Robert J Shiller’s 'Finance and the Good Society’
A version of this article was first published: ethics.org.au - July 2012
The moral reputation of the finance industry is considered dire. In the aftermath of the 2008 global economic recession, outrage expressed itself in protests around the world. People literally walked out onto the street to sit down together and ponder how we let a handful of unscrupulous profit-obsessed sociopaths have so much influence over our financial institutions. And this problem is not just academic. The Occupy movements sparked one of the most controversial police actions in Australian history. When police violently ransacked the Occupy Melbourne campsite under a media blackout they raised serious ethical questions about the relationship between government and business. In the wake of this negative press, the idea that those responsible for the financial crisis could rejuvenate their moral reputation seems so ridiculous that the satirical news source The Onion recently lambasted the investment banking and securities firm, Goldman Sachs: ‘Seeking to mollify critics over its role in the global financial crisis, Goldman Sachs announced Friday the hiring of junior analyst Greg Kohler, who executives said is the investment bank's first and only employee to possess a clear set of morals or a basic understanding of right and wrong.’ While audiences found this laughable, they also worried it could possibly be true. It should suffice to say that the morals of the finance industry are under severe public scrutiny.
Robert J Shiller’s recent book Finance and the Good Society sets itself the unenviable task of revitalising our faith in the potential good of the finance industry. It began as a handbook for his students at Yale, but Shiller soon recognised the need to present his arguments to a wider audience. While no apologist for Wall Street, Shiller makes the refreshing admission up front that he’s not interested in attributing blame for what’s happened. The Occupy Movement’s fire-and-brimstone mentality of ‘go up and down the streets of New York and if you can find but one honest banker, I will not destroy this city’, the book implicitly asserts is unhelpful. The project of revitalising the global economy ought to be less of a witch hunt and more a careful analysis of the economic concepts and institutions that have resulted in our current situation. One bold (if not slightly ‘end-of-history’) claim Shiller makes at the outset is that Capitalism is not broken and that we are stuck with it for good. So if it’s malfunctioning, we should be asking how to avoid throwing out the baby with the bathwater. And Shiller does this in the following ways.
I picked up the book knowing it was a treatment of finance in a moral context. I was expecting a stuffy and technical treatise that I would find challenging, not least of all because to me ‘sub-prime’ sounds more like a delicious cut of steak than the subject of a book that I’d read, let alone enjoy! But what I found was a smorgasbord of ideas about the nature of modern economics. This is clearly a book that was developed out of a lecture series. It is meant to engage you, and it does so on subjects as diverse as Adam Smith, neuroscience and casino design. As Robert Wade of the London School of Economics notes, Shiller ‘will convince intelligent readers who think of finance as an arcane subject that it is not just interesting but even entertaining’. And while reading about economics is usually about as enjoyable as wet socks on a cold day ... Wade is right.
This ebullience, however, belies a deep moral concern. Shiller’s main argument is that finance, in order to be of any worth to human societies, must be ‘democratised’. I found this a strange term at first because it takes quite a while for this rather grandiose claim to be substantiated in a meaningful way. I reconstruct the main premises as follows: any institution of society is only legitimate and morally justifiable when it seeks to accrue benefit for that whole society. This is the sense in which Shiller means ‘democratic’: to the benefit of the whole demos, Greek for ‘people’. When an institution (and banks, hedge funds and investment firms are all ‘institutions’ in this sense) seeks the benefit of a small group of people rather than the demos, the institution is, therefore, not morally justifiable.
Hence, Shiller’s methodology is to show that finance has historically been a force for good in democracies. Yes, institutions like Goldman Sachs have probably existed in various forms throughout history and will continue to do so while there are human beings and money in the same world. But financial institutions such as insurance brokerage, mortgages which allow property ownership, savings accounts and pensions have all revolutionised and (in their own ways) ‘democratised’ finance. Rather than being a drain on the common good, the capacity of finance for positive moral change needs to be reclaimed.
But for whom do these haughty calls for moral responsibility beckon? If morality involves notions of the way we might best live, then who is it Shiller thinks can herald in the Good Society? Great progress is made in identifying the institutions and mechanisms that are immoral. Shiller makes it pretty clear what the demands of justice are. What he leaves less clear are how those demands might be fulfilled.
The major flaw of the book, however, is the most obvious one. The first part of Finance and the Good Society suggests that a shift in thinking needs to happen around the roles of CEO’s, insurance brokers, investment managers and bankers. Those peoples are the guardians of our financial institutions, so ideally they are in the best position to make changes for the better. This seems, at the face of it, a fallacy of begging the question. If the problem is that the people currently in control of finance have heralded in catastrophic failures in international economic justice, then how can we possibly conceive of the solution as a reminder of their moral responsibilities?
It’s hard to be good in a bad system. If a system runs on the assumption that everyone breaks rules in order to get ahead, then the penalty for obeying those rules is extinction. Recall Greg Kohler, The Onion’s fictional ‘one good man’ at Goldman Sachs? We are asked, in that article, what such a person might experience in their profession: ‘working in the seclusion of his 16-square-foot office in a seldom-traveled hallway adjacent to the office cafeteria's dishwashing facility, Kohler will report to a Vice President of private wealth management who will be barred from communicating with him in person, by phone or over email in the event Kohler accidentally hears about, and thus has to report, any instances of duplicitous behavior.’ Is this really how Shiller foresees practical change happening in finance? After all, every year hundreds of graduates would be leaving Shiller’s classes at Yale to go into precisely the system he seems so enthusiastic to change.
Or maybe that’s the point. One practical step towards a better financial system is to emphasise the essential nature of the roles of both accountants and auditors. Shiller’s brief but important discussion of this subject presents auditors as the conscience of business, and that the sense of professional ethics which they impart ‘forms the backbone of our system of financial capitalism’. Indeed, the democratisation of finance is not something that can be solved by governmental intervention alone. Shiller is rather sceptical about the ability of central banks to anticipate and alleviate future crises: ‘Given that central bankers have already had prodigious research departments at their disposal and regularly attended international conferences, yet hardly had any clue about the present crisis, there is plenty of room for skepticism that they will succeed,’ he says.
So there may be limited ways in which government can help the democratisation of finance. ‘Central banks are an invention that served its purpose at a certain time in history, in a certain kind of environment’ says Shiller, and ‘their time may have passed,’ but issuing bonds linked to longevity and helping pension funds hedge their liabilities are two ways in which government can help protect consumers while advancing the public interest. Indeed, governmental intervention can be a tremendous force for good in society. However, ‘there is an unfortunate tendency to talk about the financial system in the abstract’ Shiller notes, ‘as if it is all about stocks and bonds, or about mathematical equations. But the drivers of financial capitalism are real men and women, who adopt certain personae in our society and make the goals inherent in these roles their own personal goals and the responsibilities associated with these roles their own personal responsibilities’. The point remains, therefore, that in finance it takes people in the right positions doing the right things to make it work. So we are encouraged to get involved by making finance change in the ways that would bring about a better society.
I was looking through the Forbes list of the wealthiest people in the world this morning (from my leaky, ramshackle student house in Redfern) and thought to myself, ‘What a bunch of plutocrats’. And Shiller agrees that the absurd concentrations of wealth that are becoming increasingly common in the Western world are the product of a malfunctioning finance sector. But I caught myself before I finished that thought: it’s not that we should be finding it within ourselves to forgive those greedy, or at best unscrupulously industrious, people who caused the financial crisis. Finance and the Good Society reminds us that we should be thinking about our own involvement in those institutions, at all levels, and how we can help reorient them to seek benefit for society as a whole. Our hope should be that moral figures like Greg Kohler do exist in finance. And our responsibility, so Shiller argues, is to help provide the conditions for people like Kohler to exist and survive.
Robert J Shiller is the author of Irrational Exuberance and The Subprime Solution and co-author, with George A. Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism. He is the Arthur M. Okun Professor of Economics at Yale University.
Finance and the Good Society (Published: March, 2012 ISBN 9780691154886, Princeton University Press)