GS Finance | The real relationship between money and happiness
The real relationship between money and happiness is not as Reversed, a lack of a certain amount of money or financial security can buy. Money is physical coins and bills that you can trade for the services and goods you receive. It is primarily the medium of exchange, while finance is all about how . Both parties need to be involved in the finances. Separating the money and splitting the bills is a bad idea that only leads to more money and relationship.
Some economists stress that lending also involves risk e. 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: In a short text fromBentham famously poked fun at many of the classical anti-usury arguments and defended the practice of charging interest from a utilitarian standpoint Bentham 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 BaradaranGraeberHerzog a.
These intuitions have clear affinities with the justice-based arguments outlined above. 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 SinnStrange 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 This latter argument is similar to the complaint about undeserved income raised in particular by Islamic scholars AyubWarde This is morally problematic when the risks not only affect the gambler him or herself but also society as a whole.
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. A related interpretation concerns the supposed short-sightedness of speculation. 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.
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: But even speculation in the narrower sense—of high-risk, short-term bets—can have a positive role to play: We will focus on three such issues: 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. In light of the socially constructed nature of money and finance see section 1this 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. 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 One solution is to require that the financial services industry promotes transparent communication in which they track the understanding of ordinary consumers de Bruin b, Shiller But this opens up new ethical problems that are due to the conflicts of interest inherent in financial intermediation.
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.
HendryKay The interests referred to are typically taken to be financial interests, so the obligation of the fiduciary is basically to maximize investment returns. 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 It can also cover other fragile relationships including those of bank-depositor, advisor-client, etc.
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 BoatrightHerzog forthcoming.
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.
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 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. 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. 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 LawsonMoore 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 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 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 Interestingly, many argue that the direct effects of such a policy might be positive.
Since insider trading contributes important information, it is likely to improve the process of price discovery Manne 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 We will discuss three such ideas here, respectively focusing on systemic risk a responsibility to avoid societal harmmicrofinance a responsibility towards the poor or unbankedand socially responsible investment a responsibility to help address societal challenges.
When these risks materialized, the financial system came to the brink of collapse. 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.
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?
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 JamesLinarelli In cases where precaution is impossible, one could add a related duty of rectification or compensation to the victims of the harm James It is, however, a matter of philosophical dispute whether finance professionals can be held morally responsible for these harms de Bruin A duty of precaution may here be taken to imply, e.
As an alternative to the reasoning above, one may argue that the duty of precaution is more properly located on the collective, i. We return to this suggestion below in section 5. Moreover, there will likely be cases where some bank officers discriminate against underprivileged groups, even where extensive legal protection is in place. 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 But is this correct?
Another justification holds that there is a basic human right to subsistence, and that this includes a right to savings and credit HudonMeyer 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. 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 BatemanH.
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.
The simplest and most common approach among these alternative investors is to avoid investments in companies that are perceived to be ethically problematic. The deontological perspective above has been criticized for being too black-and-white.
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.
In response to this, the deontologist could appeal to some notion of universalizability or collective responsibility: 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 It remains an open question whether socially responsible investment will grow enough in size to make financial markets a force for societal change. 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 discussions around finance in political philosophy can be grouped under three broad areas: We consider these now in turn.
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. Barry ; Christiano 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 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 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 e. 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.
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. This is similar to the problems of conflicts of interest raised above see sections 2 and 4. If financial contracts become a central, or maybe even the most central, form of social relations Lazzaratothis may create an incompatibility with the equal standing of citizens, irrespective of financial position, that is the basis of a democratic society.
While finance has, over long stretches of history, been rather strictly regulated, there has been a reversed trend towards reregulation since roughly the s. After the financial crisis ofthere have been many calls for reregulation. 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.
A first question here, already touched upon in the discussion about microfinance above section 4. 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.
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This is not only an issue 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.
Hence, it has been suggested either to regulate banking services for individuals more strictly e. 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 As Dietsch et al.
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. The danger here is that existing inequalities—which many theories of justice would describe as unjust—are reinforced even further Herzog a.
Here, however, a question about the institutional division of labor arises: The latter has been the standard approach used by many welfare systems: If one remains within that paradigm, questions arise about whether the financial sector should be taxed more highly. 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.
Another alternative theoretical approach is to integrate distributive concerns into monetary policy, i.
Philosophy of Money and Finance
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.
This raises new questions of justice: 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? But there are also significant questions in political philosophy regarding the question of where, and by what sorts of institution, should the money supply be controlled.
One complicating factor here is the extensive disagreement about the institutional basis of money creation, as described above. 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. 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: The financial system is one of the most globalized systems of social interaction that currently exist, and global entanglements are hard to deny e. The question thus is whether this creates duties of justice on the financial system, and if so, whether it fulfills these duties, i.
There are a number of institutions, especially the World Bank and the International Monetary Fund IMFthat 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.
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.
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. 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 This fact also raises questions about the distribution of power in the global sphere, which has often been criticized as favoring Western countries e.
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. Such fluctuations can disproportionately harm poorer countries, which are more vulnerable to movements of capital or rapid changes in commodity prices.
As Pogge describes e. 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. 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.
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. 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. You felt pretty much the same way you did before the big jump in pay.
Your income was up but so were your expenses.
This is the relationship between money and happiness | World Economic Forum
You're really not that much happier or unhappier since you started making more. What's that all about? It's called the hedonic treadmill and it means that we humans have a tendency to revert to a normative level of happiness even after undergoing major positive or negative life changes.
Psychologists Philip Brickman and Donald Campbell who coined the term in a essay "Hedonic Relativism and Planning the Good Society" claimed that as a person increases their income, they also increase their expectations and what they want out of life. How much money buys happiness? But we thought money doesn't buy happiness. Well, that's apparently true after achieving a certain income threshold.
Everybody at least needs to keep the wolf away from the door. Reversed, a lack of a certain amount of money or financial security can buy you terrible unhappiness. A recent Princeton University study shows that financial security is important i. So are we doomed gerbils just senselessly running on a giant spinning wheel?