Robert J. Shiller -- Finance and the good society
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Lot's of intelligent discussion of capitalist, market based
financial systems and their effect on society.  It's enlightening and
educational.  But, don't reach for this book hoping for a single,
easily graspable thread or a central argument.  It does not seem to
be here.  Shiller himself, in introducing the book, suggests that
this is more of a backup text for a college level economics class
that it is a polemic.  In other words, when you've finished reading
this book, you will be ready to participate in the discussion, but
will not likely know the one and only answer.

Much of the first half of the book is a discussion of the different
roles and actors in an economic system.  Along with that is quite a
bit of help in understanding how those actors *should* behave if the
society is to be a "good" one.  We might ask that everyone in our
political system had that understanding.  It's a valuable
discussion.  But, one thing that we might ask for is some guidance
on what we want from a "good society".  For example, I'd say that
extreme concentration of wealth is bad.  But, on the other hand I do
want enough concentration of wealth to enable *me* to enjoy the
standard of living that I do.  I suspect that there are plenty of
people who are much more rich than I who feel the same way.  So, the
problem becomes, how do we decide what is too much concentration of
wealth.  And, from my point of view, it is a serious problem that
those with much more wealth than I, also have the political power to
help them protect and increase that wealth.

Shiller's belief is that in order to improve a financial system you
must fix the institutions in that system rather than looking for bad
actors within the system to punish. If you get the institutions
right, then individuals will, mostly, do good.  If the system and
the institutions in it send the right signals, then the system will
be, for the most part, self-correcting.  So, we can view this book
as the background text for a college level class on how to design
that economic system and how to get those institutions right. It's a
book for policy designers, not law and order types.

Since we have just been through a period in which there was
excessive debt and much too much leveraged debt and extreme risk
taking, we should expect that Shiller would give considerable
attention to the problem of adjusting the system so that it sends
the right signals and sends effective signal when that excess debt
and risk begin to occur.

If you are going to argue that the way to fix a economic system and
its signals and mechanisms, then you must also believe that we have
a political system that functions both intelligently and
effectively.  But, we in the U.S. have a political system that is
both paralyzed by partisan grid lock and, far from acting
intelligently, seems almost unable to act unless it is forced to do
so, resulting in decisions that, while we are attempting to recover
from a recession, back us into policies of austerity.  That's
something that reasonable economists tell us not to do.

But, there is another issue here: The financial system isn't even
for the most part under the control of the political system.  The
financial system is to a great extent "self regulating" and not
necessarily in a good way; it's reflexive.  So, even if our Federal
government had good intentions and was capable of acting
intelligently and effectively, it's questionable how much good it
could do.

Perhaps, designing a good, much less a best system is more than we
attempt to do.  Perhaps, adjustments to the system that would
provide a dampening effect on some of the more negative effects of
the system is the most we should hope for. Worse yet, it may be that
even those minimal dampening effects are adjustments that we can
design *only* in hindsight. And, since the financial system adjusts
to any exogenous influences, those adjustments must be re-designed
over and over.

03/12/2013

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