Someone raised this distinction on my work in financial
ethics by asking “Are you saying participants in financial markets should be
benevolent in how they price instruments?” They answer rhetorically with the
observation that the reality is that the markets are motivated by greed and
fear with leading market participants acting in a ‘brutish’ manner that
motivates the rest to conform. On this basis, ethics needs to be ‘realistic’
in referencing the ‘facts on the ground’ and accommodate human nature. Faced
with this reality, you can try to ensure the regulator is of good character (‘superiorly
prudent’ to use Adam Smith’s language) and might be able to improve the
functioning of markets.
My correspondent referred me to the Menian
Dialogue in Thucydides History
of the Peloponnesian War as an example of ‘realism’.
This was interesting to me. While I don’t know the full
context and Thucydides’ intent, I am confident that there is a widely held view
that the behaviour of the Athenian negotiators was an example of hubris; the Menian negotiator even
notes that the gods would be on their side. The subsequent defeat of Athens was
therefore nemesis.
My justification was that hubris/nemesis was a central theme of Greek classical
culture along with the idea that a human can never be so sure as to be certain.
The Athenian’s were confident that they could sack Menos without fear of
reprisal; they were wrong, and I understand the Athenians surrendered to Sparta
because they were concerned about the precedent they had set at Menos. Note
that there is an important financial connection: the term Romans used for
interest was poine the spirit that
accompanies Nemesis.
A related topic is this Stoic problem:
A grain merchant from Alexandria arrives at Rhodes,
which is gripped by famine. The merchant
knows that other merchants are following him with plentiful supplies of grain,
though the town’s inhabitants do not know this.
How should the merchant price the grain he has?
Cicero, in De Officiis,
had argued that the merchant should charge a lower price based on the knowledge
of the coming relief. Thomas Aquinas disagreed; the merchant may think that
there are more grain shipments on the way, but they do not know. Hence the
‘reality’ of the market prices in Rhodes could be employed. The Franciscans
took a different approach, Pierre Jean Olivi, argued that the metaphysical
probability of more grain arriving in Rhodes, had a certain reality, which
Aquinas was ignoring by focusing on the ‘physical’ reality of the prices being
offered in the market. Olivi observed that
The judgement of the value of a thing in exchange
seldom or never can be made except through conjecture or probable opinion, and
not so precisely, or as if understood and measured by one invisible point, but
rather as a fitting latitude within which the diverse judgements of men will
differ in estimation.
Olivi realised that market exchange was about equating
expectations, not accepting concrete valuations agreed by property owners. This was a major development over the
Pythagorean approach of fixing the relationship between an object and a number. Olivi regarded uncertain events ‒ such as
more grain deliveries, lost ships, or defaults on debts ‒ as influencing prices
and so fair exchange had to be based on the sharing and interpretation of
information. This meant that chance
could be quantified, and there is a consensus that this observation is the
genesis of the idea of mathematical probability.
Changing tack a bit to the issue of ‘power’. I have recently
been looking at Beowulf. Beowulf is a rare example of
pre-Christian northern European myth and raises the question, why did it
survive? One explanation is that it highlighted the transitory nature of human
power and so was useful story that Christian missionaries could use in
emphasising the transcendent nature of divine power. The Norse myth of Ragnarok has similarly survived and
similarly describes the temporality of power (the ‘Muspille’
interpretation). There is a similar structure in the relationship between the Illiad and Odyssey. Anger, honour and power motivate the Illiad whereas Odysseus personifies intelligence (cunning) and a
desire to return to domesticity. To me, all these myths emphasise that society
has to evolve away from one based the ‘reality of power’ to one based on the
application of intelligence. The pragmatic explanation is that a society based
on rational reflection and discourse is better able to respond to uncertainty;
this is why democratic societies thrive.
These thoughts develop something I touch upon in my book
is that there is a train of thought linking Thucydides, Hobbes, Descartes,
Spinoza and through to Nietzsche and Schmidt that focuses on the reality of
power that I reject. The problem, as I see it, is finance is fundamentally
concerned with uncertainty. This means that one day you might clearly perceive
what is in your best interests (Athens' subjugation of Melos) but you
misunderstood, resulting in catastrophe. This is the pragmatic line, which
emerged with Pierce's rejection of Cartesian certainties that he saw at the
root of the US Civil War. Cheryl Misak's Truth,
Politics and Morality informs me that the antidote is deliberative and I
give a series of examples in my book about how (well functioning) markets
undermine power. On this basis, I take a pragmatic position on ethics, i.e.
culture is an environment in which practices that “work” evolve and these
become habituated (the approximate origin of the Greek root of ‘ethics’, the Latin root of ‘morals’). For example, if a
society wants to grow its population, contraception and abortion become
immoral; if a society wants to limit population growth, they become legitimate.
On the specific issue of benevolence, I introduce the idea
of charity in commerce through Shakespeare's The Merchant of Venice, which I present as an argument against
"iron laws" and in favour of "merciful judgement"; that is
don't trust the model but use judgement. I describe how British finance was
built on Quaker institutions that had charity/benevolence as a keystone and
there are numerous accounts of how they were able to prosper in a very
uncertain environment because they put great store in charity, reciprocity and
sincerity. Finally I describe the collapse of LTCM as being a consequence of a
lack of charity. LTCM believed it was impregnable (like Athens) and so did not
feel the need to act charitably. The account of their failure I use is they got
the structuring of a fax wrong ("We need more money because the markets
are in turmoil and there are lots of opportunities" instead of "There
are lots of opportunities because the market is in turmoil, do you want to
invest?") and in the resulting run they had no reliable friends.
Financial crises, I believe, can be characterised as representing
a paradigm change, where an old ‘reality’ is replaced by a new reality. In
order to inhibit the development of crises, people need to be doubtful of their
circumstances and there need to be ways to allow opinions to change slowly
without a (mathematical) catastrophe. There is the example of how the powers
who created the Bretton Woods system could not conceive of the eclipsing of
British and French power by German and Japanese economic might in the 1960s. J.
P. Morgan doubted the profitability of CDO of MBS and so investigated the
apparent reality and survived the crisis of 2007-2009; I think J.P. Morgan was
like Odysseus where as Lehmans was more Achilles.
In my book, I try and bring these themes together by
addressing the issue of voluntary slavery. Consequentialst/utilitarian ethics
cannot reject voluntary slavery coherently, and so cannot reject slavery. The
‘reality of power’ cannot reject slavery. Deontological ethics, like Kant’s,
can reject slavery. Pragmatic ethics rejects slavery on the basis that any
rational opinion might be valid in solving a problem/prompting a gradual change
in opinion. Since slaves are silenced from giving opinions, therefore slavery
cannot be tolerated.
I believe my approach is coherent with Adam Smith, mainly
because Smith worked within the Aristotelean framework. In the Theory
of Moral Sentiments I note that Smith compares ‘prudence’ with ‘superior
prudence’ as
Prudence, in short, when directed merely to the care of
the health, of the fortune, and of the rank and reputation of the individual,
though it is regarded as a most respectable and even, in some degree, as an
amiable and agreeable quality, yet it never is considered as one, either of the
most endearing, or of the most ennobling of the virtues. It commands a certain
cold esteem, but seems not entitled to any very ardent love or admiration.
Wise and judicious conduct, when directed to greater
and nobler purposes than the care of the health, the fortune, the rank and
reputation of the individual, is frequently and very properly called prudence.
We talk of the prudence of the great general, of the great statesman, of the
great legislator. Prudence is, in all these cases, combined with many greater
and more splendid virtues, with valour, with extensive and strong benevolence,
with a sacred regard to the rules of justice, and all these supported by a
proper degree of self-command. This superior prudence, when carried to the
highest degree of perfection, necessarily supposes the art, the talent, and the
habit or disposition of acting with the most perfect propriety in every
possible circumstance and situation. It necessarily supposes the utmost
perfection of all the intellectual and of all the moral virtues. It is the best
head joined to the best heart. It is the most perfect wisdom combined with the
most perfect virtue. It constitutes very nearly the character of the Academical
or Peripatetic sage, as the inferior prudence does that of the Epicurean.
For Aristotle, reciprocity was a
component of justice. Justice, itself, was, according
to Plato, the virtue that ensures a functionally differentiated system,
such as a society, works well. Therefore, my treating markets as centres of
communicative action, governed by reciprocity, sincerity and charity, fits within
Smith’s framework of ‘superior prudence’ as well as classical conceptions of
the relationship between the polis and the individual, since the ideas are
rooted in classical theory.
