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Introduction: Lecture 1: Financial Markets (2011), Robert Shiller

Great introductory lecture from one of our leading practitioners and philosophers of finance and economics, Robert Shiller (who has taught this course for 25 years, since Fall '85). Shiller argues that "Financial institutions are a pillar of civilized society, supporting people in their productive ventures and managing the economic risks they take on." His closing thought is about the moral purpose of finance which he claims "is about making your purposes happen"! 1 hour and 15 minute video lecture.

1. Introduction and What this Course Will Do for You and Your Purposes

Financial markets are about allocating resources through space and time: the basic function of economics. Financial markets incentivize people to do "productive" things (Does this imply that economics and finance is inherently political? Is this necessary and unavoidable or could we imagine structuring society to be productive in other ways? Is society necessarily about being productive?). Finance is about making large ventures happen. Anything big and important that we do is uncertain, markets help us manage those risks.

Shiller argues strongly for the importance of a moral sense in finance. We should all have other purposes in life besides finance, but finance is an important purpose in life for everyone. He suggests that unless you want to be a hermit, you need to know the basics of finance.

He claims that finance is a technology for doing things which is the purpose of finance. Finance is about how we make things happen. Finance is a type of engineering that works with people. He observes that modern financial technologies are causing rapid growth in the developing world: it is important from a world development perspective.

This leads me to ask: instead of angrily asserting that "you can either make sense or make money" as Bucky did, ought we be working to improve financial technology much as Bucky worked to improve housing technology? As I mentioned last weak, Bucky argued that we should study economics. But how do we integrate Bucky's ideas about technology with Shiller's vision of finance as a technology?

Shiller then boldly examines the issue of the hyper-wealthy (the 1%). Does money-wealth have a purpose? Ought it be allowed? He notes that sumptuary laws (laws regulating consumption) date back to 700 BC in Greece (the Locrian code). Often these laws prohibit conspicuous consumption. Since one cannot really buy enough mansions to live in and exhaust a billion dollars and since none of us need more than a few sports cars, is there something amiss with making wealth as the objective of your life?

Shiller than focuses on philanthropy as an objective of Big Money. He discusses Andrew Carnegie's 1889 essay "Wealth" ( which suggests that there is a moral imperative of philanthropy for the wealthy.

Although I'm grateful that Shiller discusses Big Money with Yale students who will soon be engaged in building the big projects of tomorrow, this discussion on philanthropy rubbed me wrong. Could it be that philanthropy is an unfair exercise of political power? If so, isn't philanthropy both reprehensible and economically distorting? By financing the vision of the hype-wealthy does society lose the capabilities of its visionary members who do not have the skills or accoutrements of finance? Should the rest of us suffer in misery in NOT getting our serious problems addressed just because no hyper-wealthy person sees fit to donate to our causes? Or is finance a pre-requisite for getting anything done and ought we just accept that and get with the program and join the philanthropists in funding our own personal vision for making the world better?

He gives an interesting example of how insurance can help protect us from earthquake devastation: Haiti vs. San Francisco. The Haiti earthquake was so devastating because there was no insurance industry regulating building construction to ensure their safety in an earthquake zone. Fascinating. But I doubt that insurance is the only impediment to building earthquake resistant housing in Haiti.

Here is a list of topics to be covered in the course: risks, financial crises (Great Depression: worldwide massive unemployment led to animosity and anxiety leading to war which was resolved by a massive government stimulus program of drafting the unemployed to fight), financial technology, portfolio diversification, capital asset pricing model, insurance, efficient markets theory, debt markets, stock market, real estate, behavioral finance (application of psychology, sociology and other social sciences to finance), banking, forwards (markets for contracts that deliver in the future which involve over-the-counter contracts done one-on-one between parties with the help of an investment bank) and futures markets (contracts traded on organized futures exchanges), options markets (e.g., stock options which are contracts that allow you to purchase a share of a stock or to sell a share at a pre-specified price. They are traded on options exchanges), monetary policy (central banking), securities, derivatives, investment banking (help companies raise capital, issue securities, retire securities), regulation, money managers, exchanges, brokers, dealers, clearinghouses, public and non-profit finance, the moral purpose of finance.
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