Shiller front
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| Shiller.front 12/30/02 4:01 PM Page xviii The Promise of Economic Security WALL STREET, along with the City of London and other world fi- nancial centers, has served as the liveliest laboratory for new ideas in all of capitalism. Modern finance—not only securities and banking but also insurance and public finance—grows out of powerful theories, both mathematical and psychological, and has produced economic in- ventions of the greatest utility. Despite some awful financial scandals that surface from time to time, these inventions really work, most of the time. The inventions work because the fundamental ideas are sound and because finance professionals have learned to apply them effec- tively to real people, with all their psychological biases and quirks. The primary subject matter of finance is the management of risks. Finance looks at the various forms of human disappointments and economic suffering as risks to which probabilities can be attached. Fi- nance poses arrangements that reduce these disappointments and blunt their impact on individuals by dispersing their effects among large numbers of people. Finance helps us realize our dreams by en- abling creators and innovators to pursue their ideas without bearing all of the risks themselves and encourages them to take great risks for good purposes, as when entrepreneurs start new companies financed by venture capitalists. Unfortunately, the insights of finance have been applied in only a lim- ited way. Risk sharing has been used primarily for certain narrow kinds of insurable risks, such as stock market crashes or hurricanes, or for man- aging the risks of conventional investments, such as diversifying invest- ment portfolios or hedging commodity risks, benefits that often accrue mainly to the already-well-off members of our society. Finance has sub- stantially neglected the protection of our ordinary riches, our careers, our homes, and our very abilities to be creative as professionals. We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart. We need to extend finance beyond our major financial capitals to the rest of the world. We need to extend the domain of finance beyond that of phys- ical capital to human capital, and to cover the risks that really matter in our lives. Fortunately, the principles of financial management can now be expanded to include society as a whole. And if we are to thrive as a society, finance must be for all of us—in deep and fundamental ways. Democratizing finance means effectively solving the problem of gra- tuitous economic inequality, that is, inequality that cannot be justified on rational grounds in terms of differences in effort or talent. Finance can thus be made to address a problem that has motivated utopian or socialist thinkers for centuries. Indeed, financial thinking has been more rigorous than most other traditions on how to reduce random in- come disparities. Equipped with modern digital technology, we can now make these financial solutions a reality. Right now we are witnessing an explosion of new information systems, payment systems, electronic markets, online personal financial planners, and other technologically induced economic innovations, and consequently much in our economy will be changed within just a few years. Almost all of our economy will be transformed within just a few decades. This new technology can do cheaply what once was expensive by systematizing our approach to risk management and by generating vast new repositories of information that make it possible for us to disperse risk and contain hazard. Society can achieve a greater democratization of finance and stabi- lization of our economic lives through radical financial innovation. We must make this happen, given the economic uncertainty of our future at a time of global change and given the problems and inadequacies of today’s financial arrangements. This book presents ideas for a new fi- nancial order, a new financial capitalism, and a new economic infra- structure, and further describes how such ideas can realistically be de- veloped and implemented. Incentives for Great Works without Moral Hazard Financial arrangements exist to limit the inhibitions that fear of failure places on our actions and to do this in such a way that little moral haz- ard is created. Moral hazard occurs when financial arrangements en- courage people to engage in destructive rather than productive acts, such as phony work done only to impress investors, wanton spending, or accounting malfeasance. An entrepreneur may feel discouraged from starting an exciting new business because the risk of failure is too high. Modern financial arrangements can often solve this problem. For instance, this entre- preneur might find a venture capital firm that will agree to bear the risks, paying the entrepreneur a salary yet providing the entrepreneur some incentive for inspired work by offering shares in the upside if the company does well. The risk that might have prevented the en- trepreneur from ever launching the business seems to disappear. Ac- tually, the risk does not disappear, but its effects virtually disappear as the risks to the individual business are blended into large interna- tional portfolios where they are diversified away to almost nothing among the ultimate bearers of the risk, the international investors. In- ternational portfolio managers from Kabuto-Cho to Dalal Street to Piazza Affari to Avenida Paulista each take on some of this entrepre- neur’s risk, but as less than a millionth of their total portfolio—so small a part of their portfolios that they do not feel any of this entre- preneur’s risk. The entrepreneur is now protected, at virtually no cost to anyone, and can launch an exciting new business without fear. Thus do financial arrangements foster individual creativity and achievement. This is the essential wisdom of finance and its principle of diversification. As noted above, this inspirational effect of risk management on the entrepreneur can work very well if the venture capital firm is careful to avoid moral hazard, that is, incentives for the entrepreneur to burn down the plant or to pursue flashy opportunities that have only the appearance of potential for success, to postpone dealing with problems for fear of revealing them to others, or to continue too long in an en- terprise that is clearly failing. Finance has not been perfect in containing moral hazard—witness the recent Wall Street scandals in the United States. But it would be ab- surd to junk the system because of a few failures. We should instead adapt and extend finance’s insights by applying its essential wisdom to the management of economic risks faced by everyone, and similarly spread the payoffs to everyone. Financial institutions can be strength- ened to short-circuit fiascoes like that at Enron Corporation, where moral hazard escaped the controls, where top management, using some clever financial innovation as a foil, dishonestly ran off with the money at the expense of their employees. the promise of economic security Yüklə 1,44 Mb. Dostları ilə paylaş:
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