Natural Law and Finance

natural law and finance

By Myles Bayliss

Natural Law refers to both a moral theory and a legal theory.  This article looks at the legal theory. From that perspective, Natural Law is a legal philosophy that proposes a universal set of rights and morals inherent in human nature, existing regardless of whether a government recognizes or enforces them (Finch, 1979). Traditionally these rights and morals are drawn from a transcendent being such as God. However, this connection diminished with the rise of secularity.

Historical developments

This section details important developments of Natural Law theory. Natural Law can be broadly and roughly split into two categories: Classical or Divine Natural Law, and Modern Natural Law. Both categories generally concur on the existence of an inherent set of rights and morals but diverge on their source. Classical Natural Law theorists typically source the existence of rights and morality from a divine being. Classical Natural Law philosophy was also a guiding influence on the drafters of texts such as the Magna Carta and the American Constitution (Desmond, 1953). Classical Natural Law began to fall out of favour towards the end of the eighteenth century before seeing a resurgence following World War II. In this version, the influence of a divine being is significantly diminished or removed entirely. Natural Law continues to influence several areas of law, most notably international law (Zurbuchen,  1998).

Classical Natural Law

The roots of Natural Law can be traced back to Ancient Greece, first appearing in the work of Plato in passing instances, most notably Gorgias, Republic and Laws. Whilst Plato did not explicitly outline a framework for a natural law theory, his work did contain several elements of many natural law theories, particularly in his theory of forms (Wild, 1953). Plato’s theory of forms posits that non-physical forms or ideas represent the most accurate reality and are the basis of an orderly universe. Several forms are key to Plato’s orderly universe, those being the form of the Good, the True, and the Beautiful.

Natural law theory was developed more fully by the Stoics. The Stoics asserted the universe exists according to a rational and purposeful order and the means by which a rational being lived in accordance with this cosmic order was considered natural law (Sills, 1968). Stoic Natural Law differs from Greek Natural law as Stoic Natural Law is not concerned with the actual source of Natural Law where Greek Natural Law has strong links to a higher divine source.

Perhaps the most notable development of Classical Natural Law was by Catholic philosopher St. Thomas Aquinas. Prior to Aquinas, Natural Law was often equated with divine law in Christian Theology. Aquinas would restore Natural Law to an independent body of thought in his Summa Theologica, recognizing four distinct kinds of law: eternal, natural, human, and divine (Aquinas, 1979).

Aquinas defined Natural Law as the rational creature’s participation in the eternal law, however as human reason could not fully comprehend Eternal Law — law as contained in the mind of God and as seen by God himself — it needed to be supplemented by the Divine Law — law derived from Eternal Law as it appears to humans i.e., commandments or scripture. Aquinas posited that moral law derived from the nature of human beings, and that it was appropriate for them to behave in a way that corresponded to their rational nature. As such, human laws were to be judged by their conformity to natural law; an unjust law not conforming to Natural Law is not a law at all (Burns, 2001).

Towards the end of the eighteenth century and early nineteenth century, scholarship began to be driven by scientific and objective reasoning as a result of the Enlightenment. Natural law could not be subjected to a scientific or objective analysis and thus began to fall out of favour (Zimmerman, 2010). At the same time a new school of legal philosophy, Legal Positivism, began to gain influence, essentially replacing Natural Law as the dominant school of legal philosophy.

Modern Natural Law

Following World War II, Natural Law experienced something of a resurgence. Legal Positivism began to attract criticism following the abuses of power in Nazi Germany under the guise of national sovereignty (Mirabella, 2012). Under Legal Positivism, laws which have a legitimate source (proper enactment by the state) are not invalid even if immoral. This was a significant issue for war crime prosecutors as many of the human rights abuses were protected by way of ‘valid’ law (Zimmerman, 2010). From the Nuremberg Trials and ‘Grudge Cases’ came the Nuremberg principle, an obligation upon individuals to disobey laws which are clearly recognisable as violating higher moral principles (Moens, 2011).

Interest in Natural Law was renewed following the Nuremberg Trials (Mirabella, 2012). The United Nations Charter (1945) was based upon Natural Law principles as was the Universal Declaration of Human Rights (1948). In academia, Natural Law also experienced a resurgence, notably in the Lon Fuller (1902 – 1978) and H.L.A Hart (1907 – 1992) debate on law and morality. Modern Natural Law mostly does away with the connection to divine beings shifting to a rights approach.

Natural Law in Finance

One criticism of financial regulation is that legislation, such as the Dodd-Frank Act, is not sufficient to stop misconduct due to constant market innovation and an often-prolonged legislative period (Acharya, 2011). Smith and Muniz-Fraticlli instead suggest moving to a functional approach to regulation giving discretionary power to administrative bodies and judicial bodies to identify specific abusive acts (Smith and Muniz-Fraticlli, 2013). Giving discretionary power to administrative and judicial bodies allows regulators to respond to market innovations at a much quicker rate, minimising regulatory lag.

Such an approach could be based on Natural Law, incorporating an ethics based approach to regulation. Cohn notes that a system of equitable principles instead of, or acting in superiority to statutes and other forms of traditional authority, may be more conducive to arriving at a ‘fair and just’ outcome in corporate law (Cohn, 1996).

Jackson states that Natural Law theory provides a basis for incorporating human rights into global governance while also making a business case for taking human rights seriously (Jackson, 2008).  Jackson proposes the recognition of ‘reputational capital’ (the reputation of a business) as an intangible asset. This is done to incentivise the promotion or even innovation of human rights by corporations. Jackson argues this model is superior to the current model of reputational capital which has corporations simply acting to avoid ‘bad press’. Hodges proposes an ethics-based regulation model for business in Law and Corporate Behavior (Hodges, 2015). Echoing Jackson, Hodges argues that such a regulatory system should not be focussed on prevention, but should also encourage and reward ethical market interventions and relations.

Islamic Finance could also serve as a potential model for Natural Law/ethics based financial regulation. Islamic Finance is a set of banking and finance practices based on the principles of Sharia or Islamic Law. As these practices are based on a form of divine law — similar to the definition of Natural Law espoused by Thomas Aquinas — there is a closer link to morality than the typical Western financial regulations/ethics. Islamic scholars suggest that aspects of Islamic Finance, such as the ban on usury or interest, may be superior to the current Western model as it would lead to more prudent investment and lending practices. Such judicious acts are due to a closer relationship between financier and financee through risk-sharing or participation (Vernados, 2012).  James suggests that weaknesses in the financial system could be significantly reduced by an elimination or reduction in availability of debt-based finance (James, 2012). This may have prevented behaviour that led to the Global Financial Crisis such as overreliance on debt and non-prudent lending practices.


Natural Law is the oldest school of legal philosophy, having originated in Ancient Greece and Rome through Plato and the Stoics. Whilst Natural Law did experience a period of ‘abandonment’ at the hands of empirical-based scholarship, Natural Law has again risen to popularity in both the academy and in practice. In terms of practical application, Natural Law could serve the field of finance as a basis for future regulatory practice. A Natural Law approach to regulation could provide a model to better involve corporations in the human rights or ethics process by incentivising compliance. Islamic Finance practices may also be able to inform or model any future regulations due to its ties to Islamic Natural Law.

References Cited

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