As I review this book, I must start by confessing a bias in favor of Shiller the man, based on one interaction I had with him in 2003. I was being interviewed on On Point, a Boston radio show that is syndicated to a large number of National Public Radio affiliates. The topic was the 2003 Bush tax cut on capital gains and dividends, which I was defending. Indeed, I thought it to be substantially better, from an economic efficiency standpoint, than the more-famous 2001 Bush tax cut. The show’s host, Tom Ashbrook, was quite critical of the cut, and his choice of the two other guests reflected that. One was a left-wing labor union official whose name I’ve forgotten; I do remember that he ranted a lot. The other was Shiller, who was also critical of the cut. So the opinions of the discussants were three-to-one opposed, with me being the one. But unlike the union official, Shiller did not attack my motives. Indeed, often when I made a point about the efficiency of this or that policy and Ashbrook looked to Shiller to refute me, Shiller prefaced his disagreement, not by marginalizing me, but rather by stating that I was expressing the mainstream view of economists and he was stating the minority view. I was so impressed by Shiller’s gentlemanly behavior that I e‑mailed him afterward to thank him. In reviewing this book, I will uphold the standard of politeness that he set in 2003.

Of course, I can’t mention all the highlights of his book. Instead, I’ll focus on the main positive contributions and the most important places where I think he goes astray.

Unconventional thinker | Shiller is strongest in—I promise that I will use only one cliché in this whole review, and here it is—“thinking outside the box.” This is evidenced in his chapter titled “An Impulse for Conventionality and Familiarity.” In it, he discusses why we often think so narrowly about financial issues and financial instruments. He challenges us to think more broadly.

He notes, for example, that in Chile, which had high inflation in the 1960s and 1970s, many contracts and quoted prices are not in money but in Unidad de Fomento (UF), which he explains is “a non-monetary unit of account indexed to inflation.” Because rent is likely to be quoted in UF and there are no fluctuations in its real value over the length of the lease, the renter pays a different amount in pesos every month.

Why would that be relevant in the United States, where inflation has been low for 29 years and not that variable? It isn’t directly relevant. But if prices could be denominated in real terms and not in rubber dollars, why couldn’t mortgages be set up in advance with what Shiller calls a “preplanned workout?” He proposes a mortgage that specifies changes in terms in the event of a recession or a fall in home prices. Shiller argues that if such mortgages had been the norm, we “would probably not have experienced the financial crisis of 2007.”

On the issue of crises, the main financial crisis in our future is likely to be paying the huge commitments governments have made to government workers, Social Security recipients, and people on Medicare. Shiller does not challenge the idea that these people have a right to some level of support in their old age. But he does suggest having the government give the support in a way that takes account of the burden imposed on those who pay. He writes, “The right to a standard of living in old age is framed in an absolute manner, and so the provision of pension benefits becomes stuck in an ancient system.” His solution? “Government pensions,” writes Shiller, “should instead be indexed to some indicator of taxpayer ability to pay, such as GDP.” So, for example—I’m building on what Shiller suggests—the government could allocate x percent of the budget to Social Security and y percent to Medicare and then adjust payments and benefits annually based on those percentages.

Shiller also nicely explains—and defends—derivatives. The term “derivatives,” he notes, “has become a dirty word.” But a derivative “is merely a financial product that derives from another market, and it is not inherently good or evil.” He points out that derivatives go back a long way, even having been mentioned by Aristotle. His case for derivatives is the standard one: they allow people to, in essence, buy insurance against a loss in the value of an asset.

In a terse chapter on insurance, he points out that what ultimately made the 2010 Deepwater Horizon oil spill in the Gulf of Mexico not very tragic—except, of course, for the loss of 11 lives—was the fact that insurance covered most of the losses borne by various people. I found implausible, though, his claim that, in the wake of the devastating 2010 earthquake, Haitians would have been much better off with catastrophe insurance because such insurance would have led insurers to insist on better building standards. The problem is that better building standards are expensive and Haitians are dirt poor.

Good government? | Where Shiller’s book is most dissatisfying is in his treatment of government. First, he often understates the evil of government. Second, and related to the first, he treats government as if it is mainly a group of people working for the common good.

Consider his discussion of one of the main atrocities of government in the 20th century: Soviet collectivization of agriculture. Millions of farmers starved because of Stalin’s actions, a fact that Shiller’s Yale colleague, historian Timothy Snyder, recently documented in the blood-curdling book Bloodlands. It’s not that Shiller minimizes the harm. He writes that 11 million people died in the famine of 1932–1933, which, if anything, is probably somewhat of an overestimate, and that the famine was due to collectivization. So what’s the problem? Shiller minimizes the evil intent behind the harm. The deaths, he writes, “reflect government error.” In other words, he sees the deaths as a policy mistake instead of intentional malevolence. In fact, what happened was that Stalin forcibly took grain from millions of Ukrainian farmers, knowing full well that the result would be starvation. Snyder highlights a Soviet government poster that read, “We will destroy the kulaks [Ukrainian farmers] as a class.” The word “error” doesn’t quite describe what happened.

Fortunately, that is the worst of Shiller’s minimizations of government evil. Some of his other treatments in the same vein, though, require comment. “Labor unions,” he writes, “have in the past been the most likely lobbyists for lower-income people.” That is not at all an accurate statement about labor unions, as President Jimmy Carter’s labor secretary, Ray Marshall, could have told him. Labor unions derived most of their power from monopoly privileges granted to them by the federal government. In the early 20th century, they used that power systematically to exclude black people, most of whom were poor, from good jobs. Marshall, a labor economist, spent much of his career documenting the racist policies of government-privileged labor unions. Unions didn’t just prevent black people from holding jobs; they sometimes assaulted, and occasionally murdered, black workers who tried to compete with them, a fact that Marshall documents in his 1967 book The Negro Worker. The disagreements between early 20th-century black leaders W.E.B. DuBois and Booker T. Washington were legendary, but one thing they agreed on was that unions were, in DuBois’s words, “the greatest enemy of the black working man.”

Shiller’s too-rosy view of government most likely derives from his view that government is there mainly to help us. I’m guessing that it’s for that reason that he does not criticize the Dodd-Frank law that imposes heavy, largely yet-to-be-determined regulations on the financial industries. Of course, it’s hard to criticize regulations that haven’t been formulated. Yet, in the few cases in which he mentions Dodd-Frank, he does so favorably, always seeming to trust regulators’ intentions. His one criticism—a good one—is the Hayekian one that regulators are not likely to have the information they need to take action against bubbles. But the regulators’ intentions? According to Shiller, they’re pure. He even states that regulators must be given “the respect and appreciation that they deserve.” And, in context, he clearly means that they deserve a lot of respect and appreciation.

It’s not that Shiller is completely unaware of government officials’ incentives. In a discussion of philanthropy, he points out that one advantage of philanthropy is that it allows organizations like the Bill and Melinda Gates Foundation to give grants to find a cure for river blindness, a disease suffered by people in extremely poor regions of Africa and Asia. The support of rich countries’ governments for such causes is weak, he notes, because they gain little political capital by helping people in poor countries. In other words, governments don’t have a strong incentive to help people in other countries. If he had taken this reasoning further, Shiller would have realized that even our own government has little or no incentive to look out for the politically unorganized.

Virtually every book on government policy written by good economists who ignore the perverse incentives of government officials would be much better if their authors took those incentives into account. Finance and the Good Society is one case in point.