Editorial: The Nobel in Economics
By: Dr. Kara Tan Bhala
The topics covered in this, the fourth issue of Moral Cents, are diverse though the subject matter of every article falls within the scope of finance and ethics. The diversity is an indication that the ethical dimension is everywhere in finance. Ignoring the existence of this dimension does not serve us well as the recent past demonstrates. Banks such as JPMorgan and Deutsche Bank are still paying enormous, profit shattering, fines for misdeeds committed during and after the Great Financial Crisis. There is nothing to fear or disdain in studying ethics in finance, and much to be gained.
It may not even be far fetched to suppose a future Nobel in Economics being awarded for academic work in Ethics or Morals and (financial) Economics. This year’s prize was awarded to three economists: Eugene Fama, Lars Peter Hansen and Robert Shiller. The three are icons of their respective fields of research. Mr. Fama is the father of the Efficient Market Hypothesis that posits markets as informationally efficient i.e. share prices reflect all new available information. Mr. Hansen designed methods for analyzing drivers of stock market volatility and developed the Generalized Method of Moments. His Generalized Method reveals that standard models based on rationality, in the neoclassical sense, cannot explain swings in asset prices. Mr. Shiller, in contrast to Mr. Fama, believes that share prices do not just reflect market efficiency, but also are affected by investor psychology. It is psychology not rationality that accounts for financial bubbles. Mr. Shiller’s research therefore, gives a reason for the asset price volatility that Mr. Hansen pointed out, but could not explain using the rationality-based model of Mr. Fama. Thus, the Nobel committee awarded this year’s economic prize to a set of models that together is a more complete and comprehensive explanation of asset price movements. The message from the Nobel judges may be interpreted to mean that no single one of these theories is sufficient in itself to explain financial markets. Each has a deficiency. But together they offer a fuller and more complete picture. Yet, the trio still lacks an important element – the ethical dimension. We await further economic work on financial markets that takes account of moral values. Such research will add to the work of economists like Amartya Sen, Joseph Stiglitz and David C. Rose.
In Mr. Rose’s book, The Moral Foundation of Economic Behavior, he asks the question, if a society’s sole objective is to maximize general prosperity, given the moral beliefs it chooses, what kinds of beliefs would it choose? Preeti Dhillon attempts to answer this question. In a survey of global values, she analyses rankings of moral values in different regions of the world. Her objective: to assess the possibility of developing a financial system based on universal moral values. She takes the ranking of values from a number of surveys of regions across the world. The rankings are striking because of their differences. Does this mean there is little hope for an ethically based financial system that is universally acceptable? Ms. Dhillon believes there is hope.
Edward Henniker-Major recounts the history of the British firm, the Anglo-Iranian Oil Company (AIOC), and focuses on the events surrounding the Iranian nationalization of the AIOC’s assets in May 1951. Why did the Iranian Government nationalize the AIOC and was its action ethical? The author concludes that British behavior was intransigent, outdated, and insincere, which provoked Iranian demands and ultimately led to the nationalization of the oil industry in Iran.
Sam Storrs brings us back to more recent history with his study of campaign finance reform in the US in the 20th and 21st centuries. There has been a series of legislative attempts to reform campaign finance but the wretched issue of too much money in elections continues to plague the US political landscape. It is a seemingly impossible task to reconcile the need for equality among voters and the rights of free speech.
Sumil Thakrar tussles with the problem of the banking regulation in China. The issue is the state’s influence on banks exacerbates rather than alleviates the problems of bad lending practices, corruption, and the high levels of non-performing loans. The author recommends A reduction in the influence of the state in banks at all levels, whether in forming goals, implementing business decisions, or hiring banking officials. He ends with some doubt about the efficacy of implementing ethical codes.
Jana Mudorovna writes about the financialization of non-financial companies. This phenomenon is a consequence of the emphasis on firm efficiency, which is defined strictly in monetary terms, and has become the focus of the company performance. Such an understanding of efficiency favors finance (capital) over labor and productivity of labor (as opposed to productivity of property). Thus, non-financial corporations cut investment and innovation and channel resources to short-term capital gains through stock buy-backs and dividend payouts.
Finally, YRK Reddy offers an opinion piece on the necessity of regaining trust in the financial system from an emerging market viewpoint.
