Robert Shiller is wrong


The American academic Robert Shiller has taken another contrarian tack with his latest book Finance and the good society. His claim is that Western finance has lost the sense of virtue that it once had. It is interesting to trace where Shiller is wrong, or at least looking in the wrong direction. Because it tells us much about where finance has become post-capitalist and ever more dangerous.

Much of what Shiller says is right. For instance his observation that “financial institutions and financial variables are as much a source of direction and an ordering principle in our lives as the rising and setting sun, the seasons and the tides.” This is undoubtedly true. Indeed, finance IS rules, so it sets the rules of money, and therefore the rules of commerce.

He then goes on to argue that most bankers and financiers aren’t especially bad people, that greed is something of an aberration. He cites the virtuous stalwarts of the past from Goldman Sachs and ratings agencies to show that recklessness has not always characterised the sector. A return to that sense of virtuous service of commerce, he argues, will re-invigorate the strength of capitalism, surely the best economic and political system. Shiller cites Montesquieu’s argument that healthy commerce tends to produce societies less inclined to war and vicious politics (the Frenchman was obviously not writing at a time when some society’s commerce heavily depended on the production of instruments of war, as is the case now).


It is all fine stuff, and there is certainly considerable historical precedent to support what he is saying. Trouble is, it has very little to do with the problems that have emerged over the last decade or two. Here are some objections:

1. It is true that many bankers and financiers are not unusually bad people. They are probably like any other group of people; some good, some bad. And that is the point. It is a systemic problem. The financial behaviour that emerged is just what most would do, given the chance. Blaming individuals is not the way to solve it, deeply satisfying though that often is. Changes have to be made to the system.

2. Shiller makes an error that I think is almost ubiquitous. He assumes that regulation is somehow external to finance, acting on it as an outside constraint. That is not true, as we can see implied in his own quote. Money IS rules and governments set those rules. What has changed in the last two decades is that governments gave up that role, until they could no longer avoid it after the GFC, and traders instead established their own rules, derivatives mostly. We now have a system in which the financial players make up their own rules. Little wonder that the systemic problems are massive (see point 1).


3. Allowing traders to make up their own rules means that the subordinate role of finance, its function of serving commerce, has been altered, very much for the worse. Shiller argues that finance should support business, it should be humble. That is what will not happen in the current system, or at least not happen often enough. It has become a world unto itself, an exercise in gaming a system of rules in a potentially endless regress of making money out of the money made out of money.

4. We are now in that world of “meta-money”. Its most extreme iteration is high frequency trading, which, especially in stock markets, is a travesty of capitalism. The purpose of stock markets is to raise capital to fund public companies. The trading in nano seconds has nothing to do with that; the algorithms make no distinction between companies. It is just an exercise in gaming the rules of share trading. Same with currencies, which is also dominated by high frequency trading.

We would all love to go back to the world Shiller describes.Such virtuous men and women could grace the hallowed corridors of Yale, no doubt, making the odd financial donation. The problem is that it is not going to return. The computer driven monster of meta money has been unleashed. That is the world as it is, not as it once was.