Fishburn Hedges

02.06.2010

Robert Cole, news editor, former business editor of The Times and recent author of The Unwritten Laws of Finance and Investment, draws on some themes from his recent work to emphasise the human, even moral, aspects of money.

My slim volume provides sharp and sweet guidance for those that know less, or more, about the world in which I have ensconced myself these past twenty years.

It is astonishing that such a vast majority think that finance is a machine, an inanimate edifice. It is, surely, entirely human, driven to good and bad by the human strengths and flaws that lie behind it. If economics is a science, it is a social science.

To my mind some of the central laws in the book – and before you ask yes I know they cannot be unwritten if they are now written down, it’s an idiomatic title – are the ones that connect money with the people who create it, use it, benefit from it, and suffer at its hands.

So, from a pulpit where some will think I should not be, have these four laws. If you want to argue the toss, or want to berate me as a poseur for being so wilfully obtuse, blogify me at www.robertcolewrites.com

1. The civilising law of finance

Money is an essential component of civilisation – albeit that civilisations have not always shown themselves to be civilised. In some senses money almost defines civilisation.

Why? Before settled civilisations were created, men were nomads, hunters and gatherers, jacks of all trades. Cavemen subsisted, making or taking from nature everything they wanted or needed. They had no need of money.

As settled communities emerged, people became more efficient, productive and affluent. Instead of hunting and gathering, people took specialised roles as farmers or bread makers (and then clothes designers and rocket scientists).

Specialisation meant people got better at what they did and had more opportunities to make discoveries, to invent new techniques and to explore fresh opportunities.

But without money settled civilisations could not function. Without money there would be no effective way for specialists to exchange the things they make with the numerous other things they need but do not, or cannot, make themselves.

Money oils the cogs of civilisation, of specialisation, of progress and of human ingenuity.

It is because of money that the people of the world can give their resources, strength, skills and time to others and it is thanks to currencies that people enjoy enhanced health and more everyday comforts.

2. In trust we trust

‘Glass, china, and reputation are easily cracked, and never well mended,’ said American statesman Benjamin Franklin.

Why do people repay debts? Is it because they feel morally obliged? Is it because they fear retribution, as lenders carry out threats to repossess goods or inflict injury when debts are left unpaid? Do people fear the actions of bailiffs or the due process of law?

Feelings of duty to lenders exist, oddly enough, even when rates of interest are usuriously high.

Part of the obligation comes because people do as they would be done by. A borrower might not renege on a promise for fear that he or she might later be a lender and be hoisted by the same petard.

Borrowers also know that if they renege on a debt they will find it more difficult to borrow in future. It is very likely to be more expensive. It may not be possible to find anyone willing to lend to a blacklisted borrower.

Those who provide capital to companies and governments may have some contractual security offered in exchange, but in the final analysis investors have to trust those executives and ministers who take the money. They trust them to make wise choices, to invest honestly and prudently, to pay interest and dividends, and to stand by obligations to protect, and enhance, the value of savings.

Trust lies at the heart of finance – ancient and modern – although it is, perhaps, for entirely selfish reasons that users of capital try hard not to betray investors’ trust. The financial world is held together by a wide and intricate web of promises.

3. Sound finance is built on fairness

‘Fair exchange,’ as the proverb goes, ‘is no robbery.’

In popular imagination finance polarises society. It separates rich and poor, creating divisions between the ‘haves’ and the ‘have nots’ (and, it is sometimes said, the ‘have yachts’).

Experience suggests these weaknesses are both real and endemic: one has only to recall the United Nations research that suggests the richest 2 per cent of the world’s population own half the world’s household wealth, while the poorest 50 per cent of the global population control just 1 per cent of the world’s riches.

Yet sound financial systems are based on extending fairness, and equality, and distributing wealth. Reliability and sustainability come through linking diverse groups in mutual financial interest.

Take employer-run pension schemes, for example. Through pension schemes, employers and employees, shareholders, regulators, taxpayers, customers and retired people are bound by the common interest of creating and sustaining long-term wealth. Each stakeholder has an invaluable role to play.

Private pension schemes, of the sort developed in Europe and North America in the twentieth century, have thrived in large part because they connected owners and users of investment capital, employers and employees, consumers, producers, taxpayers and the beneficiaries of social welfare in an intricate, sturdy, symbiotic financial network.

In such delicate economic ‘ecosystems’, if one or other group becomes too strong or too weak, the whole intricately symbiotic relationship breaks down.

In the UK in the 1970s, the trade unions held the upper hand and, arguably at least, destabilised the economy because they held too much influence.

In the early to mid-part of the 2000s, the interests of financial capital held sway in a way that proved far from healthy.

It is easy to argue that company executives grabbed too much power and the ordinary investors (who ultimately own most of the capital used by companies) enjoyed too little influence. This might, perhaps should, prompt private investors to take a more active role in the management of their money and the companies in which it is invested.

It is important to watch for companies where one or other set of stakeholders stands out. The over-mighty power of directors and employees of the Enron electricity trading charabanc may, ultimately, be why that story ended in disaster. Robert Maxwell’s publishing empire imploded partly because Robert Maxwell’s interest held precedence over all others.

The interests of other stakeholders, especially the pensioners, were neglected, with disastrous consequences.

4. Money is moral

Finance is often thought to be amoral, perhaps because it often seems to cause immoral behaviour. In fact, issues of morality – or ethics – cannot and should not be divorced from money.

Investors may argue long and hard about the precise nature of ethics, but the rule of thumb must be that unethical behaviour creates bad investments. Sustained investment profits arise from companies and financial institutions that perform useful social functions.

‘There can be no high civility without a deep morality,’ said Ralph Waldo Emerson, the American essayist.