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Shortly after the 2008 financial crisis, Queen Elizabeth visited the London School of Economics. Like most of her subjects, she wanted the answer to a very simple question: “Why,” she asked of the assembled economists, “did no one see the crisis coming?” Around the world, hundreds of thousands of students study economics and tens of thousands study finance. Had they not been checking the system was doing its job properly, that it was fulfilling its purpose, and not about to collapse?
The answer, of course, was that had not happened. Everyone was in their own area of specialisation, researching the detail of their own subject. No one noticed that the system was becoming unstable.
Few had spotted other chronic failures in the system; for example, that on the best evidence available, for more than a century, the financial system has created no productivity increase in its task of taking our savings and investing them in productive projects.
That was one of the reasons that London Business School introduced a new required course for its masters in finance, which I teach, called the Purpose of Finance. The inspiration was the recognition that economics, corporate finance, investment theory and accounting are not enough on their own. Financial systems should be designed to fit their purpose otherwise they will not deliver better services and will not avoid financial crises.
Masters of finance graduates need to understand the basic technical subjects, but also other perspectives. The further students seek to progress in their careers, the more important these perspectives will become.
Much like a doctor who needs to learn the disciplines of patient care, not just anatomy and biochemistry, so finance industry professionals need to have at the heart of their training the multi-faceted disciplines that allow financial systems to work well.
These include considering behavioural and institutional economics. So, for example, when students investigate the first successful funded pension plan, they discover that it was not just breakthroughs in data collection and statistics that allowed its establishment, but also trust, culture and purpose. That pension plan was created in the 1740s by Robert Wallace and Alexander Webster, two Church of Scotland ministers, for the widows of their fellow ministers. In a world that remembered the scandals of the South Sea Bubble in the early 18th century, the integrity of these two men engendered enough trust that subscribers could be confident their money was safe and the pension promise was sound.
My course avoids trying to preach ethics, but it makes sure students know that many economists and economic historians emphasise that the culture of a society seems to be at the heart of economic success. And that economic relations simply cannot exist without some degree of trust. Before we launched the course, I researched what other masters in finance degrees taught. I could not find a single one that is explicit in teaching about purpose. That seemed a huge missed opportunity.
When the Queen asked her question, she suggested an answer for the embarrassed economists. Perhaps “things had got a bit lax”? Yet that was not what had happened. Financial disciplines are quite rigorous — but as with many things, before you apply that rigour you need to ask what the purpose of the study is in the first place.
David Pitt-Watson is executive fellow of finance at London Business School and an author of ‘What They Do With Your Money’