Reforming Global Finance

The State of Finance: An Interim Assessment

What can be done so that financial capitalism is a source not of disasters, but of true human progress and democratization?

Purchase Finance and the Good Society from Princeton University Press.

Takeaways


  • All people must gain the ability to participate in the financial system as equals.
  • Full access to information and resources, human and electronic, would enable people to participate in the financial system.
  • Finance must incorporate behavioral economics research to overcome barriers to rationale and humane decision-making.
  • Finance, despite its flaws, is a force that can help create a better, more prosperous and more equitable society.
  • The very financial system that facilitates some of our greatest achievements can also create disaster.
  • So many more countries are now experimenting with different economic structures to compete in the world markets.

Financial capitalism will only have fulfilled its mission and purpose in society when it has arrived at a point where it gives people the ability to participate in the financial system as equals.

That, in turn, means they would have full access to information and the resources, both human and electronic, that would enable them to make active and intelligent use of their opportunities. Only then can they truly consider themselves part of modern financial capitalism — and not the victims of the aggressive and selfish acts of a cynical financial establishment.

To get to that ultimate goal will mean designing new financial inventions that take account of the most up-to-date financial theory, as well as the research revolution in behavioral economics and behavioral finance that has explored the real human limitations that inhibit rational and humane decision making.

Creating and implementing such inventions will be the best tactic to deal with economic inequality. And, amazingly, this is true in advanced nations just as much as developing ones.

Public street protests against both governments and the financial establishment were front-page news in 2011. The protests apparently took their inspiration from those of the Arab Spring against dictatorial governments in the Middle East.

They began to be directed against the financial establishment with the Movimiento 15-M in Madrid, then with Occupy Wall Street in New York, along with Occupy Boston, Occupy Los Angeles, Occupy London, Occupy Melbourne, Occupy Rome and other variants.

Universal resentment

It is important to realize that these movements are not necessarily left-wing. Even those who consider themselves the ideological opposite of Occupy Wall Street in the United States, the right-wing Tea Party activists, seem upset by the apparent concentration of wealth and power in New York and other financial centers, while “middle America” does all the work.

There seems to be almost universal agreement, by those of all political persuasions, that wealthy financial interests should not use their influence over government to grab more wealth, as seems to have been the case in some of the events leading up to and following the global financial crisis. But there is much less agreement as to what should be done next.

Many people seem fixed on the idea that those responsible for the financial crisis should go to jail. Certainly, anyone who committed fraud should suffer penalties. But it is hard to blame the crisis on a sudden outbreak of malevolence.

But we also need to look at the larger picture. We have a financial system that malfunctioned because of a host of factors. If we do not address the deeper sources of these problems by improving the system, we will have missed the point of the problem — and the opportunity to correct it.

Ideally, a force for good

Finance should not be viewed as inherently or exclusively elitist or as an engine of economic injustice. Finance, despite its flaws and excesses, is a force that potentially can help us create a better, more prosperous and more equitable society. In fact, finance has been central to the rise of prosperous market economies in the modern age. Indeed, this rise would be unimaginable without it.

Given that past record, it seems a paradox that the very financial system that is the facilitator of some of our greatest achievements can also implode and create such a disaster. Yet, perhaps even more paradoxically, the best way for society to proceed is not to restrain financial innovation, but instead to release it. Such an approach can reduce the impact of such disasters — and at the same time democratize finance.

If we took this determined — and admittedly courageous — step forward, we would find that socially productive financial innovations could be moving forward rapidly. That, in my view, is a logical consequence of both the information revolution and the fact that so many more countries are experimenting with different economic structures and competing in the world marketplace.

And that is why I hope that, in coming decades, we could also see innovative measures developed that would curtail, not widen, the rising plague of economic inequality that threatens to create serious social problems in so many of our societies around the world.

Editor’s note: This article is an edited version of a section from Finance and the Good Society by Robert J. Shiller. Published by arrangement with Princeton University Press. Copyright © 2012 by Princeton University Press.

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About Robert J. Shiller

Robert J. Shiller is the Arthur M. Okun Professor of Economics at Yale University. He was a co-recipient of the 2013 Nobel Economics Prize.

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