Discourse Ethics for Debt Markets
By considering the history of money and other derivative instruments from pre-Socratic Greece, through the seventeenth century to contemporary practices it argues that embedded in effective markets are three norms: sincerity, reciprocity and charity, that characterise validity claims in the subjective, objective and social spheres, respectively.
The case for sincerity is made buy examining the specific role of market-makers, as opposed to brokers, as 'price discoverers' in markets. In the process we justify taking a pragmatic approach to markets, as opposed to a positive, focusing on the objective sphere, or a normative, focusing on the social sphere, approach. We also explain why theories based on power relations struggle to explain market-making.
The claim that reciprocity is embedded in financial economics was first made in Johnson (2015). Here, in the context of the argument presented regarding sincerity, we focus on the medieval distinction between usury and interest and applying the general case in Johnson (2015) to the specific example of credit markets.
Starting with the observation that the objective and subjective norms would not preclude self-slavery (debt-bondage), while society prohibits the practice of slavery, we address the social sphere through the norm of charity. We consider Shakespeare's personification of charity in the form of Antonio, The Merchant of Venice, and then discuss the success of Quaker bankers and the importance of social networks in finance.
The three norms are related to current issues in finance, including: high-frequency trading, the LIBOR manipulation scandal, financialisation, the status of Credit Default Swaps, sub-prime lending, credit-scoring and emergent technologies such as crowdfunding and peer-to-peer lending.
The paper is motivated by the question "If recent financial crises have been crises of ethics, what role does mathematics have in their mitigation". It applies Habermas in a broadly pragmatic framework and is based on both the history of financial mathematics and contemporary financial theory and practice. By synthesising mathematical and social theory it delivers new insights into the governance of markets.
References
T. C. Johnson, Reciprocity as a foundation of Financial Mathematics, Journal of Business Ethics, 131:1 (2015), pages 43-67