Robert Shiller on the Social Benefits of Finance

It’s a bad sign for the finance industry that one of its leading minds – the distinguished Yale economist Robert Shiller – has felt compelled to write a book in order to defend the idea that finance itself is a constructive pursuit, worthwhile to modern society. Have things really gotten that bad?

One of my favorite explanations of finance describes it as the set of innovations that make it possible to pay for a $100 million airliner today with the proceeds of tickets that will be sold for $100 a piece over the next 40 years. But Shiller, whose new book is Finance and the Good Society, takes a surprisingly – and refreshingly – different tack, describing finance as the stewardship of society’s assets.

That portrayal, in my mind at least, applies more to the specialty of investment management than it does to finance generally.  But at a time when the very concept of finance, not just its practice by imperfect people, is being vilified as a destructive force, Shiller’s defense of it is most welcome. 

While I laud his efforts, however, Shiller’s rallying cry for finance could have been more full-throated.  Shiller asks big questions.  What is finance?  What is it for?  How does it help people?  How does it hurt them?  How has finance worked its way into the structures of everyday life?  These topics give readers a chance to mine so rich a lode of moral philosophy and economic history that, when I saw the author and title, I expected a mind-altering book on the order of Milton Friedman’s Capitalism and Freedom, or Henry Hazlitt’s Economics in One Lesson.

What Shiller delivers does not achieve those heights - but it is still a fascinating read. 

Finance and society: Not preaching to the business-school choir

It is clear from the first words of his introduction that Shiller anticipates a hostile audience. Lamenting that, in common parlance, the word “finance” is synonymous with “ensuring that the rich grow richer,” and that the field is widely seen as antithetical to an egalitarian “good society,” Shiller acknowledges that his readers’ first impressions of finance may be that it is at odds with their values.

This is not the approach of a man who expects to be preaching to the choir. Shiller is addressing the wider world – outside the walls of the Yale School of Management – where people assume that poverty exists not because there are too few rich people, but because there are too many. Such confused logic prevails in the press and even more so in most of academia.

Another prevailing sentiment that Shiller tries to confront is the belief that those who get rich in finance receive more than their due, at least when compared with those in more favored, more tangible enterprises like manufacturing, technology, and construction.  Implicit in this criticism is a notion that finance is a kind of infrastructure or public utility; it mostly matters when it is broken. 

Shiller is sympathetic to the idea of finance as infrastructure, but he does not think that means it should necessarily be inexpensive.  The availability of well-administered and creatively designed financial services makes a huge difference to the prosperity of a society, he argues, so it is natural that finance jobs are well compensated, especially because they also require a high level of education and technical expertise. But Shiller defends high compensation for CEOs more vigorously than for financiers; he has some sympathy for the idea that finance salaries are bloated, correlate too closely with the stock market, and seduce too many talented young people away from other productive activities in the economy.  “Financial capitalism does not necessarily produce unjust wealth distribution,” he concludes (the emphasis is his).  “Public policy can allow us to enjoy the benefits of modern finance without producing such inequality.”

Since Shiller does not contemplate salary caps, presumably he means that taxes can be more progressive or more specifically targeted to profits from financial activities.  To square finance with the good society, Shiller would allow quite a bit of room for policies that many readers would consider confiscatory.