Robert Shiller argues that financial markets are a force for good. But is he blind to their current failings?by Martin Wolf / May 24, 2012 / Leave a comment
Nowadays a book with the title “Finance and the good society” is likely to appear, at best, a contradiction in terms and, at worst, a sick joke. It is a measure of Robert Shiller’s intellectual courage, or perhaps his foolhardiness, that this understandable hostility to finance did not daunt him. He believes strongly that finance makes an essential contribution to the good society.
This latest book from Shiller is a thought-provoking, lucid, wide-ranging and largely convincing explanation of why this is so. Shiller falls into the category of idealistic, yet practical, reformers on whom so much of human progress has depended. This book demonstrates these qualities perfectly.
Shiller has won a deserved reputation as being among the world’s most prescient analysts of financial excesses. When he defends finance, we should pay attention. Yet how, the reader must wonder, can any reasonable person defend finance after the recent epidemic of greed, knavery and folly, which resulted in the biggest financial and economic crisis since the 1930s? A part of the answer is that Shiller defines finance very broadly:
“At its broadest level, finance is the science of goal architecture—of the structuring of the broadest arrangements necessary to achieve a set of goals and of the stewardship of the assets needed for that achievement. The goals may be those of households, small businesses, corporations, civic institutions, governments, and of society itself. Once an objective has been specified—such as payment for a college education, a couple’s comfortable retirement, the opening of a restaurant, the addition of a new wing on a hospital, the creation of a social security system or a trip to the moon—the parties involved need the right financial tools, and often expert guidance, to help achieve the goal. In this sense, finance is analogous to engineering.”
The implication of Shiller’s definition is that finance is not just about the financial sector, narrowly defined. It is not even about the market economy. It concerns public finances as well as private and so public purposes as well as private ones. It is a necessary aspect of any complex society in which people seek to plan their activities. It is a vital part of an economy that relies on decentralised decision-making within a market-governed division of labour.