Can We Live the Good Life in the World of Finance and Banking?07 Jun 2016
Samuel Gregg writes at the intersection of ethics and political economy. Much of his work is focused upon providing coherent moral foundations for the habits and institutions of the market economy and the commercial society more generally. In doing so, he draws heavily upon natural law theory and natural law thinkers such as Thomas Aquinas and John Finnis but also the work of modern theorists of the case for free markets, especially Adam Smith and his Wealth of Nations, and the German economist Wilhelm Röpke, the intellectual architect of the German economic miracle. He has also written papers for, and co-edited collections of essays such as Profit, Prudence and Virtue (2009) and Natural Law, Economics, and the Common Good (2012), both based on conferences sponsored by STI.
In books such as The Commercial Society (2006) and Becoming Europe (2013), Gregg explored the connections between different sets of values and the creation, growth and decline of particular sets of economic arrangements and institutions. In his latest book, For God and Profit (2016), Gregg looks specifically at the area of banking and finance. Recognizing that it is an area presently marked by particularly difficult ethical and economic problems, he seeks to show how, from the standpoint of Christian faith and natural reason, banking and finance can genuinely serve the common good instead of being a source of scandal and economic dysfunctionality. Beginning by showing how medieval and early modern Christian thought and practice laid the foundations of modern financial systems, he goes on to examine particular problems characterizing contemporary banking, before explaining how finance can be understood as a vocation. In this interview with STI, Gregg outlines some of his key findings and insights.
Let’s start with two obvious questions. Why did you write this book? And why did you give it the title For God and Profit?
The title comes from an inscription, Deus enim et proficuum (“For God and Profit”), that medieval merchants who lived and worked in the world’s first capitalist economies wrote in the upper corners of their accounting ledgers. Others opened their partnership contracts with the formula A nome di Dio e guadangnio (“In the Name of God and Profit”). This wasn’t some type of proto-prosperity gospel. Instead these words reflected their authors’ conviction that banking and finance were economically useful endeavors, and that in pursuing profit they were in some way giving glory to God, by helping to unfold the full potential of the universe He had created.
In a way, these words also point to the goals of the book. First of all, it’s an exercise in historical recovery. Most people today, including those working in finance and banking, have little idea that most of the key institutions, protocols, and concepts that characterize finance today were developed by Christians. The second goal is to help Christians better understand the nature and character of finance and banking, not least because Christians can’t help provide moral guidance to an area of the economy which surely needs it, unless they actually understand things like short-selling, speculation, the function of time preference, and the different roles played by interest. Third, I wanted to help Christians to see that working in finance and banking can be a genuine vocation, one in which they help money and capital contribute to the furtherance of human flourishing and the common good of society.
What was the most surprising thing you encountered in your research?
I suppose what struck me the most was the sheer sophistication of the analysis and understanding of the functions of money in the more-or-less capitalist economies of many medieval states that’s found in the writings of theologians writing about these subjects. Part of this results from the fact that they were grappling with the usury question, and asking whether there were in fact cases in which you could legitimately charge interest. Great minds like Antoninus of Florence realized that in the conditions of a growing economy, money was no longer just a means of exchange, and therefore unproductive in itself. Instead they saw that money also assumed the character of capital.
This was, to use a contemporary expression, a game-changer. It also opened the door to the development of intellectual tools and financial institutions that played a critical role in spurring on economic development in Europe. I should add here that when theologians such as Juan de Mariana, Bernardine of Siena, Johannes Eck, and Luis de Molina wrote about these matters, they made a point of talking at length and in depth to the merchants and bankers of their time.
What’s the biggest challenge facing Christians and other people of good will seeking to shape the world of finance and banking?
Perhaps the most important is that we need to learn how modern banking and finance functions before they make suggestions or critiques. There’s no point criticizing something like short-selling unless you understand, first, what short-selling is, and second, the ways in which it actually serves as an early warning system for significant problems in a business or even an economy. In fact, short-sellers are invariably light-years ahead of the regulators when it comes to such matters.
Another example is speculation. The word has very negative connotations but speculation plays a crucial role in stabilizing prices over the long-term and smoothing the supply and demand of commodities (such as food, oil, and minerals) and currencies. This in turn enables individuals and business engage in better planning for their economic future. Are there forms of speculation that amount to sophisticated gambling? Yes, but those cases are actually very rare.
A second major challenge is to see finance as not something that’s merely useful from time to time but as something through which the economic component of the common good can be further realized. Because finance helps to put the goods of the world to use for billions of people over extended periods of time. When I invest in the stock market, for instance, my investment is put to work in other people’s businesses and enterprises, thus helping others—who, in all likelihood, I’ll never know—realize their dreams and ambitions now and in the future. In that sense, finance provides a bridge between me and others, and my present and future, and other peoples’ present and future. It builds trust, prices risks, and enables opportunity. Without these factors at work, we would all be living in the subsistence economies that characterized the pre-medieval world.
What do you regard as the most significant problem facing the financial sector today?
There are many, but perhaps the most pressing is the issue of what’s called “moral hazard.” This is a way of describing those circumstances, policies and institutions that encourage individuals and businesses to take on excessive risk, most notably with assets and capital entrusted to them by others, because they safely assume they won’t pick up the bill for any failure. Hence, while profits remain private, losses are socialized. Heads, I win. Tails, taxpayers lose. The higher the extent of the guarantee, the greater is the risk of moral hazard.
Take, for instance, central banks. Among other things, they serve as a lender of last resort. The difficulty is that the very existence of a lender of last resort can encourage private financial actors to imagine that they are “too big to fail.” Indeed, if they possess enough systematic presence in a given financial system, they have good reason to assume they’ll be provided with liquidity by a central bank if a failed endeavor threatens their solvency, no matter how foolish or irresponsible their behavior. As a result, such financial actors will become complacent and take risks which become increasingly irresponsible over time. In this context, the word “moral” reflects, I’d argue, some innate awareness that there is something ethically questionable about creating situations in which people are severely tempted to make imprudent choices. Even in the wake of the 2008 financial crisis, much of which was driven by the problem of moral hazard, this problem continues to cast a shadow over the financial sector.
Can virtue be found in the financial sector?
Absolutely. Money can certainly become an idol and greed is never good. But we can be virtuous in the use of money and capital in ways that go beyond philanthropy and charity.
Reading Aquinas on this matter is eye-opening. He defines magnificence as the virtue of “that which is great in the use of money.” It is not so much, he specifies, about making gifts or charity. Nor, Aquinas adds, does the person who embraces this virtue “intend principally to be lavish towards himself.” Rather, he says, magnificence concerns “some great work which has to be produced” with a view to the good that goes beyond the immediate gain, and which cannot be done “without expenditure or outlay” of great sums of money. Moreover, magnificence for Aquinas also concerns “expenditure in reference to hope, by attaining to the difficulty, not simply, as magnanimity does, but in a determinate matter, namely expenditure.”
Here we find a hitherto underappreciated basis for a Christian understanding of finance as a vocation. Magnificentia isn’t so much about who owns the wealth. Aquinas points out that the poor man can also choose to do great things. Rather it’s about the one who deploys great sums to help realize a “great work.” It’s also important to know that Aquinas links the act of magnificence to one of the three great theological virtues: the act of hope. This is especially relevant to finance, for without hope—the expectation of, and firm confidence in, positive outcomes, even in conditions of uncertainty—the entire world of finance would crumble from within.
Dr. Samuel Gregg is Director of Research at the Acton Institute. He has an M.A. in political philosophy from the University of Melbourne, and a D.Phil in moral philosophy and political economy from the University of Oxford. He has authored many books on ethics and political economy. He participated in STI's "Rethinking Business Management" (Princeton, 2007), "Ethics, Families, Entrepreneurship and the Corporation" (Princeton, 2006), and "The Financial Crisis Revisited" (Fisole, 2010) meetings.
Learn more about some of Gregg’s arguments in this article: “How Medieval Monks Changed the Face of Banking” published by American Banker.