The allocation of financial risks and

social justiceMoral and political philosophy research seminar

Teppo Eskelinen

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

Defining risk

• Risks vs uncertainties (”fortuna”)

• Risks as (negative) commodities

• Risks as (discoursive) power

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

…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.

…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

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

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).

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)

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).

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.

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

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

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

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.

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

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)