the failure of nobel laureate robert j. shiller

7/27/2019 The failure of Nobel laureate Robert J. Shiller

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463

Book Review

Finance and theGood Society

RobeRt J. ShilleR

PRinceton and oxfoRd: PRinceton UniveRSity PReSS , 2012, 288 PP.

david howden

What denes a “gd scety” and hw can we use nancet acheve t? Rbert Shller takes the frmer questn as

settled, and dedcates hs new bk Finance and the Good Society tthe latter: what s wrng wth mdern nance, and hw shuld t be restructured t reach ths deal?

What cnsttutes Shller’s “gd” scety”? He alleges ths termhas been used by phlsphers, hstrans and ecnmsts frcentures t sgnfy the scety we shuld aspre t lve n, whereeveryne respects and apprecates ne anther. Whle everyneagrees we shuld respect ne anther, apprecatn mples anblgatn that s less unversally accepted. Althugh ths culd be chalked up t a farly unassumng statement, the dentn,ndeed the whle bk, ges dwnhll frm here. The gd scety

David Howden ([email protected]) is chairman of the Department of Business andEconomics, St. Louis University – Madrid Campus.

VoL. 15 | No. 4 | 463–468 WiNTER 2012

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464 The Quarterly Jurnal f Austran Ecnmcs 15, N. 4 (2012)

s als an egaltaran ne, accrdng t Shller, and nance shuldnt be at dds wth ths gal.

Shller never cmpletely denes what he cnsders egaltaran tmean. in sme places, t s synnymus wth demcratc partc-patn, whch generally results n wealth equalty (p. 8). in therplaces, Shller mples that a “gd scety” s als demcratcnancally—everyne has access t the same prducts and servces(p. 44). in stll ther places, he uses the term t mply ncreasngregulatn f the nancal sectr (p. 183–185) whle n thers

deregulatn s necessary (p. 47). Perhaps mst trublng s that henever bthers t nfrm the reader why egaltaransm s an dealt attan. indeed, lke s many cncepts n the bk, he parades thedea arund wthut much justcatn.

The rst part f the bk prvdes the reader wth a rundwn f the rles f the nancal ecnmy, and sme prblems Shller haswth them.

Examples nclude CEos apparently earnng t much mney,

and takng n undue rsks because they beleve ther rms are t bg t fal (p. 23). The hgh returns n unversty endwments areexamples f ntellectual achevement and demnstrate the supe-rrty f academc-led nance (p. 31). (Never mnd the abysmal30 and 29 percent lsses n Harvard’s and Yale’s endwments n2008–2009, r the cllapse f Lng-Term Captal Management,headed by tw Nbel laureates.) Banks and bankers slve thecrtcal mral hazard prblem f nvestrs nt beng able tmntr ther wn nvestments (p. 41). Husng s a fundamentalneed, and shuld be prmted thrugh subsdes (p. 50). Pepled nt de frm lack f kdneys avalable t transplant each year because there s n legal market fr them but because, accrdng tShller, the gvernment has nt helped t desgn the market yet (p.69). (Fnancal markets that d nt exst yet, e.g., ver-the-cunterdervatves prducts, are encuraged t lk t the gvernmentt supprt a market slutn.) Prvate phlanthrpy can be“self-servng r mtvated by eg” and can generate feelngs f “resentment rather than grattude” that result n a lss f dgntyfr the recpents (p. 235–236).

S, what des he recmmend we d wth these prblems?

The gvernment shuld regulate executve pay, and perhapsdefer cmpensatn fr an extended perd, maybe as lng as ve



465Book Review: Finance and the Good Society

years (p. 23). Better t put mre nancal actvtes n the handsf banks, and t ncrease regulatry requrements t stp therrms (shadw banks) frm free-rdng n ther abltes (p. 41, 43).Subsdzng hme wnershp thrugh new gvernment-spnsredenterprses that wll nt nly make scety better , but wll alsallw us t learn frm the mstakes f Fanne Mae, Fredde Mac,et al (p. 50, 56). Fnancal engneers are nt lkng at the crrectprblems t slve, and shuld lk t the gvernment fr help,“Gvernments that d nt encurage entrepreneural enterprses

that actvely lk fr prblems t slve wn’t be very helpful” (p.73). Regulatrs are mstly mmune frm regulatry capture (ch.12), and plcy makers are nt just n charge f settng the rules f the game (as s ther tradtnal rle), but n stablzng the ecnmy(ch. 16). Central bankers, nstead f playng a rle n creatng thecrss by easy mnetary plces and extended perds f artcallylw nterest rates are prased by Shller as “the rst lne f defenseaganst ecnmc nstabltes” (p. 112).

The bk’s secnd sectn lks at specc nsttutnalmprvements that we can make t the nancal sectr t rectfysme f the msgvngs he dentes n sectn ne. Shller starts by prclamng strangely that we need t “reframe the wrdngf ‘unversal human rghts’ s that they represent the rghts f all peple t a far cmprmse—t nancal arrangements thatshare burdens and benets eectvely” (p. 150). Ths sentencesums up almst everythng that s wrng wth the bk. WhenShller dscusses “rghts,” he really means “preferences”: hs wn

preferences. it shuld cme as n surprse that ths revewer ndsalmst every plcy deal prescrbed t be n cnct wth what hecnsders “gd” fr bth scety and nance. Rghts take a wrngturn when they becme preferences, and cnct s sure t arse.

one f Shller’s prclamatns s that scety wuld be betterwth mre demcratc access t nancal markets, but he alsthnks that the Amercan persnal nancal arena s nferr t thatf Chna: the frmer has ve credt cards per persn, whle thelatter has thrty-three persns per card (p. 154). Stck wnershp

and the advent f lmted lablty allwed the masses t partcpaten nancal captalsm fr the rst tme by purchasng prtns f busnesses, but Shller als thnks that Wall Street needs t returnt a partnershp mdel t exclude peple frm ths realm (p. 176).




in a chapter enttled “inequalty and injustce,” Shller deemsestate taxes t be “just” because the peple they mst aect are n apstn t be able t ard the wealth transfers entaled. if yu arent ne f these “lucky” nes wh can ard t, never fear. Shllerremnds yu that yu can ard t; yu just need t mrtgage thefamly farm t pay the tax t retan t (p. 193).

Spreadng demcracy n the nancal wrld wuld allw mrepeple t partcpate n t and shape ther futures. Shller thnksthere s a prblem where n ne ndvdual wants t undertake ths

rle fr themselves. Never wthut a slutn, he recmmends:

Cllectvely we can make a delberate decsn t plan a mre bradly based nancal captalsm. Such a plan can be cmpared wth trad-tnal cmmunsm, whch smlarly sught t equalze wnershp…Ths centralzed mdel has been fallng ut f favr arund the wrld,snce such centralzatn des nt allw truly brad partcpatn anddes nt allw peple t use ther dverse nfrmatn actvely t drectcaptal. (p. 211)

Shller’s deas, whch are largely based n varus gvernment-nstgated nancal plans arund the wrld, cannt be cmparedt cmmunsm, n hs eyes. After all, as he pnts ut, they cannteven be called “gvernment plans” because “they were n factmplemented thrugh gvernment actn, the deas cme frmpeple themselves and n respnse t ppular cncerns” (p. 218). iguess we’re all demcrats nw.

Shller’s deal f nance excludes thse frces that are destab-

lzng and prmtes thse that are stablzng. He des nt vewspeculatrs as evl, thugh he des see ther actns as destablzngwhen drven by anmal sprts.1 What denes r drves anmalsprts s never dened, and ths revewer s nt s sure that necan knw n real-tme what prducts, actns and results are stab-lzng and thse that are nt. is tday’s buyer r seller f Greek gvernment debt a stablzng r destablzng frce? it s bvusthat the cuntry’s current trajectry s nt sustanable, thus the

1 Hs 2008 bk The Subprime Solution , pegged the nancal crss n anmal sprts,althugh wthut explanng where these sprts cme frm, r what makes themshft frm pstve t negatve (Bagus and Hwden 2009). Hs fllw-up 2009 bk wth Gerge Akerlf, Animal Spirits , largely suers frm the same decency.



467Book Review: Finance and the Good Society

purchaser s nly prlngng the nstablty and uncertanty f thecuntry’s nances. At the same tme, every seller pushes nterestrates hgher, thus pushng the cuntry (and Eurpe, ptentally)that much clser t the edge f the cl. i am nt s sure ether f these are stablzng r destablzng, thugh i d nt have a bettercategry t place them n. i d nt thnk Shller des ether.

Ths s a dangerus bk, nt just because f what t says, but because f what t leaves ut. By nt prvdng backgrund r justcatns fr the deals prpsed, Shller leaves the reader wth

a feelng that the ends have been decded already. The nly thngleft s fr us t nd the best means t attan them.

Shller and ths revewer can agree n sme thngs. We bth seenancal captalsm as a means t btan an end. it has a supprtverle, mstly. We bth vew nance as nt fundamentally abut“makng mney,” althugh Shller thnks that s what Westernscety has turned t nt. Ths revewer vews nancal captalsm,lke all frms f captalsm, as beng abut rewardng success andpunshng falure. if mney s the way that success s rewarded—the cmmn denmnatr t keep scre—makng mney mghtnt be such a bad thng.

The nly full sentence i ndded my head n agreement wthcmes, ncdentally, exactly halfway thrugh the bk: “[A] gdscety has lmted ablty t make everyne’s dreams a realty—and nance s all abut realty” (p. 120). Perhaps Shller shuld payheed t ths lessn. instead f creatng a frm f nancal captalsmthat furthers the gd scety, he shuld realze that nance, qua

nance, s nether gd nr bad; t just is. Utpan dreams mghtmake fr nterestng readng fr an undergraduate nance class, but they have repercussns n the real wrld. in nance, as therecent crss attests, bad deas reach far, and aect many.

REFERENCES

Akerlf, Gerge A., and Rbert J. Shller. 2009. Animal Spirits: How HumanPsychology Drives the Economy and Why It Matters for Global Capitalism.

Prncetn, N.J.: Prncetn Unversty Press.

Bagus, Phlpp, and Davd Hwden. 2009. “Revew f The SubprimeSolution: How Today’s Global Financial Crisis Happened, and What to Do




About It. By Rbert J. Shller.” Quarterly Journal of Austrian Economics

12, n. 1: 81–87.

Shller, Rbert J. 2008. The Subprime Solution: How Today’s Global FinancialCrisis Happened and What to Do About It. Prncetn, N.J.: PrncetnUnversty Press.

the failure of nobel laureate robert j. shiller

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