Shiller front

years would be measured by indexes of occupational incomes main-
tained by networks of computers. A good part of the risk of her career
is ultimately borne by portfolio investors all over the world, not by her
alone.
This same woman worries about members of her extended family in
a small town in India, many of whom work in an industry in danger of
closing rendering their special skills obsolete. But their company buys
a newly marketed livelihood insurance contract intended to protect its
workers in the event of untoward economic developments. The insur-
ance company then sells off the risk on the international markets.
Moreover, the Indian government makes an agreement with other
countries to share economic risks, further protecting her family.
Our young woman worries, too, about the neighborhood in a small
industrial town in the United Kingdom where her parents live, a neigh-
borhood that is undergoing economic and social change. She worries
that her parents may lose the remains of their savings if their house
loses value. But in a new financial order, her parents’ mortgage comes
with an attached home equity insurance policy, protecting them against
such an unfortunate outcome; paying a claim if the resale value of their
home declines. Moreover, an intergenerational social security system
and an inequality insurance system will further protect them.
New digital technology, with its millions of miles of fiber optic cable
connections, can manage all these risks together, offsetting a risk in
Chicago with another in Rio, a risk for violinists’ income with an offset-
ting risk in the income of wine producers in South Africa. The result will
be the stabilization and enhancement of our economies and our lives.
Risk Management Today
Most long-term economic risks that people face are actually borne by
each individual or family alone.
4
Social welfare exists primarily for the
very poor but is limited even for them. In today’s world we cannot in-
sure against risk to our paychecks over years and decades. We cannot
hedge against the economic risk that our neighborhoods will gradually
decay. We cannot diversify away the risk that economic and societal
changes will make our old age difficult, and our elderly are left vulner-
able to the risk that a stock market crash will wipe out their retirement
savings. Many people live in relative poverty today because of a failure
to control these risks.
the promise of economic security
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To the extent that we are aware of these ever-present risks, we tend
to be overcautious with our decisions, sometimes avoiding opportuni-
ties because we justifiably fear having to bear the consequences of fail-
ure. We may tend to work cynically instead, treading water, staying in
an unsatisfactory job, pretending to achieve, fearing to venture out into
the rapids where real achievement is possible.
Under present conditions, the woman in Chicago thus postpones
her career as a violinist, waiting for some better time that may never
come. She lacks information about the prospects for such a career and
has no way to protect herself economically except to choose an unin-
spiring career.
Her uncle in India is laid off from his job and is unable to secure a
comparable job; he goes into unwanted early retirement with only a
meager income. Her parents in the United Kingdom see the value of
their house fall as their neighborhood declines. At the same time, the
economy in their region slows, and the value of the U.K. stock market
where they had stashed their other savings drops. As a result, they lack
the wealth to support themselves well in their remaining years. Worry-
ing about the risks to other members of her family can make the young
woman’s own life more difficult, and dreams of a career as a violinist
even more remote.
The risks we face today are substantial, even if we do not easily meas-
ure them from day to day because they either unfold only slowly over
the course of our lives or descend sometimes quickly but rarely as part
of rare cataclysmic historical events. World economic growth over the
past century has been terribly uneven, rewarding some extravagantly
and leaving others far behind. As a result, the distribution of world in-
come is astonishingly unequal. For example, while per capita real GDP
in the United States was $31,049 in 1998, it was only $2,464 in India
that same year.
5
This inequality itself causes further social disruptions
that can in some circumstances generate even more risks through the
forces of resentment, despair, and lost ambitions, which in turn create
problems of fear, crime, and social degeneration.
We cannot properly control our most important risks since they are
not dealt with by any existing financial institutions. Until now, the fo-
cus of almost all financial innovation has been found in traditional stock
markets and other financial markets. Only a small percentage of our
true aggregate wealth—only that portion represented by the corporate
business sector—is tradable in the stock markets around the world. The
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corporate income flows that are represented in the stock markets are
not as large as people imagine. In the year 2000, a record year, total 
after-tax corporate profits (the income left over after companies pay all
their employees, their bills, and their taxes, and that is theoretically
available to pay out as dividends to shareholders) per person in the
United States were only a little over $2000, only about half the money
that state and local governments in the United States spent in that year.
Corporate profits represented by the stock exchanges in other coun-
tries are even smaller per capita than in the United States. The stock
markets are big and important, but not as big and important as we
think. Financial perturbations such as the dot-com and tech-stock
bubbles suggest that investors have far too much enthusiasm for chas-
ing far too few risk management vehicles.
Far more important to the world’s economies than the stock mar-
kets are wage and salary incomes and other nonfinancial sources of
livelihood such as the economic value of our houses and apartments.
This is where the bulk of our wealth is found.
Achieving massive risk sharing—that is, spreading risk among many
individuals until it is negligible to any one person—does not mean that
the world will live in harmony. History shows, however, that long-term
financial arrangements for risk sharing have often been useful despite
wars and disruptions of government authority. Indeed, those events
themselves are risks that the financial arrangements addressed.
Massive risk sharing can carry with it benefits far beyond that of re-
ducing poverty and diminishing income inequality. The reduction of
risks on a greater scale would provide substantial impetus to human and
economic progress. Indeed, the progress that our society has achieved
to date would not be so magnificent were it not for the kinds of risk
management devices that evolved over time. If, for example, insurance
did not exist, a vast variety of vital enterprises would have been consid-
ered too risky to even consider. Without our capital markets, we would
not have many of the corporations and partnerships, large and small,
that produce so much of value for us. Again, their work would often
have been considered too dangerous to embark upon. Without existing
financial technology, we would be living in a much less inspired world.
While we can be thankful for the applications of finance and insur-
ance that make today’s level of economic activity possible, great risks
still inhibit us from greater levels of achievement. Brilliant careers
go untried because of the fear of economic setback. The educations that
the promise of economic security
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