Abstract
AbstractMuch actuarial work is underpinned by the use of economic models derived from mainstream academic theories of finance and economics which treat money as being a neutral medium of exchange. The sustainability of a financial system whose understanding is based on a limited view of the role of money has increasingly been subject to criticism. In order to identify needed research programmes to address such criticisms and improve these disciplines, we sought to understand the current state of knowledge in economics and finance concerning the link between monetary and financial factors and sustainability. We have approached this through a search for relevant literature published in the highest-rated academic journals in economics, finance and the social sciences for titles and abstracts containing both references to the financial system on the one hand, and sustainability and environmental factors on the other. The systematic search of a universe of 125 journals and 355,000 articles yielded the finding that surprisingly few research papers jointly address these concepts. Nevertheless, we find that current research shares a broad consensus that the implications of the growth-oriented economic model results in an increasingly interconnected and fragile financial system whose participants are not incentivised to fully recognise the natural environment and resource constraints. We further observe that the prescriptions offered are relatively limited and small-scale in their outlook and that there is a vital need for further research, particularly for actuaries who are required to take a longer-term outlook. The Resource and Environment Board has supported this work with two key objectives: first, to identify research that may have direct application to actuarial work and, second, to identify gaps in academic research that would help drive the Institute and Faculty of Actuaries’ own research agenda. With this in mind there are three further areas of potential actuarial research. These are the policy aim of pursuing growth without limit within a finite ecosystem; discount factors as the primary means of capital allocation and investment decisions; and the use of gross domestic product as the key metric of economic activity and success. We also conclude that further academic research is urgently needed to understand the sustainability of the banking and monetary system.
Highlights
The sustainability of a financial system whose understanding is based on a limited view of the role of money has increasingly been subject to criticism
The aim of our review was to obtain an understanding of how far these criticisms have been addressed in academic literature. To the extent they have been addressed, we have investigated whether new insights are being integrated into revised theories of the functioning of the macro-economy and what implications these insights may have in relation to understanding the sustainability or otherwise of the way the financial economy operates
In building our understanding of what lies ahead, we inevitably look to the past for guidance experience has taught us that what we perceive to be “normal” can be anything but
Summary
A number of bodies – including policy institutions, commentators and think tanks – have offered increasingly detailed challenges to the sustainability of banking and finance as currently practiced These include a growing awareness that critical features of the fractional reserve banking system are omitted from mainstream economic theory. The global financial crisis appears to provide evidence that our financial system contains significant and hidden dangers, but the unsustainable effects of the current system are alleged to include pro-cyclicality, systemic wealth concentration and acceleration of the depletion of natural capital These bodies identify causes of unsustainability in the structure of modern finance and money creation including critiques of fractional reserve banking and the globalisation of capital. While our review has identified some interesting papers which offer genuine insights into the interrelated topics of sustainability and of the financial system, to us it has more urgently highlighted the need for further work on this relationship
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