This is the 6th chapter of the book Finance and the Common Good (2019, Amsterdam University Press), written by prof. dr. Govert Buijs.

In this contribution I will elaborate on the doctrine of the trinity. You may have heard of this doctrine as a kind of theological delicacy in Christianity. Do not worry – that is not my brief here. What I wish to address is the economic trinity, that is to say: the trinity of the contract – or for that matter any transaction that takes place on the market.

My thesis is that in mainstream economic thinking, as well as in general practice, we have come to misunderstand transactions as simple, one-dimensional operations. In this way we have forgotten what it takes for a market to work well. In fact, we may undermine the very preconditions for the market. In that sense, we have started to act as parasites – which generally do not end very well, as the parasite has a tendency to consume his host. If we lack a proper understanding of market transactions and act on that understanding, we may start to thwart the proper functioning of the market. It is exactly this, which may give, and likely has already given, rise to feelings of alienation among the wider public. It has even led to public outrage, the effects of which are now permeating our political system.

It will be my claim that reflection on the mentioned economic trinity shows a path to an agenda of renewal for (financial) organisations and their employees. Towards the end of this contribution, I will elaborate on six key elements of this agenda.

Three kinds of contracts in each transaction

Every market transaction involves three contracts that are concluded simultaneously. The first contract is the most visible one and is almost always committed to paper. This could be as simple as a receipt received in the supermarket. The contract describes the concrete ‘tit-for-tat’: a jar of peanut butter for €1.50. However, this first contract is always accompanied by a second one, which is not written down; it is an implicit contract, contract II, which actually makes possible contract I.

This second contract states that both contractors in contract I make a promise not to cheat on each other. The existence of contract II can easily be understood, namely ex negativo: if I would know at the point of conclusion of contract I that the other partner is cheating on me, the transaction will not proceed, but will be cancelled. As such, contract II is tacitly presupposed in contract I. The first we can call the ‘formal-legal contract’, the second is the ‘trust contract’.

And then there is a third contract. The very second the two contractors conclude their transaction they also enter into a contract with the society they are in. They assume that society will respect their mutual agreement. Above all, however, they also assume that society will ensure that effective redress is possible if one of the partners fails to live up to the terms of the contract. As such, any agreement, be it written or verbal, implicitly refers to a society in which there is a rule of law: one that serves as the background and the foundation, enabling people to produce and consume, to wheel and to deal. This also means that both parties implicitly situate themselves in the community and are therefore committed to the wellbeing of society. This third contract is the ‘social contract’ or ‘civil contract’. It implies the promise to at the very least refrain from harming the legal and social order; and positively formulated it implies that one actually acknowledges the duty to sustain and promote this order.

These are three different contracts, yet at the same time they are one – hence I call them a trinity. If one of the three is denied or obscured, no transaction can take place, at least not on a sustained basis.

Of course, it is possible to shift the relative weight between the three contracts. If contract II is downplayed, it can be compensated by high transaction costs. The first contract becomes a mountain of paper and a matter to be dealt with by lawyers and solicitors. If one minimises the social contract, society can only respond with ever increasing regulations that eventually may undermine the creative freedom that the market requires from an economic perspective. Yet even then, the trinity can never be ignored completely. After all, if ever it turns out that the parties involved in a contract have violated one of its three ‘sub’-contracts, anger and frustration will follow and further transactions become very difficult. The parties will be in big trouble and may even risk liquidation – clear examples of this are Arthur Andersen and Enron. And we have seen such anger in the last decade: there has been great public outrage at the role of the banks in the financial crisis.

From Occupy to populism and beyond…

On a socio-psychological and political level, our society is experiencing hectic times. Many citizens feel insecure and unprotected. One of the most influential social science advisors of the Dutch government, Paul Schnabel, expressed this sentiment in his famous one-liner: ‘I am fine, but we are not’ (cf. 2018). Individual wellbeing is at odds with the way
people feel society is doing. There is a widespread feeling of betrayal: the societal contract has been undermined by some of the parties involved. The Occupy movement was an expression of this sentiment. Feelings of distrust have acquired even more force by their adoption into the views of populist movements worldwide. The close relationship between the leftist Occupy movement and right-wing populism was underlined by a CNN commentator in early 2017, when he noted that Donald Trump’s inauguration speech could almost have been written by Bernie Sanders. The latter might have mentioned ‘Wall Street’ a few times, while Trump considered ‘Washington’ the origin and epitome of all evil.

We do live in an age of deeply felt distrust in institutions, ranging from state to church, from housing corporations to health care institutions, and from banks to educational institutions. Why? ‘Burgerschap’, the Dutch word for ‘citizenship’, is derived from ‘burcht’, shelter or castle. Institutions give shelter to people. In this basic role, many institutions are failing today.

I believe this brief analysis makes visible the contours of an agenda of restoration and innovation that representatives of financial institutions and society must explore. Let me summarise current events as well as this agenda of renewal in six key points.

1. Acknowledge that the financial sector has played a key role in growing distrust

Research by Funke et al (2016) shows that in the period between 1870 and 2014, a political crisis almost always occurred within a few years of a financial crisis. These political crises were characterised by populist movements – or worse. The financial sector has created and/or stimulated the current post-crisis distrust in two ways. First, it has tarnished or even destroyed its own century-old reputation of reliability and trustworthiness. Second, in its gargantuan growth, the sector has become an entirely self-contained ‘new economy’; one that is larger than the ‘first economy’, but with far less transparency. The financial sector is a globally operating, massive force of economic energy that nobody can curb or control.

Here we touch upon the issue of ‘financialisation’: the immensely increased role of the financial sector we experience every day in universities, health care institutions, and in politics. It seems that the only debates that matter today deal with money issues. In the background, debt and risk management issues are often involved.

The lesson is this: we must curb our dependence on finance and our addiction to debt.

2. Pay new attention to the forgotten second and third contracts

As explained above, every market transaction consists of three contracts: the manifest, or formal, contract, the trust contract and the social contract. It is essential that the second and third contract once again receive all the attention they deserve – in theory, but even more in practice. This implies, for example, that the reliability and trustworthiness of banks in the relationship with customers must again become indubitable. Banks should also be aware of their societal role and significance; that is to say: they should live up to the third contract.

3. Develop new ethics …

Much attention has been given in recent years to the personal ethics of employees of (financial) institutions. Employees must develop virtues, identify moral dilemmas, and know how to deal with these dilemmas. In itself, this is a positive development. Yet we should not fool ourselves with fancy language, or have wrong expectations of employees in the financial sector – that they are to become ethical virtuosi that always stand on a moral high ground. They are only weak, vulnerable, and impressionable human beings – like everyone else. The new ethics we require should not only give attention to the moral demands that people must meet in order to be ‘virtuous’, but also (and perhaps more importantly) to phenomena such as moral weakness, transgression, and forgiveness.

4. … and new systems

It is rather a risk to expect too much from employees’ personal ethics. We are all weak: sometimes inadvertently, sometimes because we are inclined to do evil. It is therefore equally important to pay attention to the moral design of systems and organisational cultures. How do our incentive systems work? What type of behaviour is rewarded (financially, but also in terms of career opportunities), and what behaviour is punished? What is the organisational culture?

At the end of the day, what is true leadership? Does it focus on financial profit, quality of services, customer satisfaction, or societal responsibility? How does the organisation as a whole deal with its duty to protect customers?

5. Find a new definition of relevant actors: true stakeholders

Many problems today have their roots in an extremely limited definition of who the actual stakeholders of a (financial) company are. Many companies have given their shareholders an all-dominant position. This has come at the expense of, for example, customers. It is particularly regrettable that this has happened to banks, for they commonly originate from citizens’ initiatives, such as cooperatives. They oftentimes were never private market organisations to begin with; rather, they were civil organisations that were explicitly designed to provide protection to people. Many banks have become parasitic outgrowths of their own origins. As such, a new identification of true stakeholders must take place.

6. Identify what we should consider the telos, or ultimate goal, of our economy

Why do we have an economy? This simple question is hardly discussed in contemporary economic science. If the question would receive a clear answer, it could be possible to give positive direction to economic behavior. If we identify what it is that we are doing and what we are doing it for, we can judge whether we are on track. Gradually, indeed, more substantive answers are started to being given, often relating to ‘happiness’ of ‘human flourishing’. This implies that the key question that must be asked by financial institutions is as follows: do we – or does the process of financialisation, which we have promoted in the past – actually contribute to human happiness and/or human flourishing?

In conclusion

My contribution started by reflecting on the economic trinity of transaction, trust, and society. To restore this trinity is indeed almost a religious act, in the sense that it presupposes something like a ‘conversion’ or change of ways. If there is one truth found in almost all classical religious and in philosophical traditions, it is this: conversion, a change of heart, is not easy – but it is certainly feasible.

Govert Buijs holds the Abraham Kuyper Chair for Political Philosophy & Religion at the philosophy department of the Vrije Universiteit Amsterdam. Next to this, he also holds the Goldschmeding Research Chair ‘Economics & Civil Society’. He is the project leader of the research project ‘What Good Markets Are Good For‘, which established the Moral Markets website. He teaches both in the Faculty of Humanities and in the School of Business and Economics of the VU. Buijs frequently acts as a policy advisor for (managers and boards of) non-profit and profit organisations in the Netherlands and is a regular commentator in Dutch media on socio-ethical issues.

This chapter was made possible through the support of a grant from Templeton World Charity Foundation, Inc. The opinions expressed in this publication are those of the author and do not necessarily reflect the views of Templeton World Charity Foundation, Inc.