In his fascinating introduction to the long-awaited St Paul's Institute report on morality and the City (PDF here), outgoing Canon Chancellor Giles Fraser tells a by-now familiar tale of how ethics in the financial markets were subverted by a combination of de-regulation and computerisation following the Big Bang of 1986. What was lost, he thinks, was the salutary effect of face-to-face communication that was basic to that prelapsarian world of old school ties, when an Englishman's word was his bond. He sounds positively misty-eyed about those far-off days:

The old City may have been an exclusive and inward looking club -- but the benefit of clubs is that members often have a better developed sense of values and are able to hold each other to account for failing to live up to the club's standards. As Albert Schweitzer put it: "Ethics is a state of solidarity with other human beings."

Put this another way: moral behaviour is bound up with empathy, and you're likely to feel more empathy with another person when you can see the whites of their eyes. No system of regulation can fully compensate for that. There's a truth in here, which is that human beings have a pronounced tendency to respond more warmly to people than to abstractions. Personal relationships engage the conscience, and also ancient and probably innate human instincts of loyalty and shame.

The moral Prime Directive underlying all this is that of reciprocity: as it is often expressed, "do unto others as you would have them do unto you." This sounds religious. It has been discovered and claimed as their own by all major world religions. But it is in fact pre-human, an evolved response to the problem of survival. Vampire bats are the standard example from nature. It is in the interest of bats to share the fruits of their bloodsucking with other, less advantaged bats, because the night may come when they themselves will have to rely on the generosity of a fellow bat. From such humble beginnings may derive our ethics and the most valuable insights of religion.

Yet human personal relationships have always been vulnerable to less wholesome passions: hatred, resentment, revenge, one-upmanship, herd mentality, contagious fear and intrigue. Giles Fraser admits that the pre-Big Bang City was not a paragon of virtue. He mentions the Guinness scandal as a case in point. His argument is that such problems are magnified when personal relationships are replaced by purely "transactional" ones, and the market itself becomes a source of virtue:

Appealing to the market as an independent authority, unconnected with human decisions about 'housekeeping', has meant in many contexts over the last few decades a ruinous legacy for heavily indebted countries, large-scale and costly social disruption even in developed economies; and, most recently, the extraordinary phenomena of a financial trading world in which the marketing of toxic debt became the driver of money-making -- until the bluffs were all called at the same time.

But there's a paradox here. For whatever the virtues of personal relationships the great moral insight of the market economy derives from its very impersonality, which for the first time made possible a kind of objective ethics. And the market is reciprocity in action. As Adam Smith famously said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

The title of the St Paul's report, Value and values, is a reminder of how much of our moral vocabulary consists of metaphors derived from the marketplace. Value is a measure of what something is worth. And a "worthy" person is morally an upright one. If someone does you a favour you are in their debt, you owe them. And there's no such thing as a free lunch. Sooner or later will come payback time. You will be held to account for your actions. Respect, in life, has to be earned. Conversely, we believe that criminals should "pay" for their crimes, that betrayal is a sell-out and that politicians who lecture the rest of us while enjoying the privileges of office are morally bankrupt.

The moral language of the markets is as old as the Bible. The Old Testament reports that a king of Babylon was "weighed in the balance and found wanting", and tells us that the price of a virtuous woman is "far above rubies". In the "parable of the talents" (a talent being a large quantity of silver), Jesus speaks of spiritual capital as a sum of money with which you should speculate to accumulate. As for Muhammad, he worked for most of his life as a trader.

What all this suggests to me is that the trading relationship that developed in the first market economies enabled people to think about ethics and morality in new and interesting ways, and has thus been a source of moral progress.

Before the formalisation of relationships in the marketplace, there were "primitive", intuitive forms of social relationship: parent and child, sexual partnership, the wider kinship systems of the tribe, and the relationship of subordinate to superior in a dominance hierarchy. All such "natural" relationships are mediated by, and encourage, pre-moral forms of repriprocity: bribes, threats, genetic claims, feelings of social solidarity, etc.

Such relationships may contain the seeds of morality, but by themselves are not moral; in fact they can impede morality as we now understand it. We think it's wrong to bribe or threaten others or promote our relatives against better-qualified non-relatives, for example. For most of human history, and in some places even today, this would not have seemed obvious. That it seems obvious to us is one of the moral lessons of the market.

"Personal relationships good, impersonal market forces bad" is thus at best a simplification and probably highly misleading. A properly functioning market will expose and punish underhand behaviour. The main problem with today's financial markets is that they have become dysfunctional.