Working Paper by Werner Erhard and Michael Jensen, the Jesse Isidor Strauss Professor of Business Emeritus at Harvard Business School.

The seemingly never ending scandals in the world of finance with their damaging effects on value and human welfare (that continue unabated in spite of all the various efforts to curtail the behavior that results in those scandals) argues strongly for an addition to the current paradigm of financial economics.

In our paper, Putting Integrity Into Finance: A Purely Positive* Approach, which was recently made publicly available on SSRN, we summarize our new theory of integrity that reveals integrity as a purely positive phenomenon with no normative aspects whatsoever.

*positive as used here is from the discipline of economics – it does not mean something good or desirable, it means the way the world actually is and operates

The roots of what we are dealing with here are in philosophy and in particular ontology (the philosophy and science of the nature of being) and phenomenology (ontology’s methodology).

Adding integrity as a positive phenomenon to the paradigm of financial economics provides actionable access (rather than mere explanation with no access) to the source of the behavior that has resulted in those damaging effects on value and human welfare, thereby significantly reducing that behavior.

More generally, we argue that this addition to the paradigm of financial economics will create significant increases in economic efficiency, productivity, and aggregate human welfare.

This paper is profoundly different from the way we economists normally model aspects of the world, how we think about measuring the effects of different policy choices on human beings and how we communicate the results of that research. What we say about integrity in this paper will stretch most of us.

It will not fit the current worldview or mindset of most economists. However, if we are successful, it will shift your worldview to a more powerful place. What we are discussing is highly relevant to and complementary to economics, business and management. Yet, it is not economics as it is generally thought of.

The roots of what we are dealing with here are in philosophy and in particular ontology (the philosophy and science of the nature of being) and phenomenology (ontology’s methodology).

While much of what we say about integrity is not economics, we hasten to add that integrity (as we define it) or the lack thereof on the part of individuals or organizations has enormous economic implications (for value, productivity, quality of life, etc.).

Indeed, integrity is a factor of production as important as labor, capital, and technology. Without a clear, concise and actionable definition of integrity, economics is far less powerful than it can be. So too are finance and management.

We argue that there are large increases in workability, value, and quality of life to be realized by putting integrity as a positive phenomenon into the theory and practice of finance.

We then ask you to experiment with putting integrity into your personal life, your family life, and your professional life. See if you observe the predicted effects of integrity on workability and therefore your opportunity for performance.

Given the radical departure from the current understanding of what integrity is that is generated by this new model—that is, given the radical departure from the way in which integrity has historically occurred for us—we ask our readers to suspend judgment of the elements until the whole of the model has been laid out.

We then ask you to experiment with putting integrity into your personal life, your family life, and your professional life. See if you observe the predicted effects of integrity on workability and therefore your opportunity for performance.

We predict that you will see firsthand a real impact on the quality of your personal and professional life, on the trust others place in you, on your productivity and performance, on your well-being, and on reducing the messes in your life.

Article previously published in The Harvard Law School Forum March 26, 2014.

 

The working paper Putting Integrity Into Finance: A Purely Positive Approach by Werner Erhard and Michael Jensen was published by National Bureau of Economic Research in July, 2014 and European Corporate Governance Institiue (ECGI) in April, 2014.

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A New Model of Integrity in Corporate Finance: Michael Jensen

A New Model of Corporate Integrity: Harvard Professor Emeritus Michael Jensen discusses a model of integrity and its application to corporate finance and management. Kellogg-Aspen Conference on Rethinking ‘Shareholder Value’ and the Purpose of the Corporation, March 7, 2013.