by Marc Chandler
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The concept of moral economy was first used by 18th-century thinkers trying to make sense of the rising capitalist values. In feudal society, a "fair price" was preferred over a free price especially for the necessities of the day.
The reciprocal rights and responsibilities of feudalism let the lord set the fair price. The British historian E. P. Thompson showed how farmers clung to this belief. Large farmers who sold their product at a higher price elsewhere while there was some still in need in the village were ostracized.
The concept is being revisited in practice if not in name. The heightened sensitivity to the disparity of income and wealth is pervasive within high income countries. Sometimes it is expressed in pragmatic terms in the sense that the disparity is inhibiting a stronger economic recovery. However, the populist appeal is also based on a sense of fairness.
What is fairness? Among the first classes a law student takes is on contracts. Contracts are the bedrock of modern society. What is fair and just is fulfilling one's contractual obligations. You committed to performing some service in exchange for some recognition. Now do it. That is fair.
However, this concept of fairness is dramatically different than the fairness that was the basis of traditional society. Perhaps more influenced by the Catholic Church's teachings, fairness is about one's social obligations. Justice was in recognizing fellow Catholics as brothers and sisters.
Market economies turned the traditional meaning of fairness on its head. To some extent, non-market spheres that persist, including to different extents and in different ways, the family, and church, have kept the embers of the earlier meaning of fairness alive.
Although we would not push it too far, there is some evidence that a sense of fairness crosses cultural lines. There is an exercise called the Ultimatum Game. It involves two people. The first is given a modest sum of money, say $100, and can split it any way. The second person can accept it or not. If it is rejected both people get nothing. Repeated tests have found that provided the game is played within a particular social group; a 70-30 split is rejected.
There are numerous explanations for this outcome. It is also reasonable to think that if the sums involved were considerable greater, such as $100 mln, the pecuniary gain outweighs the concern about fairness. Nevertheless, in non-extreme situations, it seems as if there is a basic sense of fairness that is distinct from contractual obligation. It seems that nearly every culture has valued being hospitable. It is evident in legends, stories, and folk wisdom. We would draw parallels between the value of fairness and the value of being a good host.
One reason the disparity of wealth and income has become an important political and social issue is that the situation has begun arousing this traditional sense of fairness. The anger (and fear) seems to be a lodestone for many of the populist campaigns.
The issue is being raised anew in Central Europe. In Hungary and Poland, many households took out Swiss franc mortgages. Sometimes, it was a calculated risk. Sometimes, reports suggest, that some people were led by the banks to take franc mortgages, which may have been more lucrative for the bank than the traditional mortgages.
Due to no fault of the Polish or Hungarian household, and due to no special foresight on the part of the banks, the mortgages became dramatically more expensive after the Swiss National Bank lifted its cap on the franc in January 2015. In the weeks before the decision, SNB officials reaffirmed the commitment to that currency cap.
What is fair? Fulfilling the contractual obligation is fair. One borrowed Swiss francs. One pays back Swiss francs. Is that not justice? Yet, informed by the traditional idea of fairness, a different outcome is sought by both the Hungarian and Polish governments. Hungary took its steps before the dramatic appreciation of the Swiss franc. It was controversial but less expense than the belated response in Poland.
The Polish Central Bank has pushed hard against the government's proposals, which Governor Belka estimated would cost the banks four years of profits. The government has wavered, and it is not clear how it will be resolved. Recently the government has suggested a voluntary program.
The challenge is that while the banks are organized by mutual self-interest, households are a disparate lot. Only the government is in a position to speak for the households, but that makes it less than voluntary. Perhaps it would best if the banks offered a fair compromise, granting some degree of forbearance, to preserve and sustain relationships, which would be in the interest of present and future shareholders.
China also may offer an alternative to the Western liberal notion of fairness, though it may prove to be illusive. Over-ruling contractual obligations often is to allow non-market sources of power to be brought to bear. Contracts may not define fairness in its entirety, but they have to be the starting point.
Without the protections of contracts, modern society would crumble. Exclusive reliance on contracts may generate outcomes that contradict a basic sense of fairness and justice. We do not only want to produce and consume goods and services, but we want to do so fairly.
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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