The Moral Psychology of Finance and Virtue Economics (a hasty note)

(Other pressing engagements restrict me from saying more about this topic now, but I plan to turn and write something, at least as an introduction, later in 2009. It seems to me a quite important perspective in the current legal, economic, policy, and intellectual environment of the financial crisis, and one that has not so far emerged in its own right. I might make some unannounced revisions to this at some moment, as it mostly constitutes notes to myself. I’m afraid I buried the lede, though, and don’t have time to correct it now - sorry! - the important stuff is halfway in and then to the end.)

As economics absorbs psychology and expands to create behavioral economics (the intersection of actual behavior and posited rational behavior), it will inevitably wind up having to address a third large area. This third area has sometimes been called ‘moral psychology’ - the study of moral concepts that have to do with the emotional and affective propensities, capacities, and behaviors of human beings. Perhaps not really a discipline, it partakes partly of philosophy of mind and moral philosophy, insofar as it is about elucidating the meanings and concepts of affective states, including the virtues but also including crucial concepts of human psychology, such as trust, friendship, love, hate, and many more. It also partakes, for obvious reasons, of psychology - and yet psychology, because of the disruptions to the discipline of the past fifty years (starting with the collapse of Freudianism), has had difficulty taking part as it sorts its methodologies out.

Can I give any concrete examples of moral psychologists? The writers in moral philosophy who have analyzed the virtues have, to one extent or another, almost of necessity written to some extent in moral psychology - Philippa Foot, for example, or many writers in virtue ethics, notably Rosalind Hursthouse. It also includes writers in virtue ethics and law - Larry Solum, who many of us know for his Legal Theory Blog and as a jurisprudentialist and theorist of intellectual property, is, in my humble view, most important in the long term for his work on virtue ethics and judging. But moral psychology has also included, for reasons also obvious, writers on the morality of punishment, forgiveness, praise and blame, desert, thankfulness, and so on. Some of the most important - the great philosopher of morality, famous for his work on punishment, Herbert Morris, has written extensively on philosophy and psychoanalysis and Freud, and who continues to teach at UCLA on the moral emotions. The link among all these is the willingness to look not merely at actions and acts, but at the interior subjective state as a source and matter of morality, upon affect and affection, that necessarily require a view of mind, emotion, and feeling.

Lawyers and law professors have long shown great propensity for moral psychology - in the distinctions of intentionality in the criminal law, for example, or distinguishing between kinds of performative utterances, and so forth. Taking a book not-quite at random from my shelf, Ian Ayres’, et al., Insincere Promises (Yale 2005). Although you might have thought it would begin with a disquisition on rationality, promising-and-defection games (important, of course), instead it begins with a fastidiously subtle discussion of promising as a performative act, a rigorous linguistic account of mental states in promising sincerely and insincerely. Lawyers are good at moral psychology. To some degree, however, in the infatuation of academic law with rationality games of economics, moral psychology has been devalued as, well ... the humanities.

Affective moral psychology has been au courant for at least a generation now in academic moral philosophy; nothing new there. Behavioral economics is quickly coming into its own. Two things seem to me to have gone unremarked, however, each of which deserves far greater attention.

One is that this rising field of behavioral economics stands in need of far greater attention to and from moral psychology - specifically from philosophers who, trained in the careful distinguishing of moral concepts but also attuned to affect, are able to disentangle such concepts crucial to the new disciplines, but frankly not carefully thought out, such as trust.

I will return to ‘trust’ in a moment. But first note that this attention from philosophers is different from another kind of attention that seems to flow in fits and starts across successive academic generations - the philosophy of economics more generally, meaning by that mostly the philosophical concepts of value and comparison. The philosophy of economics (the field I would be most inclined to study in philosophy and intellectual history were I starting all over) has had some great contributions in recent decades - Elizabeth Anderson, Martha Nussbaum, Amartya Sen, Cass Sunstein (particularly his contributions on incommensurables and on analogical reasoning). Yet it tends to stop and start over the long term. We need more discussion of these core concepts in economics, more attention from philosophers, not less - but I mean something much more specific in referring to moral psychology: philosophy of economics only sometimes addresses itself to questions of affect.

Rising awareness of the specificity of finance, and the role of such things as passions, greed and fear, virtue and vice, rationality and irrationality - naturally these are the first subjects for the new behavioral economics and behavioral finance. But notice how quickly these subjects turn to topics in moral psychology. The great finance economist Robert Schiller, for example, had an opinion piece, drawn out of a new book, in the Wall Street Journal a few days ago (WSJ, Opinion Page, January 27, 2009) that specifically asserted ‘trust’ as a condition of financial markets. Yet it was striking how undeeply conceived the concept of trust was in the essay - it was nothing more than ‘confidence’ in one’s fellow participants.

Whereas the essay seemed to rely upon a quite different idea than merely mutual confidence giving rise to animal spirits, in Keynes’ famous term. It seemed to rely not on trust in one’s fellow market players, but instead the much more psychologically and philosophically nuanced idea that in a society governed by the neutral rule of law, while one might need a certain amount of mutual confidence in the willingness at one point or another in the business cycle to take risks, one did not need to have any great trust in one’s fellow market participants, but instead trust in a set of public institutions to enforce agreed upon relationships between otherwise not-greatly-trusting participants in markets. This is, after all, what separates out public trust societies from cousin-loyalty societies - and the implications of wherein you place your trust have enormous implications for what and how you regulate in order to maintain that necessary trust. If one stops to parse the concepts, trust involves a mutuality, or assumption of mutuality, that confidence need not - it might, as my reference to ‘mutual confidence’ suggests, but it need not. Trust is psychologically and conceptually - evidenced in the nuances for how we use the terms, which is to say, partly as synonyms but partly not - deeper and more inherently ‘mutual’ than confidence: these apparently minor or subtle differences have considerable implications, perhaps surprisingly, for what Schiller’s essay might propose to regulate or not, as a matter of public policy.

This is a small example, of course, and one that does not especially deal with affective aspects of trust - but it is illustrative of the general problem that finance economists have not necessarily thought all that deeply about affective concepts, let alone how an affective, interior, intersubjective concept like trust can be distinguished from other closely related, and yet different (and with different implications, sometimes very large, for how to regulate) concepts in moral psychology - or operationalized as testable propositions in empirical behavioral economics. I would guess that Professor Schiller has probably not read Francis Fukuyama’s under-appreciated book on precisely this subject - and a very fine work of moral psychology by a non-philosopher - Trust: The Social Virtues and the Creation of Prosperity.

The second unremarked thing follows closely on this. It is that finance, in particular, stands in special need of dialogue with moral psychology. Why finance more than economics generally? It is because finance, and finance theorists, are discovering with astonishing rapidity in the dislocations of markets today that markets do not always follow impersonal rules of economic rationality - there are limits upon efficient markets (I say this as a believer, not a revisionist), there are empirical behavioral tendencies that can undermine markets that regulation needs to take into account - and there are important conceptual issues about empirical behavior that need to be understood even in the real-world act of establishing regulation. Trust is a good example - if you think that trust in financial markets is mostly about trust in your fellow participants, as even Greenspan seemed to suggest in his latest Congressional testimony, then you will have one view about regulation. If you think it is about trust in the neutrality of public institutions leading to the enforcement of contrast irrespective of the identity or propensity or affect of other market participants, then you will have a quite different view of regulation. The conceptualization of what is at bottom a concept, a concept with feet planted in multiple disciplines, but ethics and psychology being two of them - that conceptualization really matters. It matters in particular in finance.

Why finance, then? Because in many other parts of economics, the operation of brute self-interest or else the truly impersonal operation of institutions is sufficient to establish and ordain behavior. You don’t need to reach deeply into psychological, let alone moral, concepts, provided (typically) that the law is sufficient to enforce external rules. Finance, by contrast, to the degree that that economists such as Schiller are themselves today asserting that the nature of markets permitting mass participation by individuals, and not just by impersonal institutions, invokes the psychology of both individuals and masses (that is, without saying more about it, both psychology and sociology - sociology, that is, and not merely psychology, in such matters as legitimation of public institutions such as financial markets), then finance is different. It is different in part because of the different role of psychology - and concepts that rely upon affect and upon concepts and understanding of moral affect, greed and fear, virtue and vice, reward and punishment, praise and blame, shame and guilt, anxiety and relief, euphoria and melancholy, animal spirits and animal passivity, affection and disaffection. Those are especially present in mass market finance, as the behavioral economists well know today - but that betokens a far closer examination of the underlying concepts and their meaning. This is a job for moral psychology.

And so ... the moral psychology of finance. Perhaps even a new, and slightly different field ... virtue economics? Why not?

(I see from comments that some people are taking ‘virtue economics’ to mean ‘economics as influenced by distributive morality’ - that field is already highly worked out, and I intend something different here. By ‘virtue economics’, I mean not questions of distributive justice, but instead the conceptual meanings, distinctions, and elucidation of psychological states, emotions, feelings, and affect, as they interact with economics and financial economics particularly.)

I don’t have time at this point to say more. But if we were going further, we might turn to consider not just moral psychology and finance, but also sociology and finance. It is not irrelevant to say that with respect to public financial markets, there is a certain kind of legitimation crisis underway. That is a concept alien these days not just to the economists, but in large part even to the political scientists. But, really, how is one to understand the problem of trust or confidence in public markets in which one invests one’s life savings without a deep concept of ... legitimacy?