Fiduciary Relationship in Capitalism-Fiduciary Relationship as a Requirement of the order of society.

1. Why Fiduciary Relationship?

Ethics is becoming an important issue in the capitalism of the 21st century. The accumulation of the burden on the earth caused by the conventional system based on mass production and mass consumption is approaching its limits, and the American economic system, which had focused on the supremacy of shareholders, has brought serious inequality problems. With the term CSR, SDGs and ESG, there has been a great deal of attention paid to businesses that solve social issues, and some are calling for a return to public interest and ethics in capitalism. However, the issue of "economy and ethics" is not unique to this era and has been addressed by many thinkers such as Adam Smith, Max Weber, and Eiichi Shibusawa, although from different perspectives. In considering the relationship between economy and ethics, the direction of the debate depends on how "ethics" is defined. Among these directions, one that can be expected to provide useful suggestions is to consider economy and ethics from the perspective of the fiduciary relationship. According to Iwai, who has criticized neoclassical economics from the viewpoint of fiduciary theory, fiduciary relationship, in other words, the relationship in which one person is entrusted by a trust with a task that is intended only to benefit the other person," is 100% consistent with Kant's definition of ethics. The ethics found in this trust theory will become more and more important in the increasingly sophisticated capitalism of the future. Therefore, this paper will focus on the fiduciary relationship or trust law in order to examine the relationship between capitalism and ethics and try to clarify why ethics is necessary for capitalism. The thesis that "capitalism needs ethics" may be false from the point of view of economics as social science, which began with the affirmation of self-love by the "invisible hand. "However, the thesis that "ethics is necessary for capitalism" is a worthy topic for consideration, given that what economics, which became independent as a social science by banishing ethics from its interior by the "invisible hand," has brought about is the current crisis situation of the earth in the 21st century. In this paper, I will first refer to Iwai's discussion of the fiduciary relationship and discuss the significance of the fiduciary relationship in the post-industrial capitalism of the 21st century. Next, I will focus on the history of the trust law and how the trust law came into being, and I will argue that the trust relationship is not a problem unique to the 21st century, but something that human beings, regardless of civilization, have always advocated its importance. Finally, based on these arguments, I will discuss why ethics is necessary for the future of capitalism.

2. Fiduciary relationship in 21st century

According to Prof. Katsuhito Iwai, in an increasingly sophisticated capitalist society, the trust relationship will become more important than the contractual relationship. And this argument is strongly supported by the following three perspectives.

The first is from the perspective of company theory. Because it can be argued that a company is a curious entity that has both human and material characteristics and that the relationship between a company as a thing and its manager is a fiduciary relationship. Prof. Iwai claims that the theory of shareholder sovereignty represented by Milton Friedman, which emphasizes the aspect of the company as a thing, is a theoretical error and emphasizes that the company is an entity that has both the characteristics of a thing and a person. A company legally acts like a person and owns its property and makes contracts. On the other hand, a company, which is an abstract entity without a physical body, always needs a real person to act like a human being, and the manager is that person. In this case, the relationship between the company and the manager cannot be reduced to a contractual relationship. The reason for such a claim is that a contractual relationship is a relationship between two people based on their own free will to pursue their own interests, but if the relationship between the company and the manager is a contractual relationship, it means a self-contract, which is not legally binding. This relationship between the company and the manager is not a contractual relationship but a relationship of trust. In this relationship, the manager is entrusted with the task of working solely for the benefit of the company by trust, and it is here that ethics is found in the form of the duty of loyalty. Therefore, the importance of the trust relationship can be found in the theory of the company, or in other words, from the perspective of “who owns the company?”.

Secondly, the importance of the trust relationship is also suggested from the perspective of environmental issues. The essence of this problem lies in intergenerational ethics and the relationship between the present and future generations, and this relationship is not a contractual relationship but a fiduciary relationship. One of the reasons for the current rise in the average temperature of the earth is thought to be the increase in greenhouse gas emissions, which are brought about by the consumption activities of the current generation. While the current generation (especially in the West Countries) is enjoying material wealth in a system that endorses mass production and mass consumption, such production and consumption activities could result in damage to future generations not yet born at the present time due to extreme weather conditions, rising sea levels, and the following food crises and conflicts. Here, the actions and decisions of the present generation determine the damage that the future generation will suffer, while the future generation has no realistic means of negotiating with the present generation. The relationship between the present generation and the future generation is not an equal contractual relationship but a relationship of trust in which the present generation is forced to act as the agency of the future generation. In this relationship, people living in the present generation are required to suppress the pursuit of their own interests and act for the benefit of others(future generation), which again means that the trust relationship is required as intergenerational ethics or environmental ethics in this 21st century. Therefore, the fiducial relationship is also required from the perspective of environmental issues, which is a critical issue in the 21st century.

Thirdly, the importance of the trust relationship can also be seen from the perspective of specialized knowledge. In this 21st century, all disciplines have become highly specialized, and knowledge has become so narrow that it is impossible to be familiar with all fields. It can be said that the concept of division of labour proposed by Adam Smith in his "Wealth of Nations" has been applied to knowledge itself. It has been a long time since we experienced the institutionalization and professionalization of knowledge(known as the second scientific revolution), and living as an expert in one field and living as a non-expert in other fields would be like the two sides of the same coin. This suggests that everyone today has to live as both a specialist and a non-specialist in some way and that the relationship between specialization and non-specialization exists behind our living today. The relationship between professionalization and non-professionalization can also be categorized as a relationship of trust. The non-expert in a certain matter has to rely on the expert in that matter. In this situation, the expert is in the position of a recipient of trust and must respond to the non-expert in good faith while suppressing his or her own interests. This professional ethics can be considered as one of the ethics born from the trust relationship. Furthermore, expert knowledge could be a source of profit in a post-industrial capitalist society where new ideas are valuable. As post-industrial capitalism progresses, the diversification of expert knowledge will further develop, and the importance of the duty of loyalty of experts to non-experts will increase accordingly.

In this way, the trust relationship will become even more important in thinking about capitalism in the 21st century. Moreover, as Iwai points out, this trust relationship retains universality in the sense that everyone trusts and is entrusted with it, and this universality is considered to be comparable to the contractual relationship that supports the foundation of capitalism. The importance of trust relationships or ethical obligations has so far been advocated as a matter of course outside of economics. However, the fact that the importance of ethics has been discovered in this way inside economics, which began by focusing on the pursuit of private interests rather than ethical obligations through the "invisible hand," is considered to be a curial point in considering capitalism in the 21st century.

3. Fiduciary Law in History

This paper has already mentioned in the previous paragraph that the trust relationship will become more important in the capitalism of the 21st century. However, the importance of the trust relationship is not limited to the present day; it has been emphasized by civilizations throughout history, and the trust law has a long history. For example, regarding the emergence of the trust system in England, Higuchi cites the fiducial transfer of a real estate in the 14th century and points out that the origin of trust law was the intentions of feudal lords in feudal society as follows. First, the origin of trust law was the desire of lords to reduce the burden of feudal fees from their lords. In feudal England, lords imposed various feudal burdens such as inheritance fees, guardianship fees, marriage fees, and confiscation of real estate. These feudal burdens did not belong to the lords personally but were attached to the real estate (feuds), so the lords could avoid the burden of feudal fees by telling the lords that they did not own the real estate (which the feudal fees were attached). This is the first background of the trust law. The second origin of the trust law is the desire of the feudal lords for an inheritance to someone other than the eldest son. Medieval English law did not allow to transfer of the real estate to someone other than the eldest son. This meant that it was legally impossible for a lord to give his property to a son other than his eldest son or to donate part of his property to the church for the repose of his soul after death. This is where the idea of a second trust law comes in. In other words, since it was difficult for a feudal lord to legally give his property to anyone other than his eldest son, he tried to make it possible by taking the land out of his hands and transferring it to a trustworthy person. However, while this made it possible in principle to reduce the burden of feudal fees and to allow a property to be inherited by someone other than the eldest son, it also brought about another problem: the recipient of the trust would not distribute the proceeds to the beneficiaries, but would keep the property for himself. According to Higuchi, the trust law was developed in response to this breach of trust. Therefore, Higuchi concludes that the law of trust was designed to prevent a breach of trust by the trustee and to remedy a breach of trust once it had occurred

Frankel also focuses on the history of the law of trust in chapter 2 of "Fiduciary Law" and points out that the ancient law of trust is not so different from our law of trust today. Here, in addition to the origins of the English law of trust, as discussed by Higuchi, Frankel mentions the law of trust in other civilizations and points out that the problem it was intended to solve was a universal problem for human beings.In making this argument, Frankel refers to the laws of Hammurabi and Eshnunna, the New Testament, Islamic law, Jewish law, Roman law, and the recent history of the United States, all of which share the theme of morality and fairness in their cultural norms, and the protection of the trustee from serious violations of the relationship . He argues that all of these cultural norms share a common theme of morality and fairness and aim to protect the trustee from being seriously violated by the relationship

4. Fiduciary as a spirit of "Fair play."

As this paper has seen in the previous paragraph, the law of trust has evolved in human beings with the purpose of protecting those who trust (and sometimes those whose trust is betrayed). Supposing this in the context of the 21st century, we could see that the law of trust is an important law for the protection of trustees, such as companies(as a person), future generations, and non-professionals. At the same time, these trustees will exist universally on the earth, and trust law would be required of society as long as the system of the company exists, as long as human beings aspire to preserve its species, and as long as the specialization of knowledge occurs. In societies where trust relationships are disregarded, it will be impossible for people to trust each other with anything, which will not only lead to great economic inefficiency but will also make it difficult to maintain social order. As we saw in the previous discussion, referring to Iwai's argument, trust is an inevitable part of the economic logic of the 21st century, but it is also an inevitable part of a larger framework than economic logic. Trust law is the fundamental point for keeping order in human society. And the fact that the law of trust was required even in ancient times when economic society was not as developed as it is today can be considered as one proof of this.

This trust relationship, which is indispensable for the maintenance of order in human society, was also recognized by Adam Smith, who is often said to have started economics by affirming self-love with his "invisible hand. While Smith affirmed the competition based on the self-interest of ambition, in his "The Theory of Moral Sentiments," he stated the importance of the spirit of "fair play" like this:

In the race for wealth and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of.

Although Smith affirms self-interest through the "invisible hand" in his "Wealth of Nations", he emphasizes the importance of adhering to the rules of fair play, or justice, as a prerequisite of competition. Needless to say, justice is something that brings order to society (using the words of David Hume, who is the best friend of Smith, justice is "convention"), and Smith was also concerned with justice as a precondition for the competition from the perspective of moral philosophy, which is broader than economics. Smith argues for justice and morality using "sympathy" and an "impartial observer" (this is what distinguishes the rationalist Kant from the emotionalist Hume and Smith). Doumoku says, "If competition is conducted without regard to the rules of fair play, social order will be disordered, the 'invisible hand' will not function, and social prosperity will not be realized. " And Doume claims that "for Smith, only ambition controlled by a sense of justice, and competition conducted under that ambition, can bring order and prosperity to society" . This is the claim that emphasizes the spirit of "fair play" as a premise of Smith's "invisible hand. Based on this point, the importance of the trust relationship in capitalism would be clear, as it was also emphasized by Smith, who is often referred to as the founder of laissez-faire.

The importance of the trust relationship in economics is that in the 21st century, according to Iwai's argument, it can be logically derived from the perspective of the theory of the corporation. However, at the same time, as Higuchi et al. point out, the trust relationship has historically been required for the stability of social order even in civilizations before economic society. And it was also required as "fair play" in Smith's time when economic society was just about to be born. From this point of view, ethics in the form of adherence to the fiducial relationship is indispensable for the maintenance of order in human society, and since the system of capitalism, along with democracy and science and technology, is a system that forms the basis of modern human society, it is a reasonable conclusion that ethics is required of it. And the importance of the fiducial relationship seems to be evident from the perspective of Iwai's theory, history, and Adam Smith.

Citation

Adam Smith, “Theory of Moral Sentiments” 1759.

Domome Takuo, “Adam Smith -the world of ”Theory of Moral Sentiments”and “Wealth of Nations”-” Chuokoron-Shinsha. 2008.

Katsuhito Iwai, “What will happen to the company?”Heibonsha Publishing Co. 2009.

Katsuhito Iwai, “Capitalism in 21st century” Satsuma Shobou Co. 2006.

Katsuhito Iwai, “Capitalism and Ethics” Toyo Keizai Inc. 2019.

Norio Higuchi, “The Age of Fiduciary”　 Yuhikaku Publishing Co. 1999.

Tamar frankel, 三菱 UFJ 信託銀行研究会 (translation), “ Fiduciary Law” (『21世紀のフィデューシャリー』), Kobundo Publishing Co. 2014.