The institutions of public finance, with their implicit insurance features and their creation of a progressive tax system, health care systems, can also innovate. Governments can stabilize speculative markets against bubbles and bursts either through discretionary stabilization policy or towards regulatory safeguards. They can impose regulations that deal with the problems of phishing broadly construed: phishing meaning manipulation and deception that seems to accompany the development of financial institutions until they are corrected. Governments can help deal with risks for which the private sector is inadequate. Nations can share risks much more than they do today, and they can incentivize each other for better behavior.
This technology is certainly not perfect. We need forward-thinking innovators, who are willing to do controlled experiments and tabulate the outcome so that the best experiments can be applied. Finance, when suitably configured for the future, can be the strongest force for promoting the well-being and fulfillment of an expanding global population and for achieving the greater goals of society.
This chapter derives from Robert Shiller’s book Finance and the Good Society (Princeton, 2012).