Ethical behaviour, your values, and the role of Investing

Economics of Investing Responsible Investing

This blog is based on the idea that investing is not a (merely) question about profit maximization or making money, but sees it from a rather societal and broad perspective.
One important dimension of one’s life consists in certain core values one might embrace or define as one’s personal values according to which to live one’s life.
We all have different goals and priorities, some might pursue maximization of wealth, many consider laws enacted by governments as boundaries, others engage in illegal activities to pursue even higher profit possibilities. Again, some people devote their lifes to god (think of monks and nuns), or the society in general, give away all their assets, devote all their time to NGOs for causes such as erradicating poverty or fighting climate change.
To sum up, there are numerous definitions of what one considers as desirable goals and values to follow, and this is perfectly in line with our idea of freedom, individuality, and pluralism.

One influential definition of such value or guideline is the categorical imperative by Immanuel Kant. It can be summarized as

Act only according to that maxim by which you can at the same time will that it should become a universal law

We consider this imperative as a useful concept when thinking about what one can do in his or her life in various domains.

In this post, we want to summarize the different options or levers one has in modern democratic and market economy based societies to put this theoretical concept in practice.

We identify three ways by which one can acticely contribute to society and decide actively what values to follow in one’s own life.

  1. Elections: In moder democracies the right to vote is a fundamental human right and people will typically express their values and preferences by giving their vote to the party with which they mostly agree with.
  2. Civil Society: Besides enshrined democratic institutions, the civil society provides many ways of actively express ones interest, beliefs and values. For instance, joining a NGO, participating in demonstrations or manifestations such as the Fridays for Future movement and many other ways exist in which people express their beliefs and acticely seek to make their values and beliefs public in a pursuit of convincing the greater public and society at large of their beliefs and values.
  3. The Economy: In capitalist or market based economies, we interact on a large number of markets as firm owners, consumers, and suppliers of labour and capital. This third domain is the one we focus on this blog and we will hence describe it more in detail.

Abstracting from firm owners (since it applies only to a minority of people, but we will dedicate a further post on this group), the interactions of a person with the Economy can be summarized with a simple concept known as the budget equation of a person (or household). Basically, it states that the income of person must be equal to the total expenditures. It can be written as follows

\(w\cdot L+r\cdot K+Tr_{received}=C+S+Tr_{sent}\)

We can identify all elements where one interacts with the economy and can hence make active decisions about how to decide in each of the terms. Thereby, in line with the Kantian imperative, following one’s own values or maxim, one can at least to the degree one is able to, influence society and economy according to one’s own maxim.

On a side note, this implies that if everyone where to follow this considerations, the full set of societal values would be reflected in our economy. We hence don’t subscribe to the belief that one is too small to make a difference in society, since if everyone where to think this way, it would indeed happen that it would n0t matter (self-fulfilling prophecy). However, if everyone acted like that, indeed the economy would fully reflect societies values and maxim.

Now let’s look at the six terms of the budget equation and see how each of them gives us a way to decide on how we wish to live our live in the economic sphere of society:

  1. \(w\cdot L\): Labour (hours worked per year) times the hourly wage \(w\). Ones decision about what profession to pursue and which job to take, while not always voluntary, in general allows to a great deal to follow one’s values. It can be reflected in the type of job, the amount of hours worked L, and the corresponding wage w, that is paid on the labour market.
  2. \(r\cdot K\): this term corresponds to the income from owning fixed assets (capital K), which includes lang (housing, land) and (shares of) companies and any financial assets. The return on the capital owned, r, varies highly between different types of capital. While of course the capital or wealth one owns at any given point in time depends on many factors including family history, past activities etc, the individual decision here is still where to “invest” the capital, and what type of return r to aim for (which is of course often risky). This is one of the main topics of this blog.
  3. Transfers received: Besides labour and capital income, transfer income constitutes the third factor of income of individuals. It can consist in transfers from the government, e.g., social assistance or unemployment insurance, but also includes family support e.g., for students, donations and gifts and other money received.

These three factors constitute the income side of the budget equation. The right-hand side of the equation instead shows how the income is used. Also here we have three factors corresponding to the three previous ones, in particular:

  1. \(C\): This it the total aggregate of money spent on consumption goods, including food, leisure expenses, traveling, car expenses etc. Here we have a large degree of freedom what to consume and how much to spend in general. This is the topic for instance of movements aiming at reducing waste by consuming plastic-less products, vegetarianism, boycotting certain firms, etc. When it comes to the amount of consumption, the movement of “Minimalism” aims at reducing the total amount of consumption, with the “value” or maxim of reducing consumption in total. According to this budget equation, reducing C in total, you can either increase the next term, savings, or reduce income (reducing working hours L or accept a lower wage w)
  2. \(S\): Savings, this is the part of the income that you don’t spend on consumption or transfers, and hence will be added to your capital in the next period. It is a crucial lever for several purposes. Here you can decide how much to save, based on your preferences for consumption today or the future, and how to save it, if to keep it on your account, or invest in different ways.
  3. \(Tr_sent\): You can also decide to give some money to others. This included donations to Charity, helping out Strangers or family members, donating to a cause etc. Here clearly one can follow one’s maxim and devote part of one’s income directly to someone or an institution in line with ones values.

It is worthwile consider these six terms in one’s own life in order to understand how one is in line with the maxim of ones life or values.

In the next posts we will go through several examples using this concept.

 

 

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