By Robert J. Schiller
- Phishing for Phools; The Economics of Manipulation and Deception (2015)
- Finance and the Good Society (2012)
The reputation of the financial industry could hardly be worse than it is today in the painful aftermath of the 2008 financial crisis. New York Times best-selling economist Robert Shiller is no apologist for the sins of finance - he is probably the only person to have predicted both the stock market bubble of 2000 and the real estate bubble that led up to the subprime mortgage meltdown. But in this important and timely book, Shiller argues that, rather than condemning finance, we need to reclaim it for the common good. Finance and the Good Society makes a powerful case for recognizing that finance, far from being a parasite on society, is one of the most powerful tools we have for solving our common problems and increasing the general well-being. We need more financial innovation - not less - and finance should play a larger role in helping society achieve its goals.
Challenging the public and its leaders to rethink finance and its role in society, Finance and the Good Society argues that finance should be defined not merely as the manipulation of money or the management of risk but as the stewardship of society's assets. Shiller explains how people in financial careers - from CEO, investment manager, and banker to insurer, lawyer, and regulator - can and do manage, protect, and increase these assets. He describes how finance has historically contributed to the good of society through inventions such as insurance, mortgages, savings accounts, and pensions, and argues that we need to envision new ways to rechannel financial creativity to benefit society as a whole.
Ultimately, Shiller shows how society can once again harness the power of finance for the greater good.
D.N. Ghosh on Economic & Political Weekly wrote:
"This is a didactic book, organized around teaching readers the single Big Idea that to achieve the goals of the good society, the role of finance in our society should be expanded rather than restricted. [...] In imagining how financial capitalism should evolve, Shiller appeals to two of his guiding principles, arguing that finance must be democratized and humanized. [...] Shiller draws on these principles to suggest what financial innovations might be a part of the good society's solution. While his proposals will be unsurprising to those who know Shiller's work, the book gets credit for bringing these ideas to a wider audience and for melding them together with a timely discussion of the proper role of finance in our society. [...] The book is organized in two parts [...] the first part catalogues the many actors and their roles, while the second part weaves them together to create a picture of the industry and its successes and failure. [...] While the cataloguing of the various players helps readers understand how the industry is woven together, at times Shiller's portrayals feel overly sunny. Regulators are 'public-spirited, sincere people' (98), investment bankers are 'keepers of the peace' (49), and traders are simply experts with 'an intuitive appreciation of market forces' and 'practical ethics' (58). At other times, the descriptions feel shallow."
Robin Harding on Financial Times wrote:
"The core of Shiller's thesis is that if finance has to contribute to social good, the financial elite of the society along with the other organs of financial capitalism - their working partners in running the present system - have to change their behavioural pattern and must accept the responsibility for "enlightened stewardship" for managing financial assets in a way that can bring stability to the capitalist system and insulate it from recurrent disruptions. [...] What makes one think that finance capital will suddenly of its own, change its colours? What kind of economy have the financial elites - the driving force for financialisation ever since the 1970s - produced? [...] iety. It is Utopian to think they would willingly participate in any reform programme aimed at creating or reinforcing social values and institutional practices that place limits and curbs on the self-perpetuating needs of profit maximisation."
Sebastian Mallaby on The New York Times wrote:
"He argues convincingly that finance can, should and usually does make the world a better place. It helps us to buy a home, ward off catastrophic risks, and invest small sums in enterprises that would otherwise be too risky. Mr Shiller tends to assume that innovations in finance automatically make society better. But if collateralised debt obligations and subprime mortgages prove anything, it is surely the reverse: the natural tendency of financial innovation is towards complexity, exploitation and crisis. Finance can serve the 'good society', but Mr Shiller is curiously reluctant to demand that governments, regulators and financiers make it do so. As an advocate for the financial system, however, he is wonderfully persuasive because he never plays down the problems. Instead, he shows how they reflect the flaws of human nature. [...] Mr Shiller reminds us of the profound importance of finance to making our society work. But a good society rests always on the good people who struggle to make it so."
"Shiller’s main line of argument is an extension of Kenneth Arrow’s classic 1964 article, “The Role of Securities in the Optimal Allocation of Risk Bearing,” which emphasized the importance of markets for protecting against risk. If firms and individuals cannot insure themselves against bad outcomes, they will be necessarily cautious; the economy will grow more slowly than it should. [...] Shiller’s book is a lament that nearly 50 years after Arrow’s article, many forms of risk remain hard to buy and sell. [...] The big point is that despite the popular revulsion at Wall Street, society needs more financial innovation, not less. But what is holding innovation back? Here Shiller offers two answers. New financial instruments are attractive only if they can be bought and sold easily; they have to be widely adopted before people will want to adopt them widely. Shiller would like to solve this chicken-and-egg problem with government-supported tax incentives for market makers who kick-start trading in new instruments. [...] The second reason for the shortfall in financial experimentation is that society has grown suspicious of it. [...] Shiller devotes a large part of his book to the assertion that this prejudice against finance is wrong. Psychologists have established that the key to happiness lies not in riches but in social esteem; therefore, Shiller says, financiers face powerful emotional incentives to balance profit seeking with a social conscience. [...] Some readers may suspect that Shiller, a Yale professor, underestimates the materialism of Manhattan and Greenwich. Others may be frustrated by his meandering style. Reading his book is like wandering through an interesting garden. [...] But the best passages in this book make a persuasive case for a fresh view of an industry that is too glibly demonized."
Interview with the Author
Or, instead of this 30-minute interview, watch this 1-hour lecture by Robert J. Shiller.
- Open Yale Course "Financial Markets" (2011) by Robert J. Shiller
- Q&A with Robert J. Shiller on the publisher's website
About Robert J. Shiller
Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University. Shiller was ranked by the IDEAS RePEc publications monitor in 2008 as among the 100 most influential economists of the world; and he was still on that list in 2017. He is the author of - among others - Irrational Exuberance (2000), and Phishing for Phools: The Economics of Manipulation and Deception (2015), co-authored with George Akerlof.
Table of Contents of Finance and the Good Society
- Introduction: Finance, Stewardship, and Our Goals
Part One - Roles and Responsibilities
- Chief Executive Officers
- Investment Managers
- Investment Bankers
- Mortgage Lenders and Securitizers
- Traders and Market Makers
- Market Designers and Financial Engineers
- Derivatives Providers
- Lawyers and Financial Advisers
- Accountants and Auditors
- Public Good Financiers
- Policy Makers in Charge of Stabilizing the Economy
- Trustees and Nonprofit Managers
Part Two - Finance and Its Discontents
- Finance, Mathematics, and Beauty
- Categorizing People: Financiers versus Artists and Other Idealists
- An Impulse for Risk Taking
- An Impulse for Conventionality and Familiarity
- Debt and Leverage
- Some Unfortunate Incentives to Sleaziness Inherent in Finance
- The Significance of Financial Speculation
- Speculative Bubbles and Their Cost to Society
- Inequality and Injustice
- Problems with Philanthropy
- The Dispersal of Ownership of Capital
- The Great Illusion, Then and Now
- Epilogue: Finance, Power and Human Values