First up, some links: here’s the book on Amazon.com (not an affiliate link), and here’s the homepage of Robert Shiller, the author. Here’s a review of the book by the NYTimes, which is much better than this post.

I found the book about a year ago via a disapproving review, the link to which I have lost, which painted it as a kind of naive apologetic for finance. That was interesting enough to grab my attention, so I bought the book, but held back from reading it for awhile because I thought it would be fairly horrid.

But it isn’t really. Schiller does come across as naive about the virtue of those working in the finance industry, but at its heart the book is actually a sophisticated critique of finance, which Schiller defines more broadly than usual. To quote the book:

But finance should not be viewed as inherently or exclusively elitist or as an engine of economic justice. Finance, despite its flaws and excesses, is a force that potentially can help us create a better, more prosperous, and more equitable society.

I can’t disagree with that!

The broad structure of the book goes: introduction, an outlining of the various roles in finance – from CEOs, investment managers, bankers, all the way down to lobbyists, educators and philanthropists – and then a discussion of the many problems in finance and innovations that might fix them.

To make a gross summary, the broad thrust seems to be:

  • For all its faults, finance is integral to the ‘good society';
  • Financial innovation is unfairly demonised: what is needed is more financial innovation, not less. We need to democratise and humanise finance;
  • People in finance aren’t that bad, there are just some unfortunate operating incentives in the industry.

I was mostly convinced by the first two arguments; less by the third – though I do agree about the incentives in finance. To me, Schiller mostly misses the biggest criticism of finance, which isn’t a technical critique, but is actually a combination of regulatory capture and the weird equilibria that can emerge from surprisingly simple financial systems. He does talk about dispersal of capital and the way that inequality can be transmitted through generations, but he doesn’t talk about how the rules of the game in society seem to be rigged to aid and maintain the advantage of those already at the top. He only really talks about this for a few paragraphs in the epilogue.

But back to the first two points. Schiller presents some clever ideas for financial innovation. My favourite was the idea of a taxation system directly indexed to inequality, wherein a statistical increase in inequality will lead to the tax system becoming more steeply progressive. The book is full of clever innovations like this – indexation is a common theme as he also proposes home loans indexed to macroeconomic conditions – and he laments the conservatism society shows in taking up what he sees as clearly beneficial forms of innovation.

Threaded through all this seems to be Schiller’s idealism, which came through for me as naivety. Some examples:

  • ‘It is true that social barriers prevent some from realizing, and profiting from, their talents’. Oh, really?
  • After being impressed by the ‘spirit’ of some market makers he met: ‘These encounters confirmed for me once again that the vast majority of financial professionals are not in the business just to make money.’ Surely not: power and influence are fun too!
  • In speaking of the virtue of the insurance – something I really do believe in – Schiller talked about how the damage of the Deepwater Horizon oil spill in the Gulf of Mexico, beyond the initial tragedy of the loss of life – was actually mostly ameliorated by insurance, and that the media over-reported the financial dislocation caused by the disaster. And I agree with all of that! But here’s how he said it: ‘No insurance policy can bring back life. But the other tragedies of the spill could be – and largely were – dealt with by insurance.’ Yup, glad they got that insurance on the biodiversity of the region, and not to mention the lives and welfare of seabirds. Phew.

There are many more examples. I can’t tell if Schiller is being disingenuous – perhaps due to his ties to the finance industry? – or just genuinely like that. Maybe it’s a hedgehog thing. I might watch some of his lectures online to see what he’s like.

The NYTimes review linked above describes the book as ‘meandering’ and ‘like wandering through an interesting garden.’ I completely agree with that, and would suggest it’s something of a brain dump by Schiller: it feels like he’s tried to stuff in everything interesting he knows about finance. Maybe it’s also a showcase of his previous work, as many of the hundreds of references are of his own papers. Nonetheless I liked the book.

The comparison between Schiller’s book and the last book I reviewed, the Christopher Hayes’ Twilight of the Elites is fascinating: Hayes makes a sophisticated social critique of inequality threaded with a distressingly simplistic view of finance; Schiller makes a sophisticated critique of inequality with a distressingly simplistic conception of the social drivers of inequality. Maybe they should have a coffee and write another book together?

On a totally unrelated note, I’m also writing about software engineering and other technical things over at the mgnb software blog.