Capitalism and Financial Innovation

At the 2012 CFA Institute Financial Analysts Seminar, held 23–27 July in Chicago, Robert J. Shiller discussed his view that capitalism must be constantly updated through innovation in order to be successful in its purpose of achieving society’s goals. Three recent innovations—the benefit corporation, crowd funding, and the social impact bond—are good examples of how finance and financiers can contribute to attaining these goals.At the 2012 CFA Institute Financial Analysts Seminar, held 23–27 July in Chicago, Robert J. Shiller discussed his view that capitalism must be constantly updated through innovation in order to be successful in its purpose of achieving society’s goals. Three recent innovations—the benefit corporation, crowd funding, and the social impact bond—are good examples of how finance and financiers can contribute to attaining these goals. A benefit corporation is a class of corporation required by law to create a general benefit for society as well as for its shareholders through profit maximization. Crowd funding is the funding of a company by selling small amounts of equity to many investors. It allows the small investor to be, in effect, a venture capitalist, and it essentially democratizes finance. A social impact bond operates over a fixed period of time but does not offer a fixed rate of return. Repayment to investors is contingent on the achievement of specified social outcomes. The idea is to let the free enterprise system solve a social or even an environmental problem. The bond proceeds are used to create a financial market that will encourage and incentivize private vendors to find practical solutions for social concerns.The author also proposes an investment vehicle called “trills” that could be a useful innovation. A trill is a promise to pay an investor a share of a nation’s GDP. A government would sell shares of its GDP to the public and make the shares marketable. The price of a trill would fluctuate in the market on the basis of the anticipated GDP of the issuing country. The concept is similar to a country issuing equity instead of debt, and trill issuance would be a type of risk management for the country. The author suggests that the U.S. government could begin to solve the budget crisis today by refinancing maturing debt into trills.