Tuesday 26th September 2023

by Dr Owen Kelly

This blog is based on a speech Dr Owen Kelly gave at a David Hume Institute event on Monday 18th September 2023 at the University of Edinburgh Business School discussing the Great Risk Transfer.

Owen is a Doctoral Researcher in the Department of Philosophy at Edinburgh University, examining how ancient ethical ideas can be applied to modern business practice. He also works at the University of Edinburgh Business School as Director of Engagement, and at the Edinburgh Futures Institute, where he is the Deputy Director. From 2008 to 2016 he was Chief Executive of Scottish Financial Enterprise, the representative body for Scotland's financial services industry. Before working for the financial services industry, he worked for 20 years as a civil servant in the UK and Scottish Governments.

The David Hume Institute ‘encourages diversity of thought’. The Institute and Faculty of Actuaries acknowledges that the Great Risk Transfer is multidisciplinary in its implications. I am taking both of them at their word in offering some thoughts from a philosophical perspective. 

The work of the Institute and Faculty is profoundly empirical in nature, as befits a professional body; and the DHI’s research is similarly grounded in evidence, gathered from primary sources.

My approach is philosophical and more, metaphysical. Such thinking has its place, however. As Dr Myra Hamilton notes in her excellent introduction to the issues, the political and social context of the Great Risk Transfer provides its conceptual justification. That context is, in turn, shaped by philosophical ideas about markets and, ultimately, what the good life for human beings consists in. 

I want to cover three broad areas: justice; freedom; and the nature and consequences of financialization.

First, justice. It is rarely invoked in discussions of commercial or business affairs. Usually we talk about ethics and compliance with codes and rules. But few philosophers, if any, argue that justice is not in some way essential to human life. Since business is part of human life, it must be essential to that, too.

Is the Great Risk Transfer an injustice and, if so, to whom? There are plenty of examples of how it is unfair, or unequal, in its effects but is it unjust? 

Myra Hamilton refers to the idea that taking on risk is seen by some as part of the ‘natural moral order’. This is based on the view that  people should be more self-reliant and take more responsibility for their own situation. But it is also based on the idea that desert is what should guide us in determining whether someone has been justly treated. A sort of ‘you get what you deserve’ view. Desert is part of what is ‘due’ - and the idea of justice as something ‘due’ is ancient, and one of the foundations of the definition of justice put forward by the Emperor Justinian in the 6th Century AD, and still accepted as the closest anyone has got to a working definition of justice.

What is desert based on? 

The philosopher Michael Sandel says that meritocracy is a story we tell ourselves about desert, based on the idea that ‘merit’ can be measured and rewarded. He points out that the dominant measure of merit in most market-based societies is wealth. On that basis, we might say that the unequal consequences of the Great Risk Transfer, where the wealthy are better equipped to take advantage of it and are in any case protected against the downsides, are deserved by all involved. To the rich, more should be given, sort of thing. But Sandel draws out the failings of meritocracy as a measure of actual merit, noting that merit is socially determined and very much in the eye of the beholder. Goodness, kindness and similar qualities, for example, don’t usually figure in the calculations of those seeking to apportion ‘merit’ in a meritocracy. And we should remember that the inventor of the concept of meritocracy, the philosopher Michael Young, did so to sound a warning, not to promote the idea. So the idea that risk has been transferred on the basis of merit, or desert, seems weak.

Also, the bearing of a risk is a harm in itself. The risk transferees – those who have received it – did not seek it and they are, it is fair to say, unsettled and discontented by it. 

For something to be considered an injustice, according to the Code of Justinian, which still stands up as a working definition used by philosophers, there must be an agent. The weather is not usually seen as unjust, though it can be seen as unfair, because there is no agent involved. 

But the Great Risk Transfer is not like the weather – it has agents, identified if not named in the Institute and Faculty’s papers – governments, companies and regulators. I therefore suggest in philosophical terms there has been a big dose of injustice in all this. It may not be common practice to ask around board tables whether a company’s actions are just but given that it is a key question in every other aspect of our lives, perhaps it should be asked more often.

Moving on to the philosophical foundations of markets. It is commonly held that markets and freedom are closely related to one another. The Great Risk Transfer emerges from a philosophical belief that freedom is a good thing in itself.  It is hard to disagree with that belief. But, moreover, that markets give us more freedom. This is true both at the superficial level, as in the greater freedom of choice that came with UK pension reform, and at the more philosophical level – markets add to the good for humans.  They provide a sort of theatre within which freedom is exercised. We are all familiar with the idea that free markets buttress free societies.

But in the case of the Great Risk Transfer, this freedom is, for most people affected, just an abstract concept with little practical content. Immanual Kant proposed that the basis of morality, at least as far as humans are concerned, is that people should be treated as ends in themselves, not as means to an end. Because of the asymmetry in the market between consumers and providers, in terms of knowledge and expertise, highlighted by the Institute and Faculty of Actuaries, consumers are being treated as means, not ends. They are being used as ill-equipped participants in a shift away from the collective, towards the individualised.

The Institute and Faculty does recommend that this is addressed; but companies have, following government and regulatory actions, acted in their own interests, not those of customers. Why should they do otherwise? 

There are many ways to make money in the new individualised world and they are companies after all – but consumers are the means, not the ends, in this great shift, and Kant would find fault with the companies and the policy makers, accordingly.

Finally, there is a reference in the interim report to financialisation. This is a well-recognised phenomenon, and we see it everywhere. I want to highlight two points. The first is that financialisation creates new opportunities for what economists call ‘rent seeking’. This is when the way in which markets are organised creates pinch points, at which money can be made. A good current example is the emergence of credit scoring agencies. These large financial companies – there are only 3 in the UK – provide a service to lenders. They offer to check the creditworthiness of borrowers, interposing themselves between the lender and the borrower. Sure, the lenders pay for their services but to get credit, you need to have a newly-contrived thing called a credit score. To get the credit score, you need to use their products. They create the barrier, then charge you to get over it.

This rent-seeking behaviour is relevant to the Great Risk Transfer because there is a social requirement for risk management - things like insurance and pensions, as well as things like health and safety and flood prevention. 

Oliver Wendell Holmes, the great American jurist, said: ”Taxes are what we pay for a civilised society” - all of us benefit from people paying taxes, just as all of us benefit from the management of risk. 

Put bluntly, we do not have destitute old people on the streets. Risk management, like taxation, is a collective public good that helps create a civilised society. But these risk mitigators are only available through private providers, and they are required by society, like car insurance – not an optional purchase, you need it, by law, and society needs you to have it. Pensions, health and other things are the same. They, like taxation, are part of the price we pay for a civilised society.

It is doubtful that private, profit-orientated organisations can provide these services, which we are obliged to use, without rent seeking at the pinch point; and financialisation intensifies this problem. Financialisation creates the environment, abstracted from the world as we encounter it day to day and trading today off against tomorrow, where pinch points can be created and tolls exacted as the price of passage.

 I would like to see companies campaigning to remove these pinch points and encouraging regulators to do so. I realise this is a provocative comment but that is what philosophy is sometimes for!

Ends

Read more about the Great Risk Transfer