miércoles, 27 de noviembre de 2013

Ethics of trade and its impact in the economy of nations


Index
1. The concept of ethics
2.  Adam Smith and his vision for traders and trade
3.  Interest, fair price and inflation
4.  The main cause of inflation is human selfishness
5.  There can be no ethics in business without an ethical conception of life
6.  What happens when the state becomes a trader?
7. Conclusion

1. The concept of ethics
The word ethics comes from the Latin ethicum. The dictionary defines the word ethics as: 1. Theoretical part of the moral evaluation of human acts. Synonym: moral. 2. Philosophy: Set of moral principles and rules governing human activities.

2.  Adam Smith and his vision for traders and trade
Adam Smith (1723-1790) founder of the Economic Liberalism was a philosopher of entrenched ethical stance believer in the virtues derived from a providential order. Contrary to what many people may believe, Adam Smith was not a staunch defender of capitalism without limits. One of the most famous quotes from his book The Wealth of Nations, illustrates clearly the stated above, this concept is as follows: " The merchants of the same item seldom meet together, even for entertainment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Smith had suspicion about traders because he thought they were trying to eliminate competition, create monopolies and sell at the highest price possible; those facts were contrary to his ethical view of life and his liberal conception of economics.
In various parts of its summit work, The Wealth of Nations, Smith reflects on merchants and commerce. For example, in chapter IV of the book one "Of the Origin and Use of Money "  Smith says that “Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” In chapter IX referred to "Of the Profits of Stock ", says that “Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."
In chapter IV of book three regarding “How the Commerce of the Towns Contributed to the Improvement of the Country" he said that "A merchant, it has been said very properly, is not necessarily the citizen of any particular country. It is in a great measure indifferent to him from what place he carries on his trade; and a very trifling disgust will make him remove his capital, and together with it all the industry which it supports, from one country to another. No part of it can be said to belong to any particular country, till it has been spread as it were over the face of that country, either in buildings or in the lasting improvement of lands.
In Chapter II of Book IV, “Of the System of Political Economy” said: "Country gentlemen and farmers, dispersed in different parts of the country, cannot so easily combine as merchants and manufacturers, who, being collected into towns, and accustomed to that exclusive corporation spirit which prevails in them, naturally endeavour to obtain against all their countrymen the same exclusive privilege which they generally possess against the inhabitants of their respective towns. They accordingly seem to have been the original inventors of those restraints upon the importation of foreign goods which secure to them the monopoly of the home-market. It was probably in imitation of them, and to put themselves upon a level with those who, they found, were disposed to oppress them, that the country gentlemen and farmers of Great Britain in so far forgot the generosity which is natural to their station as to demand the exclusive privilege of supplying their countrymen with corn and butcher's-meat. They did not perhaps take time to consider how much less their interest could be affected by the freedom of trade than that of the people whose example they followed.” End of the quotes.
These concepts of the founder of the Economic Liberalism bring out his clear understanding of the role played by the traders in society and demonstrate the manipulation that has been made of his ideas over time to justify non- intervention in the economy. Indeed, Adam Smith never said explicitly that he agreed with the price control, but their reasoning is clear that he was aware that traders and trade each carry in itself the germ of speculation.

3.  Interest, fair price and inflation
Criticism of interest and usury appears for the first time in the history of the Western world in the Old Testament. Then, in the Greek civilization, were given the first steps to creating the economy.  A pre-Socratic philosopher, Xenophon (430-355 BC), in his work Oeconomics, was the creator of the concept that referred mainly to the administration of the house. After, Plato (427-347 BC), in his book The Republic, condemns usury while Aristotle (384-322 BC) in his Ethics, censorship also the collection of interest and usury, laying also the foundations of the theory of value and the division of labor. Ancient Rome suffered from inflation and this caused great conflict, to the extent that the Emperor Diocletian was obliged to enact price controls and establish the death penalty for those who violate the control. Then, in the Middle Age, the issue becomes more relevant with the reflections of St. Thomas Aquinas (1225-1274) in his Summa Theological, which prohibits usury and advocates for the fair price.
Nicholas Oresme (1340-1382) wrote the first treatise on monetary economics, criticizing the tendency of the Kings to decrease the content of gold and silver of the coins and considers the effects of these measures on prices.  It is Nicolas Oresme the precursor of the concept which assures that the coins of minor value substitute the coins of most value, idea developed later, in the sixteenth century by Thomas Gresham, an adviser to Queen Elizabeth I of England.
The works of Xenophon, Plato, Aristotle and a Diocletian in the Antiquity and the work of St. Thomas Aquinas and Nicholas Oresme in the Middle Age, represent the economic ideology of each one of those times.
But it is in the Modern Age, from the discovery of America (1492), that economic thinking will be developed intensively. The main concern of the first researchers of the economy was about monetary affairs because of the arrival in Europe of vast amounts of gold and silver from America caused great changes in the economy, including inflation.
The first economic doctrine was Mercantilism (sixteenth to eighteenth centuries). Mercantilism believed that the wealth of nations was formed by the quantity of accumulated precious metals.  They thought that for obtaining wealth was necessary to have a privileged position in the international trade by exporting more goods and importing the strictly necessary. Mercantilism advocated state intervention in the economy to provide the above explained purposes. The French philosopher Jean Bodin (1530-1596), was the first speaker of the mercantilist doctrine in his book, The Republic, which also makes a study of the rise in prices and a defense of private property. This work of Jean Bodin therefore opens up the great themes of modern economic thought: protectionism and free trade, liberalism and socialism. From there is developed all the modern economic conceptual structure. In England, the founder of Mercantilism is Thomas Mun (1571-1641), with his work England's Treasure by Foreign Trade. In the 18th century, in opposition to the Mercantilism Physiocrats doctrine arises, whose main exponent was the French physician, Francoise Quesnay (1694-1774).  Then appeared the Economic Liberalism, which maximum figure is Adam Smith (1723-1790) and almost a century later, Karl Marx (1818-1883), published his work, The Capital, which constitutes a negation of the principles of Economic Liberalism.
In the four main economic doctrines, Mercantilism, Physiocracy, Economic Liberalism and Marxism, was always present the issue of free trade inside the countries and between the countries, sometimes explicitly and at other times implicitly. In the 20th century the subject occupied the attention of rulers and economists, especially from the nineties, because of the imposition of Neoliberalism to developing nations, by international financial organizations.
Interest, fair price and inflation have always been related to two practical facts: a) economic freedom or restriction by the state and b) with the abundance or restriction of money. Believers in the Quantity Theory of Money attributed inflation to the over abundance of money, but in different historical moments has been demonstrated that this assumption is not a single universal truth, but a relative truth.  It depends on various factors like the idle capacity of the economy. For example, an economy that is not employing all its capacity of production can react quickly to monetary stimulus and increase the supply of goods and services without noticeable changes in price levels.
David Hume (1711-1776), in his essay on money, was the first to demonstrate the positive effects of a monetary expansion and explained it through his theory of beneficial inflation. Three centuries after Hume, another Englishman, John Maynard Keynes (1883-1946), expand and strengthen the thesis of Hume, in his book The General Theory of Employment, Interest and Money, which provided the basis for overcoming the Great Depression of the thirties years of the 20th century. When the theory was published, there were critics who claimed that the thesis would not solve the long-term economic problems. To answer this objection, Keynes replied simply that in the long run we all will be dead; thereby demonstrating that what matters is what is happening here and now, because no one can know what will happen in the future.
The thesis of Keynes had thirty years of continuous success and that historical period was called the Age of Keynes; it covered since the end of World War II until the late seventies when again the global economy came back into crisis as a result of monetary manipulations developed early in the decade by Germany and other European countries, events that led to the devaluation of the dollar in 1971 and later to the crisis by increasing oil prices since 1973. From these facts reappeared on stage Keynesian critics like the Chicago School, who attributed the crisis, among other factors, to the State intervention in the economy, the welfare policy which extended social benefits to all sectors of society and the monetary consequences of that policy. First it was the British Prime Minister, Margaret Thatcher, who took the principles outlined by the Chicago School, whose main representative was Professor Milton Friedman. Then the U.S. President, Ronald Regan, adopted the policy and thereafter these principles became the ABC-book of the international financial institutions, the World Bank and the International Monetary Fund.
Friedman tried to retrieve and enforce the thought of Adam Smith regarding the non- intervention in the economy and, at the same time, the essence of the Quantity Theory of Money, which attribute to the expansion of the money supply the cause of inflation. It was therefore the opposite to the idea of ​​Keynes view. However, we can spotlight that Friedman never ignored the short-term effects arising from monetary expansion in terms of increased production, employment and low inflation, like was demonstrated in the reality during the period between the Second World War end and the seventies; a stage of expansion of employment, production and low inflation. Friedman’s objection to the theory of Keynes was essentially for their long-term consequences but recognized its positive effects on the immediate. We can say, in short, that the conception of Keynes regarding the benefits of increased investment on employment, production and prices could not be denied so far.

4. The main cause of inflation is human selfishness
The above explanations are justified because inflation and speculation often pretend to be explained or justified because of increased government spending and / or growth of liquidity in the economy. We cannot deny that both elements may have an impact on inflation when, in fact, the abundance of money is unrelated to the amount of goods and services on a given time. But in my opinion, that is not the main cause of inflation. The main cause of inflation is human selfishness that knows no limits to the accumulation of wealth and whose goal is to accumulate and accumulate.
In the book Critical Appreciation of Monetary Policy, Apreciación Crítica de la Política Monetaria (1), explained that the causes of inflation are, among others: a) devaluation of currencies, b) usury, c) tax burden, d) augment in the price of inputs and services e) the increase in demand in face of inadequate supply, i.e., the existence of means of payment in an superior amount than the quantity of goods and services  that exists in the  society in a concrete time.
In countries affected by extreme price variations are present one or more of the above factors, but to a greater extent, the tendency toward speculation. It means the tendency to invoke the existence of any of the above discussed factors to justify raising prices arbitrarily. That is the attitude that clearly referred Adam Smith.

5.  There can be no ethics in business without an ethical conception of life
In the essay entitled Wild Countries and Advanced Countries (2) I said that “What distinguishes a savage country from an advanced country is that in wild countries the behavior of a significant proportion of its population are opposed to moral values ​​defined in the Ten Commandments of the Law of God, while in the advanced countries the majority of its population respects those principles.
The ethics of trade is directly linked to two fundamental commandments: a) You shall not steal b) You shall no covet the properties of your neighbor.
The problem is that from the beginning of time man has violated these principles. The current world is not an exception and only in too few countries we can say that there is respect for these fundamental principles.
There are countries where the situation is worse than others. They are nations where there are no limits on speculative profits. High interest rates, usury, speculation in food, medicine, dwelling and other essential goods and services, are common elements in those countries. When this happens, the chances of development disappear or are minimal.

6. What happens when the state becomes a trader?
The other major problem facing nations is that many political leaders misunderstand the meaning of politics and transform the States and governments in business and / or private companies. The situation has reached a level that now, in plenty 21st century, some governments has authorized the creation of private armies, mercenary companies to operate in theaters of war.
Some leaders believe that politics and governments is a business that must be profitable. They want that public activities like health, education, infrastructure and other public services provide profits. When this occurs, a great damage is made to all the society. That is what is happening today in Europe, in countries such as Portugal, Spain, Italy and Greece, which have reduced public investment to privatize essential services.

7. Conclusion
Only state action can prevent usury and speculation through laws and moral action to sanction such conduct. Competition in the market is not sufficient to keep prices at fair levels, because there are uncontrollable speculative tendencies in the market, motivated by selfish behavior whose only goal is to have more money. Understanding this reality is essential. Adam Smith, the father of Economic Liberalism never said this explicitly, but from his views on trade and traders we can infer that he was clear about the need of to curb speculative behavior in society.
(1)   Pablo Rafael González. Apreciación crítica de la política monetaria, el bolívar oro. Monte Ávila Editores Latinoamericana, página 138. Caracas, 2007.


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