- Dr. John E. Charalambakis is the Chief Economist at Blacksummit Financial Group, Inc. Lexington, Kentucky. He is also with the Adjunct Faculty at Patterson School of Diplomacy, University of Kentucky.
Coauthored by: Dr. David Coulliette of Asbury University and Dr. Kenneth Rietz of Centre College
This article will be posted in three segments due its length. This is Part I.
In Plato’s Republic we find Socrates asking the fundamental question that has been with us for centuries, “What is justice?” It seems that for Plato, as well as for Aristotle who followed him, justice is the essential virtue of a society. Socrates taught his disciples that justice is giving and getting one’s due. Plato describes that justice must be counted as desirable for its own sake (Plato, trans. Grube, 1982.) Justice, in other words, is harmony in the soul and harmony in the state. Furthermore, Plato tells us that responsibility should be delegated in accordance to one’s ability and place.
We believe that the latter could become the foundation for viewing international trade as an instrument of justice, because what is produced, where it is produced, and by whom is produced, depends upon the ability to produce in an efficient manner. In such a case, everyone can gain from the transaction, a concept that was taken to the next step by Aristotle.
In this framework of thought, justice is viewed as fairness, power is restrained, the disadvantaged are empowered, and the interests of the society as a whole are being advanced. If that is the case then, sectors in the economy would work together in harmony (nowadays that would apply to the production and financial sectors), while convergence would be observed across nations.
This paper discusses first international trade as a venue and instrument of justice from a theoretical perspective, then adds a theological dimension to the theoretical framework where justice issues are viewed from a wholistic perspective and where international trade is viewed as the main venue of capital formation, which in association with social, physical, and financial infrastructures creates and sustains a middle class, without which democracy cannot function (Zakaria, 2003). Finally, the paper tests the above hypothesis by employing a vast number of factors and data from forty-four countries (categorized as frontier, emerging, and developed) and by using the support vector machine (SVM) algorithm.
The empirical results verify the hypothesis that trade is a source of creating a middle class, and thus serves as a venue of distributive and commutative justice. The paper concludes with a thesis (which still needs to be tested) that when the financial interests of collateralization and securitazation, are separated from production interests at a global level, then Pandora’s box is being opened, financial crises take place, and the reverse route starts i.e. the destruction of the middle class and injustice prevails.
From Plato to Rawls and Nozick
In the Republic, Socrates refuses and rejects the argument of Thrasymachus who argued that justice always serves the interests of the rulers of the society, the interests of the stronger in our midst. Moreover, Socrates rejects Glaucon’s argument which suggested a more modest approach, that justice is ultimately a matter of self interest and that people observe justice to avoid punishment. Both of these negative views about justice were rejected by Socrates who insisted that justice is the ultimate responsibility of the person, and should be delegated according to ability and place. Justice cannot be viewed as punishment, retribution or revenge. In ancient times, in Platonic terms, justice is a matter of social harmony and in Christian ethics, it is a matter of mercy. In economic terms we can talk about just wages, just distribution of rewards and of income. Issues of justice come at the forefront when there are exchanges. In his famous 1971 book, The Theory of Justice, John Rawls takes the liberal approach to find the proper balance between liberty and equality, with a particular concern for the least advantaged. A few years later his colleague, Robert Nozick takes a more libertarian approach to justice defending a strong notion of entitlement where everyone gets what he or she is entitled to, based on endowments, without any reference to needs or inequalities.
We have the impression that any reference to justice by neglecting the concept of community (ecclesia in theological terms) would have horrified Plato, Socrates, Aristotle and their followers. Cicero long argued that the leading virtue in a society is justice and that the definitive ingredient of justice is merit. Therefore, meritocracy in society is a necessary condition for justice to be administered. Meritocracy at the same time requires the observance of the rule of law, because the rule of law distributes rights and a just law advances fairness. (In the theoretical framework below, this will be titled the legal infrastructure.)
If production responsibilities are designated according to merit and ability (Plato and Cicero) then, the responsibility of justice is to enable the individuals across nations to produce according to their natural and enhanced capabilities and endowments. If we take the concept of justice a step further, we would probably understand that justice is inseparable from righteousness (in the form of dikaiosyni as proclaimed in the New Testament), at least in the Platonic and Aristotelian paradigms. In that sense, Plato’s central claim of righteousness is “performing the functions for which one’s nature is best fitted.” It is also interesting to note that both Plato and Aristotle defend non-egalitarian views of justice.
In The Ethics, Aristotle gives us a complex concept of justice. He divides justice in two broad categories as the lawful (he does not necessarily mean obedience to the laws of any particular state) and the concept of fair and equal. It is the latter that is advanced in Aristotelian ethics (Aristotle, transl. Irwin, 1985.) The literal meaning of the word justice in Aristotelian ethics is the meaning of righteousness, which is the form of justice that represents complete virtue of the soul which cannot be understood unless it is comprehended within the framework of community, i.e., in relationships. There is no doubt then, that this Aristotelian understanding of justice fits well into the ecclesiastical paradigm of koinonia. Aristotle divides this kind of justice into distributive and rectificatory. For Aristotle, the student of Plato, justice should be viewed as fairness. Distributive justice for Aristotle is primarily concerned with what people deserve. We also need to keep in mind that Aristotle is particularly concerned with the justice of transactions. When Aristotle talks about justice in transactions, he refers to commutative justice in voluntary exchanges such as buying, selling and lending, or involuntary matters where we have victims of insults, thefts or assassinations. When Aristotle talks about equality and justice he refers to proportional, or what he calls geometrical proportion in distributive justice. Through the centuries since then, we understand that in Aristotelian ethics we need to treat equals equally, while unequals deserve unequal treatment in proportion to their merit, in proportion to their abilities, and in proportion to their enhanced capabilities.
Therefore, according to Vlastos (Vlastos, 1962) – a leading scholar for Plato and Aristotle – a distribution to be just is almost always an unequal one. Vlastos writes, “the meritarian view of justice paid reluctant homage to the equalitarian one by using the vocabulary of equality to assert the justice of inequality.”
We believe that central to Aristotle’s overall argument is the concept of justice as a state of attitudes, habits, customs and cultivated policies that advance and enhance the capabilities of persons, groups and nations. The enhancement of that capability leads to the development of character and to the development of a nation. When individuals are deprived from their potential, their nations cannot prosper. This kind of justice according to Aristotle is complete virtue, not complete virtue unconditionally, but complete virtue in relation to another (koinonia). Aristotle writes, “Moreover justice is complete virtue to the highest degree because it is the complete exercise of complete virtue and it is the complete exercise because the person who has justice is able to exercise virtue in relation to another not only in what concerns himself for many are able to exercise virtue in their own concerns but unable in what relates to another… and for the same reason justice is the only virtue that seems to be another person’s good because it is related to another for it does what benefits another, either the ruler or the fellow member of the community… and the best person is not the one who exercises virtue only toward himself but the one who also exercises it in relation to another since this is a difficult task… for virtue is the same as justice, but what it is to be virtue is not the same as what it is to be justice.”
A few sections later, Aristotle would argue, “what is just then is what is proportionate and what is unjust is what is counter proportionate, hence in an unjust action one term becomes more and the other less and this is indeed how it turns out in practice since the one doing injustice has more of the good and the victim less.” This proportionality in distributive justice is in accordance with merit, ability, and – in economic terms – efficiency. Therefore, in Aristotelian ethics justice in order to be just has to have unequal proportions.
It should not be a surprise that Christian teachings from the first few centuries (Chrysostom, Basil, Gregory of Nyssa among others) as well as from the Middle Ages to the Wesleyan renewal movements emphasized the uplifting of the poor as a natural outcome of Christian conversion. The lack of social uplifting and social holiness portrays betrayal of the Christian–kingdom principles.
St. Thomas Aquinas synthesized the Christianity of the Church with Aristotelian ethics and came up with some articles relating to justice that can be summarized as follows (Solomon and Murphy, 1990): First, justice is a habit whereby a man renders to each one his due by a constant and perpetual will. Second, justice is always towards another, and third, justice is a virtue and actually it’s the chief of all the moral virtues.
Aquinas concludes his thesis on justice by echoing St. Augustine and Cicero by suggesting that charity, generosity and liberality is an essential part of justice, especially to the ones who are the least among us.
Free Trade and Capital Formation
The pursuit of higher ideals as well as intellectual achievements could only take place when the fear of starvation and the fear of lacking the necessities of life disappear. For the latter to take place, we have to reach a point of creating a middle class that is sustainable. Justice in such a society, where middle class can be created and be sustained, is not achieved overnight, but over time, and its achievement is determined by institutional arrangements.
This is exactly where free trade fits. Even if it is not the purpose of the paper to exemplify the advantages of free trade it would be proper to review that according to both theoretical and empirical evidence, free trade could become an instrument of convergence, of uplifting the poor from their misery, of restraining monopoly and oligopolistic powers, of advancing opportunities to the least in the society, of offering new horizons for the disadvantaged, and certainly of bringing better understanding and dialogue among rivals.
However, any instrument that is not being taken care of, loses its appeal, especially when it neglects those who are left behind. Free trade has the potential of becoming an instrument of justice, and therefore of social equality where equals are treated equally. However like any double-faced sword, when it neglects the disadvantaged and allows inequalities to get out of hand (especially when the latter are coupled with over-extension of credit via over-collateralization and securitization means), then social and political instabilities feed the capital formation process, and ultimately lead to economic stagnation.
Speaking of the intellectual and moral consequences and benefits of international trade, we would do great injustice if we fail to look at the writings of Charles Montesquieu (Montesquieu, 1989), especially book twenty of his The Spirit of Laws where he clearly declares that, “commerce is a cure for the most destructive prejudices.” Later in the same book Montesquieu will declare “peace is the natural effect of trade. Two nations who traffic with each other become reciprocally dependent for, if one has an interest in buying, the other has an interest in selling and thus their union is founded on their mutual necessities.” Furthermore, Montesquieu will declare and articulate that trade among nations produces a sense of justice among them, as the latter has been understood by Aristotle. We believe that when people exchange goods or services they start understanding each other better, there is a dialogue that is being established, and therefore uncivilized notions are being eliminated through communication. Moreover, they discover that there are mutual benefits and advancements of efficiencies in their economies and organizations, and through this mutual advancement peaceful resolutions could heal particular disputes, while creating an environment of better understanding among peoples and nations.
It was easily understood even before the time of Adam Smith – and according to Montesquieu’s arguments – that international exchanges will bring specialization and that specialization will lead, as Montesquieu explains, from small to grand enterprises which implies greater productivity and efficiency, and an ability to produce at a lower cost. The latter will lead to lower prices, especially for the poor who previously could not get particular goods or services. The standards of living then increase because of greater efficiencies, lower costs, and the ability that is given to poor persons to not only purchase goods but also to be actively involved in the production of goods.
From that perspective international exchanges and international trade becomes and instrument of enhancing the capabilities of persons and especially of the least advantaged. Montesquieu continues and shows through historical examples, how harbor cities and nearby communities to the port thrived by immigrants who came to those cities to find jobs. The poor found good fortune where international exchanges were taking place, whether it was at Tyre, Venice or the cities of Holland. The ability of the port cities to attract immigrants signifies the concept of mobility, because we all know that without mobility there cannot be social progress.
However, if we read carefully Montesquieu’s arguments we will clearly see the underpinning theory which advocates that capital formation is the essence of establishing the framework of prosperity for the average person. Capital formation then, could become the alpha and omega of having a peaceful society that cares for the least advantaged, for the sustainment of a middle class, and for higher values and ideals. Capital formation and the ability to generate stock of capital is the essence of economic activity and commerce in a society that generates jobs, incomes and the ability to consume the necessities of life.
The Theoretical Framework
We are very fortunate to have the latest work published by William Bernstein entitled, A Splendid Exchange, How trade shaped the world, (Bernstein, 2008), who in a fascinating and elaborate way reminds us that from Mesopotamia in 3000 B.C. to the globalization debates in the Seattle battles, trade is the foundation of capital foundation. Bernstein in his study reminds us how the early traders floated ivory, copper and barley through the Tigris and Euphrates and he reminds us how the Greeks fought wars in order to advance the concept of trade. He also tells us the story of the Chinese and how they carried silk from China to Rome, and how the Portuguese traded spices in the sixteenth century. When he reviews for his readers how the British came to Jamaica and how American trade policies in the late nineteenth and early part of the twentieth century became the key elements of economic growth, then we could concur with him and Montesquieu that trade is the foundational cornerstone of capital formation.
Part II will be posted within a week.