This piece has been posted on the Res Publica think tank Disraeli Room blog.
I recently asked a prominent mathematician who once ran a hedge fund, Doyne Farmer, whether seeking to make a riskless profit was ethical. I don't think he understood the question. 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.
I am a mathematician who works on financial problems who became interested in the role of mathematics in the financial crises since 2006. Initially my focus was on explaining why mathematics is so critical to modern banking in response to, for example, the FSA's misplaced assessment, in the Turner Review, that there had been an over-reliance on sophisticated mathematics in the lead up to the crisis (the techniques they discussed were simplistic and not part of mathematics). Subsequent, more authoritative, reviews such as the US Financial Crisis Inquiry Commission and the Parliamentary Commission on Banking Standards removed mathematics from centre stage and replaced it with ethics.
At first sight this re-direction of blame was a relief, but I soon realised it raises a concern: if the problem of finance is one of ethics, what role does mathematics have in its solution? The immediate response is none, but the concern is that if we believe that maths, physics and engineering are concerned with what is, and have nothing to say about what ought to be, we will struggle to convince people trained in the scientific tradition to take commercial corporate morality seriously. 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.
Arguing that ethos and purpose should be placed at the heart of finance misses the point that there is an ethos and purpose at the heart of modern finance. The ethos is based on consequential morality: that an individual seeking a profit has consequential societal benefit, and excesses can be restrained by well-crafted rules. This results in the purpose of finance being any profit within the letter of the law. This ethos presupposes, firstly, that it is possible to calculate consequences and secondly, that restraining regulations can be well crafted. It is a very scientific ethos whose origins can be traced back to Descartes, and comes to us via the British empiricists, Hume and J. S. Mill. It is the ethos that has led to the contemporary study of economics imbuing the student with greed. Many quants would regard the doctrine as being comparable to Darwinian evolution and the Big Bang Theory. 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.