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Title: Aristotle and the Ethics of Wall Street
Date: 24-Aug-2009
Category: Opinion Essays
Source/Author: Stephen B. Young, Global Executive Director, The Caux Round Table
Description: Aristotle essentially made the same disparaging distinction between the real economy and financial markets that is now in vogue after Wall Street’s meltdown last year.

Stephen B. Young
Stephen B. Young
For my current trip to Asia, I needed to prepare some remarks on effective constitutionalism. So in preparing for my flight over the Pacific, I pulled Aristotle’s Politics off the shelf to take with me and on the plane started re-reading this classic. My old under-linings of key passages quickly told me that I had never spent much time on the first section of this treatise. For good reason I might add. Book I of the Politics deals with the family, which modern political science does not consider part of its disciplined approach to government but which Aristotle viewed as the basic building bloc of human communities.

As I was skimming over Aristotle’s observations on the dynamics of what he considered to be the most natural political community for our species, I came upon his use of the word “economy” and found something surprising. I was suddenly very sorry I had not paid attention to this analysis years ago when first reading him in college.

Aristotle essentially made the same disparaging distinction between the real economy and financial markets that is now in vogue after Wall Street’s meltdown last year.

What Aristotle called the “oikos” was management of the family’s well-being; it was family management, a kind of entrepreneurial calling seeking better conditions for members of the entity through work and exchange.

Property is an instrument to living, says Aristotle and therefore necessary and desirable. A fair point for those of us who believe in free regimes of wealth creation. I then skipped over his defense of slaves as legitimate property as that kind of subjugation is, thankfully, irrelevant to our current social and economic arrangements.

But then Aristotle makes a distinction between two kinds of property – one which we get from nature to sustain our lives and another which we create to facilitate our interpersonal relationships not from nature but from our promises to one another. The first includes things like wood, animals, tools, stones for houses, yarn for weaving, grapes for eating, etc., and the second is money.

There are limits to what we can get from nature, but, since money is created by society, there is no end to the amount of money we can aspire to collect. Aristotle doesn’t like the impact of money.

Exchanges by barter, he notes, are limited by what nature provides and by what our labor and inventiveness can cull and stimulate from natural environments. Barter, however, he asserts, led to the invention of money. What is different about money Aristotle says is that its value is set by convention. It has no intrinsic use value; only an exchange value and keeps that value only as long as people agree to accept it in payment for goods and services. It is a convention of human society.

Aristotle writes: “Money, then being established as the necessary medium of exchange, another species of money-getting soon took place, namely, by buying and selling, at probably first in a simple manner, afterwards with more skills and experience, where and how the greatest profits might be made. For which reason the art of money getting seems to be chiefly conversant about trade, and the business of it to be able to tell where the greatest profits can be made, being the means of procuring abundance of wealth and possessions; and thus wealth is very often supposed to consist in the quantity of money which any one possesses….”

Money, he says is the first principle and the end of trade; nor are there any bounds to be set to what is thereby acquired. “Thus in the art of acquiring riches, there are no limits, for the object of that is money and possessions; but economy has a boundary..”

Economy, he writes, does require the possession of wealth, not for the hoarding of money but for the acquisition of other things. But money, on the other hand, seems to be an end in itself as many think the proper end of economy is to save and hoard money without end. Such people, says Aristotle seek to live, but they do not live well.

Such persons make everything subservient to money getting, as if this was the only end. Money getting is not necessary to the good life, says Aristotle, but economy is.

Aristotle’s argument today seems unsophisticated but his insight into money nevertheless deserves attention. Where money is concerned as the end of human activity, a unique set of rules apply. There is no limit built into money or to money getting that tells us to stop, that our goal has been reached, that we have enough already. As a mega-millionaire recently responded to the question of whether or not he had enough money: “You can never have too much money.”

With the invention of money, separate from economy of production and provision of services, hubris – that vicious appetite which drives our destinies to destruction - enters in to our pursuit of wealth and sound discretion beats a retreat.

This distinction between commodity trading markets in money and an economy constrained by factors of production such as land, labor and credit-worthiness raises an important policy question: can the confidence we have in self-regulation of economic markets be transferred to financial markets?

I would say no, it can’t. Adam Smith’s conceit of an invisible hand set in motion by self-interested private transactions but tending towards a public good seems more fit for the natural economy of Aristotle where there are limits and constraints than it does for financial markets where the socialized supply of money and credit is seemingly endless and the desire for the good of socially legitimated purchasing power pushes demand curves to irrational highs.
Thus, reflecting on Aristotle, we could imagine a less restrictive regulatory regime for the real economy and more controls on financial markets to confront the effects of hubris when it is really running wild with anticipation and imagination.

The efficient market hypothesis on the capacity of financial markets to find stable equilibriums of value does not seem to be accurate. Again and again, financial markets have not found themselves able to bring about a necessary equilibrium of prices at sustainable and reliable asset valuations. More than markets are needed to prevent major discontinuities in the amplitudes of price curves in financial trading.

Federal Reserve Chairman William McChesney Martin is famous for saying that the point of monetary and credit regulation is to “take away the punch bowl just as the party gets going”. Aristotle would have approved.

Wall Street collapsed last year because it became obsessed with what Aristotle calls “money-getting”. The punch bowl of earning very lucrative fees and bonuses kept getting topped-up. Sub-prime loans were issued and securitized, CDOs issued and CDSs offered as if risk had disappeared from the markets and the dance music would play forever. As Citigroup CEO Chuck Prince said, “As long as the music is playing, you get up and dance.”

To think that risk would just go away is true hubris.

Risk is, however, an Aristotelian phenomenon of the natural, “real” economy and sets limits on acquisitiveness. Risk can’t be eliminated though social contrivances such as money or CDOs or CDSs. Reality is always the nemesis to human hubris.

The problem with markets for money is that they have no wise checks against hubris – a more classical term for what Alan Greenspan famously called “irrational exuberance.” From the Tulip mania of 1636 to the 2008 meltdown of Wall Street, good old plain vanilla human hubris has upset financial markets again and again to the great loss of ordinary people who depend for their happiness on the natural “economy”.

We would have been better off, I suggest, paying more attention to Aristotle in designing rules for Wall Street. We should have put a socially contrived nemesis in place to check the advance of our self-empowering hubris before it could do great damage by drawing upon itself a natural opposition to unending greed.



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