The Great Illusion

Over the years, financial activities have come to consume an enormous amount of time and resour­ces. The gross value added by finan­cial corporate business in the United States (US) has been moving upward consistently: from 2.3% of the gross ­domestic product (GDP) in 1948 to 9.1% in 2010 (p 12). Clearly, we have been witnessing what Kari Polanyi Levitt (2008) termed “The Great Financialisation”, signifying a long-term shift in the centre of gravity of the capitalist system from production to finance. Also labelled “financial capita­lism”, this finds its reflection in every aspect of the economy: share of financial profits as well as of total profits, rising levels of debt relative to GDP, a pyra­midal financial superstructure built on the foundation of innovative opaque ­instruments, and so on.

The recent financial crisis has laid bare several unpleasant facts about the functioning of financial capitalism. ­Robert Shiller had dissected the nature of the crisis in two earlier books, ­Irrational Exuberance and The Sub-Prime Solution. Admittedly, the credibility of the system itself is at stake and the persons in command, the drivers of the ­system, have been the targets of public hostility. There is a general perception, as Shiller recognises, that “the wealthy in our society – among them the financiers – have a real and genuine incentive to use devious means to attack and subjugate, economically, the majority of the population” (p 220). Such an attitude towards finance, if allowed to continue unchecked, would pose a threat to the advance of the world’s prosperity in the coming years (p 220). Finance owes it to itself to undergo some kind of penance. The book is the outcome of an attempt by Shiller to “develop a working theory of financial capitalism to help guide the greater discussion of finance and the good society” (p 14). In his judgment, it is only on the strength of such a reform package that finance should strive to ­redeem itself.