## 1. Metaphysics


### 1.1 What is Money?



Money is so ever-present in modern life that we tend to take its
existence and nature for granted. But do we know what money actually
is? Two competing theories present fundamentally different ontologies
of money.



**The commodity theory of money:** A classic theory,
which goes back all the way to Aristotle (*Politics*,
1255b-1256b), holds that money is a kind of commodity that
fulfills three functions: it serves as (i) a medium of exchange, (ii)
a unit of account, and (iii) a store of value. Imagine a society that
lacks money, and in which people have to barter goods with each other.
Barter only works when there is a *double coincidence of
wants*; that is, when *A* wants what *B* has and
*B* wants what *A* has. But since such coincidences are
likely to be uncommon, a barter economy seems both cumbersome and
inefficient (Smith 1776, Menger 1892). At some point, people will
realize that they can trade more easily if they use some intermediate
good--money. This intermediate good should ideally be easy to
handle, store and transport (function i). It should be easy to measure
and divide to facilitate calculations (function ii). And it should be
difficult to destroy so that it lasts over time (function iii).



Monetary history may be viewed as a process of improvement with regard
to these functions of money (Ferguson 2008, Weatherford 1997). For
example, some early societies used certain basic necessities as money,
such as cattle or grain. Other societies settled on commodities that
were easier to handle and to tally but with more indirect value, such
as clamshells and precious metals. The archetypical form of money
throughout history are gold or silver coins--therefore the
commodity theory is sometimes called *metallism* (Knapp 1924,
Schumpeter 1954). Coinage is an improvement on bullion in that both
quantity and purity are guaranteed by some third party, typically the
government. Finally, paper money can be viewed as a simplification of
the trade in coins. For example, a bank note issued by the Bank of
England in the 1700s was a promise to pay the bearer a certain pound
weight of sterling silver (hence the origin of the name of the British
currency as "pounds sterling").



The commodity theory of money was defended by many classical
economists and can still be found in most economics textbooks (Mankiw
2009, Parkin 2011). This latter fact is curious since it has provoked
serious and sustained critique. An obvious flaw is that it has
difficulties in explaining inflation, the decreasing value of money
over time (Innes 1913, Keynes 1936). It has also been challenged on
the grounds that it is historically inaccurate. For example, recent
anthropological studies question the idea that early societies went
from a barter economy to money; instead money seems to have arisen to
keep track of pre-existing credit relationships (Graeber 2011, Martin
2013, Douglas 2016).



**The credit theory of money:** According to the main
rival theory, coins and notes are merely tokens of something more
abstract: money is a social construction rather than a physical
commodity. The abstract entity in question is a credit relationship;
that is, a promise from someone to grant (or repay) a favor (product
or service) to the holder of the token (Macleod 1889, Innes 1914,
Ingham 2004). In order to function as money, two further features are
crucial: that (i) the promise is sufficiently credible, that is, the
issuer is "creditworthy"; and (ii) the credit is
transferable, that is, also others will accept it as payment for
trade.



It is commonly thought that the most creditworthy issuer of money is
the state. This thought provides an alternative explanation of the
predominance of coins and notes whose value is guaranteed by states.
But note that this theory also can explain so-called fiat money, which
is money that is underwritten by the state but not redeemable in any
commodity like gold or silver. Fiat money has been the dominant kind
of money globally since 1971, when the United States terminated the
convertibility of dollars to gold. The view that only states can issue
money is called *chartalism*, or the state theory of money
(Knapp 1924). However, in order to properly understand the current
monetary system, it is important to distinguish between states'
*issuing* versus *underwriting* money. Most credit money
in modern economies is actually issued by commercial banks through
their lending operations, and the role of the state is only to
guarantee the convertibility of bank deposits into cash (Pettifor
2014).



Criticisms of the credit theory tend to be normative and focus on the
risk of overexpansion of money, that is, that states (and banks) can
overuse their "printing presses" which may lead to
unsustainable debt levels, excessive inflation, financial instability
and economic crises. These are sometimes seen as arguments for a
return to the gold standard (Rothbard 1983, Schlichter 2014). However,
others argue that the realization that money is socially constructed
is the best starting point for developing a more sustainable and
equitable monetary regime (Graeber 2010, Pettifor 2014). We will
return to this political debate below
 (section 5.2).



**The social ontology of money:** But exactly how does
the "social construction" of money work? This question
invokes the more general philosophical issue of social ontology, with
regard to which money is often used as a prime example. In an early
philosophical-sociological account, Georg Simmel (1900) describes
money as an institution that is a crucial precondition for modernity
because it allows putting a value on things and simplifies
transactions; he also criticizes the way in which money thereby
replaces other forms of valuation (see also
 section 4.1).



In the more recent debate, one can distinguish between two main
philosophical camps. An influential account of social ontology holds
that money is the sort of social institution whose existence depends
on "collective intentionality": beliefs and attitudes that
are shared in a community (Searle 1995, 2010). The process starts with
someone's simple and unilateral declaration that something is
money, which is a performative speech act. When other people recognize
or accept the declaration it becomes a standing social rule. Thus,
money is said to depend on our subjective attitudes but is not located
(solely) in our minds (see also Lawson 2016, Brynjarsdottir
2018, Passinsky 2020, Vooys & Dick 2021).



An alternative account holds that the creation of money need not be
intentional or declarative in the above sense. Instead money comes
about as a solution to a social problem (the double coincidence of
wants) - and it is maintained simply because it is functional or
beneficial to us (Guala 2016, Hindriks & Guala 2021). Thus what
makes something money is not the official declarations of some
authority, but rather that it works (functions) as money in a given
society (see also Smit et al. 2011; 2016). (For more discussion see
the special issue by Hindriks & Sandberg 2020, as well as the
entries on
 social ontology
 and
 social institutions).


### 1.2 What is Finance?



One may view "finance" more generally (that is, the
financial sector or system) as an extension of the monetary system. It
is typically said that the financial sector has two main functions:
(1) to maintain an effective payments system; and (2) to facilitate an
efficient use of money. The latter function can be broken down further
into two parts. First, to bring together those with excess money
(savers, investors) and those without it (borrowers, enterprises),
which is typically done through financial intermediation (the inner
workings of banks) or financial markets (such as stock or bond
markets). Second, to create opportunities for market participants to
buy and sell money, which is typically done through the invention of
financial products, or "assets", with features
distinguished by different levels of risk, return, and maturation.



The modern financial system can thus be seen as an infrastructure
built to facilitate transactions of money and other financial assets,
as noted at the outset. It is important to note that it contains both
private elements (such as commercial banks, insurance companies, and
investment funds) and public elements (such as central banks and
regulatory authorities). "Finance" can also refer to the
systematic study of this system; most often to the field of financial
economics (see
 section 3).



**Financial assets:** Of interest from an ontological
viewpoint is that modern finance consists of several other
"asset types" besides money; central examples include
credit arrangements (bank accounts, bonds), equity (shares or stocks),
derivatives (futures, options, swaps, etc.) and funds (trusts). What
are the defining characteristics of financial assets?



The typical distinction here is between financial and
"real" assets, such as buildings and machines (Fabozzi
2002), because financial assets are less tangible or concrete. Just
like money, they can be viewed as a social construction. Financial
assets are often derived from or at least involve underlying
"real" assets--as, for example, in the relation
between owning a house and investing in a housing company. However,
financial transactions are different from ordinary market trades in
that the underlying assets seldom change hands, instead one exchanges
abstract contracts or promises of future transactions. In this sense,
one may view the financial market as the "meta-level" of
the economy, since it involves indirect trade or speculation on the
success of other parts of the economy.



More distinctly, financial assets are defined as promises of future
money payments (Mishkin 2016, Pilbeam 2010). If the credit theory of
money is correct, they can be regarded as meta-promises: promises on
promises. The level of abstraction can sometimes become enormous: For
example, a "synthetic collateralized debt obligation" (or
"synthetic CDO"), a form of derivative common before the
financial crisis, is a promise from person *A* (the seller) to
person *B* (the buyer) that some persons *C* to
*I* (speculators) will pay an amount of money depending on the
losses incurred by person *J* (the holder of an underlying
derivative), which typically depend on certain portions (so-called
tranches) of the cash flow from persons *K* to *Q*
(mortgage borrowers) originally promised to persons *R* to
*X* (mortgage lenders) but then sold to person *Y* (the
originator of the underlying derivative). The function of a synthetic
CDO is mainly to spread financial risks more thinly between different
speculators.



**Intrinsic value:** Perhaps the most important
characteristic of financial assets is that their *price* can
vary enormously with the attitudes of investors. Put simply, there are
two main factors that determine the price of a financial asset: (i)
the credibility or strength of the underlying promise (which will
depend on the future cash flows generated by the asset); and (ii) its
transferability or popularity within the market, that is, how many
other investors are interested in buying the asset. In the process
known as "price discovery", investors assess these factors
based on the information available to them, and then make bids to buy
or sell the asset, which in turn sets its price on the market (Mishkin
2016, Pilbeam 2010).



A philosophically interesting question is whether there is such a
thing as an "intrinsic" value of financial assets, as is
often assumed in discussions about financial crises. For example, a
common definition of an "asset bubble" is that this is a
situation that occurs when certain assets trade at a price that
strongly exceed their intrinsic value--which is dangerous since
the bubble can burst and cause an economic shock (Kindleberger 1978,
Minsky 1986, Reinhart & Rogoff 2009). But what is the intrinsic
value of an asset? The rational answer seems to be that this depends
only on the discounted value of the underlying future cash
flow--in other words, on (i) and not (ii) above. However, someone
still has to assess these factors to compute a price, and this
assessment inevitably includes subjective elements. As just noted, it
is assumed that different investors have different valuations of
financial assets, which is why they can engage in trades on the market
in the first place.



A further complication here is that (i) may actually be influenced by
(ii). The fundamentals may be influenced by investors'
perceptions of them, which is a phenomenon known as
"reflexivity" (Soros 1987, 2008). For example, a company
whose shares are popular among investors will often find it easier to
borrow more money and thereby to expand its cash flow, in turn making
it even more popular among investors. Conversely, when the
company's profits start to fall it may lose popularity among
investors, thereby making its loans more expensive and its profits
even lower. This phenomenon amplifies the risks posed by financial
bubbles (Keynes 1936).


## 2. Epistemology



Given the abstractness and complexity of financial assets and
relations, as outlined above, it is easy to see the epistemic
challenges they raise. For example, what is a proper basis for forming
justified beliefs about matters of money and finance?



A central concept here is that of risk. Since financial assets are
essentially promises of future money payments, a main challenge for
financial agents is to develop rational expectations or hypotheses
about relevant future outcomes. The two main factors in this regard
are (1) expected return on the asset, which is typically calculated as
the value of all possible outcomes weighted by their probability of
occurrence, and (2) financial risk, which is typically calculated as
the level of variation in these returns. The concept of financial risk
is especially interesting from a philosophical viewpoint since it
represents the financial industry's response to epistemic
uncertainty. It is often argued that the financial system is designed
exactly to address or minimize financial risks--for example,
financial intermediation and markets allow investors to spread their
money over several assets with differing risk profiles (Pilbeam 2010,
Shiller 2012). However, many authors have been critical of mainstream
operationalizations of risk which tend to focus exclusively on
historical price volatility and thereby downplay the risk of
large-scale financial crises (Lanchester 2010, Thamotheram & Ward
2014).



This point leads us further to questions about the normativity of
belief and knowledge. Research on such topics as the ethics of belief
and virtue epistemology considers questions about the responsibilities
that subjects have in epistemic matters. These include epistemic
duties concerning the acquisition, storage, and transmission of
information; the evaluation of evidence; and the revision or rejection
of belief (see also
 ethics of belief).
 In line with a reappraisal of virtue theory in business ethics, it is
in particular virtue epistemology that has attracted attention from
scholars working on finance. For example, while most commentators have
focused on the moral failings that led to the financial crisis of
2008, a growing literature examines epistemic failures.



Epistemic failings in finance can be detected both at the level of
individuals and collectives (de Bruin 2015). Organizations may develop
corporate epistemic virtue along three dimensions: through matching
epistemic virtues to particular functions (e.g., diversity at the
board level); through providing adequate organizational support for
the exercise of epistemic virtue (e.g., knowledge management
techniques); and by adopting organizational remedies against epistemic
vice (e.g., rotation policies). Using this three-pronged approach
helps to interpret such epistemic failings as the failure of financial
due diligence to spot Bernard Madoff's notorious Ponzi scheme
(uncovered in the midst of the financial crisis) (de Bruin 2014a,
2015).



Epistemic virtue is not only relevant for financial agents themselves,
but also for other institutions in the financial system. An important
example concerns accounting (auditing) firms. Accounting firms
investigate businesses in order to make sure that their accounts
(annual reports) offer an accurate reflection of the financial
situation. While the primary intended beneficiaries of these auditing
services are shareholders (and the public at large), accountants are
paid by the firms they audit. This remuneration system is often said
to lead to conflicts of interest. While accounting ethics is primarily
concerned with codes of ethics and other management tools to minimize
these conflicts of interests, an epistemological perspective may help
to show that the business-auditor relationship should be seen as
involving a joint epistemic agent in which the business provides
evidence, and the auditor epistemic justification (de Bruin 2013). We
will return to issues concerning conflicts of interest below (in
 section 4.2).



Epistemic virtue is also important for an effective governance or
regulation of financial activities. For example, a salient epistemic
failing that contributed to the 2008 financial crisis seems to be the
way that Credit Rating Agencies rated mortgage-backed securities and
other structured finance instruments, and with related failures of
financial due diligence, and faulty risk management (Warenski 2008).
Credit Rating Agencies provide estimates of credit risk of bonds that
institutional investors are legally bound to use in their investment
decisions. This may, however, effectively amount to an institutional
setup in which investors are forced by law partly to outsource their
risk management, which fails to foster epistemic virtue (Booth &
de Bruin 2021, de Bruin 2017). Beyond this, epistemic failures can
also occur among regulators themselves, as well as among relevant
policy makers (see further in
 section 5.1).



A related line of work attests to the relevance of epistemic injustice
to finance. Taking Fricker's (2009) work as a point of
departure, de Bruin (2021) examines testimonial injustice in financial
services, whereas Mussell (2021) focuses on the harms and wrongs of
testimonial injustice as they occur in the relationship between
trustees and fiduciaries.


## 3. Philosophy of Science



Compared to financial practitioners, one could think that financial
economists should be at an epistemic advantage in matters of money and
finance. Financial economics is a fairly young but well established
discipline in the social sciences that seeks to understand, explain,
and predict activities within financial markets. However, a few months
after the crash in 2008, Queen Elizabeth II famously asked a room full
of financial economists in London why they had not predicted the
crisis (Egidi 2014). The Queen's question should be an excellent
starting point for an inquiry into the philosophy of science of
financial economics. Yet only a few philosophers of science have
considered finance specifically (Vergara Fernandez & de
Bruin
 2021).[1]



Some important topics in financial economics have received partial
attention, including the Modigliani-Miller capital structure
irrelevance theorem (Hindriks 2008), the efficient market hypothesis
(Collier 2011), the Black-Scholes option pricing model (Weatherall
2017), portfolio theory (Walsh 2015), financial equilibrium models
(Farmer & Geanakoplos 2009), the concept of money (Maki
1997), and behavioral finance (Brav, Heaton, & Rosenberg 2004),
even though most of the debate still occurs among economists
interested in methodology rather than among philosophers. A host of
topics remain to be investigated, however: the concept of Value at
Risk (VaR) (and more broadly the concept of financial risk), the
capital asset pricing model (CAPM), the Gaussian copula, random walks,
financial derivatives, event studies, forecasting (and big data),
volatility, animal spirits, cost of capital, the various financial
ratios, the concept of insolvency, and neurofinance, all stand in need
of more sustained attention from philosophers.



Most existing work on finance in philosophy of science is concerned
with models and modelling (see also
 models in science
 and
 philosophy of economics).
 It seems intuitive to view financial markets as extremely complex
systems: with so many different factors at play, predicting the price
of securities (shares, bonds, etc.) seems almost impossible. Yet
mainstream financial economics is firmly committed to the idea that
market behavior should be understood as ultimately resulting from
interactions of agents maximizing their expected utility. This is a
direct application of the so-called neoclassical school of economics
that was developed during the late nineteenth and early twentieth
centuries. While this school continues to dominate textbooks in the
field, there is a growing scholarly trend that seeks to criticize,
complement or even replace some of its main assumptions. We can see
how the problems play out in both corporate finance and asset pricing
theory.



Corporate finance concerns the financing of firms. One question
concerns a firm's capital structure: should a firm obtain
funding through equity (that is, from shareholders expecting
dividends) or through debt (that is, from bondholders who lend money
to the firm and have a contractual right to receive interest on the
loans), or through a combination of the two. A key result in corporate
finance is the Modigliani-Miller theorem, which says that a
firm's capital structure is irrelevant to its market value
(Modigliani & Miller 1958). This theorem makes a number of highly
unrealistic assumptions, among them the assumption that markets are
efficient, and that there are no taxes. Alongside many other results
in economics, it may therefore be considered as useless for predictive
purposes; or even as dangerous, once used for such purposes
nonetheless (Egidi 2014). In a detailed study of the Modigliani-Miller
theorem, Hindriks (2008) has argued, however, that the value of highly
idealized models in economics may lie in their providing
counterfactual insights, just as in physics. Galileo's law of
free fall tells us what happens in a vacuum. Despite the fact that
vacuum is rare in reality, the law is not uninformative, because it
allows us to associate observed phenomena to the extent to which an
unrealistic assumption must be relaxed. Similarly, if one of the
assumptions that the Modigliani-Miller theorem makes is the absence of
taxes, the observed relevance of capital structure may well have to be
explained as resulting from particular tax regimes. The explanation
obtained by relaxing unrealistic assumptions is called
"explanation by concretization" (Hindriks 2008).



Explanation by concretization works if models and reality share at
least a few concrete features. This is arguably the case for many
extant models in finance, including models of bubbles and crises that
are immediately relevant to explaining the 2008 crisis (Abreu &
Brunnermeier 2003). A fairly recent development called
"econophysics" may, however, be an exception. Econophysics
uses physics methods to model financial markets (see Rickles 2007 for
an overview). Where traditional models of crises include individual
investors with beliefs and desires modelled by probability
distributions and utility functions, econophysics models capture
crises the way physicists model transitions of matter from fluid to
solid state (Kuhlmann 2014).



Next, consider asset pricing theory. Ever since Bachelier's
groundbreaking mathematical treatment of asset pricing, financial
economists have struggled to find the best way to determine the price
developments of securities such as shares, bonds, and derivative
instruments such as options. The mathematics of financial returns has
received some attention in the literature (de Bruin & Walter 2017;
Ippoliti & Chen 2017). Most models assume that returns follow
Gaussian random walks, that is, stochastic processes in discrete time
with independent and identically distributed increments. Empirical
studies show, however, that returns are more peaked than Gaussian
distributions, and that they have "fat tails". This means
that extreme events such as financial crises are far less improbable
than the models assume. An exception with regards to these assumptions
is Benoit Mandelbrot's (1963) well-known contribution to
financial mathematics, and work in this direction is gaining traction
in mathematical finance.



A third aspect of financial models concerns the way they incorporate
uncertainty (Bertolotti & Magnani 2017). Some of the problems of
contemporary financial (and macroeconomic) models are due to the way
they model uncertainty as risk, as outlined above (Frydman &
Goldberg 2013). Both neo-classical models and behavioral economics
capture uncertainty as probabilistic uncertainty, consequently
ignoring Knightian uncertainty (Knight 1921 see also
 decision theory).
 The philosophy of science literature that pertains to financial
economics is, however, still fairly small (Vergara Fernandez
& de Bruin 2021).


## 4. Ethics



Having considered the epistemic and scientific challenges of finance,
we now turn to the broad range of compelling ethical challenges
related to money and finance. The present part is divided into three
sections, discussing 1) the claim that financial activities are always
morally suspect, 2) various issues of fairness that can arise in
financial markets, and 3) discussions about the social
responsibilities of financial agents.


### 4.1 Money as the Root of All Evil?



Throughout cultural history, activities that involve money or finance
have been subject to intense moral scrutiny and ethical debate. It
seems fair to say that most traditional ethicists held a very negative
attitude towards such activities. We will here discuss three very
sweeping criticisms, respectively directed at the love of money (the
profit motive), usury (lending at interest), and speculation (gambling
in finance).


#### 4.1.1 The love of money



At the heart of many sweeping criticisms of money and finance lies the
question of motive. For instance, the full Biblical quotation says
that "the love of money is the root of all [kinds of]
evil" (1 Timothy 6:10). To have a "love of money",
or (in less moralistic words) a profit motive, means to seek money for
its own sake. It has been the subject of much moral criticism
throughout history and continues to be controversial in popular
morality.



There are three main variations of the criticism. A first variation
says that there is something unnatural about the profit motive itself.
For example, Aristotle argued that we should treat objects in ways
that are befitting to their fundamental nature, and since money is not
meant to be a good in itself but only a medium of exchange (see
 section 1.1),
 he concluded that it is unnatural to desire money as an end in itself
(*Politics*, 1252a-1260b). A similar thought is picked up
by Marx, who argues that capitalism replaces the natural economic
cycle of C-M-C (commodity exchanged for money exchanged
for commodity) with M-C-M (money exchanged for commodity
exchanged for money). Thus the endless accumulation of money becomes
the sole goal of the capitalist, which Marx describes as a form of
"fetishism" (Marx 1867, volume I).



A second variation of the criticism concerns the character, or more
precisely the vice, that the profit motive is thought to exemplify
(see also
 virtue ethics).
 To have a love for money is typically associated with selfishness and
greed, i.e., a desire to have as much as possible for oneself and/or
more than one really needs (McCarty 1988, Walsh & Lynch 2008).
Another association is the loss of moral scruples so that one is ready
to do anything for money. The financial industry is often held out as
the worst in this regard, especially because of its high levels of
compensation. Allegations of greed soared after the 2008 crisis, when
financial executives continued to receive million-dollar bonuses while
many ordinary workers lost their jobs (Piketty 2014, McCall 2010,
Andersson & Sandberg 2019).



A third variation of the criticism says that the profit motive signals
the absence of more appropriate motives. Kant argued that actions only
have moral worth if they are performed for moral reasons, or, more
specifically, for the sake of duty. Thus it is not enough that we do
what is right, we must also do it *because* it is right (Kant
1785). Another relevant Kantian principle is that we never should
treat others merely as means for our own ends, but always also as ends
in themselves (see also
 Kant's moral philosophy).
 Both of these principles seem to contrast with the profit motive
which therefore is rendered morally problematic (Bowie 1999, Maitland
2002). It should come as no surprise that Kant was a strong critic of
several examples of "commodification" and other market
excesses (see also
 markets).



There are two main lines of defensive argumentation. The most
influential is Adam Smith's well-known argument about the
positive side-effects of a self-interested pursuit of profits:
although the baker and brewer only aim at their own respective good,
Smith suggested, they are "led by an invisible hand" to at
the same time promote the public good (Smith 1776, see also Mandeville
1732). This argument is typically viewed as a consequentialist
vindication of the profit motive (see also
 consequentialism):
 positive societal effects can morally outweigh the possible
shortcomings in individual virtue (Flew 1976).



A second argument is more direct and holds that the profit motive can
exemplify a positive virtue. For example, there is the well-known
Protestant work ethic that emphasizes the positive nature of hard
work, discipline and frugality (Long 1972, Wesley 1771). The profit
motive can, on this view, be associated with virtues such as ambition,
industry, and discipline (see also Brennan 2021). According to Max
Weber (1905), the Protestant work ethic played an important role in
the development of capitalism. But it is not clear whether any of
these arguments can justify an *exclusive* focus on profits, of
course, or rather give permission to *also* focus on profits
under certain circumstances.


#### 4.1.2 Usury and interest



If having a love of money seems morally suspect, then the practice of
making money on money--for instance, lending money at
interest--could seem even worse. This is another sweeping
criticism directed at finance that can be found among the traditional
ethicists. Societies in both Ancient and Medieval times typically
condemned or banned the practice of "usury", which
originally meant all charging of interest on loans. As the practice
started to become socially acceptable, usury came to mean the charging
of *excessive rates* of interest. However, modern Islam still
contains a general prohibition against interest, and many countries
still have at least partial usury laws, most often setting an upper
limit on interest rates.



What could be wrong with lending at interest? Some of the more obscure
arguments concern the nature of money (again): Aristotle argued that
there is something unnatural with "money begetting money".
While he allowed that money is a useful means for facilitating
commercial exchange, Aristotle thought that it has no productive use
in itself and so receiving interest over and above the borrowed amount
is unnatural and wrong (*Politics*, 1258b). A related argument
can be found in Aquinas, who argued that money is a good that is
consumed on use. Although a lender can legitimately demand repayment
of an amount equivalent to the loan, it is illegitimate to demand
payment for the *use* of the borrowed amount and so adding
interest is unnatural and wrong (*Summa Theologica*,
II-II, Q78).



Some more promising arguments concern justice and inequality. For
example, as early as Plato we see the expression of the worry that
allowing interest may lead to societal instability (*The
Republic*, II). It may be noted that the biblical condemnations of
usury most straightforwardly prohibit interest-taking from the poor.
One idea here is that we have a duty of charity to the poor and
charging interest is incompatible with this duty. Another idea is that
the problem lies in the outcome of interest payments: Loans are
typically extended by someone who is richer (someone with capital) to
someone who is poorer (someone without it) and so asking for
additional interest may increase the inequitable distribution of
wealth (Sandberg 2012, Visser & MacIntosh 1998). A third idea,
which is prominent in the protestant tradition, is that lending often
involves opportunism or exploitation in the sense of offering bad
deals to poor people who have no other options (Graafland 2010).



The Islamic condemnation of interest, or *riba*, adds an
additional, third line of argument which holds that interest is
essentially unearned or undeserved income: Since the lender neither
partakes in the actual productive use of the money lent, nor exposes
him- or herself to commercial risk, the lender cannot legitimately
share in the gains produced by the loan (Ayub 2007, Birnie 1952,
Thomas 2006). Based on this argument, contemporary Islamic banks
insist that lenders and borrowers must form a business partnership in
order for fees on loans to be morally legitimate (Ayub 2007, Warde
2010). Economists have over the years given several retorts to this
argument. Some economists stress that lending also involves risk
(e.g., that the borrower defaults and is unable to repay); others
stress the so-called opportunity costs of lending (i.e., that the
money could have been used more profitably elsewhere); and yet again
others stress the simple time-preference of individuals (i.e., that we
value present more than future consumption, and therefore the lender
deserves compensation for postponing consumption).



The gradual abandonment of the medieval usury laws in the West is
typically attributed to a growing acknowledgment of the great
potential for economic growth unleashed by easy access to capital. One
could perhaps say that history itself disproved Aristotle: money
indeed proved to have a productive use. In a short text from 1787,
Bentham famously poked fun at many of the classical anti-usury
arguments and defended the practice of charging interest from a
utilitarian standpoint (Bentham 1787). However, this does not mean
that worries about the ethics of charging interest, and allegations of
usury, have disappeared entirely in society. As noted above, usury
today means charging interest rates that seem excessive or exorbitant.
For instance, many people are outraged by the rates charged on modern
payday loans, or the way in which rich countries exact interest on
their loans from poor countries (Baradaran 2015, Graeber 2011, Herzog
2017a). These intuitions have clear affinities with the justice-based
arguments outlined above.


#### 4.1.3 Speculation and gambling



A sweeping criticism of a more contemporary nature concerns the
supposed moral defects of speculation. This criticism tends to be
directed towards financial activities that go beyond mere lending.
Critics of the capitalist system often liken the stock market to a
casino and investors to gamblers or punters (Sinn 2010, Strange 1986).
More moderate critics insist on a strict distinction between investors
or shareholders, on the one hand, and speculators or gamblers, on the
other (Bogle 2012, Sorell & Hendry 1994). In any case, the
underlying assumption is that the similarities between modern
financial activities and gambling are morally troublesome.



On some interpretations, these concerns are similar to those raised
above. For example, some argue that speculators are driven by the
profit motive whereas investors have a genuine concern for the
underlying business enterprise (Hendry 2013). Others see speculation
as "parasitic", that is, to be without productive use, and
solely dependent on luck (Borna & Lowry 1987, Ryan 1902). This
latter argument is similar to the complaint about undeserved income
raised in particular by Islamic scholars (Ayub 2007, Warde 2010).



A more distinct interpretation holds that speculation typically
includes very high levels of risk-taking (Borna & Lowry 1987).
This is morally problematic when the risks not only affect the gambler
him or herself but also society as a whole. A root cause of the
financial crisis of 2008 was widespread speculation on very risky
derivatives such as "synthetic collateralized debt
obligations" (see
 section 1.2).
 When the value of such derivatives fell dramatically, the financial
system as a whole came to the brink of collapse. We will return to
this issue below (in
 section 4.3.1).
 In this regard, the question of risk imposition becomes important too
(Moggia 2021).



A related interpretation concerns the supposed short-sightedness of
speculation. It is often argued that financial agents and markets are
"myopic" in the sense that they care only about profits in
the very near term, e.g., the next quarter (Dallas 2012). Modern
disclosure requirements force companies to publish quarterly earnings
reports. The myopia of finance is typically blamed for negative
effects such as market volatility, the continuous occurrence of manias
and crashes, inadequate investment in social welfare, and the general
shortsightedness of the economy (e.g., Lacke 1996).



Defenders of speculation argue that it can serve a number of positive
ends. To the extent that all financial activities are speculative in
some sense, of course, the ends coincide with the function of finance
more generally: to channel funds to the individuals or companies who
can use them in the most productive ways. But even speculation in the
narrower sense--of high-risk, short-term bets--can have a
positive role to play: It can be used to "hedge" or
off-set the risks of more long-term investments, and it contributes to
sustaining "market liquidity" (that is, as a means for
providing counterparties to trade with at any given point of time)
which is important for an efficient pricing mechanism (Angel &
McCabe 2009, Koslowski 2009).


### 4.2 Fairness in Financial Markets



Let us now assume that the existence of financial markets is at least
in general terms ethically acceptable, so that we can turn to discuss
some of the issues involved in making them fair and just for all
parties involve. We will focus on three such issues: deception and
fraud (honesty), conflicts of interest (care for customers), and
insider trading (fair play).


#### 4.2.1 Deception and fraud



Some of the best-known ethical scandals in finance are cases of
deception or fraud. Enron, a huge US corporation, went bankrupt after
it was discovered that its top managers had "cooked the
books", i.e., engaged in fraudulent accounting practices,
keeping huge debts off the company's balance sheet in an effort
to make it look more profitable (McLean & Elkind 2003). Other
scandals in the industry have involved deceptive marketing practices,
hidden fees or costs, undisclosed or misrepresented financial risks,
and outright Ponzi schemes (see
 section 2).



While these examples seem obvious, on further examination it is not
easy to give an exact definition of financial deception or fraud. The
most straightforward case seems to be deliberately misrepresenting or
lying about financial facts. However, this assumes that there is such
a thing as a financial fact, i.e., a correct way of representing a
financial value or transaction. In light of the socially constructed
nature of money and finance (see
 section 1),
 this may not always be clear. Less straightforward cases include
simply concealing or omitting financial information, or refraining
from obtaining the information in the first place.



A philosophical conception of fraud, inspired by Kant, defines it as
denying to the weaker party in a financial transaction (such as a
consumer or investor) information that is necessary to make a rational
(or autonomous) decision (Boatright 2014, Duska & Clarke 2002).
Many countries require that the seller of a financial product (such a
company issuing shares) must disclose all information that is
"material" to the product. It is an interesting question
whether this suggestion, especially the conception of rationality
involved, should include or rule out a consideration of the ethical
nature of the product (such as the ethical nature of the
company's operations) (Lydenberg 2014). Furthermore, there may
be information that is legitimately excluded by other considerations,
such as the privacy of individuals or companies commonly protected by
"bank secrecy" laws.



But is access to adequate information enough? A complication here is
that the weaker party, especially ordinary consumers, may have trouble
processing the information sufficiently well to identify cases of
fraud. This is a structural problem in finance that has no easy fix,
because financial products are often abstract, complex, and difficult
to price. Therefore, full autonomy of agents may not only require
access to adequate information, but also access to sufficient know
how, processing ability and resources to analyze the information
(Boatright 2014). One solution is to require that the financial
services industry promotes transparent communication in which they
track the understanding of ordinary consumers (de Bruin 2014b,
Endorfer & De Bruin 2019, Shiller 2012).


#### 4.2.2 Avoiding conflicts of interest



Due to the problems just noted, the majority of ordinary consumers
refrain from engaging in financial markets on their own and instead
rely on the services of financial intermediaries, such as banks,
investment funds, and insurance companies. But this opens up new
ethical problems that are due to the conflicts of interest inherent in
financial intermediation. Simply put, the managers or employees of
intermediaries have ample opportunity, and often also incentives, to
misuse their customers' money and trust.



Although it is once again difficult to give an exact definition, the
literature is full of examples of such misuse--including
so-called churning (trading excessively to generate high fees),
stuffing (selling the bank's undesired assets to a client),
front-running (buying an asset for the bank first and then reselling
it to the client at a higher price) and tailgating (mimicking a
client's trade to piggyback on his/her information) (Dilworth
1994; Heacock, Hill, & Anderson 1987). Interestingly, some argue
that the whole industry of actively managed investment funds may be
seen as a form of fraud. According to economic theory, namely, it is
impossible to beat the average returns of the market for any given
level of financial risk, at least in the long term. Therefore, funds
who claim that they can do this for a fee are basically cheating their
clients (cf. Hendry 2013, Kay 2015).



A legal doctrine that aims to protect clients is so-called fiduciary
duty, which imposes obligations on fiduciaries (those entrusted with
others' money) to act in the sole interest of beneficiaries
(those who own the money). The interests referred to are typically
taken to be *financial* interests, so the obligation of the
fiduciary is basically to maximize investment returns. But some argue
that there are cases in which beneficiaries' broader interests
should take precedence, such as when investing in fossil fuels may
give high financial returns but pose serious risks to people's
future (Lydenberg 2014; Sandberg 2013, 2016). In any case, it is often
thought that fiduciary duties go beyond the ideal of a free market to
instead give stronger protection to the weaker party of a fragile
relationship.



As an alternative or compliment to fiduciary duty, some argue for the
adoption of a code of ethics or professional conduct by financial
professionals. A code of ethics would be less arduous in legal terms
and is therefore more attractive to free market proponents (Koslowski
2009). It can also cover other fragile relationships (including those
of bank-depositor, advisor-client, etc.). Just as doctors and lawyers
have a professional code, then, so finance professionals could have
one that stresses values such as honesty, due care and accuracy (de
Bruin 2016, Graafland & Ven 2011). But according to critics, the
financial industry is simply too subdivided into different roles and
competencies to have a uniform code of ethics (Ragatz & Duska
2010). It is also unclear whether finance can be regarded as a
profession in the traditional sense, which typically requires a body
of specialized knowledge, high degrees of organization and
self-regulation, and a commitment to public service (Boatright 2014,
Herzog 2019).


#### 4.2.3 Insider trading



Probably the most well-known ethical problem concerning fairness in
finance, and also perhaps the one on which philosophers most disagree,
is so-called insider trading. Put simply, this occurs when an agent
uses his or her position within, or privileged information about, a
company to buy or sell its shares (or other related financial assets)
at favorable times and prices. For example, a CEO may buy shares in
his or her company just before it announces a major increase in
earnings that will boost the share price. While there is no fraud or
breach of fiduciary duty, the agent seems to be exploiting an
asymmetry of information.



Just as in the cases above, it is difficult to give an exact
definition of insider trading, and the scope of its operative
definition tends to vary across jurisdictions. Most commentators agree
that it is the *information* and its attendant
*informational asymmetry* that counts and, thus, the
"insider" need not be inside the company at
all--those abusing access to information could be family, friends
or other tippees (Irvine 1987a, Moore 1990). Indeed, some argue that
even stock analysts or journalists can be regarded as insiders if they
trade on information that they have gathered themselves but not yet
made publicly available. It is also debatable whether an actual trade
has to take place or whether insider trading can consist in an
omission to trade based on inside information, or also in enabling
others to trade or not trade (Koslowski 2009).



Several philosophical perspectives have been used to explain what (if
anything) is wrong with insider trading. A first perspective invokes
the concept of fair play. Even in a situation with fully autonomous
traders, the argument goes, market transactions are not fair if one
party has access to information that the other has not. Fair play
requires a "level playing field", i.e., that no
participant starts from an unfairly advantaged position (Werhane 1989,
1991). However, critics argue that this perspective imposes excessive
demands of informational equality. There are many asymmetries of
information in the market that are seemingly unproblematic, e.g., that
an antiquary knows more about antiques than his or her customers
(Lawson 1988, Machan 1996). So might it be the
*inaccessibility* of inside information that is problematic?
But against this, one could argue that, in principle, outsiders have
the possibility to become insiders and thus to obtain the exact same
information (Lawson 1988, Moore 1990).



A second perspective views insider trading as a breach of duty, not
towards the counterparty in the trade but towards the source of the
information. US legislation treats inside information as the property
of the underlying company and, thus, insider trading is essentially a
form of theft of corporate property (often called the misappropriation
theory) (Lawson 1988). A related suggestion is that it can be seen as
a violation of the fiduciary duty that insiders have towards the
company for which they work (Moore 1990). However, critics argue that
the misappropriation theory misrepresents the relationship between
companies and insiders. On the one hand, there are many normal
business situations in which insiders are permitted or even expected
to spread inside information to outside sources (Boatright 2014). On
the other hand, if the information is the property of the company, why
do we not allow it to be "sold" to insiders as a form of
remuneration? (Engelen & van Liedekerke 2010, Manne 1966)



A third perspective deals with the effects, both direct and indirect,
of allowing insider trading. Interestingly, many argue that the direct
effects of such a policy might be positive. As noted above, one of the
main purposes of financial markets is to form (or
"discover") prices that reflect all available information
about a company. Since insider trading contributes important
information, it is likely to improve the process of price discovery
(Manne 1966). Indeed, the same reasoning suggests that insider trading
actually helps the counterparty in the trade to get a better price
(since the insider's activity is likely to move the price in the
"right" direction) so it is a victimless crime (Engelen
& Liedekerke 2010). However, others express concern over the
indirect effects, which are likely to be more negative. Allowing
insider trading may erode the moral standards of market participants
by favoring opportunism over fair play (Werhane 1989). Moreover, many
people may be dissuaded from even participating in the market since
they feel that it is "rigged" to their disadvantage
(Strudler 2009).


### 4.3 The Social Responsibility of Finance



We will now move on to take a societal view on finance, and discuss
ideas relating to the broader social responsibilities of financial
agents, that go beyond their basic role as market participants. We
will discuss three such ideas here, respectively focusing on systemic
risk (a responsibility to avoid societal harm), microfinance (a
responsibility towards the poor or unbanked), and socially responsible
investment (a responsibility to help address societal challenges).


#### 4.3.1 Systemic risk and financial crises



One root cause of the financial crisis of 2008 was the very high
levels of risk-taking of many banks and other financial agents. When
these risks materialized, the financial system came to the brink of
collapse. Many banks lost so much money that their normal lending
operations were hampered, which in turn had negative effects on the
real economy, with the result that millions of "ordinary"
people around the world lost their jobs. Many governments stepped in
to bail out the banks and in consequence sacrificed other parts of
public spending. This is a prime example of how certain financial
activities, when run amok, can have devastating effects on third
parties and society in general.



Much subsequent debate has focused on so-called systemic risk, that
is, the risk of failures across several agents which impairs the
functioning of the financial system as such (Brunnermeier & Oehmke
2013, Smaga 2014). The concept of systemic risk gives rise to several
prominent ethical issues. To what extent do financial agents have a
moral duty to limit their contributions to systemic risk? It could be
argued that financial transactions always carry risk and that this is
"part of the game". But the important point about systemic
risk is that financial crises have negative effects on third parties
(so-called externalities). This constitutes a prima facie case for a
duty of precaution on the part of financial agents, based on the
social responsibility to avoid causing unnecessary harm (James 2017,
Linarelli 2017). In cases where precaution is impossible, one could
add a related duty of rectification or compensation to the victims of
the harm (Endorfer 2022). It is, however, a matter of
philosophical dispute whether finance professionals can be held
morally responsible for these harms (de Bruin 2018, Moggia 2021).



Two factors determine how much an agent's activity contributes
to systemic risk (Brunnermeier & Oehmke 2013, Smaga 2014). The
first is financial risk of the agent's activity in the
traditional sense, i.e., the probability and size of the potential
losses for that particular agent. A duty of precaution may here be
taken to imply, e.g., stricter requirements on capital and liquidity
reserves (roughly, the money that the agents must keep in their
coffers for emergency situations) (Admati & Hellwig 2013). The
second factor is the agent's place in the financial system,
which typically is measured by its interconnectedness with--and
thereby potential for cascading effects upon--other agents. This
factor indicates that the duty of precaution is stronger for financial
agents that are "systemically important" or, as the saying
goes, "too-big-to-fail" institutions (Stiglitz 2009).



As an alternative to the reasoning above, one may argue that the duty
of precaution is more properly located on the collective, i.e.,
political level (James 2012, 2017). We return to this suggestion below
(in
 section 5.1).


#### 4.3.2 Microfinance



Even in normal times, people with very low income or wealth have
hardly any access to basic financial services. Commercial banks have
little to gain from offering such services to them; there is an
elevated risk of loan losses (since the poor lack collateral) and it
is costly to administer a large amount of very small loans
(Armendariz & Morduch 2010). Moreover, there will likely be
cases where some bank officers discriminate against underprivileged
groups, even where extensive legal protection is in place. An
initiative that seeks to remedy these problems is
"microfinance", that is, the extension of financial
services, such as lending and saving, to poor people who are otherwise
"unbanked". The initiative started in some of the poorest
countries of the world, such as Bangladesh and India.



The justifications offered for microfinance are similar to the
justifications offered for development aid. A popular justification
holds that affluent people have a duty of assistance towards the poor,
and microfinance is thought to be a particularly efficient way to
alleviate poverty (Yunus 1998, 2007). But is this correct? Judging
from the growing number of empirical "impact studies", it
seems more correct to say that microfinance is *sometimes*
helpful, but at other times can be either ineffective or have negative
side-effects (Hudon & Sandberg 2013, Roodman 2012). Another
justification holds that there is a basic human right to subsistence,
and that this includes a right to savings and credit (Hudon 2009,
Meyer 2018). But critics argue that the framework of human rights is
not a good fit for financial services that come with both benefits and
challenges (Gershman & Morduch 2015, Sorell 2015).



Microfinance is of course different from development aid in that it
involves commercial banking relations. This invites the familiar
political debate of state- versus market-based support. Proponents of
microfinance argue that traditional state-led development projects
have been too rigid and corrupt, whereas market-based initiatives are
more flexible and help people to help *themselves*
(Armendariz & Morduch 2010, Yunus 2007). According to
critics, however, it is the other way around: Markets will tend to
breed greed and inequality, whereas real development is created by
large-scale investments in education and infrastructure (Bateman 2010,
H. Weber 2004).



In recent years, the microfinance industry has witnessed several
"ethical scandals" that seemingly testify to the risk of
market excesses. Reports have indicated that interest rates on
microloans average at 20-30% per annum, and can sometimes be in
excess of 100%, which is much higher than the rates for non-poor
borrowers. This raises questions about usury (Hudon & Ashta 2013;
Rosenberg, Gonzalez, & Narain 2009). However, some suggest a
defense of "second best", or last resort, when other
sources of aid or cheaper credit are unavailable (Sandberg 2012).
Microfinance institutions have also been accused of using coercive
lending techniques and forceful loan recovery practices (Dichter &
Harper (eds) 2007; Priyadarshee & Ghalib 2012). This raises
questions about the ethical justifiability of commercial activity
directed at the desperately poor, because very poor customers may have
no viable alternative to accepting deals that are both unfair and
exploitative (Arnold & Valentin 2013, Hudon & Sandberg
2013).


#### 4.3.3 Socially responsible investment



Socially responsible investment refers to the emerging practice
whereby financial agents give weight to putatively ethical, social or
environmental considerations in investment decisions--e.g.,
decisions about what bonds or stocks to buy or sell, or how to engage
with the companies in one's portfolio. This is sometimes part of
a strictly profit-driven investment philosophy, based on the
assumption that companies with superior social performance also have
superior financial performance (Richardson & Cragg 2010). But more
commonly, it is perceived as an alternative to mainstream investment.
The background argument here is that market pricing mechanisms, and
financial markets in particular, seem to be unable to promote
sufficient levels of social and environmental responsibility in firms.
Even though there is widespread social agreement on the evils of
sweatshop labor and environmental degradation, for instance,
mainstream investors are still financing enterprises that sustain such
unjustifiable practices. Therefore, there is a need for a new kind of
investor with a stronger sense of social responsibility (Sandberg
2008, Cowton & Sandberg 2012).



The simplest and most common approach among these alternative
investors is to avoid investments in companies that are perceived to
be ethically problematic. This is typically justified from a
deontological idea to the effect that it is wrong to invest in someone
else's wrongdoing (Irvine 1987b, Langtry 2002, Larmer 1997).
There are at least three interpretations of such moral
"taint": (1) the view that it is wrong in itself to profit
from others' wrongdoings, or to benefit from other
people's suffering; (2) the view that it is wrong to harm
others, or also to facilitate harm to other; or (3) the view that
there is a form of expressive or symbolic wrongdoing involved in
"morally supporting" or "accepting" wrongful
activities.



The deontological perspective above has been criticized for being too
black-and-white. On the one hand, it seems difficult to find any
investment opportunity that is completely "pure" or devoid
of possible moral taint (Kolers 2001). On the other hand, the
relationship between the investor and the investee is not as direct as
one may think. To the extent that investors buy and sell shares on the
stock market, they are not engaging with the underlying companies but
rather with other investors. The only way in which such transactions
could benefit the companies would be through movements in the share
price (which determines the companies' so-called cost of
capital), but it is extremely unlikely that a group of ethical
investors can significantly affect that price. After all, the
*raison d'etre* of stock exchanges is exactly to
create markets that are sufficiently liquid to maintain stable prices
(Haigh & Hazelton 2004, Hudson 2005). In response to this, the
deontologist could appeal to some notion of universalizability or
collective responsibility: perhaps the right question to ask is not
"what happens if *I* do this?" but instead
"what happens if *we all* do this?". However, such
more complicated philosophical positions have problems of their own
(see also
 rule consequentialism
 and
 collective responsibility)



A rival perspective on socially responsible investment is the (more
straightforward) consequentialist idea that investors' duty
towards society consists in using their financial powers to promote
positive societal goods, such as social justice and environmental
sustainability. This perspective is typically taken to prefer more
progressive investment practices, such as pushing management to adopt
more ambitious social policies and/or seeking out environmentally
friendly technology firms (Mackenzie 1997, Sandberg 2008). Of course,
the flip side of such practices, which may explain why they are less
common in the market, is that they invite greater financial risks
(Sandberg 2011). It remains an open question whether socially
responsible investment will grow enough in size to make financial
markets a force for societal change.



Recent work has started exploring whether concrete sustainable finance
policies (such as those suggested by the European Commission's
Sustainable Finance Action Plan) will generate sufficient funds to pay
for climate change mitigation and adaptation, based as they are on
policies of information provision only (De Bruin 2023).


## 5. Political Philosophy



Discussions about the social responsibility of finance are obviously
premised on the observation that the financial system forms a central
infrastructure of modern economies and societies. As we noted at the
outset, it is important to see that the system contains both private
elements (such as commercial banks, insurance companies, and
investment funds) and public elements (such as central banks and
regulatory bodies). However, issues concerning the proper balance
between these elements, especially the proper role and reach of the
state, are perennially recurrent in both popular and philosophical
debates.



The financial system and the provision of money indeed raise a number
of questions that connect it to the "big questions" of
political philosophy: including questions of democracy, justice, and
legitimacy, at both the national and global levels (on the history of
political thinking about money see Eich 2019, 2020, 2022; Ingham 2004,
2019; Martin 2013). The discussions around finance in political
philosophy can be grouped under three broad areas: financialization
and democracy; finance, money and domestic justice; and finance and
global justice. We consider these now in turn.


### 5.1 Financialization and Democracy



Many of the questions political philosophy raises about finance have
to do with "financialization". The phenomenon of
"financialization", whereby the economic system has become
characterized by the increasing dominance of finance capital and by
systems of financial intermediation (Erturk et al. 2008; Davis
2011; Engelen et al. 2011; Palley 2013), is of potentially substantial
normative significance in a number of regards. A related normative
concern is the potential growth in political power of the financial
sector, which may be seen as a threat to democratic politics.



These worries are, in effect, an amplification of familiar concerns
about the "structural power" or "structural
constraints" of capital, whereby capitalist investors are able
to reduce the freedom of action of democratic governments by
threatening "investment strikes" when their preferred
political options are not pursued (see Lindblom 1977, 1982; Przeworski
& Wallerstein 1988; Cohen 1989; B. Barry 2002; Christiano 2010,
2012; Furendal & O'Neill 2022). To take one recent version
of these worries, Stuart White argues that a republican commitment to
popular sovereignty is in significant tension with the acceptance of
an economic system where important choices about investment, and hence
the direction of development of the economy, are under the control of
financial interests (White 2011).



In many such debates, the fault-line seems to be the traditional one
between those who favor social coordination by free markets, and hence
strict limitations on state activities, and those who favor democratic
politics, and hence strict limitations on markets (without denying
that there can be intermediate positions). But the current financial
system is *not* a pure creature of the free market. In the
financial system that we currently see, the principle that individuals
are to be held financially accountable for their actions, and that
they will therefore be "disciplined" by markets, is patchy
at best. One major issue, discussed above, is the problem of banks
that are so large and interconnected that their failure would risk
taking down the whole financial system--hence, they can
anticipate that they will be bailed out by tax-payers' money,
which creates a huge "moral hazard" problem (e.g., Pistor
2013, 2017). In addition, current legal systems find it difficult to
impose accountability for complex processes of divided labor, which is
why there were very few legal remedies after the financial crisis of
2008 (e.g., Reiff 2017).



The lack of accountability intensifies worries about the power
relations between democratic politicians and individuals or
corporations in the financial realm. One question is whether we can
even apply our standard concept of democracy to societies that have
the kinds of financial systems we see today. We may ask whether
societies that are highly financialized can ever be true democracies,
or whether they are more likely to be "post-democracies"
(Crouch 2004). For example, states with high levels of sovereign debt
will need to consider the reaction of financial markets in every
significant policy decision (see, e.g., Streeck 2013 [2014], see also
Klein 2020) Moreover "revolving doors" between private
financial institutions and supervising authorities impact on the
ability of public officials to hold financial agents accountable. This
is similar to the problems of conflicts of interest raised above (see
sections
 2
 and
 4.2.2).
 If financial contracts become a central, or maybe even *the*
most central, form of social relations (Lazzarato 2012), this may
create an incompatibility with the equal standing of citizens,
irrespective of financial position, that should be the basis of a
democratic society and its public sphere of deliberation (see also
Bennett 2020 from an epistemic perspective).



While finance has, over long stretches of history, been rather
strictly regulated, there has been a reversed trend towards
deregulation since roughly the 1970s. After the financial crisis of
2008, there have been many calls for reregulation. Proposals include
higher capital ratios in banks (Admati & Hellwig 2013), a return
to the separation of commercial banking from speculative finance, as
had been the case, in the US, during the period when the
Glass-Steagall Act was in place (Kay 2015), or a financial transaction
tax (Wollner 2014). However, given that the financial system is a
global system, one controversial question is whether regulatory steps
by single countries would have any effect other than capital
flight.


### 5.2 Finance, Money, and Domestic Justice



When it comes to domestic social justice, the central question
relating to the finance system concerns the ways in which the
realization of justice can be helped or hindered by how the financial
system is organized.



A first question here, already touched upon in the discussion about
microfinance above
 (section 4.3.2),
 concerns the status of citizens as participants in financial markets.
Should they all have a right to certain financial services such as a
bank account or certain forms of loans, because credit should be seen
as a primary good in capitalist economies (see, e.g., Hudon 2009,
Sorell 2015, Meyer 2018)? More broadly, how does the pattern of access
to credit affect the distribution of freedom and unfreedom within
society? (see Dietsch 2021; Preiss 2021). These are not only issues
for very poor countries, but also for richer countries with high
economic inequality, where it becomes a question of domestic justice.
In some countries all residents have the right to open a basic bank
account (see bank accounts in the EU in
 Other Internet Resources).
 For others this is not the case. It has been argued that not having
access to basic financial services creates an unfairness, because it
drives poorer individuals into a cash economy in which they are more
vulnerable to exploitative lenders, and in which it is more difficult
to build up savings (e.g., Baradaran 2015). Hence, it has been
suggested either to regulate banking services for individuals more
strictly (e.g., Herzog 2017a), to consider various forms of household
debt relief (Persad 2018), or to offer a public banking service, e.g.,
run by the postal office, which offers basic services at affordable
costs (Baradaran 2015).



Secondly, financialization may also have more direct effects on
socio-economic inequality. Those with managerial positions within the
financial sector are disproportionately represented among the very top
end of the income distribution, and so the growth of inequality can in
part be explained by the growth in the financial sector itself
(Piketty 2014). There may also be an effect on social norms, whereby
the "hypermeritocratic" norms of the financial sector have
played a part in increasing social tolerance for inequality in society
more broadly (Piketty 2014: 265, 2020; see also O'Neill 2017,
2021). As Dietsch et al. point out, the process of increasing
financialization within the economies of the advanced industrial
societies has been encouraged by the actions of central banks over
recent decades, and so the issue of financialization also connects
closely to questions regarding the justice and legitimacy of central
banks and monetary policy (Dietsch, Claveau, & Fontan 2016, 2018;
see also Jacobs & King 2016).



Thirdly, many debates about the relation between distributive justice
and the financial system revolve around the market for mortgages,
because for many individuals, a house is the single largest item for
which they need to take out a loan, and their mortgage their main
point of interaction with the financial system. This means that the
question of who has access to mortgage loans and at what price can
have a major impact on the overall distribution of income and wealth.
In addition, it has an impact on how financial risks are distributed
in society. Highly indebted individuals are more vulnerable when it
comes to ups and downs either in their personal lives (e.g., illness,
loss of job, divorce) or in the economy as a whole (e.g., economic
slumps) (Mian & Sufi 2014). The danger here is that existing
inequalities--which many theories of justice would describe as
unjust--are reinforced even further (Herzog 2017a).



Here, however, a question about the institutional division of labor
arises: which goals of distributive justice should be achieved within
markets--and specifically, within financial markets--and
which ones by other means, for example through taxation and
redistribution? The latter has been the standard approach used by many
welfare systems: the idea being to let markets run their course, and
then to achieve the desired patterns of distribution by taxation and
redistribution. If one remains within that paradigm, questions arise
about whether the financial sector should be taxed more highly. In
contrast, the approach of "pre-distribution" (Hacker 2011;
O'Neill & Williamson 2012; O'Neill 202), or what
Dietsch calls "process redistribution" (2010), is to
design the rules of the economic game such that they contribute to
bringing about the distributive pattern that is seen as just. This
could, for example, mean regulating banking services and credit
markets in ways that reduce inequality, for example by imposing
regulations on payday lenders and banks, so that poor individuals are
protected from falling into a spiral of ever higher debt. A more
radical view could be to see the financial problems faced by such
individuals as being caused by more general structural injustices the
solution of which does not necessarily require interventions with the
financial industry, but rather more general redistributive (or
predistributive) policies.



**Money creation:** Another alternative theoretical
approach is to integrate distributive concerns into *monetary*
policy, i.e., when it comes to the creation of money. So far, central
banks have focused on the stability of currencies and, in some cases,
levels of employment. This technical focus, together with the risk
that politicians might abuse monetary policy to try to boost the
economy before elections, have been used in arguments for putting the
control of the money supply into the hands of technical experts,
removing monetary policy from democratic politics. But after the
financial crisis of 2008, many central banks have used unconventional
measures, such as "quantitative easing", which had
strongly regressive effects, favoring the owners of stocks or of
landed property (Fontan et al. 2016, Dietsch 2017); they did not take
into account other societal goals, e.g., the financing of green
energy, either. This raises new questions of justice: are such
measures justified if their declared aim is to move the economy out of
a slump, which presumably also helps disadvantaged individuals
(Haldane 2014)? Would other measures, for instance "helicopter
money" that is distributed to all citizens, have been a better
alternative? And if such measures are used, is it still appropriate to
think of central banks as institutions in which nothing but technical
expertise is required, or should there be some form of accountability
to society? (Fontan, Claveau, & Dietsch 2016; Dietsch 2017; Riles
2018; see also Tucker 2018; van 't Klooster 2020; James &
Hockett 2020, Downey
 2021).[2]



We have already discussed the general issue of the ontological status
of money
 (section 1.1
 above). But there are also significant questions in political
philosophy regarding the question of where, and by what sorts of
institutions, should the money supply be controlled. One complicating
factor here is the extensive disagreement about the institutional
basis of money creation, as described above. One strand of the credit
theory of money emphasizes that in today's world, money creation
is a process in which commercial banks play a significant role. These
banks in effect create new money when they make new loans to
individual or business customers (see McLeay, Radia, & Thomas
2014; see also Palley 1996; Ryan-Collins et al. 2012; Werner 2014a,b).
James Tobin refers to commercial bank-created money, in an evocative
if now dated image as "fountain pen money", that is, money
created with the swish of the bank manager's fountain pen (Tobin
1963).



However, the relationship between private commercial banks and the
central bank is a complicated one, such that we might best think of
money creation as a matter involving a kind of hybrid public-private
partnership. Hockett and Omarova refer to this relationship as
constituting a "finance franchise", with private banks
being granted on a "franchise" basis the money-creating
powers of the sovereign monetary authority, while van 't
Klooster describes this relation between the public and private as
constituting a "hybrid monetary constitution" (Hockett
& Omarova 2017; van 't Klooster 2017; see also Bell 2001).
In this hybrid public-private monetary system, it is true that private
commercial banks create money, but they nevertheless do so in a way
that involves being regulated and subject to the authority of the
central bank within each monetary jurisdiction, with that central bank
also acting as "lender of last resort" (Bagehot 1873) when
inter-bank lending dries
 up.[3]



When the curious public-private nature of money creation is brought
into focus, it is not surprising that there should exist views
advocating a shift away from this hybrid monetary constitution, either
in the direction of a fully public option, or a fully private system
of money creation.



Advocates of fully public banking envisage a system in which private
banks are stripped of their authority to create new money, and where
instead the money supply is directly controlled either by the
government or by some other state agency; for example by the central
bank lending directly to firms and households. Such a position can be
defended on a number of normative grounds: that a public option would
allow for greater financial stability, that a fully public system of
money creation would allow a smoother transmission of democratic
decisions regarding economic governance; or simply because of the
consequences of such a system with regards to socioeconomic inequality
and environmental sustainability (see Jackson & Dyson 2012; Wolf
2014a,b; Laina 2015; Dyson, Hodgson, & van Lerven 2016a,b;
Ingham, Coutts, & Konzelmann 2016; Dow 2016; Wodruff 2019;
van't Klooster 2019, Mellor 2019, Dietsch 2021; for commentary
and criticism see Goodhart & Jensen 2015; Fontana & Sawyer
2016, Larue et al. 2020).



In stark contrast, a number of libertarian authors have defended the
view that the central bank should have no role in money creation, with
the money supply being entirely a matter for private suppliers (and
with the consumers of money able to choose between different rival
suppliers), under a system of "free banking" (e.g., Simons
1936; Friedman 1962; von Hayek 1978; Selgin 1988). Advocacy of private
money creation has received a more recent stimulus with the rise of
Bitcoin and other crypto-currencies, with some of Bitcoin's
advocates drawing on similar libertarian arguments to those offered by
Hayek and Selgin (see Golumbia 2016, Robison 2022). One can also
mention the "alternative currencies" movement here which
defends private money creation on entirely different grounds, most
often by appeal to the value of community (see Larue 2022, Larue et
al. 2022).


### 5.3 Finance and Global Justice



Finally, a number of issues relate questions about finance to
questions about global justice. The debate about global justice (see
also
 global justice)
 has weighed the pros and cons of "statist" and
"cosmopolitan" approaches, that is, approaches to justice
that would focus on the nation state (maybe with some additional
duties of beneficence to the globally poor) or on the global scale.
The financial system is one of the most globalized systems of social
interaction that currently exist, and global entanglements are hard to
deny (e.g., Valentini 2011: 195-8). The question thus is whether
this creates duties of justice on the financial system, and if so,
whether it fulfills these duties, i.e., whether it contributes to
making the world more globally just, or whether it tends in the
opposite direction (or whether it is neutral).



There are a number of institutions, especially the World Bank and the
International Monetary Fund (IMF), that constitute a rudimentary
global order of finance. Arguably, many countries, especially poorer
ones, cannot reasonably opt out of the rules established by these
institutions (e.g., Hassoun 2012, Krishnamurthy 2014). It might
therefore appear to be required by justice that these institutions be
governed in a way that represents the interests of all countries. But
because of historical path-dependencies, and because a large part of
their budget comes from Western countries, the governance structures
are strongly biased in their favor (for example, the US can veto all
important decisions in the IMF). Miller (2010: 134-41) has
described this situation as "indirect financial rule" by
the US (see also Herzog 2021).



An issue worth noting in this context is the fact that the US dollar,
and to a lesser degree the Euro, function as *de facto* global
currencies, with a large part of global trade being conducted in these
currencies (e.g., Mehrling 2011, Eichengreen 2011). This allows the
issuing countries to run a current account deficit, which amounts to a
redistribution from poorer to richer countries for which compensation
might be owed (Reddy 2005: 224-5). This fact also raises
questions about the distribution of power in the global sphere, which
has often been criticized as favoring Western countries (e.g., Gulati
1980, United Nations 2009). However, global financial markets serve
not only to finance trade in goods and services; there are also
questions about fluctuations in these markets that result exclusively
from speculations (see also sect.1.4.3 above). Such fluctuations can
disproportionately harm poorer countries, which are more vulnerable to
movements of capital or rapid changes in commodity prices. Hence, an
old proposal that has recently been revived and defended from a
perspective of global justice is that of a "Tobin tax"
(Tobin 1978), which would tax financial transactions and thereby
reduce volatility in international financial markets (Reddy 2005,
Wollner 2014).



A second feature of the current global order that has been criticized
from a perspective of justice is the "borrowing
privilege". As Pogge describes (e.g., 2008: chap. 4), the
governments of countries can borrow on international financial
markets, no matter whether they have democratic legitimacy or not.
This means that rogue governments can finance themselves by incurring
debts that future generations of citizens will have to repay.



Sovereign debt raises a number of questions that are related to global
justice. Usually, the contracts on which they are based are considered
as absolutely binding (e.g., Suttle 2016), which can threaten national
sovereignty (Dietsch 2011), and raises questions of the moral and
political responsibilities both of citizens of debtor nations, and of
creditor countries themselves (Wiedenbrug, 2018a, 2018b). These
problems obtain in particular with regard to what has been called
"odious" debt (Sack 1927, Howse 2007, Dimitriu 2015, King
2016): cases in which government officials sign debt contracts in
order to enrich themselves, with lenders being aware of this fact.
Such cases have been at the center of calls for a jubilee for indebted
nations. At the moment, there are no binding international rules for
how to deal with sovereign bankruptcy, and countries in financial
distress have no systematic possibility of making their claims heard,
which is problematic from a perspective of justice (e.g., Palley 2003;
Reddy 2005: 26-33; Herman 2007; C. Barry & Tomitova 2007;
Wollner 2018). The IMF, which often supports countries in
restructuring sovereign debt, has often made this support conditional
upon certain requirements about rearranging the economic structures of
a country (for a discussion of the permissibility of such practices
see C. Barry 2011).



Finally, and perhaps most importantly, the issue of financial
regulation has a global dimension in the sense that capital is mobile
across national boundaries, creating the threats to democracy
described above. This fact makes it difficult for individual
countries, especially smaller ones, to install the more rigid
financial regulations that would be required from a perspective of
justice. Just as with many other questions of global justice (see,
e.g., Dietsch 2015 on taxation), we seem to see a failure of
coordination between countries, which leads to a "race to the
bottom". Making global financial institutions more just is
therefore likely to require significant levels of international
cooperation.