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Financial Markets · Lecture 23 of 23 · 1:15:52

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

23. Finding your Purpose in a World of Financial Capitalism on YouTube

Study guide

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?

Vocabulary

purpose (noun)
A reason or goal that makes an action meaningful.
Shiller argues finance should serve a larger purpose in life.
morality (noun)
Ideas about what is right and wrong behavior.
The lecture opens with the morality of working in finance.
reflect on (phrasal verb)
To think carefully about something, often about the past.
In this closing lecture, Shiller reflects on his whole course.
capitalism (noun)
An economic system where private individuals and companies own property and business for profit.
The lecture title mentions finding purpose within financial capitalism.
moral imperative (noun)
A duty that a person feels strongly obligated to follow.
Shiller frames building useful businesses as a kind of moral imperative.
entrepreneurship (noun)
The activity of starting and running new businesses.
He argues entrepreneurship itself can be a moral contribution to society.
enterprise (noun)
A business or company, especially a new or bold one.
Sumner defended people who take risks to build an enterprise.
superintendent (of enterprise) (noun)
A person who organizes and manages a business or project.
Sumner used the phrase 'wages of superintendents' for entrepreneurs' pay.
dismal (adjective)
Very gloomy or depressing.
Malthus's theory became known as the dismal law of population.
geometrically (adverb)
Growing by multiplying, so increasing faster and faster.
Malthus claimed population grows geometrically over time.
arithmetically (adverb)
Growing by adding a fixed amount each time, so increasing at a steady rate.
He argued that food supply grows only arithmetically.
pessimistic (adjective)
Expecting bad outcomes rather than good ones.
Shiller pushes back against Malthus's pessimistic conclusion.
habitat (noun)
The natural environment where a plant or animal normally lives.
The Nature Conservancy works to protect habitat from destruction.
extinction (noun)
The complete disappearance of a species from the earth.
Protecting land can help prevent the extinction of a species.
reparations (noun)
Payments made by a country or group to compensate for harm it caused.
Germany continued to pay reparations after World War I.
upheaval (noun)
A sudden, big, and often violent change.
Financial contracts sometimes survive severe political upheaval.
confiscate (verb)
To take property away from someone, usually by force or by law.
The Soviet government confiscated private assets after the revolution.
nationalize (industry) (verb)
To bring a private company or resource under government ownership.
Mexico moved to nationalize its oil industry.
inequality (noun)
An unfair or uneven difference in wealth or income between people.
The lecture engages with concerns about rising inequality.
lobbying (noun)
Efforts by a group to persuade politicians to support its interests.
He references a book about financial lobbying in politics.
cosmopolitan (adjective)
Familiar with and comfortable in many different places and cultures around the world.
Merton describes a cosmopolitan class fluent in global finance.
democratization (noun)
The process of making something available to ordinary people instead of only a small group.
Shiller calls for the democratization of finance.
wage garnishment (noun)
A legal process where part of a person's pay is taken directly to pay off a debt.
Some families faced informal bankruptcy through wage garnishment.
livelihood insurance (noun)
A proposed insurance that would protect people if their type of job or career becomes obsolete.
Livelihood insurance does not yet exist as a common product.
home equity insurance (noun)
A proposed insurance that would protect a homeowner if their house loses value.
Home equity insurance would guard against falling house prices.
continuous workout mortgage (noun)
A proposed home loan that automatically adjusts payments when a borrower has financial trouble.
A continuous workout mortgage would lower default rates in a downturn.
default (on a loan) (verb)
To fail to make required payments on a debt.
The new mortgage design aims to help borrowers avoid defaulting.
microfinance (noun)
Small loans given to poor people or small businesses that cannot get regular bank credit.
Muhammad Yunus is famous for group-liability microfinance.
group-liability lending (noun)
A loan model where a group of borrowers is jointly responsible for repaying the loan.
The Grameen Bank pioneered group-liability lending for the poor.
draft lottery (noun)
A random selection process used to choose people for compulsory military service.
Angrist studied how the Vietnam draft lottery affected later earnings.
obsolete (adjective)
No longer useful because something newer has replaced it.
A career can become obsolete due to new technology.
outlook (noun)
A general attitude or way of viewing the future.
Shiller advises students to keep a long, historically aware outlook.
chance (in careers) (noun)
An event that happens by luck, not by planning.
Random chance can shape a person's lifetime earnings.
synthesis (noun)
A combination of separate ideas or parts into a single whole.
This final lecture works as a synthesis of the whole course.
manuscript (noun)
A written text before it is published as a finished book.
Shiller discusses his own manuscript on the purpose of finance.
counterexample (noun)
A specific case that shows a general claim is not always true.
Soviet Russia is a counterexample to contracts surviving political change.

Chapters

From the YouTube description

Financial Markets (2011) (ECON 252)

After reviewing the main themes of this course, Professor Shiller shares his views about finance from a broader perspective. His first topic, the morality of finance, centers on Peter Unger's Living High and Letting Die and William Graham Sumner's What the Social Classes Owe Each Other. Subsequently, he addresses the hopelessness about the world's future that some see from Malthus' dismal law from the Essay on the Principle of Population, but contrasts it with a positive outlook on purposes and goals in life. While discussing the endurance and survival of financial contracts, he outlines the cases of Germany after World War I, Iran after the Islamic Revolution, and South Africa after the end of apartheid, in which financial contracts prevailed, but does not fail to mention the cases of Russia after the Russian Revolution and Japan after World War II, in which it has not been the case. After a brief comparison between Mathematical Finance and Behavioral Finance, he elaborates on the interplay between wealth and inequality, building on Jacob Hacker's and Paul Pearson's Winner-Take-All Politics, Karl Marx's Das Kapital, and Robert K. Merton concept of the cosmopolitan class. Following this, he emphasizes the democratization of finance as an important future trend and provides examples for this process from his books The Subprime Solution,The New Financial Order and Finance and the Good Society. Professor Shiller concludes the course with advice for finding the right career, highlighting the role of random events, but also the importance of a long-horizon outlook and an orientation towards history in the making.

00:00 - Chapter 1. The Course and Its Major Themes in Retrospect
06:48 - Chapter 2. The Morality of Finance
16:06 - Chapter 3. Hopelessness: Challenging Malthus's Dismal Law
30:05 - Chapter 4. The Endurance and Survival of Financial Contracts
37:41 - Chapter 5. The Importance of Financial Theory
39:13 - Chapter 6. Welfare and Poverty
50:36 - Chapter 7. The Democratization of Finance
01:02:18 - Chapter 8. Advice for the Right Career

This course was recorded in Spring 2011.

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