Robert Shiller Talks about the Role of Finance in Building a Better Society

It was appropriate to be discussing his new book at Yale SOM, Professor Robert Shiller told a roomful of students. The book, Finance and the Good Society, is about the role that business can play in making the world a better place, a fundamental part of the school's mission. "This is the most broad-picture book that I've written," he said. "I wanted to talk about values and business."

Shiller spoke as part of Convening Yale, a series that brings faculty members from around the university to Yale SOM to discuss their work. For Shiller, the Arthur M. Okun Professor of Economics, the walk down Hillhouse Avenue from the Cowles Foundation for Research in Economics was very familiar; he has taught SOM students since the early 1980s.

"Finance is so integral to what we do in a free society," Shiller said; it is how we get things done, how ideas are turned into reality. On the other hand, he said, that doesn't mean that we can't improve our financial system. The evolution of the financial system "is a process," he said. "It's not done yet."

Shiller's new book is in part a response to those who have attacked the role of financial innovation in creating the financial crisis. "The flaws that led to the financial crisis are specific and correctable," he said. "They aren't moral flaws."

In addition to defending the role of finance, Finance and the Good Society presents ideas, big and small, for making the financial system more democratic and useful in creating a better society. For example, Shiller proposes the creation of "participation nonprofits," which allow philanthropists to buy shares in worthy endeavors rather than simply donating money. Profits would be returned to shareholders in the form of dividends, which could be used only for charitable purposes. "What I'm trying to get at is to make philanthropy more rewarding," he said."

Another idea is "continuous workout mortgages," which would include a built-in method for changing the terms of a mortgage if home prices fell. Homebuyers would pay extra in order to be protected from going "underwater"—that is, owing more on a mortgage than the home is worth—as so many have in recent years.

Shiller and Mark Kamstra of Canada's York University have suggested that rather than issuing bonds, governments could issue equity shares in GDP; each share, called a "trill," would be worth one trillionth of the country's GDP. If Greece had financed itself this way, Shilller pointed out, "their crisis would have given them an automatic bailout," since the decline in the country's GDP would have led to lower financing payments.

We can never be certain about the effects of such inventions, Shiller said, but that doesn't mean that we shouldn't innovate. "We always learn something," he said. "The real world always surprises us."

Professor Robert Shiller
Robert J. Shiller
Sterling Professor of Economics, Yale University