0 markets and-morality
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Introductory class on "Markets & Morality" for a Finance Ethics course in M.S.Finance program.
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0 markets and-morality
- 1. “Markets and Morality” Lecture on 28 October 2014 for MSFin296 class ALIZA D. RACELIS, PhD
- 3. The current financial crisis has clear macroeconomic roots, but the dominant view of the firm has made the crisis deeper and more devastating. Over the past few decades, maximizing shareholder value has become the firm’s main objective. Chief executives have been keen on this because their economic incentives have been clearly associated with stock market performance. Unfortunately, this has driven many CEOs to make terrible decisions based on short-termism and greed.
- 4. Across Europe and North America the public is angry and distrustful toward banks and their regulators. Deeply flawed ideas about economics and morality have influenced economic policy and business practices to the detriment of the common good. In the United States, the broadly held consensus that Federal agencies should control macroeconomic policy has served to concentrate power and wealth in the hands of a network of people, organizations and ideas that flow between the financial and governmental centers in New York and Washington. www.nicoletbank.com
- 5. “The economic crisis, at its very root, is a cultural and anthropological crisis: we lack a nucleus of deeply socially-oriented values that would regenerate the constructive forces for the future…”
- 6. “ The reigning economism looks for mechanical causes (excessively low interest rates, “herd” behaviour in the real estate and financial bubbles, etc.), yet bad management by people in charge of many institutions affected has been crucial.”
- 7. THE OOVVEERRAALLLL AARRGGUUMMEENNTT AABBOOUUTT CCAAPPIITTAALLIISSMM && MMAARRKKEETTSS Markets are a desirable feature of complex economies for two basic reasons: 1) Markets can contribute in significant ways to efficiency and prosperity, and 2) Market exchanges can contribute to individual freedom. However: 3) The unregulated free market with minimal government intervention ends up deeply limiting individual freedom, restricting prosperity and undermining efficiency. Conclusion: 4) “Recognize that moral values are embodied in economic analysis” (Clark and Lee, 2011).
- 8. “Shareholder wealth maximization” ?!? or focusing on the persons in the organization? “The idea that the main function of companies is to boost shareholder value rests on a misunderstanding of the nature of the firm. Companies are not owned by shareholders in the way that ordinary goods are owned. They are artificial persons with a distinct legal identity. Companies are not just devices for lowering transaction costs or bundling contracts together. They are devices for getting groups of people—workers and managers as well as investors—to commit themselves to long-term goals.” -Mayer
- 9. Magnanimous morality [Duty-based morality] =helping others in ways that satisfy three characteristics: • Helping intentionally, • Doing so at a personal sacrifice, and • Providing the help to identifiable beneficiaries. Mundane morality [morality underpinning market process] =obeying the generally accepted rules or norms of conduct such as: • telling the truth, • honoring your promises and contractual obligations, • respecting the property rights of others, and • refraining from intentionally harming others. *public appeal of the former over the latter
- 10. • Command over goods and services cannot be left out of the evaluation of human well-being, but income by itself is a radically incomplete measure of human flourishing. • Such other goods as: • the personal and social virtues, • the quality of social relations, and • personal initiative are equally essential, apart from wealth.”
- 11. “…sustainable economic prosperity for all”…
- 13. “economic action is not to be regarded as something opposed to society.… Society does not have to protect itself from the market…(…) the market is the economic institution that permits encounter between persons’ (Caritas in Veritate, 34). HOWEVER: ‘Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function’ (Caritas in Veritate, 36).
- 14. “If we are talking about companies in the proper sense, we should exclude extreme cases of institutions that “earn without serving”, “serve without earning”, or “neither serve nor earn”, and concentrate on those that “earn while serving” or “serve while earning” (Carlos Llano, 2010). Carlos Llano Cifuentes PhD, Universidad de Navarra, President Founder of Instituto Panamericano de Alta Dirección de Empresa (IPADE, Ciudad de México) & Professor “Human Factor”. Professor, Philosophy, Universidad Panamericana.
- 15. • Revised model of TBL for sustainable business consisting of five domains, namely: economic, social, ecological, cultural, and ethical… …which means/involves: • fiduciary duties, • virtue ethics, • stewardship and accountability, • respect for human dignity and human rights, • promoting the common good, etc. For full article, click HERE.
- 16. “…without neglecting efficiency or profits, human wellbeing should be the first priority of every business.” Management could be called humanistic when its outlook emphasizes common human needs and is oriented to the development of human virtue, in all its forms, to its fullest extent. This kind of management appears to achieve a higher moral quality. http://humanisticmanagement.org
- 17. Humanism in Business 17 Edited by: H. Spitzeck, M. Pirson, W. Amann, S. Khan & E. v. Kimakowitz A Cambridge University Press Publication What is the purpose of our economic system? What would a more life-serving economy look like? There are many books about business and society, yet very few of them question the primacy of GDP growth, profit maximization and individual utility maximization. Humanism in Business questions these assumptions and investigates the possibility of creating a human-centered, value-oriented economy based on humanistic principles. Full Citation: Humanism in Business, Spitzeck, H., Pirson, M., Amann, W., Khan, S., von Kimakowitz, E., (Eds.) (2011). Cambridge: Cambridge University Press For a link to the book, click HERE.
- 18. The Inclusive Wealth Index (IWI) seeks to measure the social value of capital assets of nations beyond manufactured capital. The index is inclusive in the sense that it accounts for other key assets as important components of the productive base of the economy, such as natural capital and human capital. RIANE EISLER
- 19. EPILOGUE “It is usually said that business is business, and one must reply that business is not business; rather, business is business if it is ethical. And if it is not, then it is not business, but bad business, because economic activities are not autonomous; if they were, then the human being would experience self-alienation: this would be to uproot the very act of doing business and the businessman himself.” http://www.leonardopoloinstitute.org/works.html
Notas del editor
- Economics, Ethics and Morality: A Practitioner’s Perspective Across Europe and North America the public is angry and distrustful toward banks and their regulators. Deeply flawed ideas about economics and morality have influenced economic policy and business practices to the detriment of the common good. In the United States, the broadly held consensus that Federal agencies should control macroeconomic policy has served to concentrate power and wealth in the hands of a network of people, organizations and ideas that flow between the financial and governmental centers in New York and Washington. US capital markets have moved away from the task of financial intermediation and become centers for the propagation of short lived financial schemes such as the tech bubble in the late 1990s and the real estate bubble of the mid-2000s. The federal policy response to the recent crisis was to effectively guarantee the obligations of the all systemically relevant organizations operating in the US. Instead of eliminating systemic risk, multiple Federal agencies are moving to control risks and outcomes throughout the US economy. The Keynesian myth of government sponsored and controlled prosperity is not only completely impractical, but it is fundamentally hostile to the way economic activities are conducted within community life. There is plenty of blame to go around, but this article will focus on some deeply held presumptions which govern policy and practice and result in the outcomes the public loathes. Better outcomes depend on rethinking these foundational attitudes toward economic life. There is much that can be discussed and explained about each of these points, but the scope of the topics demands clarity and brevity. These are some of the prevailing ideas that govern policy and practice to our detriment. Each point contains an example of how the particular idea has played out in my work within one Midwestern community over 30 years. Some deeply held presumptions that govern policy and practice to our detriment: 1. Economic welfare is maximized by pursuing individual self-interest, 2. Economic Determinism 3. Business is impersonal 4. Capital is King 5. Keynesianism 6. Objectivity safeguards moral behavior 7. Federal oversight will control the moral corruption of large organizations "...What is lacking is a deeper evaluation of the way we think about economic life and the resultant policies."
- JMM – “The global financial crisis has revived both Austrian and post-Keynesian economic theories and reinvigorated the debate between these schools over the nature of the business cycle, the impact of external shocks, and the sources of uncertainty that destabilize markets. The Industrial Age social movement known as distributism also has experienced a popular resurgence because of its warnings about the combination of political and economic power and the moral consequences of economic indirection. This article contends that these three diverse perspectives are critically important in their own unique ways to the preservation of economic freedom in an era of immense complexity, massive bailouts, and calls for heightened regulation of a multifaceted and dynamic financial sector. --o—o—o— The financial crisis has focused the lens of politicians and regulators on hedge funds as a source of systemic and operational risk in asset markets. We examine the extent to which available data can provide useful information regarding the impact of hedge funds on the financial system. Using data from January 1994 through September 2008, we find dramatic changes in the exposures of hedge funds to risk factors, accompanied by a significant and widespread increase in correlation between hedge fund and factor returns. Lastly, the discontinuity at zero in the cross-sectional distribution of hedge fund returns persists throughout the sample. --o—o—o— FRANCE: In the context of the recent financial global crisis, the disparity in functionality between a view of the 'economy' as an accurate and abstract unit of measurement by which to monitor progress and the 'real economy' as an equally verifiable site of economic exchange and value has never been more distant. In France, the recent Stiglitz report that President Sarkozy commissioned to evaluate socio-economic progress in the aftermath of the crisis acknowledged the limitations of PIB ('produit intérieur brut'=GDP) as a measurement by which to take account of the diverse elements that constitute social and economic well-being. The report highlighted specifically the distortions inherent in this method of measurement and recommended the need for greater recognition and incorporation of 'subjective realities' into economic forecasting. This acknowledgement of the relevance of subjective data (personal circumstances, illness, depression, anxiety, loss, happiness, and so on) has formed part of a growing consensus emerging particularly among leading French economists who have called for a more eclectic approach to economic analysis. The disconnection between 'economy' and 'real economy' has opened a divide between hegemonic, objective neo-liberalism and human subjectivities of courage and virtue, localism and ethical solidarities (what we can call the 'lived' economy). Eclecticism in this context bridges the gap between the abstraction of economics and the insights offered by disciplines such as philosophy and ethics. This article charts a trend in this eclectic approach, in particular an ethico-philosophical trend (in thinking and discourse) in relation to the economic that underpins the experience of the lived economy. The article points to ways in which philosophy and ethics invite us to think about our social and economic well-being in the aftermath of crisis. It highlights how these subjectivities can impact as action and practice in daily life and how they can affect the eclectic deficit by extending the frame of economic reference to include ethical knowledge from other disciplines. Specifically, the philosophical ethics of Paul Ricoeur and, to a lesser extent Alain Badiou, are invoked to underline the fact that agency is not only critical in our understanding of ethics but offers a telling alternative to the preoccupation with the 'why' and 'what' of ethical action and practice.
- The idea that the main function of companies is to boost shareholder value rests on a misunderstanding of the nature of the firm, he says. Companies are not owned by shareholders in the way that ordinary goods are owned. They are artificial persons with a distinct legal identity. Companies are not just devices for lowering transaction costs or bundling contracts together. They are devices for getting groups of people—workers and managers as well as investors—to commit themselves to long-term goals. The doctrine of shareholder primacy is particularly dangerous when combined with dispersed ownership, he believes. Dispersed ownership (which often occurs when founding families sell shares to finance growth) leads to a separation between ownership and control. Managers exploit this separation to feather their own nests. Owners respond by relying on two devices—shareholder activism or the market for corporate control. Can anything be done to limit the damage done by such predatory behaviour? Mr Mayer … is more sympathetic to a third option—building long-termism into companies’ DNA.
- Four kinds of goods should be present in a truly prosperous community: (1) goods of personal character, (2) goods of personal initiative, (3) social goods, and (4) material goods. Character is both a means to prosperity and a principal component of it. A prosperous community bears fruit in the virtuous character of its people. If material prosperity is gained through institutions which erode the character of a people, it will not be enjoyed, and will probably not be sustainable. The more virtuous a person is, the more fully human. The virtues are the characteristic excellences of human beings, and represent a sort of ideal fulfillment in this world of our created nature amid the challenges of the Fall. The cardinal virtues – temperance, fortitude, prudence, justice – make the person more able to deliberate about and successfully pursue both his own good and the good of the communities to which he belongs.
- The symptoms of the recent financial crises had a lot to do with greed, such as, for example, the development of the shadow banking system and opaque products. As a result of this lack of transparency and of the perverse incentives system, the financial sector managers were induced to take more risks than they could swallow. That the performance measures for top management were largely the earnings they generate relative to their peers put undue pressure on them to keep up: follower-bank bosses ended up taking excessive risks in order to boost various observable measures of performance. These dysfunctions in turn made governance at both the institutional and market levels extremely difficult, if not impossible. The lesson to be learned is that regulatory reform without ethical reform will never be enough.