The recent economic turmoil in many countries has been the most disruptive since the Great Depression. A common force behind the recent disruptions has been breakdowns in various aspects of financial markets central to functioning capitalist economies. Various players in the world of financial capitalism have been widely criticized for their roles in perpetrating recent developments. In ‘Finance and the Good Society’, Robert J. Shiller examines the modern world of finance, its various players, market developments at the root of economic dysfunction and how elements of the system might be modified to better serve a wider public interest. Shiller's view of the state of financial capitalism is more sanguine than that of many commentators but he sees areas where change is warranted.

Part I of the volume includes 17 chapters describing the players in the financial markets, the services they provide, the value that society has derived from their performance and the problems some have created. Individual chapters cover corporate chief executive officers, bankers, various developers and vendors of financial instruments, those involved directly and indirectly with various relevant regulatory and legal processes, educators and those in the nonprofit and philanthropic worlds.

The sorts of financial service products that most of us use in our daily lives—insurance of various forms, pension saving providing us retirement income security, mortgages that facilitate home purchases, and the like—developed in the financial services sector and have enhanced our economic welfare considerably. While such products can be beneficial, they are also susceptible to manipulation and can take unfair advantage of users. A recurring theme is that we need to focus carefully on the regulatory structures that we put in place and the incentive structures motivating various players in order to encourage behaviors within the finance sector to enhance the benefits to society.

Part II of the volume is based on a wide ranging review and analysis of research and literature exploring some of our basic human characteristics that might explain variations in appetites toward risk taking or our impulses toward conventionality and familiarity in making financial choices. Some of us come to the table ill prepared to deal with financial concepts and our inclinations can encourage us to enter into arrangements, such as taking on excessive debt, that are beyond our prospective capacity to sustain them. On the other hand, we also have a natural inclination to stay with what we understand to be safe which often makes us reluctant to take advantage of new developments that might be to our advantage. In recent years, behavioral economics has shown that economic opportunities can be presented in ways that encourage rational economic decisions but our behavioral inclinations also can make us susceptible to unfair opportunities as well.

Shiller's view is that for financial capitalism to become a greater contributor to the good society it requires further democratization. If done properly, we can achieve more equitable distributions of income and wealth and a sense that we are all better off as a result. The democratization process implies more widespread public participation in utilizing various aspects of the financial system. Developing appropriate incentives and regulatory structures to assure that the functionaries in the marketplace behave properly are an important element in this but it also requires ‘awareness of fundamental information about the workings of the system’.

There is one area where the democratization of the US financial marketplace has expanded dramatically in recent times that received remarkably little attention in the volume. Since the early 1980s, many US workers have saved for retirement in tax-favored plans sponsored by their employers under section 401(k) of the Internal Revenue Code. Annual plan disclosures required under federal law indicate that average contributions per active participant in these defined contribution plans consistently exceeded employer contributions to private defined benefit plans from the mid-1980s through the early 2000s. The Federal Reserve Board estimates that from the mid-1980s through 2007, private plan asset balances climbed from $1.2 trillion to $11.1 trillion. In the mid-1980s, virtually all private defined benefit assets and most defined contribution assets were in centrally managed trusts; including individual retirement accounts, only about 20 percent of all private retirement assets were individually managed. By 2007, more than 70 percent of private retirement assets in tax-qualified plans were in individually managed accounts. Despite more consistent contribution patterns and far more rapid growth in total retirement savings in these plans, many analysts consider the shift away from defined benefit pensions to these types of plans to be an abject failure of the private retirement system in the United States.

The path to financial capitalism becoming a more constructive instrument in serving the good society includes many obstacles. In a world where Shiller concludes that ‘a substantial fraction of the variation in individual stock prices is not explainable in terms of anything that makes good economic sense,’ how do we convince potential savers that investing is any different than gambling? How do we instill public trust when, as Shiller suggests, there is a constant drumbeat in the news media ‘that business is relentlessly selfish’. The drumming will not disappear because of the evolution of a more enlightened approach to finance. Human nature being what it is there are a certain number among us in virtually all walks of life who operate outside acceptable social and legal boundaries. Almost certainly, there will continue to be headlines about individuals from the financial sector pursuing untoward personal gain. The more egalitarian distributions of income that Shiller sees as important in the United States requires that income redistributions through the progressive income tax should be done more ‘deliberately and judiciously than at present,’ a matter of ongoing contentious political debate not likely to be resolved soon. Possibly the highest hurdle for broader democratization of financial capitalism is engaging the public to become more active and informed participants in the system. Shiller's book provides exactly the sorts of information needed to enlighten a wider public audience but it is unlikely to be widely read by the swath of the public who could benefit most from it in moving us toward his goal of greater democratization of financial capitalism.