Lecture 23: Finding your Purpose in a World of Financial Capitalism

What this lecture covers

This closing lecture steps back from technical content to ask what finance is for and how a student should think about a career connected to it. Shiller organizes his reflections around seven themes: the morality of finance, hopelessness about the world's problems, the value of financial theory, wealth and poverty, the endurance of financial contracts through political upheaval, the democratization of finance, and career advice.

As the final session of the course, it ties together threads from earlier lectures on behavioral finance, risk management, and nonprofit and government finance. After watching, you can explain Shiller's argument that finance is a tool for pursuing purpose rather than an end in itself, and describe several concrete proposals he has made, such as livelihood insurance and continuous workout mortgages, for extending financial protection to more people.

Key ideas

• Finance as a tool, not a purpose: Shiller argues finance should serve goals people care about, not stand as the goal itself.
• Moral imperative to entrepreneurship: drawing on William Graham Sumner, he argues that building enterprises that employ and serve people is itself a moral contribution, alongside direct charitable giving.
• Endurance of financial contracts: pensions and financial obligations often survive even radical political change, as seen in post-WWI Germany, post-revolution Iran, and post-apartheid South Africa, though there are counterexamples like Soviet Russia and Maoist China.
• Cosmopolitans vs. locals: a concept from sociologist Robert K. Merton describing a class divide between people oriented toward global, financially literate networks and those oriented toward their local community.
• Democratization of finance: Shiller's argument that financial tools, information, and protection should extend beyond an educated, well-advised elite to the broader population.
• Livelihood and home equity insurance: proposed financial products that would protect people against economic risks, such as a career becoming obsolete or a home losing value, that are not currently insurable.
• Continuous workout mortgage: a proposed mortgage design with built-in, repeatable payment adjustments to prevent defaults during downturns.
• Role of chance in careers: citing Joshua Angrist's study of the Vietnam draft lottery, Shiller argues that random events substantially shape lifetime outcomes, so a career should be approached with a long, historically aware outlook.

Walkthrough

Course themes in retrospect (0:00)

Shiller reviews the course's structure, contrasting the technical detail of the Fabozzi textbook with his own manuscript, tentatively titled Finance and the Good Society, which addresses the purpose behind financial tools. He restates that finance allocates resources, incentivizes good work, and manages risk, and previews the seven themes he will cover.

The morality of finance (6:48)

He discusses Peter Unger's Living High and Letting Die, which argues that failing to donate to save lives cheaply, such as through UNICEF, is a moral failure, and describes his own decision to donate after reading it. He balances this against William Graham Sumner's 1883 defense of capitalists as providing "wages of superintendents" through the risk and effort of building enterprises, suggesting that entrepreneurship itself carries moral weight alongside direct giving.

Hopelessness and Malthus's dismal law (16:06)

Shiller presents Thomas Malthus's 1798 argument that population grows geometrically while resources grow only arithmetically, implying inevitable poverty and suffering. He pushes back on the pessimistic conclusion, noting that most people live reasonably well most of the time between catastrophic events, and highlights nonprofit efforts like the Nature Conservancy, which protects habitat to prevent species extinction, as evidence that purposeful action can improve outcomes within a constrained world.

The endurance of financial contracts (30:05)

He argues that financial arrangements often survive political upheaval, citing German reparations after WWI, pensions preserved after Iran's Islamic Revolution, and unconfiscated assets after South Africa's end of apartheid. He contrasts these with cases of confiscation, including the Soviet Union under Lenin, Mexico's oil nationalization, Maoist China, and the forced conversion of Japan's Zaibatsu family holdings after WWII.

Financial theory, welfare, and inequality (39:13)

Shiller briefly reaffirms that mathematical finance and behavioral finance are complementary rather than opposed. He then engages with concerns about rising inequality, referencing Jacob Hacker and Paul Pierson's Winner-Take-All Politics on financial lobbying, Karl Marx's Das Kapital on capital ownership, and Robert K. Merton's concept of a "cosmopolitan class" that is fluent in finance while much of the population is excluded from its tools and advisors.

The democratization of finance (50:36)

He argues that much of the harm from the financial crisis stemmed from ordinary people lacking access to lawyers, financial advisers, and protective tools, leading to informal bankruptcy through wage garnishment rather than formal legal protection. He describes efforts like Elizabeth Warren's push for the Consumer Financial Protection Bureau, and his own proposals from The Subprime Solution and The New Financial Order: livelihood insurance against career-ending economic shocks, home equity insurance against price declines, and continuous workout mortgages that automatically adjust payments during hardship.

Advice for building a career (1:02:18)

Shiller closes with career reflections, citing Mohammad Yunus, who founded the Grameen Bank and won the Nobel Peace Prize for group-liability microfinance lending, as a model of applying financial thinking to a social mission. He discusses Joshua Angrist's finding that Vietnam draft lottery outcomes affected lifetime earnings as evidence that chance plays a large role in careers, and advises students to maintain a long, historically aware outlook rather than planning only around their own life stage.

Before you watch

• This lecture assumes familiarity with topics from earlier in the course, including behavioral finance, the prior lecture on nonprofit and government finance, and general discussions of the financial crisis.
• No new technical material is introduced; it works best as a synthesis after completing most of the course.

Check your understanding

1. How does Shiller reconcile Peter Unger's argument for direct charitable giving with William Graham Sumner's defense of entrepreneurship?
2. What examples does Shiller give of financial contracts surviving major political upheaval, and what examples run counter to that pattern?
3. What does Shiller mean by the "democratization of finance," and what specific proposals does he offer to advance it?
4. According to Joshua Angrist's research on the Vietnam draft lottery, how might a random event shape someone's lifetime earnings?