Finance and Virtue Ethics: Aristotle, MacIntyre and Catholic Social Teaching
Andrea Roncella
Abstact: This paper proposes that it is necessary to understand the ethical as the root cause of many wrong financial and economic decisions. It applies virtue ethics frameworks drawn from Aristotle, Alasdair MacIntyre, and Catholic Social Teaching. The paper applies natural and unnatural chrematistics (the study of wealth accumulation) to distinguish between the ethics of market-making versus that of high frequency trading. The failure of the Reserve Primary Fund is seen through the lens of MacIntyre’s external and internal goods. Finally, Collateralized Debt Obligations are measured using principles of Catholic Social Teaching.
Introduction
The 2008 financial crisis was a watershed in financial history. The years before Lehman Brothers’ bankruptcy, an event marking the climax of the crisis, were characterized by a generally accepted trust in liberal society. In its economic component, liberalism relied on market forces alone to attain prosperity and growth. The events between the summer of 2007 and the autumn of 2008 acted as a rude awakening to the limits of an economic development driven mainly by debt and financial innovation (King 2016). Even in academia few emphasized the risks behind mounting euphoria of the financial sector (Rajan 2006). The warnings were largely ignored. Since then, and in particular following the enormous and non-market leaning intervention of the US government and US Federal Reserve to prevent the worst consequences from spreading in the real economy, there has been a change in the way of assessing the alleged benefits brought by finance to society and people.
Two Areas of Change Post 2008
The change has been directed in two areas. The first is the institutional aspect, and specifically a more stringent regulation of financial institutions. The introduction of the Dodd-Frank Act in July 2010, the Basel III proposal made by the Bank of International Settlements to strengthen international banking supervision, and the European MiFID II (Markets in Financial Instruments Directive) in 2014 to regulate the European financial markets, are concrete examples of the government attempts to repair market malfunctions or to encourage greater consumer protection. Without entering into details and consequences of these regulations, it is nevertheless clear that in the ten years following the crisis regulators have a renewed vigor in turning back the deregulation regimes of the 1980s and ‘90s.
The second aspect is the significant growing interest in the ethical or cultural dimension of the financial sector. In the wave of general fury following the crisis, a significant concern was raised about ethics, and its absence in financial agents (The Economist 2013). An agreement on the roots of this dearth of ethics has not yet been achieved. Opinions divide between those who argue that its origin should be sought, for example, in the new system of incentives that threatened the traditional values of financial institutions (Santoro and Strauss 2012), in the type of education offered in Business Schools (Ghoshal 2005; Giacalone and Wargo 2009), and in the widespread incompetence of various parties involved (De Bruin 2015). However, it is undisputed this greater awareness of the importance of ethics allowed for a better understanding of economic and financial events.
This paper argues these two components, institutional and cultural, are the foundations that must support a healthy finance industry, one capable of contributing to economic growth that serves society and people’s happiness. Therefore, this paper contributes to the debate on the second dimension, namely the ethical or cultural one. To talk about ethics, however, requires first and foremost a clearer specification given the lack of accepted clarity of this term.
