Monday, 12 June 2017

Egyptian and Mesopotamian approaches in economics

My previous post was born out of my frustration that some feel that there is a 'clash of cultures' that will inevitably lead to conflict between east and west/Islam and Christianity.  My view is that within Europe, the Middle East or China there are tensions between liberalism and authoritarianism with any society being susceptible to becoming dominated by either strand.  Every individual needs to decide whether to place there faith in authoritarianism or liberalism, a decision which will be dominated by their experience.

I believe a person's attitude to uncertainty will be fundamental in determining their view towards liberalism or authoritarianism. Cheryl Misak  explains the argument: if the future is unpredictable one must be liberal and open to any point of view, since a minority view might actually be the best.  If the future is predictable then one should place faith in those most competent at predicting the future.

Some ancient historians highlight how Mesopotamian society was founded on unpredictability while the opposite was true for Egypt, and this had profound effects on their cultures and religions.

Mesopotamia is a flat flood plain surrounded on three sides by mountains and to the south by desert. 
By Goran tek-en - Own workBased on;Karte von MesopotamienMesopotamia Syria, CC BY-SA 3.0, Link
The region, as an alluvial flood plain, was extremely fertile.  However it was susceptible to devastating floods, which tended to come at the end of the crop growing season, that could destroy communities.  The Mesopotamian civilisations were also vulnerable to invasions from mountain tribes, such as the Hittites from Anatolia to the north or Medes from the Zagros to the east.  As a result Mesopotamian religion sought to understand capricious gods and learn to predict their behaviour.   This motivated the development of astronomy supported by mathematics.

Ancient Egypt also survived because of a river, the Nile. The civilisation developed a few miles either side of the river and its delta, surrounded by desert that isolated the Egyptians from other civilisations.  Unlike the Tigris and Euphrates, the Nile followed a predictable cycle, flooding annually in a controlled manner.  Rather than bringing destruction, these annual floods rejuvenated the region just as it seemed to become gripped by drought.  A consequence was Egyptian civilisation was relatively static with a religion that focussed on cosmic equilibrium and

The difference between Egyptian and Mesopotamian approaches are highlighted in their different conceptions of the afterlife.   Egyptians believed that if individuals had lead a moral life such that they could pass the judgement of the gods, then their soul would enter paradise on death.  Because the natural world followed stable, predictable patterns, there were regular laws of nature and it followed that there were clearly defined laws of morality, which must be observed.  The Mesopotamian afterlife was a dark, desert-like underworld devoid of water or food; the dead ate dust.  Everyone ended up in this heel, whether they had been good or bad, reflecting the capriciousness of life.

Essentially, the Egyptian conception was based on justice: if a person leads a moral life they will be rewarded.  The Mesopotamians, on the other hand, did not assume an individual gets their just deserts.

I feel that much of the discussion around 'economic justice' presupposes that the world is governed by stable laws that represent an ideal (traditionally, the divine) and this means that choices can be judged as either good or bad.  I am not convinced such stable laws exist in societies and so clear cut judgements are difficult to arrive at.

I started thinking about these ideas after I spoke at the Edinburgh Science Festival and an audience member was angered by my lack of attention to the problem of wealth inequality.  They asserted that money should be distributed "democratically" and seemed to be under the impression that, as a mathematician, I claimed to have deduced a way of "fairly" distributing wealth.  As someone who is extremely sceptical that economics follows any identifiable patterns, just as the Mesopotamians seem to have rejected the idea that there are stable laws of nature, this has never been my objective.  What I am interested in is what is the role of mathematics in finance.  My conclusion is that financial markets are arenas in which parties work towards coming to agreement. This means that to work well they must be governed by discursive rules, rather than traditional norms about what is "good" or "evil".  I adopt Habermas and argue that statements in finance, prices quoted, must be true, truthful and right.  They must conform to  objective, subjective and social truth criteria.  To this end I argue that reciprocity determines the objective truth of a price and is linked to mathematics, while sincerity addresses the subjective truth and charity delivers social rightness.  Together these norms lay the foundations for trust in finance.


Monday, 22 May 2017

A Financial Approach to the 'Clash of Cultures'


Noah Smith has posed a question that resulted in a tweet thread


He later highlighted a book on the question of the ‘east-west divide’.  Noah’s question seems to have been prompted by discussion of the activities of Stephens Bannon and Miller in attacking Islam.

I can’t point Noah towards a book that explains the clash but for the past year I have been working on Ethics in Quantitative Finance which sheds some light on the topic, but from a different perspective.  The aim of the book is to investigate the relationship between mathematics, finance and ethics.  The initial findings were unexpected for a mathematician.  They revealed that there was a recurring theme that finance drove the development of science and democratic politics.  The book was written in the context of an emergence of intolerant populism that I experienced during Scottish Independence Referendum of 2014, the UK EU Referendum of 2016 and the US Presidential Election.

I became interested in Islam on the evening of 9 November 1989.  I was living in London as a recent graduate working for an oil company and, watching the collapse of the Berlin Wall with my two flat-mates we came to the conclusion that, following the collapse of Communism, tensions would emerge between Islam and the West, bearing in mind the two cultures had been allied against the Soviet Union for a decade.   The following weekend I bought Lapidus’ A History of Islamic Societies and spent the following decade forming a positive opinion of the culture, not least because in the early 1990s I spent about 6 months in the UAE.



A point struck me while reading a biography of Sir Richard Francis Bacon.  For most of Bacon’s lifetime, married women in Britain could not own property, it was all owned by their husbands.  This was not the case in Islam, with the famous example of Muhammed wife Khadija.  Rather than this custom being seen as progressive by Victorian Britain, it was regarded as another manifestation of the effeminacy of Islam and part of the justification for Europe’s dominance of Islamic states, from North Africa to East Asia.  Islam’s toleration of sexual diversity was another manifestation of this effeminacy.  Burton’s career in the East India Company was curtailed by his exploration of homosexual brothels and he coined the term ‘Sotadic zone’, which broadly coincided with the predominantly Muslim lands he was familiar with.  In Wilfred Thesinger’s 1920s books on Arabia there is discussion of mukhannath and mustergil, people who are transgender and long accepted in Arabic society.
These portrayals of Islam are diametrically opposite to contemporary attitudes.  Today it is the west that tolerates sexual diversity and gender equality while Islam is presented as repressive.  My conclusion was, and is, that Islam provides a convenient embodiment of “the other” where by specific examples of how Islam is opposite to the West come to dominate how the west sees Islam, while the similarities are ignored.  Many Muslims regard Friday 13th as the holiest day (the Arabic letter ‘M’ for Muhammed is the 13th in the alphabet); in the west it is regarded as unlucky. 

Both Islam and Christianity are built, substantially, on foundations laid by Greek philosophy.  One account (I think it is Unveiling Islam) of the difference is that Islam is rooted in the intellect ‒ it is logical to be a Muslim – where as Christianity is distinguished by its foundation on ‘charity’ (love).  This suggests that there is more in common between Islam and Christianity as there are differences this does not imply that there is not a ‘clash of cultures’, just that the clash is more complex than Christian v. Muslim or ‘East’ v. ‘West’. 

Greek culture that emerged around 600 BCE became known for being distinctive in its attitudes to politics and science.  Greek science developed a non-mythical cosmology.  The central idea emerged in Miletus, in Anatolia, and was apeiron (‘without limit’), something boundless, homogenous, eternal and abstract yet it held and motivated all things.  Simultaneously, across the Aegean in Athens, Greek ideas of democracy were codified.  The standard explanations used to argue that the non-mythical cosmology originated in the polis where citizens were equal and ruled by an impersonal law: democracy generates science.  This account did not acknowledge the temporal simultaneity of the origins of the ideas but there geographical separation.  There needed to be something that preceded democracy and science common to both Athens and Miletus.

A more empirical explanation for origin of the distinctive nature of Greek politics and science lies in the Greek adoption of money in everyday use. 

Money can be seen as a prototype for the apeiron.  Money is ‘fungible’, meaning one money-token is indistinguishable from any other, it is an empty signifier, like a word used in everyday language.  The impersonality of money means that it is universal and makes no distinctions; it is used by rich and poor uniting opposites.  There is a discrepancy between the value of money and its commodity value because money an abstract concept signified by a concrete token.  Because it is abstracted, unlike any substance, money is unlimited.  It has the power to transform objects, being able to turn wheat into wine in the market.  Together, these properties enable money to perform multiple functions simultaneously.  It is used to meet social obligations, such as tribute, legal compensation, and is the dominant means of conducting exchange; it stores value and is the unit of account.  Money’s myriad uses means that it becomes a universal aim of all members of the community using it. 

Money centralised social power in a single, abstract and impersonal entity.  In monetised, Greek, economies personal power arose from the possession of impersonal and non-substantial money.  The impersonality of Greek money nurtured the concept of equality, which is the foundation of democracy.  The Greek word nomos, associated with ‘law’, is the root of the Greek word for money, nomisma.  When combined with ‘auto’ – self – it gives autonomy, the idea that people can govern themselves and out of it, the concept of the individual emerges. 

The foundations of Athenian democracy where laid by Solon (c. 638‒558) when he instituted several legal reforms.  These sought to address instability created by conflicts in society caused by growing inequality created by the financialisation of society.  Solon’s reforms solved the problems by substituting judicial violence with fines, something that was only possible because money was widely used.  In the process, justice was depersonalised so that hostility between people was replaced by an impersonal quantification between an injury and its compensation.  While money was disruptive of society it was also integral to Solon’s reforms that created a political system in which all citizens were equal.

Greek’s highlighted how their culture was distinctive from that of their neighbours, notably those in the civilised East.  The Greeks contrasted Solon’s democratic laws to those of the Median tyrant Deioces .  The Greeks assumed that the Medes had originally lived in autonomous towns but Deioces determined to unite them under his rule.  He achieved this by gaining a reputation as an honest judge and then stopped giving judgements.  The Medes were so desperate for his decisions that they offered him the crown.  On achieving his objective Deioces ordered his subjects to build him the palace of Ecbatana, surrounded by seven concentric circular walls of different colours with the inner most being silver then golden.  Deioces hid himself from his subjects in the palace and ruled through messengers using a network of spies to monitor the kingdom.  The Greeks compared Solon’s position as impartial arbiter in an open court to Deioces’ despotism, where the judge was hidden.

The essential difference was that Greek society was monetised and operated through inter-personal exchange where as that of the neighbouring societies were re-distributive.  In re-distributive societies, power originated in the gods.  Priests (or a king, the distinction was often blurred) were the direct servants of the gods who mediated between the population and the divine.  All that the community produced was owned, exclusively, by the gods and managed by a hierarchy of priests/kings.  Produce was delivered to the temple (or palace) and the priests, from behind closed doors, would re-distribute the aggregate production per their own rules, taking a cut for their own use.  In return, the priest/kings were expected to provide material and social security: food stores, walls, law and order.  These societies maintained themselves so long as the priest/kings prevented famine and ensured peace and justice.  It was passed through the priests/kings into the community through a clear hierarchy.  The transference of power was often done through seals (amulets, talisman) that magically carried the power of the god.

Greek religious practice diverged from this standard model.  The Greek gods lived on ambrosia and nectar, not on mortal food.  When Homeric Greeks, in around 800 BCE, performed an animal sacrifice the smoke ‘honoured’ the gods, who were not located in their icons but ‘somewhere else’, alienated from the people.  The sacrificial meat was then shared out amongst the community.  The fairness of this sharing was fundamental to Greek culture, with both the Iliad and the Odyssey resting on problems resulting from unfair distribution.  Consequently, the wealth of the Greek temples was owned and managed, inclusively, by the community in an egalitarian manner, in contrast to the wealth of temples in re-distributive societies.  There is a relationship between these Greek religious practices and the emergence of money in Greek society.  The lowest value Greek coin was the obolos that took its name from the cooking spits (obelos) that were used to distribute sacrificial food and it is almost certain that the word drachma comes from obeliskon drachmai ‒ handfuls of spits.

The Odyssey focuses on the Greeks’ sense of identity and emphasises the humanity and individuality of Greek society.  It describes the transformation of Odysseus from an aristocratic warrior to a democratic leader and represents a metaphor for the transformation of Greek society from a hierarchy to a democracy.  It begins with Odysseus and his followers leaving the defeat of Troy and brutally attacking the Cicones.  This indicates that they have been traumatised by their experience of war and need to be tempered before returning to the ideal of Ithaca.  After attacking Cicones, the company arrive on the island of the Lotus-eaters.  Here the traumatised fighters can eat the lotus and fall into oblivion.  However, Odysseus chooses not to succumb to the intoxication, rather he introduces the key theme of Greek philosophy of reflecting on life and acting rationally.  This is essential in establishing an individual’s identity. 

The next episode is the story of the Cyclops and is an example of a rebirth myth, where the hero enters a tomb/womb and is reborn.  Odysseus’ inquisitiveness leads him to enter the cave of the cyclops, Polyphemus.  The cave is full of food (cheese-symbolic of animal husbandry).  Odysseus intends to exchange the cheese for wine but the cyclops does not understand the tradition of exchange and starts eating Odysseus’ while trapping Odysseus and the rest in the cave.  Odysseus realises he cannot defeat the cyclops using brute force, but must employ intelligence, in particular dolus (trickery, cunning) which is bestowed on Odysseus by Athena.  Odysseus’ plan is to offer Polyphemus wine as a gift (as distinct from in exchange), get him into a drunken stupor that will enable the crew to blind the cyclops and escape.  The meaning is that Odysseus is reborn as a thinker not a fighter and as a thinker he can defeat the myopic cyclops.

The encounter with the cyclops introduces the political theme of the Odyssey: should people be ruled by petulant autocrats supported by an aristocracy of warriors or by thinking individuals who can rationally solve problems.  The fact that Odysseus is still short of the ideal is demonstrated in the next encounter.  The crew stay with King Aeolus who gives to Odysseus a bag containing the winds that will prevent their ship returning to Ithaca.  However, Odysseus does not explain the gift to his crew.  They think the bag contains gold that Odysseus is keeping for himself.  While Odysseus sleeps the crew open the bag to share out the gold, releasing the winds that blow them away from their destination.  Odysseus and his crew are punished for not trusting each other.

Odysseus has further experiences that temper him.  The most profound being his trip to the underworld where he encounters the dead warriors from Troy, Achilles, Ajax and Agamemnon.  Achilles tells Odysseus that he would prefer to be a living servant than a dead hero.  This enlightens Odysseus who, having returned from Hades, is able to resist the temptations of the Sirens’ offer of fame and glory and ends up on the island of Ogygia, captured by the beautiful nymph Calypso.  Calypso offers Odysseus immortality and a life of pleasure, but she also represents death, in the same way that the oblivion of the lotus eaters is vacuous.  After seven or so years, Athena persuades Zeus to order Odysseus’s release and the hero escapes on a raft.  After all these trials, Odysseus has been transformed into a judicious individual and is able to return to Ithaca disguised as a beggar, the polar opposite of the aristocratic hero.

The difference between the Greek (democratic, individualistic) and Persian (hierarchical, re-distributive) cultures is exemplified in Herodotus’ description of the first contact between Athens and Persia in 507 BCE.  The Athenians were seeking Persian protection from the Spartans and initiated negotiations based on their experience gained in the agora, the main meeting place of the polis that also severed as the market (agora, forum in Latin), as that of equals.  This was inconceivable to the Persians who maintained a hierarchical state that ruled from the Indus valley to Anatolia.  The Persians promised to support the Athenians in exchange for them ritually offering earth and water.  After some discussion, the Greeks agreed.  They had not realised that they were symbolically submitting Athens to Persia and would be punished if they did not comply with Persian demands in the future.  Following this misunderstanding, it was inevitable that the Persians invaded Greece in 490 BCE.  Despite the material odds stacked against them, the Greeks, in the Delian League led by Athens, first defeated two invasions and then pushed the Persians out of much of the eastern Mediterranean by 449 BCE.

While the clash of cultures is not geographical (western v. eastern) or religious (Islam v. Christianity) but societal, relating to a difference in ideology between monetised societies based on reciprocal exchange resting on individual judgement in a democracy and those based on hierarchical distribution of resources based on autocratic, often hidden, decision making.  Within Europe this conflict repeats itself itself.  It is central to the Reformation, caricatured as between Calvinist merchants and Catholic aristocrats.  In England, there is the Civil War, that ends with the Commonwealth, the Anglicisation of the Latin res publica, followed by the political divide between Whigs and Tories.  The United States is the exemplar of Whig political philosophy, rooted in Locke’s empirical political theories.

The perennial question is why should an unstable monetised society (capitalist) be preferable to a re-distributive one (communist).  The answer depends on whether you believe the future is predictable or not.  If you believe that science can tame uncertainty the implication is that the optimal allocation of resources can be determined by a central authority, such as Deicoes.  If, on the other hand, you believe the future is not knowable, you cannot rely on the calculations of the auto/techno-cracy.  Instead it is best to allow anyone to participate in decision making in order to enable the best solution to be identified. 

This point was made by Moses ben Maimon, the twelfth century rabbi from the Almoravid Islamic Empire.  The Bible explains suffering on the basis that people were expelled from the Garden of Eden.  This is usually interpreted as going from plenty to scarcity into a world of scarcity but ben Maimon argued that God’s punishment was not so much about scarcity as uncertainty.  In the Garden of Eden, humans had perfect knowledge, which was lost with the Fall, and it is the loss of this knowledge which is at the root of suffering: if people know what will happen they can manage scarcity.  Up until the nineteenth century, it was widely accepted that the world was fundamentally uncertain.  This was expressed in Aristotle’s acceptance that there was a class of phenomena not amenable to science, the Scholastic’s acceptance that God could defy the laws of nature and Locke’s belief that knowledge would always be doubtful. 

Spinoza, a Jewish marrano living in Amsterdam in the mid-seventeenth century understood Greek philosophy through Judaic and Islamic interpretations had argued that the Olympian perspective of the scientist made the world deterministic.  He argued that people believed themselves to have free-will and had autonomy because they did not see the complete picture, being only finite.  Spinoza believed that the purpose of the individual was to lift themselves out of a mundane perspective so that they could understand the totality of creation, coming to understand the true nature of God’s will: the laws of nature.  The ethical nature of the Ethics was in describing how different actions helped, or hindered, the individual in approaching God, which would give the correct perspective on everyday phenomena.  Spinoza believed that at the most basic level people had direct knowledge of nature through their senses.  This could be improved into a scientific knowledge of the world that showed connections between phenomena and so could make generalisations.  The goal was to have direct knowledge of the generalisations, not mediated by ‘finite’ ideas or concepts and this knowledge delivered true freedom.  
Spinoza’s contribution to western philosophy was in suggesting that humans can reach a complete picture of the universe that delivered certain knowledge.  This was novel to Europeans rooted in the Scholastic tradition that synthesised Aristotle and Catholicism.  However, it was reminiscent of Jewish and Islamic mysticism.  Jewish mysticism ‒ Kabbalah ‒ had become prominent in the thirteenth century through Moshe ben Naiman Girondi, from Catalonia, while Sufi thought was legitimised in the eleventh century by the Islamic scholar al Ghazali.  Both these scholars challenged Hellenistic philosophy, with al-Ghazali’s repudiation of Aristotle in The Incoherence of the Philosophers being pivotal in the development of Islamic thought.  Associated with al-Ghazali was the doctrine of ‘occasionalism’, that effect follows cause not because of a physical law but only because God’s will.  Spinoza echoed this attitude when he argued that a law of nature was simply a consequence of God’s ‒ or nature’s ‒ consistency.  In Sufi metaphysics, there is the concept of ‘Unity of Essence’ (wahdat al-wujud, وحدة الوجود) and the idea that people seek ‘annihilation in God’ (fanaa, فناء‎‎) just as for Spinoza people sought a God-like perspective.  While Islam and Spinoza both denied contingency, they did not deny the ability of the individual to assert their own will, it was just that asserting one’s will against God ‒ or nature ‒ would be detrimental to the individual.   This idea of determinism was unusual in European thinking.  The Greeks (especially in the Oedipus myth) and Calvinists believed in predestination, that the fate of a person’s soul was destined , but an individual had will throughout their life.  Spinoza’s argument was that individuals do not have a choice in correct action; knowledge guides them to the correct course.  If someone makes an immoral choice, it is through ignorance. 

As a mathematician ‒ that is someone who sees an equivalence between a donut and a coffee cup ‒ there is no real clash of cultures between Donald Trump and Salman bin Abdulaziz, they are equivalent in representing non-democratic rulers.  While it seems incongruous that the President of the US is accompanied on state occasions by his daughter and son-in-law and that he is above the rule of law, this would be normal for an absolute monarch.  Modern populism involves an economic shift to the left accompanied by a cultural shift to the right.  It does not really matter if this is in Russia, India, Saudi Arabia, Britain or France.  The opposite of this populism is pluralistic debate rather than simple panaceas, which are destined to fail.

Tuesday, 28 February 2017

Where do experts come from?


Over the weekend, Brigitte Nerlich published a piece on the origin of the ‘deficit model’.
The ‘deficit model’ is the idea that if the public understood scientific concepts they would accept the judgements of scientists. Or, if scientists shout loud enough eventually people will agree with them. Or, people don’t like GMOs/fracking/climate change science because they are dumb.
This is a hot-topic in the aftermath of the US Presidential Election and theUK’s EU Referendum, when ‘experts’ were widely ignored and her contribution has been well received.
My reaction to Brigitte’s tweet was “Spinoza of course”, but there was no reference of the seventeenth century Dutch philosopher in her piece.
My interest is as part of my remit as the RCUK Academic Fellow for Financial Mathematics between 2006 and 2011 was the ‘publicunderstanding of Financial Mathematics’, or at least the ‘public engagement with Financial Mathematics’. This introduced me to the issue of the ‘deficit model’ over a period in time dominated by the ‘Great Financial Crisis, which started 10 years ago yesterday.
For almost ten years I have been trying to figure out what is the relationship between finance, mathematics and ethics. To me, a significant contributor to the GFC was the belief that ‘science’ had some how tamed financial risk. Therefore to understand the GFC it was necessary to understand where the faith in scientific determinism originated, and I think the source (in European science at any rate) is in Spinoza. The argument is presented in the book I am finishing off for Palgrave
and I have extracted two relevant sections, separated by some 27,000 words and 125 years.
Baruch Spinoza would produce the most influential development of Descartes’ philosophy that incorporated ideas from de Groot and Hobbes during the ‘Dutch Golden Age’. Spinoza’s family were Portuguese Jews, marranos, who had been forcibly converted to Christianity in the sixteenth century. They had immigrated to the United Provinces in 1593, taking advantage of Calvinist toleration and Baruch’s father became a prominent, and wealthy, citizen of Amsterdam. Baruch was born in 1632, his first language was Portuguese and he grew up studying in Spanish and Hebrew and he only studied Latin in his twenties. His understanding of Greek philosophy came primarily through Judaic and Islamic interpretations, rather than from the Scholastics.
Spinoza became involved with the Collegiants, a sect that had emerged as a successor to the Arminians, and was eventually excommunicated by his synagogue in 1656, changing his name to Benedictus. The excommunication did not worry Spinoza too much and he developed a reputation as a teacher, writer and a lens-grinder, a skilled profession closely associated with the important new science of optics. Supported, in part, by a pension from de Witt, he developed his philosophy and in 1670 moved to The Hague where he would witness de Witt’s murder in 1672. He died in 1677, probably of tuberculosis.
Spinoza’s most influential work, his Ethics, was published posthumously in 1677. Spinoza echoed Plato, Augustine and Descartes in arguing that mathematics provided the means of discerning truthi and the text presented a deductive chain that proved propositions having started with definitions and axioms. The key step that Spinoza took in developing Descartes’ work was to collapse the three types of substance: matter, mind and God, into one. This was captured in his phrase Deus sive natura, ‘God or nature’, indicating that there is only a single substance2 that, when viewed from one perspective is nature but from another is God. This solved the problem of how Descartes’ mind interacted with matter at the cost of prohibiting contingency3 because if everything was connected to God, it could not happen by chance. This also meant that emotions were not part of the mind, and so could not be rationalised, but were governed by the laws of nature4, as Hobbes had implied.
Spinoza argued that people believed themselves to possess free-will and had autonomy because they did not see the complete picture, being only finite5. Spinoza believed that the purpose of the individual was to lift themselves out of a mundane perspective in order to comprehend the totality of creation, coming to understand the true nature of God’s will: the laws of nature. The ethical nature of the Ethics was in describing how different actions helped, or hindered, the individual in approaching God6, which would give the correct perspective on everyday phenomena. Spinoza believed that at the most basic level people had direct knowledge of nature through their senses. This could be improved into a scientific knowledge of the world that identified connections between phenomena and so was able to make generalisations. The ultimate aim was to have direct knowledge of the generalisations7, not mediated by ‘finite’ ideas or concepts and this knowledge delivered true freedom8.
Spinoza’s contribution to western philosophy was in suggesting that humans were capable of attaining a complete picture of the universe that provided certain knowledge. This was novel to Europeans rooted in the Scholastic tradition that synthesised Aristotle and Augustine. However, it was reminiscent of Jewish and Islamic mysticism. Jewish mysticism Kabbalah had become prominent in the thirteenth century through Moshe ben Naiman Girondi, from Catalonia, while Sufi thought was legitimised in the eleventh century by the Islamic scholar Muhammad ibn Muhammad al Ghazali. Both these scholars challenged Hellenistic philosophy, with al-Ghazali’s repudiation of Aristotle in The Incoherence of the Philosophers being pivotal in the development of Islamic thought. Associated with al-Ghazali was the doctrine of occasionalism, that effect follows cause not because of a physical law but only because God’s will. Spinoza echoed this attitude when he argued that a law of nature was simply a consequence of God’s or nature’s consistency9. In Sufi metaphysics there is the concept of ‘Unity of Essence’ (wahdat al-wujud, وحدة الوجود) and the idea that people seek ‘annihilation in God’ (fanaa,فناء‎‎)10 just as for Spinoza people sought a God-like perspective. While Islam and Spinoza both denied contingency, they did not deny the ability of the individual to assert their own will, it was just that asserting one’s will against God or nature would be detrimental to the individual11. This idea of determinism was unusual in European thinking. The Calvinists believed in predestination, that the ultimate fate of a person’s soul was destined for heaven or hell, but an individual had will throughout their life. Spinoza’s argument was that individuals don’t really have a choice in correct action; knowledge guides them to the correct course12. If someone makes an immoral choice, it is through ignorance13. This is less bestial than Hobbes but still rejects autonomy.
If Judaism can be characterised by the covenant with God and Christianity by God’s caritas for people, in Islam people can be characterised by having an intellect that can discern God’s will14. In this sense Spinoza was introducing Islamic, specifically Sufi, ideas into western philosophy. This was possible because Spinoza was re-presenting tested Islamic philosophy that opposed Aristotle, just as European thought was rejecting Aristotelian ideas.
The influence of Spinoza on western thought becomes significant at the end of the Enlightenment. Romanticism had appeared in English literature in the 1790s. It incorporated Rousseau’s idealisation of the ‘noble savage’, in a ‘state of nature’, and empiricism, which focused on the individual sensation of nature. In Germany, the movement was broader and more significant with a philosophical basis, idealism, in a problem Kant created in trying to resolve the issue of mind-body dualism. Idealism addressed the problems by dissolving the distinction between observers and observed, an approach that was heavily influenced by Spinoza15. A core concept in idealism was the principle that what was observed was dependent on the thinking ‘I’ that, itself, could only exist in the context of society. This spawned the idea that national identity was fundamental to the individual, fusing Spinoza, Rousseau and Kant.
Johann Wolfgang von Goethe, born in 1749, exemplified the broader Romantic Movement. His fame was established with his 1774 sentimental novel Die Leiden des jungen Werthers (The Sorrows of Young Werther). Today Goethe is known for his interpretation of the Faust story, written in 1808, that describes how Mephistopheles suggests that a ruler solved their financial problems by printing paper money, backed by gold reserves, which were yet to be discovered16. In 1775 had been invited to become a civil servant for the small Duchy of Weimar where he would remain a bureaucrat until his death in 1832. Goethe was responsible for some mines and became interested in geology and the natural sciences generally. As a novelist, Goethe was interested in the ‘narrative’ of science rather than brute, individual facts, an approach that coincided with the idealists’ approach to science, Naturphilosophie.
Naturphilosophie was personified by the Prussian naturalist Alexander von Humboldt. Humboldt travelled to South America between 1799 and 1804 and gathered observations of nature that he then presented in Ansichten der Natur (Aspects on nature) in 1807. Humboldt aimed at Spinoza’s all-encompassing perspective that transformed an apparently capricious nature into a cohesive whole17. However, this implied that science was fundamentally subjective, with the scientist being part of, not an objective observer of, nature18. To ensure that the ideas coming out of the mind of a scientist, often presented as a solitary genius, were true representations of the world, their observations had to be precise and accurate. Johann Carl Friedrich Gauss, the director of the Göttingen observatory from 1807, addressed the fidelity of scientific observations by developing the Central Limit Theorem into a theory of measurement and the Normal distribution, which is often referred to as the Gaussian distribution.
The Romantics regarded nature as a complex, ‘living’ organism and were concerned with how nature changed, rather than focusing on how it was at any single point in time19. This represented a ‘counter-revolution’ in science, reverting to Aristotelian qualities rather than Cartesian quantities. Some Romantics, notably William Blake, were highly critical of the mechanistic natural philosophy founded on Descartes and Newton20 and stressed the need for human imagination in theory construction. With respect to Malthus, the Romantics saw his argument as reducing people to elements of a machine and they preferred more paternalistic policies, associated with the Tories.
Prussia had initially joined the attacks on Revolutionary France in 1792 but became neutral in 1795, content to see the Holy Roman Empire, ruled by the Austrian Hapsburgs, disintegrate. However, in 1806, as Napoleon presented a greater threat, Prussia declared war on the Empire and was swiftly defeated. In the aftermath of the defeat the Prussian’s began a programme of reorganising the state administration, inspired by Kantian ideals, whereby subjects would become citizens21. During this time, Georg W.F. Hegel developed idealism by arguing that the nation was a living organism, with a purpose, will and rationality22. This contrasted with the dominant view of the eighteenth century that saw the state as a machine designed to deliver ‘interests’, a view that Hegel rejected for the same reasons that the Romantics rejected mechanistic science. Hegel argued that the state’s will was defined by ‘public opinion’ which expressed
the genuine needs and correct tendencies of common life, but also, in the form of common sense, of the eternal, substantive principles of justice23.
Hegel argued that the state and people were indistinguishable, because an individual was formed in the context of culture, and so their aims are necessarily compatible. In addition, he rejected the idea that public opinion developed through discourse could be meaningful, since it would only represent the subjective opinions of a narrow section of the public24. Therefore, like Rousseau, Hegel believed the well-constituted state could not be challenged and the role of education was to ensure people’s subjective opinions conformed to the state’s, Spinozian, objectivity. This perspective can be contrasted with that of Thomas Paine, who had argued at the start of Common Sense, an essay of 1776 and a key inspiration of the American Revolution, that
Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first is a patron, the last a punisher.25

I suspect students of Spinoza and Hegel will object to my caricature, but I think the essential point that " Spinoza’s contribution to western philosophy was in suggesting that humans were capable of attaining a complete picture of the universe that provided certain knowledge." is important in understanding why 'science' believes in the 'deficit model'.

1 (Spinoza 2002, 240)
2 (Spinoza 2002, I.P14, 224)
3 (Spinoza 2002, I.P26, 232)
4 (Spinoza 2002, 277-278)
5 (Spinoza 2002, 238-241)
6 (Spinoza 2002, IV.P28, 334)
7 (Spinoza 2002, V.P25, 375)
8 (Spinoza 2002, 378-379)
9 (Spinoza 2002, 239)
10 (Davis 1984, 12)
11 Qu’ran 4:79, (Spinoza 2002, 359-362)
12 (Spinoza 2002, V.P42, 382)
13 (Spinoza 2002, IV.P27,334)
14 (Schuon 1976, 19-22)
15 (Frank 2003, 55-76), (Förster and Melamed 2012),
16 (Wennerlind 2003, 234), (Binswanger 1994)
17 (Daston 2010)
18 (Fara 2009, 215-218)
19 (Brush 1976, 655)
20 (Christensen 1982)
21 (Clark 2006, 327-344)
22 (Hegel 1952, Secs. 257-258), (Clark 2006, 451)
23 (Hegel 1952, Sec. 317), (Habermas 1991, 120)
24 (Habermas 1991, 119)
25 (Paine 1998, 5)


Brush, S. G. 1976. The Kind of motion we call heat: A history of the kinetic theory of gases in the 19th century. North-Holland.
Christensen, B.J. 1982. “The Apple in the Vortex: Newton, Blake and Descartes.” Philosophy and Literature 6 (1&2): 147-161.
Clark, C. 2006. Iron Kingdom: The Rise and Downfall of Prussia, 1600--1947. Penguin.
Daston, L. J. 2010. “The Humboltian Gaze.” In Cultures and Politics of Research from the Early Modern Period to the Age of Extremes, by M. Epple and C. Zittel, 45-60. Walter de Gruyter.
Davis, D. 1984. “Introduction to The Conference of the Birds.” In The Conference of the Birds, by Farid ud Din Attar, 9-26. Penguin Classics.
Fara, P. 2009. Science: a four thousand year history. OUP.
Förster, E., and Y. Y. Melamed, . 2012. Spinoza and German Idealism. Cambridge University Press.
Frank, M. 2003. The Philosophical Foundations of Early German Romanticism. Translated by E. Millán-Zaibert. SUNY Press.
Habermas, J. 1991. The Structural Transformation of the Public Sphere: An Inquiry Into a Category of Bourgeois Society. Translated by T. Burger and F. Lawrence. MIT Press.
Hegel, G.W.F. 1952. “Hegel’s Philosophy of Right.” Edited by T.M. Knox. Clarendon Press. Accessed September 2016. https://www.marxists.org/reference/archive/hegel/works/pr/philosophy-of-right.pdf.
Paine, T. 1998. Rights of Man, Common Sense and other Political Writings. Edited by M. Philip. Oxford University Press.
Schuon, F. 1976. Understanding Islam. Unwin.
Spinoza, B. 2002. “Ethics.” In Spinoza: Complete Works, edited by M. L. Morgan, translated by S. Shirley, 213-382. Hackett Publishing.
Wennerlind, C. 2003. “Credit-Money as the Philosopher's Stone: Alchemy and the Coinage Problem in Seventeenth-Century England.” History of Political Economy 35 (5): 234-261.

Saturday, 7 January 2017

Some implications of the Bank of England comparing itself to the MetOffice

At some point over the Christmas break I was cursing the fact that I was finding  it difficult to find a weather map.  That is a weather map with isobars and fronts marked on it not one with icons of cloud, rain and sun.  My favourite subject as a final year physics student was Atmospheric Physics: I was fascinated by how the differential equations delivered different weather, particularly cloud formations, based on different inputs.  Underpinning this academic interest my father taught me to sail and until I left the oil industry for academia, and lost money and free time as a result, I was a keen sailor.  This has left me with the ability to formulate my own idea of the future weather from pressure charts, and my expertise is such that my wife confidently ignores it.  Though I find pressure charts more useful than the rain icons, which I believe replace the cloud icon with a rain icon when 26 out of the 50 simulations the MetOffice runs return rain.

Meteorology also featured in a discussion of "fog" and "mist", on the BBC Radio 4's Today programme.  The meteorologist distinguished the two identical phenomenon in terms of visibility: fog is less than 1,000 m, mist indicates visibility is 1,000m-2,000m and they said terms like "thick fog" or "dense fog" are meaningless.  I checked my 1998 RYA Weather forecast book, where it said shipping forecasts do distinguish fog (200m-1000m), thick fog (50m-200m) and dense fog (less than 50m).  The distinctions the meteorologist was making come from aviation forecasts and they were ignoring maritime definitions, that describes visibility of 1,000m-2,000m as "Poor visibility", since it can be caused by mist, dust or smoke.

Two things struck me about these experiences.  Firstly the meteorologists definition reflected the relative significance of modern aviation over shipping, the public forecast definitions reflected this change in status, definitions were mutable to social status.  The weather map issue is more significant in that the maps it uses today provide the public with "the answer" (there is a 52% chance of rain tomorrow, here is a rain icon that is interpreted as rain) rather than the information to make a judgement.  I see this is an example of the transformation of the public sphere, where by a state institution inhibits the public's ability to think and criticise.  I think this type of transformation in relation to finance as being core to the lack of faith the public have in finance and the public's inability to knowledgeably criticise finance the root of financial crises.

A key episode in the transformation of finance was the 1844 Bank Charter Act.  This was a consequence of twenty years debate amongst economists on the  merits of fixing the relationship between money and gold. The currency school argued, with the support of statistics, that the easy availability of credit led to inflation and so there should be a link between the, concrete, quantity of gold and the availability of credit. The banking school argued that financial instability was a consequence of fluctuations in demand and supply and had nothing to do with the networks of banks providing credit by issuing their own notes. This argument was supported by the fact that high, not low, interest rates were associated with periods of inflation. The currency school won the argument and  the Bank Charter Act prohibited English banks, other than the Bank of England, from issuing notes and required all banks to hold Bank of England notes as a capital reserve to back up their lending. Banks could still create ‘money’ in bank deposits by lending money, which would be ‘destroyed’ once the loan was repaid but were under the centralised control of the Bank of England.

In the aftermath of the Bank Charter Act the Quaker dominance of banking waned. The Act undermined the network of ‘country’ banks that served local businesses and led to the merger and centralisation of the provincial Quaker institutions. Following this centralisation a number of Quakers became associated with financial malfeasance. The most famous example is the failure of Overend, Gurney & Company in 1866. The firm was connected to the Quaker Gurney banking dynasty and had been able to underwrite other banks during a crisis of 1825. Its failure was a result of speculative investing in the 1850s, exposed by the Panic of 1866, and the refusal of the Bank of England to underwrite it. In the distributed financial network that existed before 1844 the stability of the system rested on inter-personal relationships and trust. Quaker doctrine nurtured this trust and produced financial success. After 1844 this stability rested on the centralised decision making of the ‘lender of last resort’.  

On this basis I was interested to hear that Andy Haldane, Chief Economist at the Bank of England had also drawn connections between finance and weather forecasting in a speech hosted by the Institute of Government (the relevant section is initiated at 15:22 and then developed at 18:45 in this video)




 Dr Haldane compares economists' failures to foresee the Credit Crisis with the the BBC's lunctime weather forecast of 15th October 1987




Note that the forecaster starts by dismissing the prospect of a hurricane hitting the UK raised by a member of the public.  The following day the BBC reported a "hurricane" had struck the UK overnight causing the death of 18 people.  It is ironic that the BoE looks back to the weather event of 15 October 1987, skilfully passing over Black Monday of 19 October 1987.

Dr Haldane observes that the accuracy of weather forecasts has improved dramatically since 1987 through the greater use of data  and economics could similarly improve (19:53-20:10).  I would start of by disputing Dr Haldane's diagnosis and argue it was not greater data (10 weather ships used in the 1970s have been replaced by 18 weather buoys) that lead to the improved forecasts but greater computational power that has allowed finer scale simulations of the differential equations that has delivered the better precision.  Whether or not the improvement in forecast accuracy is down to greater data or greater computational power the underlying assumption is that the economy, like the weather, is a system that can be represented by a set of differential equations that can be used to simulate the evolution of the economy.  This is a massive assumption.

Both Aristotle and Cicero recognised that it was feasible to predict natural phenomena, like the weather but events subject to human agency were impossible to foresee.  Augustine agreed that humans were not able to foresee the future though the Christian God, unlike the pagan gods, had perfect fore-knowledge.  The change in attitude begins with Descartes search for certainty that involved applying the deductive reasoning presented in Euclid's Elements to non-mathematical thinking starting from the ‘common notion’  “I think therefore I am”.  This resulted in Descartes seeking mechanical, logical, explanations for natural phenomenon, rather than the teleological ones of Aristotle. Because different objects had different ends, Aristotle believed there were distinctive sciences to account for different phenomenon. Descartes, in contrast, believed in a unified science and he likened his whole philosophical programme to a tree whose roots were in metaphysics while its trunk was made up of mathematics ‒ “on account of the certitude and evidence of [its] reasoning” ‒ and physics with the branches of the tree being the practical sciences, both natural and moral.  Both Dr Haldane's association of economics and meteorology, a consequence of a belief in unified science, and his search for certainty, revealed (19:41-19:48) by his admiration of precision in weather forecasts,  reflect a commitment to Cartesian science.

 
The alternative to Descartes has traditionally been Locke who dismissed the Cartesian belief that there are innate ideas, rather people are born with minds that are blank-sheets: tabula rasa.  Locke argued that knowledge came from experience with sense organs first perceiving events in the real world and then the mind interpreting them to form ideas. The validity of an idea did not depend on how it conformed to some authority, theoretical or political, but on the  origins of idea and how had it evolved: its genealogy.  This meant that people needed to investigate the origins of their beliefs, reflecting a Puritan upbringing. For Locke the purpose of philosophy was to show how the tabula rasa was filled with knowledge, which is “the perception of the agreement” of two ideas. In contrast to Descartes  Locke argued that human knowledge could never be certain.  One  might observe the Sun rising every morning of our lives and infer it will do the same tomorrow, but we cannot assume it is true and this motivates us to ask ourselves why the Sun rises. Locke finished the An Essay concerning Human Understanding by dividing knowledge into three types. The first is physica, the nature of things. The second is practica, what people should do as rational and wilful agents. The final type is semeiotika (Greek for ‘signs’), how physica and practica are attained and communicated.
 
Locke applied these ideas to politics in his Two Treatises of Government.  As a Puritan who had lived through the Civil War, Commonwealth and Restoration, Locke had been concerned with the fundamental tension between an individual’s right to sincerely express their religious beliefs and the need for a well ordered society to mandate the restriction of those rights, such as by a sovereign’s exercise of prerogative powers. Locke argued that a state was made up of autonomous individuals ruled by rationally constituted, abstract and universal laws rather than by subjects enforced to comply with the personal decrees of monarchs.

While Descartes philosophy can be caricatured as being based on doubt, Locke’s can be characterised as focusing on trust with Locke claiming that language was important because it enabled promises to be made , which created the trust that bound a society together.  Since knowledge was fallible reliable knowledge could only be based on trust, faith is only necessary in the presence of doubt, while a stable political system relied on people making and keeping promises and abiding by contracts. Locke opposed atheism because it dissolved trust by undermining individuals’ commitment to truth telling, promise keeping and consideration for others.

Locke's influence was persistent.  The tripartite separation of knowledge into physica, practica and semeiotika was mirrored in  Kant's tripartite Critique of Pure Reason, Critique of Practical Reason and Critique of Judgement.   Laplace’s reputation in mathematics was built on two parallel pairs of books: Mécanique Céleste (1799-1825) and Exposition du système du monde (1796) describing the mathematics of physica to a technical and general audience, while Théorie analytique des probabilités (1812) and Théorie des probabilités (1819) did the same for the mathematics of practica.

Descartes view of a certain, unified science came to dominate during the nineteenth century.   Descartes' ideas had been developed by Spinoza who's Deus sive natura, ‘God or nature’, indicated that there was only a single substance that, when viewed from one perspective is nature but from another is God. This solved the problem of how Descartes’ mind interacted with matter at the cost of prohibiting contingency, because if everything is connected to God, it cannot happen randomly. Spinoza argued that people believe themselves to possess free-will and have autonomy because, being only finite, they do not see the complete picture. The purpose of human rationality was to come to understand the true nature of God, the laws of nature.  Spinoza believed that at the most basic level people have direct knowledge of nature through their senses. This can be improved into a scientific knowledge of the world that could identify connections between phenomena and so was able to make generalisations. The ultimate aim was to have direct knowledge of the generalisations, not mediated by ‘finite’ ideas or concepts and this ‘third type’ of knowledge delivered true freedom. Spinoza saw the purpose of the individual as to lift themselves out of a mundane perspective in order to comprehend the totality of creation.  Spinoza's objective, described in his Ethics, presented in the Euclidean style, was of attaining a 'God-like' perspective was picked up by the German Romantics and resulted in the Idealists assuming a deterministic outlook across a unified science.

Dr Haldane refers to a "methodological mono-culture" in economics (16:29-16:31). I  think that the mono-culture is not a specific to neo- or new-Keynesianism or Marxism etc. etc. but to the fact that they are all based on the Cartesian tradition that results in 'rationality' coming to signify a commitment to deterministic certainty.

I suspect Dr Haldane would regard these points as reading a little too much into what he has said in an informal setting, in much the same way a patient may dismiss a line their psychiatrist takes.  However, I think the distinction between a Lockean and Cartesian approach to economic policy making is fundamental to the issues the BoE is facing up to.  Consider the issue of market liquidity.  For most of the period since 1700 liquidity, the ability to transact at will, had been associated with a person's credit, Defoe discussed it frequently.  A person's credit was based on their trustworthiness and the financial system was founded on believing 'promises to pay'.  Today much of the research on liquidity, some of it funded by the BoE, seems to see 'liquidity' as a utility that is the responsibility of the regulator.  This tends to focus on defining the capital reserves of institutions, based on the assumption that the economy is a deterministic system, and ignores the Lockean issue of trust.  I suspect these points have broader relevance in the whole issue around "post-truth" politics: people who think there is an issue seem to have lost the faith of the public.

Some post-scripts:

  1. Proofs that the economy is not deterministic are fairly straight forward to construct.  Locke and Spinoza would agree that peoples' beliefs are formed by their experiences and inform their decisions.  Hence, whether or not a person has a conversation with another determines the future.  The economy can only be predictable if individual interactions are predictable.  This is only possible if all peoples deaths are predictable, which is not the case since earthquakes and hurricanes are not predictable.  It might be admirable to aspire to identifying the equations that represent the economy and amass the data, but in the meantime I think it would be better to focus on what is important and achievable in an uncertain world, such as restoring public trust in economics.
  2. It might seem odd that a mathematician is sceptical about the Euclidean method.  Most mathematicians appreciate that a proof of a theorem starts at the result and the process of working out what is required to deliver the proof.  This approach to organising science was the great contribution of the ancient Greeks and was rooted in Platonic Forms, which needed to be the foundations of knowledge.  This fact about Euclid was not really appreciated until Frege in the 1880s and resulted in Descartes belief in innate ideas and justified Kant's synthetic a priori truths.  Its a great way of 'proving' the conclusion you want to, with Hobbes being the first great exponent.
  3. An interest.  I submitted a grant application to the BoE in spring 2016 for funds to model, mathematically, the effect that trust might have on the resilience and effectiveness of financial networks.  It was declined. 

Monday, 8 February 2016

Quaker bankers: building trust on the basis of sincerity, reciprocity and charity

This post follows discussions of the norms sincerity, reciprocity and charity in financial markets. It suggests that the success of Quaker finance, that funded the British Industrial Revolution (the Darby's of Coalbrookdale, the Stockton and Darlington Railway) was based on trust built on the norms. A full argument is in a working paper Discourse Ethics for Debt Markets.
Trust is defined as “a firm belief in the reliability, truth or ability of someone”. Accounts of how trust is developed vary, however they involve terms connected to sincerity, such as: honesty, integrity, credibility, predictability, dependability and reliability; terms connected to reciprocity, such as: judgement and fairness; and terms related to charity, such as: benevolence, goodwill and responsibility (Seppänen et al., 2007:255). Essentially, the synthesis of the norms sincerity, reciprocity and charity, can be seen as the basis of trust in commerce and our argument reduces to: finance relies on trust, which is built on the three norms. This might be regarded as naïve and trust a nebulous concept. However Quakerism represented in the names Barclays, Lloyds, Cooper, Waterhouse and Peat in connection with banking and accountancy offer testament to its concrete practicality.
The Quakers emerged as a non-conformist Christian sect during the English Civil War (1642‒1651) and became an important expression of independent (not Anglican/Episcopalian or Presbyterian) faith during the Commonwealth. The sect was ‘comfortably bourgeois in character’ and egalitarian, promoting the rights of women and would lead the Abolitionist movement in the nineteenth century. With the Restoration of Charles II (1660) the Quakers were suppressed and it was during the period of persecution during that the Quakers became the dominant independent church, accounting for around 1% (60,000) of the English population in 1680.
The growth of Quakerism, while other independent sects founded on charismatic leaders disappeared, can be explained by how the sect was organised. Quakerism was distinctive from Anglicanism and Presbyterianism in rejecting a priesthood (appointed or elected) and the particular authority of the Bible. To fill the void of dogma, a system emerged where the central ‘Meeting House’ issued Queries to individual Meetings on a regular basis, enquiring about ‘the state of the society’ and posing specific questions to the congregations. The replies were reviewed and Advices issued defining Quakerism: doctrine, holding the community together, was developed in a discursive manner that was able to react quickly to events (Walvin, 1998:24‒26).
On this basis the “Quaker success story” (Prior and Kirby, 2006; Roberts, 2003) in finance was built. It could be that the financial prominence of the Quakers was a consequence of their ‘Protestant work ethic’ and frugality, which delivered unconsumed surpluses that they were able to re-invest. However, other Protestant sects were equally frugal but did not have the disproportionate influence on finance that the Quakers had.
Being a Quaker meant adhering to the regulations collected in the Advices, in return a Quaker businessmen could rely on the support of the whole community. Quakers were required to account for themselves and to monitor each other, this lead them to rely on written records that testified to individuals’ conformity to the Advices and the development of networks of communities based on letters and libraries (Prior and Kirby (2006:117‒121); Walvin (1998:46‒47)). In business, Quakers were expected to consult with more experienced ‘mentors’ before engaging in activity that required borrowing. Moreover they were scrupulous, like Antonio, in repaying debts during a time characterised by high levels of default (Prior and Kirby (2006:121‒129); Walvin (1998:55‒57)).
The Quaker commitment to the repayment of debts highlights their commitment to reciprocity. Sincerity was a consequence of their doctrine of simplicity. This ranged from simplicity in appearance, which inhibited consumerism, to simplicity ‒ honesty ‒ in speech. Quakers
detested that which is common, to ask for more goods than the market price, or what they may be afforded for; but usually set the price at one word (Walvin, 1998:32)
Quaker’s were renowned for their charity (Cookson (2003); Walvin (1998:81‒90)) and the norms sincerity, reciprocity and charity are captured in their approach to lending, encapsulated in their proverb
“Well, Friend”, said the Quaker Banker, “Tell me the answers to these questions so that I may help you in your projects, for you have opportunities: Firstly, how much do you seek to borrow? For how long? And how will you repay the loan plus its interest?” These are the issues all good bankers must explore.
The Quaker experience suggests that the culture of sincerity (commitment to truthfulness), reciprocity (commitment to fair pricing and repaying debts) and genuine care for others generated a robust financial network that was able to fund the growth of the British economy between 1700 and 1850. Quaker influence waned towards the end of the Industrial Revolution in the mid-nineteenth century. The 1844 Bank Charter Act undermined the network of ‘country’ banks that served local businesses and lead to the merger, and centralisation, of the provincial Quaker institutions. In the aftermath of this centralisation a number of Quakers became associated with financial malfeasance. The most famous example is the failure of Overend, Gurney & Company in 1866. The firm was connected to the Quaker banking dynasty, the Gurneys, and for the first half of the nineteenth century dominated the discounting of Bills and was able to underwrite other banks during the Crisis of 1825. Its failure was a result of speculative investing in the 1850s exposed in the Panic of 1866 and the refusal of the Bank of England to underwrite it. In the distributed financial network before 1844 the stability of the system rested on inter-personal relationships and trust, the Quakers’ doctrine nurtured trust and on it rested their financial success. After 1844 the stability rested on the centralised decision making of the ‘lender of last resort’.
In the pursuit of efficiency, banks, both retail and commercial, have replaced personal relationships with clients by automated systems in the loan approval process. A retail bank will employ dozens of models to convert data on a customer into a loan decision (only a dozen or so models are used in commercial lending). This has seen the emergence of the ‘credit risk modelling’ profession that develops, maintains and interprets the algorithms.
While many models appear to use the same data to make similar decisions they often deliver contradictory results. Lending managers, confronted with a diversity of results, tend to focus on a single model to deliver ‘objective truth’ without investigating why others deliver different answers. Founded on algorithms, the process cannot be sincere (it can be objective/reciprocal) and as a consequence the borrower and lender are alienated. The bank’s task is to optimise the ‘harvesting’ of loans and is devoid of charity.
Financial institutions understand that using data from social media, ‘Big Data’, will enhance the algorithms, but are prevented from doing so by European Union and U.S. legislation. However, ‘the gods punish us by giving what we pray for’ and, in the event that such data could be used it is difficult to see how existing banks would survive in competition with social media platforms that started to offer loans. This suggests that the survival of existing retail banks does not depend on their ability to implement new technologies, but their ability to communicate meaningfully with their clients1.
This account leaves open the problem facing contemporary finance: how to support a financial culture that nurtures trust in a pluralistic society, not centred on Quaker doctrine?

Notes

1 Banks cannot employ ‘machine learning’ because they need to justify their lending decisions. Because a machine learning algorithm evolves independent of human interaction, it cannot provide a justification.

References

   Cookson, G. (2003). Quaker families and business networks in Nineteenth-Century Darlington. Quaker Studies, 8(2):119‒140.
   Prior, A. and Kirby, M. (2006). The Society of Friends and business culture, 1700-1830. In Jeremy, D., editor Religion, Business and Wealth in Modern Britain, pages 115‒136. Routledge.
   Roberts, H. (2003). Friends in business: Researching the history of Quaker involvement in industry and commerce. Quaker Studies, 8(2):172‒193.
   Seppänen, R., Blomqvist, K., and Sundqvist, S. (2007). Measuring inter-organizational trust: a critical review of the empirical research in 1990‒2003. Industrial Marketing Management, 36(2):249 ‒ 265.

    Walvin, J. (1998). The Quakers: Money and Morals. John Murray.