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The allocation of financial risks and
social justiceMoral and political philosophy research seminar
Teppo Eskelinen
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The puzzlement
• Financial crises with intuitively very unjust outcomes
• Seems to relate to ”financial risks”
• What are financial risks and how has their allocation become to determine social positions so greatly?
• Lots of analysis on risks, very little on financial risks and justice
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Defining risk
• Risks vs uncertainties (”fortuna”)
• Risks as (negative) commodities
• Risks as (discoursive) power
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Is risk a market good (burden)?
• Analogy: what is the problem with unequal distribution of bread loafs?
• Answer 1: Nothing, because their unequal distribution only shows varying preferences (rice to bread, for example)
• -> market = preference-based allocation
• Answer 2: The problem is the unequal distribution of money, which results in unequal capacities to obtain bread
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…continued
• -> Neither of the answers see the distribution of bread loafs as a problem of justice in its own right (not problem at all / result of the problem)
• -> Is there something in the nature of risks why this analogy would not be hold?
• Answer 1: To some extent, the analogy works. For example, I can choose to buy or not to buy a medical insurance for my child. Not doing this, I accept that she is not protected in the case of illness. I am fully aware of this consequence and choose to use my money differently.
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…continued
• Answer 2: Are protection from risks always obtainable by money?
• ->The difference: explicit and implicit logics
• Explicit logic: for example existing insurances etc
• Implicit logic: for example bail-outs of banks
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Risk constructs: the farmer
• Problem 1: likelihood of crop being destroyed by a flood
• Problem 2: fluctuation or prices
• ->Hedging products. Farmer pays for protection from natural / market risk, someone else assumes the risk for compensation
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The farmer (2)
• Level 2: reselling the farmer’s risk on an open secondary market
• Level 3: securitizing the farmer’s risk
• Level 4: gambling on the farmer’s risk
• Level 5: systemic risks on society by gambling on the farmer’s risk (risk of collapse and bail-out, investment by social security investment funds etc).
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Risk constructs: The hierarchy
1: Insurance / minimum payment deal
• 2: Selling the risk on a secondary market (commodification)
• 3: Creating CDOs (gambling)
• 4: Creating complex risk structures (systemic risk)
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Two notions of future
• Likelihood: Statistically, and other relevant issues considered, how likely is event X (say, a flood)?
• Discipline: What level of risk exists, that A will not pay me the sum legally owed by her?
• ->The notion of risk entails both a) anticipation of future events; b) enforcement of a system of financial discipline
• ->Future events might be predicted falsely, but they belong to ”external reality”. Financial discipline might fail collectively, and is always a political issue (i.e. enforcing payments vs social rights).
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Financial capitalism (1)
• Relative size of finance to production.
• Relative size to capital gains to salaries.
• Financial imperatives deciding production decisions.
• Financial imperatives disciplining government consumption.
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Financial capitalism (2)
• The financial risk society.
• The birth of the speculative economy and its politics (bail-outs etc)
• 1 Increasing number of ”exceptional situations”, exceptions to explicit rules (”financial crises”)
• 2 Increasingly hierarchial implicit risk allocations
• 3 Overturning the classical justification of capitalism
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Perspectives on risk and justice (1)
• Standard market view
• Financial market as a platform / trading venue for risks
• Optimisation, free-willing buyers, no creation of risks
• Potential normative problems related to:
• 1 Malfunctioning of the market institutions (can accommodate a notion of institutional fairness)
• 2 Misinformation, deception
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Perspectives on risk and justice (2)
• Finance vs society
• Finance as an agent
• Creation of systemic risk
• Governments binded by the sheer size of finance
• Implicit risk distribution
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Perspectives on risk and justice (3)
• Terms of participating in the financial market
• How are financial risks assumed?
• Emergence of private insurance, investment-based social security, etc.
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Theory of justice
• Universal vs particular
• Marxist, communitarian etc critiques
• Accepting the critique (at least partially):
• 1 Theory of justice has to use concepts relevant to current society (today financial capitalism)
• 2 Hierarchies seek new forms
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Some conclusions
• To some extent, risk distribution is a separate ”sphere” of justice or a distributive logic not reducable to money or traditional liberal concepts such as ”rights” or ”resources” (or even ”capabilities”)
• Public service provision: how?
• Hierarchies: like class, but taking new forms (revolution of positions of protection)