The financial sector confounds most people with its clusters of confusing terms: asset allocation, capital gain, dividends, block chains. The technical nature of finance makes it difficult to make moral judgments about it. But understanding the ethics of finance is an urgent task, because there seem to be high-stakes moral hazards built into the financial sector: to give an obvious example, many Americans’ livelihoods were decimated during the Great Recession.
Therefore, finance needs some ethical guidance. In his 2021 book, Finance: A Christian Perspective, Pierre de Lauzun attempts to do just this. He examines the relationship between Christianity’s moral tradition and finance—and uses Christian thought to evaluate finance. Lauzun, in other words, seeks to explain economics and finance through a lens of philosophy and theology.
But before one can understand the ethics of finance, it’s important to have a basic grasp of what finance actually does. At bottom, finance is a risk mitigation tool: which investment, and what type of contractual arrangement, will reduce the odds of investors losing part or all their investment? The intersection of both profit performance and risk is the pricing of capital. Put another way, when capital is priced, it is priced in terms of the risk. This price is commonly referred to as the “return” for the investor and the “cost of capital” for the consumer of capital.
But is this pricing of risk just? Is the allocation of risk between the investors and the consumers of capital just? What kinds of burdens do pricing and allocation place on society (like risk to savings and retirement accounts)? Clearly, there are reasons to be concerned about injustices that seem endemic to the financial sector. After the 2008 housing crisis, everyone witnessed how the losses were socialized, yet the gains during the housing boom were privatized. Can finance be practiced in a manner different from this—one that is ethical and just for both the parties and society? How can the financial sector gain a sense of moral responsibility?
Lauzun offers responses to these challenges by providing an overview of economic history, looking to the Catholic Church’s contributions on concepts of money, markets, and prices. His discussion includes an overview of the mendicant orders’ (Dominicans and Franciscans) impact on nascent economic and financial concepts. For instance, the scholastics considered when a certain price for goods or services is just, and whether profit can be good. The short answer: a price is just if two parties enter a transaction in a non-coercive manner at a mutually agreed upon price. These thinkers are probably unknown to most libertarians, but they echo a principle outlined by Aquinas. The 13th-century Franciscan John Peter Olivi “emphasized the beneficial role of the entrepreneurial initiative,” which paved the way for the moral justification of economic activity.
Lauzun also includes well-footnoted discussions of money, usury (which may or may not be the same thing as interest), just prices, Church social teaching, and an understanding of the implied rational calculation in relationships and transactions. Any time individuals freely enter into an exchange, each party implicitly attaches a subjective value to the goods involved in the exchange. Lauzun shows how this “rational calculation” concept implies a prioritization, or hierarchy, of values: the parties in a transaction rank goods or services from the most valuable to the least, therefore they enter transactions freely based on these subjective, yet rational, calculations of value. With this understanding, finance becomes a set of quantitative tools used to aid decisions about these transactions.
Therefore, for Lauzun, this is the “main subject, the function of finance and its basic questions: how to arbitrate the allocation of this rare resource, capital, and how to assume the duties of ownership.” Therefore, what distinguishes finance from other economic activity is that it moves beyond the price of tangible and intangible goods, and contemplates the price of money.
One of the most urgent moral concerns about finance is the way it’s tied to cultural decline. On several occasions, Lauzun points out that if we rely solely on quantitative money-based tools, we become a culture overwrought with the financialization of every decision. The term financialization, academically, connotes the increasing influence of the finance sector over general decisions of society. The government has to be mindful of how its spending and laws affect the financial sector, since commercial activity and people’s retirement and investments rely on the financial sector. Financialization even trickles down to everyday personal and family decisions, often transforming them into primarily financial decisions. In summary, Lauzun argues there has been an inversion: finance is seen as primary over, instead of derivative of, the higher human goods.
Another ethical concern of finance that Christianity raises is the financial sector’s implied view of risk, which is detached from concerns about how the financial sector’s activity affects people. Finance is taught as the management of risk, and risk in this realm is the chance the future will not turn out as planned. Every business school teaches that risk can be reduced, although not eliminated. But this perspective often means that the human person is completely disassociated from the underlying asset or investment being tinkered with. Lauzun describes this phenomenon as “detachment.” Imagine financiers sitting in offices on Wall Street, manipulating spreadsheets, with no attachment to the impact of their decisions on everyday people. As someone who has worked in that position, I know how effortless it is to manipulate numbers on a screen and allocate resources, without any consideration of real people or the real world.
Then, of course, there is the question of interest and usury. Usury, as noted above, had long been condemned by the Catholic Church. So a primary moral obstacle for modern finance is how to justify charging interest on money. And can there be a “just price” of capital between providers and the consumers of capital? In this reviewer’s opinion, the fundamental part of capital that’s being priced is risk. Therefore the question is, how do we arrive at a just price for risk? In other words, how does society justly allocate economic risk? This is even more difficult since society has lost a certain understanding of risk, paradoxically, as we believe we have become better at managing it.
Lauzun concludes by discussing possible solutions to the various problems confronting finance. At a state or regulatory level, the solutions tend to work against basic functions of the market. For example, one might reduce or eliminate what is known as “high frequency trading” by imposing a certain minimum period for which to hold a security, but this solution runs counter to a basic market function of liquidity, which is the ability to convert a security into cash. At the individual level, Lauzun’s solutions could be summarized as an exhortation for people to take responsibility for their own moral development. These “solutions” aren’t especially original or satisfying, but I suppose Lauzun can be forgiven: his book is less about practical prescriptions and more about providing a philosophical and theological review of finance.
I would supplement Lauzun’s proposals with one of my own, even though it too is incomplete: Christian colleges and universities must teach their business and finance students about ethics and acquaint them with the liberal arts tradition.
I have taught at various institutions of higher learning, all nominally Catholic with core liberal arts traditions. Unfortunately, at more selective Catholic institutions, business schools seem to be moving further away from liberal education. One institution once had a requirement that all business majors take at least two non-business electives, but this is no longer true, to my knowledge. At another institution the economics and finance faculty had lunch with the CIO (chief investment officer) of a major bank. Discussion bandied about various topics of business, but when asked what was the single area in which students could be better prepared, our guest responded, directly and bluntly: their liberal education. And as Lauzun’s book makes clear, a liberal education with a focus on our Christian roots is the most promising path forward.