive which therefore is rendered morally problematic Bowie , Maitland There are two main lines of defensive argumentation.

This argument is typically viewed as a consequentialist vindication of the profit motive see also consequentialism : positive societal effects can morally outweigh the possible shortcomings in individual virtue Flew A second argument is more direct and holds that the profit motive can exemplify a positive virtue.

For example, there is the well-known Protestant work ethic that emphasizes the positive nature of hard work, discipline and frugality Long , Wesley The profit motive can, on this view, be associated with virtues such as ambition, industry, and discipline. According to Max Weber , the Protestant work ethic played an important role in the development of capitalism.

But it is not clear whether any of these arguments can justify an exclusive focus on profits, of course, or rather give permission to also focus on profits under certain circumstances. If having a love of money seems morally suspect, then the practice of making money on money—for instance, lending money at interest—could seem even worse. This is another sweeping criticism directed at finance that can be found among the traditional ethicists.

As the practice started to become socially acceptable, usury came to mean the charging of excessive rates of interest. However, modern Islam still contains a general prohibition against interest, and many countries still have at least partial usury laws, most often setting an upper limit on interest rates. What could be wrong with lending at interest?

While he allowed that money is a useful means for facilitating commercial exchange, Aristotle thought that it has no productive use in itself and so receiving interest over and above the borrowed amount is unnatural and wrong Politics , b. A related argument can be found in Aquinas, who argued that money is a good that is consumed on use. Although a lender can legitimately demand repayment of an amount equivalent to the loan, it is illegitimate to demand payment for the use of the borrowed amount and so adding interest is unnatural and wrong Summa Theologica , II—II, Q Some more promising arguments concern justice and inequality.

For example, as early as Plato we see the expression of the worry that allowing interest may lead to societal instability The Republic , II. It may be noted that the biblical condemnations of usury most straightforwardly prohibit interest-taking from the poor. One idea here is that we have a duty of charity to the poor and charging interest is incompatible with this duty. A third idea, which is prominent in the protestant tradition, is that lending often involves opportunism or exploitation in the sense of offering bad deals to poor people who have no other options Graafland The Islamic condemnation of interest, or riba , adds an additional, third line of argument which holds that interest is essentially unearned or undeserved income: Since the lender neither partakes in the actual productive use of the money lent, nor exposes him- or herself to commercial risk, the lender cannot legitimately share in the gains produced by the loan Ayub , Birnie , Thomas Based on this argument, contemporary Islamic banks insist that lenders and borrowers must form a business partnership in order for fees on loans to be morally legitimate Ayub , Warde Economists have over the years given several retorts to this argument.

Some economists stress that lending also involves risk e. The gradual abandonment of the medieval usury laws in the West is typically attributed to a growing acknowledgment of the great potential for economic growth unleashed by easy access to capital. One could perhaps say that history itself disproved Aristotle: money indeed proved to have a productive use.

In a short text from , Bentham famously poked fun at many of the classical anti-usury arguments and defended the practice of charging interest from a utilitarian standpoint Bentham However, this does not mean that worries about the ethics of charging interest, and allegations of usury, have disappeared entirely in society.

As noted above, usury today means charging interest rates that seem excessive or exorbitant. For instance, many people are outraged by the rates charged on modern payday loans, or the way in which rich countries exact interest on their loans from poor countries Baradaran , Graeber , Herzog a. These intuitions have clear affinities with the justice-based arguments outlined above.

A sweeping criticism of a more contemporary nature concerns the supposed moral defects of speculation. This criticism tends to be directed towards financial activities that go beyond mere lending. Critics of the capitalist system often liken the stock market to a casino and investors to gamblers or punters Sinn , Strange In any case, the underlying assumption is that the similarities between modern financial activities and gambling are morally troublesome.

On some interpretations, these concerns are similar to those raised above. For example, some argue that speculators are driven by the profit motive whereas investors have a genuine concern for the underlying business enterprise Hendry This latter argument is similar to the complaint about undeserved income raised in particular by Islamic scholars Ayub , Warde This is morally problematic when the risks not only affect the gambler him or herself but also society as a whole.

When the value of such derivatives fell dramatically, the financial system as a whole came to the brink of collapse. We will return to this issue below in section 4. A related interpretation concerns the supposed short-sightedness of speculation. Modern disclosure requirements force companies to publish quarterly earnings reports. The myopia of finance is typically blamed for negative effects such as market volatility, the continuous occurrence of manias and crashes, inadequate investment in social welfare, and the general shortsightedness of the economy e.

Defenders of speculation argue that it can serve a number of positive ends. To the extent that all financial activities are speculative in some sense, of course, the ends coincide with the function of finance more generally: to channel funds to the individuals or companies who can use them in the most productive ways. Let us now assume that the existence of financial markets is at least in general terms ethically acceptable, so that we can turn to discuss some of the issues involved in making them fair and just for all parties involve.

We will focus on three such issues: deception and fraud honesty , conflicts of interest care for customers , and insider trading fair play. Some of the best-known ethical scandals in finance are cases of deception or fraud. Other scandals in the industry have involved deceptive marketing practices, hidden fees or costs, undisclosed or misrepresented financial risks, and outright Ponzi schemes see section 2. While these examples seem obvious, on further examination it is not easy to give an exact definition of financial deception or fraud.

The most straightforward case seems to be deliberately misrepresenting or lying about financial facts. However, this assumes that there is such a thing as a financial fact, i. In light of the socially constructed nature of money and finance see section 1 , this may not always be clear. Less straightforward cases include simply concealing or omitting financial information, or refraining from obtaining the information in the first place. But is access to adequate information enough? A complication here is that the weaker party, especially ordinary consumers, may have trouble processing the information sufficiently well to identify cases of fraud.

This is a structural problem in finance that has no easy fix, because financial products are often abstract, complex, and difficult to price. Therefore, full autonomy of agents may not only require access to adequate information, but also access to sufficient know how, processing ability and resources to analyze the information Boatright One solution is to require that the financial services industry promotes transparent communication in which they track the understanding of ordinary consumers de Bruin b, Shiller Due to the problems just noted, the majority of ordinary consumers refrain from engaging in financial markets on their own and instead rely on the services of financial intermediaries, such as banks, investment funds, and insurance companies.


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But this opens up new ethical problems that are due to the conflicts of interest inherent in financial intermediation. Interestingly, some argue that the whole industry of actively managed investment funds may be seen as a form of fraud. According to economic theory, namely, it is impossible to beat the average returns of the market for any given level of financial risk, at least in the long term.

Therefore, funds who claim that they can do this for a fee are basically cheating their clients cf. Hendry , Kay The interests referred to are typically taken to be financial interests, so the obligation of the fiduciary is basically to maximize investment returns. In any case, it is often thought that fiduciary duties go beyond the ideal of a free market to instead give stronger protection to the weaker party of a fragile relationship. As an alternative or compliment to fiduciary duty, some argue for the adoption of a code of ethics or professional conduct by financial professionals.

A code of ethics would be less arduous in legal terms and is therefore more attractive to free market proponents Koslowski It can also cover other fragile relationships including those of bank-depositor, advisor-client, etc. It is also unclear whether finance can be regarded as a profession in the traditional sense, which typically requires a body of specialized knowledge, high degrees of organization and self-regulation, and a commitment to public service Boatright , Herzog forthcoming.

Probably the most well-known ethical problem concerning fairness in finance, and also perhaps the one on which philosophers most disagree, is so-called insider trading. Put simply, this occurs when an agent uses his or her position within, or privileged information about, a company to buy or sell its shares or other related financial assets at favorable times and prices. For example, a CEO may buy shares in his or her company just before it announces a major increase in earnings that will boost the share price. While there is no fraud or breach of fiduciary duty, the agent seems to be exploiting an asymmetry of information.

Just as in the cases above, it is difficult to give an exact definition of insider trading, and the scope of its operative definition tends to vary across jurisdictions. Indeed, some argue that even stock analysts or journalists can be regarded as insiders if they trade on information that they have gathered themselves but not yet made publicly available. It is also debatable whether an actual trade has to take place or whether insider trading can consist in an omission to trade based on inside information, or also in enabling others to trade or not trade Koslowski Several philosophical perspectives have been used to explain what if anything is wrong with insider trading.

A first perspective invokes the concept of fair play. Even in a situation with fully autonomous traders, the argument goes, market transactions are not fair if one party has access to information that the other has not. However, critics argue that this perspective imposes excessive demands of informational equality. There are many asymmetries of information in the market that are seemingly unproblematic, e. So might it be the inaccessibility of inside information that is problematic?

But against this, one could argue that, in principle, outsiders have the possibility to become insiders and thus to obtain the exact same information Lawson , Moore A second perspective views insider trading as a breach of duty, not towards the counterparty in the trade but towards the source of the information. US legislation treats inside information as the property of the underlying company and, thus, insider trading is essentially a form of theft of corporate property often called the misappropriation theory Lawson A related suggestion is that it can be seen as a violation of the fiduciary duty that insiders have towards the company for which they work Moore However, critics argue that the misappropriation theory misrepresents the relationship between companies and insiders.

On the one hand, there are many normal business situations in which insiders are permitted or even expected to spread inside information to outside sources Boatright A third perspective deals with the effects, both direct and indirect, of allowing insider trading. Interestingly, many argue that the direct effects of such a policy might be positive. Since insider trading contributes important information, it is likely to improve the process of price discovery Manne However, others express concern over the indirect effects, which are likely to be more negative.

Allowing insider trading may erode the moral standards of market participants by favoring opportunism over fair play Werhane We will now move on to take a societal view on finance, and discuss ideas relating to the broader social responsibilities of financial agents, that go beyond their basic role as market participants. We will discuss three such ideas here, respectively focusing on systemic risk a responsibility to avoid societal harm , microfinance a responsibility towards the poor or unbanked , and socially responsible investment a responsibility to help address societal challenges.

One root cause of the financial crisis of was the very high levels of risk-taking of many banks and other financial agents. When these risks materialized, the financial system came to the brink of collapse. Many governments stepped in to bail out the banks and in consequence sacrificed other parts of public spending.

This is a prime example of how certain financial activities, when run amok, can have devastating effects on third parties and society in general. The concept of systemic risk gives rise to several prominent ethical issues. To what extent do financial agents have a moral duty to limit their contributions to systemic risk? But the important point about systemic risk is that financial crises have negative effects on third parties so-called externalities. This constitutes a prima facie case for a duty of precaution on the part of financial agents, based on the social responsibility to avoid causing unnecessary harm James , Linarelli In cases where precaution is impossible, one could add a related duty of rectification or compensation to the victims of the harm James It is, however, a matter of philosophical dispute whether finance professionals can be held morally responsible for these harms de Bruin A duty of precaution may here be taken to imply, e.

As an alternative to the reasoning above, one may argue that the duty of precaution is more properly located on the collective, i. We return to this suggestion below in section 5. Even in normal times, people with very low income or wealth have hardly any access to basic financial services. Moreover, there will likely be cases where some bank officers discriminate against underprivileged groups, even where extensive legal protection is in place. The initiative started in some of the poorest countries of the world, such as Bangladesh and India.

The justifications offered for microfinance are similar to the justifications offered for development aid. A popular justification holds that affluent people have a duty of assistance towards the poor, and microfinance is thought to be a particularly efficient way to alleviate poverty Yunus , But is this correct? Another justification holds that there is a basic human right to subsistence, and that this includes a right to savings and credit Hudon , Meyer Microfinance is of course different from development aid in that it involves commercial banking relations.

This invites the familiar political debate of state- versus market-based support. According to critics, however, it is the other way around: Markets will tend to breed greed and inequality, whereas real development is created by large-scale investments in education and infrastructure Bateman , H. Weber Socially responsible investment refers to the emerging practice whereby financial agents give weight to putatively ethical, social or environmental considerations in investment decisions—e.

But more commonly, it is perceived as an alternative to mainstream investment. The background argument here is that market pricing mechanisms, and financial markets in particular, seem to be unable to promote sufficient levels of social and environmental responsibility in firms. Even though there is widespread social agreement on the evils of sweatshop labor and environmental degradation, for instance, mainstream investors are still financing enterprises that sustain such unjustifiable practices.

The simplest and most common approach among these alternative investors is to avoid investments in companies that are perceived to be ethically problematic. The deontological perspective above has been criticized for being too black-and-white.

The History of Paper Money - Origins of Exchange - Extra History - #1

On the other hand, the relationship between the investor and the investee is not as direct as one may think. To the extent that investors buy and sell shares on the stock market, they are not engaging with the underlying companies but rather with other investors. However, such more complicated philosophical positions have problems of their own see also rule consequentialism and collective responsibility.

Of course, the flip side of such practices, which may explain why they are less common in the market, is that they invite greater financial risks Sandberg Aqwal Qatadah b. Da'amah al-Sadusi. Editor s : Abdulrahman al-Salimi. Publication Date: 05 Dec Essays in Honor of Everett K.

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