Finance and the Good Society
Summary
Shiller wrote this after the crisis as a defence of finance as an activity, arguing that the response to financial failure should be more and better financial innovation rather than less.
His framing is that finance is a technology for managing risk and for allocating resources across time and people, and that criticism of it usually attacks the behaviour of particular participants rather than the function. He argues the function is necessary and that the correct response to its failures is to design institutions that perform it better.
The first half is structured around roles: chief executives, investment managers, bankers, investment bankers, mortgage lenders, traders, insurers, market designers, regulators, accountants, educators, philanthropists, policymakers and others. For each he describes what the role actually contributes when performed properly, which is a device for arguing that these are professions with genuine social functions rather than rent extraction positions.
The second half covers his criticisms and his proposals. He argues for democratising finance, meaning extending to ordinary people the risk management tools that institutions have; for the risk-sharing instruments he proposed in The New Financial Order, including livelihood insurance, home equity insurance and income-linked loans; for financial advice as a fiduciary profession; for improved disclosure designed around how people actually process information; and for institutions that would share risks across generations and across countries.
He also addresses the moral objections directly, including the question of whether high financial sector compensation is justified and whether speculation serves any purpose.
The book was written into an environment hostile to finance and reads partly as advocacy. Its proposals largely have not been adopted, and the argument that innovation is the answer to innovation's failures is the part critics find least persuasive. Shiller's own research on bubbles and on housing gives him standing to make the argument that a defender without that record would not have.
Key takeaways 7
- Finance is a technology for managing risk and allocating resources across time, and criticism usually attacks participants rather than the function.
- The correct response to financial failure is designing institutions that perform the function better rather than reducing financial activity.
- Ordinary people lack access to the risk management tools that institutions use, which is the inequality that matters most in finance.
- Livelihood insurance, home equity insurance and income-linked loans are technically constructible and do not exist.
- Financial advice should be a fiduciary profession with the obligations that implies rather than a sales function.
- Disclosure should be designed around how people actually process information rather than around legal completeness.
- Speculation performs a price discovery function that a market without it would have to replicate some other way.
Who should read it
Readers who want a serious defence of finance as a social technology, and a catalogue of risk-sharing institutions that could exist and do not.
About Robert J. Shiller
Sterling Professor of Economics Emeritus, Yale University; co-creator of the Case-Shiller home price indices; Nobel laureate in economics 2013
Excess-volatility work and Irrational Exuberance are the primary sources for the empirical case that asset prices move far more than fundamentals justify.
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