Finance and the good society

nice interview of Robert Shiller. 

He says finance is not all that bad as it is eant out to be. Yes some people have denigrated its role but broadly finance is very useful. 

Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam and today’s interview is with Professor Robert Shiller from Yale University. He and I met in the city of Bristol in the UK in May 2012, where we spoke about his book Finance and the Good Society. The basic theme of the book is the need to democratise finance by making the financial markets work better for everybody.

I began by asking Bob to explain exactly what he means by that.

Robert Shiller: The Occupy Wall Street and Occupy London people say “We are the 99%”. There’s an increasing concern with unequal distribution of wealth, and finance is perceived as the villain in all of this. But I’m thinking it can’t be the villain; finance is a technology that can, if it’s properly applied, help reduce inequality if it’s applied to everyone. So I think that people who are in finance today have a moral obligation to help advance the trend toward democratisation of finance. That means using the principles to really help people.

RV: Could you explain a little bit more on what that means? In the book you use the phrase “finance is about human desires and human possibilities” which is a very powerful sense of being about our deepest wants and what we’re able to achieve. Could you explain how finance helps us to fulfil our desires?

RS: When you think of finance, you come to it thinking “Make money! Get rich!” You should instead think about financing activities, things that people do together that are important to them. Achieving goals that are shared by groups of people. Financing activities is what it’s all about. And the underlying problem is that just about anything that we think is important to do can’t be done by one person. You need groups of people and you need resources, various things that are produced in other countries that would be inputs to your activities. And the organisation generally has to last for years and years to achieve the goal, so it has to have some kind of continuity of support from people and resources. And that support is called financing, so that’s what it’s all about.

He cites some recent innovations in finance like benefit corporation, social impact bond:

RV: Can you give us some specific examples of great innovations, great advances in the technology of finance that have helped society to develop?

RS: There’s a lot of scepticism about financial innovation. Paul Volcker, the former Fed chair, said he couldn’t think of a financial innovation other than the Automatic Teller Machine that gives him cash. He said that about two years ago and it’s been quoted a million times. Even since he said it I can think of a number of innovations. One of them is the benefit corporation, which was created in the United States. The first one was about a year and a half ago.

The benefit corporation is a new kind of corporation that’s halfway between profit and non-profit. It fills a need. The benefit corporation makes profits and distributes them to shareholders just like a for-profit corporation. The only difference is, and this may seem like a small difference to some, the corporate charter specifies a purpose – a social, environmental or charitable purpose – in addition to the profit-making purpose. It doesn’t really clarify how the effort will be divided between the two. Some traditional economists who look at this would say, “This doesn’t make any sense! A company should make profits and be focused on that. If there’s any charity it’ll come after the company distributes the profit to shareholders, and they can do what they want with it, including charity.”

But the problem is, and this is what’s bothering people these days, a strictly for-profit corporation just seems selfish. And it is selfish, because focusing directly on profit is just not humane. I think everyone will feel better about these benefit corporations. They’re just starting up now, only in the US at this point but I think the idea will spread. So that’s one innovation.

The social impact bond, which started also in the last couple of years in the United Kingdom. It’s a bond issued by the government which pays out only if some social goal for the society is met. So, for example, the UK government issued a bond that will pay out in six years if the re-incarceration rate of prisoners released from Peterborough prison falls by 7.5%. A very well-defined goal. They release someone after his term is up and six months later he’s done it again, he’s right back in jail, and they just can’t figure out what to do about that problem. So the social impact bond opens it up to entrepreneurship. They’re finally saying, “We don’t know what to do about this problem. Can somebody out there figure it out?” And anybody who wants to can come in and invest in these bonds and the money goes to, say, working with prisoners, finding them jobs, that sort of thing. But these people know that they will get nothing unless they actually reduce the rate. The idea is that this incentivisation will bring in some diverse new ideas and enthusiasm to fix the problem.

Hmm..Not sure how benefit corporation is a innovation. It has been here for a while via other names like corporate social responsibility. Social impact bond looks interesting though..

Superb as always from Shiller..


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