I'm reading Robert Shiller's book The New Financial Order: Risk in the 21st Century. I thought, from the title, that the books was more reportage of the current state of finance; it turns out to be prescription for dealing with risk through a higher order of financial tools. That is, ideas about fixing capitalism through more capitalism.

Still, there are important concepts outlined in the book. One could argue that risk management is another way of describing the material basis for society or human groups. We have a better chance of surviving together than apart. Capitalism, because of its focus on private property, competition and the individual, that is, by its fundamental law system, creates risk for people. These risks are over and above the natural risks of plagues, hurricanes, locusts, fire, drought, etc. Shiller outlines these risks, in particular risks to individual and national income and risks to savings. New technology adds to the risk mix under capitalism, by endangering old forms of earning income and undermining national economies through the vicissitudes of globalization. But new technology also allows new ways of hedging against risk, and his book describes some hypothetical financial instruments to distribute the risk.

Risk management is really an information game (e.g., the construction of actuarial tables in the 18th century provided the basis for modern insurance). By understanding probabilities of outcomes based on actual data, the cost of risk management can be determined, and priced accordingly. The complexity of risks that can be managed is, per Shiller, a function of the quality (speed, cost) of information technology. Information technology applies in the data collection and analysis department; and again in managing the distribution of shares of risk across a broad market of whoever wants to buy the risk, for some consideration (i.e., speculate). More sophisticated information processing technology means more complicated risks can be managed.

The way out of the destruction of capitalism then is through different kinds of insurance or derivatives for personal income, national income, home prices, etc. Socialism, or communism, is another, more obvious way of managing such risks -- that is, mutual social responsibility, mediated through public, community structures rather than hedge funds and banks.

Shiller's book does highlight the confluence of several themes I find of interest: new technologies allow us to understand or interact w/ processes in more discrete ways -- the pellets of iron have different properties than the ingot. New technologies shrink transaction costs -- the hookup cost (the cost of making a connection) and the transmission cost (the cost of using a connection), the processing cost (the time the node is busy). So more connections can happen. And as more connections happen, the medium exists for emergent properties to flower. These properties will be conditioned by the law system that governs the network/process.

Capitalism allows connections in very specific ways. Its volatility equals risk. Creative destruction, perhaps, but destruction nevertheless. The global may flourish, in an aggregate way, while the local is sacrificed quite brutally. Wealth polarizes. The factories of Canton and Akron are shuttered, while new ones open in Guangdong. The wheatfields of North Dakota lay fallow while those of the Ukraine or Argentina ripen.

Shiller envisions a global system of managing such risks via new financial instruments made possible by new information technology. Much more straightforward solutions have been proposed in the past; he is looking for ways to manage the symptoms while leaving the causes in place.

His argument, I think, is that capitalism allows for creativity, initiative and opportunity that other systems do not. But risk is the enemy of creativity and opportunity (better to go the safe route than the risky one), so managing the risk will allow for more opportunities to be explored, more experiments made, more connections explored, hence more likelihood of good things to happen (emergence). Which all sounds good, but also seems like hoping the wolf becomes a vegetarian.