Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks

By Robert J. Shiller | Go to book overview

Preface

This book arose from an awareness that the major economic risks that our society faces are dealt with individually: each person bears his or her own misfortunes. Society does share some risks, such as risks of natural disaster, medical emergencies, or temporary unemployment; society takes care of many sudden or extreme misfortunes. Still, most of the risk that individuals face about their lifetime well-being is not shared. We allow our standards of living to be determined substantially by a game of chance.

The sharing of economic risk is one of society's deepest concerns, and rightly so. Inequality of income and wealth is painful to see. Income and wealth determine who is served and who is servant, determine who may expect to live in comfort and health and who may not, determine who can pursue a fulfilling career or life plan and who cannot. To the extent that this inequality is created by pure luck, it is not only painful to see, but also a shame.

We must ask why our market system does not allow all people, not just the most extreme cases of economic hardship, to share their largest economic risks, and whether any new technology of markets, to be used by individuals or by organizations to which they belong or with which they have business, might make such risk sharing possible.

The initial spur to my thinking on this topic was living (in New Haven) through the sudden and spectacular residential real estate boom in the mid 1980s that afflicted the north-east United States. The prices of homes are an important part of the determinants of our standards of living, and at this time these prices sustained some major shocks. At the peak of this boom house prices were rising at the rate of about 40% per year; prices doubled in a few years. At this time it was easy to observe significant disruptions in people's lives. People who had not purchased homes realized that they might never be able to afford them. In the midst of this boom young people who did not feel ready to buy housing felt compelled to make great sacrifices to invest now in a home, or else risk being priced out of the market. Others (like myself) who had bought before the boom felt a little guilty to receive this windfall, which

-v-

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Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks
Table of contents

Table of contents

  • Title Page iii
  • Preface v
  • Acknowledgements x
  • Contents xiii
  • 1 - Introduction 1
  • 2 - Psychological Barriers 17
  • 3 - Mechanisms for Hedging Long Streams of Income 31
  • 4 - National Income and Labor Income Markets 52
  • Appendix to Chapter 4: Econometric methods 72
  • 5 - Real Estate and Other Markets 78
  • 6 - The Construction of Index Numbers for Contract Settlement 116
  • 7 - Index Numbers: Issues and Alternatives 152
  • 8 - The Problem of Index Revisions 182
  • 9 - Making It Happen 201
  • Notes 215
  • References 228
  • Author Index 241
  • Subject Index 245
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