Tuesday 27 March 2012 7:16 pm

Don’t let banker-bashing hide the beauty and importance of finance

IN SPITE of all the ugly criticism that the financial community has been getting since the financial crisis began in 2007, there is something beautiful about finance. It can charm those who see beauty in abstraction or who are impressed by the complex systems that make our civilisation work. When I teach introductory finance to young people here at Yale University, as I have been for 25 years, I tell the students that the sense of beauty is not to be neglected when choosing a career. One ought to live a life genuinely involved with one’s economic function, and so the aesthetics matter. Mathematical intricacies are part of the beauty of finance. There is a natural aesthetic in systematisation and generalisation of our quantitative intuition, in the finality of proofs and their revelation of a transcendent reality. Mathematicians also tend often to find themselves interested in finance. It is a curious historical fact that Thales of Miletus, the man often acclaimed as the world’s first real mathematician, c.624-c.547 BC, was so interested. Aristotle described him as a successful speculator in options on olive presses. Aristotle used the example of Thales’ financial dealings as a proof that “philosophers can easily be rich if they like.” But it also illustrates that people who find finance interesting are not necessarily greedily preoccupied with riches, as common discourse sometimes seems to suggest. Some people ask, why have so many young people recently been going into finance? Wouldn’t society be better served if instead they went into science or engineering? But finance is a branch of science and engineering, broadly interpreted. I tell my students that not only do aesthetics matter, but purpose in one’s economic life matters. Scientists and engineers have to reflect not only on the beauty of their fields but how their knowledge is applied, and what it does for humanity. When they think about applying their knowledge to making big things happen for people, they too are often drawn to some involvement in finance. I have my own etymology for the word finance. It is commonly accepted that it derives from the Latin word finis meaning end, and it is said that the transformation of finis to finance comes ultimately from the use of that Latin word to represent the completion or fulfilment of financial contracts. As the Latin word finis was also used metaphorically to mean goal or purpose, just as is the word end in modern English, I like to think of finance as the field of achieving our goals. It is all about financing activities, making the right things happen. We should not lose sight, in the current financial-crisis-induced economic slump, that the advent of financial capitalism around most of the world in recent decades has brought an unprecedented advance of civilisation. Progress in finance is essential to the history of our times that will one day be written, and will take more prominence than many of the trivial things that occupy our attention now. The role of financial dealings in this economic advance is not always clear, for it is mostly invisible. Especially invisible to most people is the role that complex financial contracts, like futures or swaps or collateralised debt obligations, play in that advance. One needs an appreciation of the mathematics of finance to see these contracts as something other than gambling vehicles. Risk-taking is essential to economic progress, and the mathematics of finance shows how risk can be transformed and moved around and repackaged. Only those who have studied finance will appreciate that well. There is still work to do in making finance into a more effective tool for advancing our fundamental goals. Finance needs to be democratised, to serve all the people more effectively than it has been. It needs to be humanised, so that it respects human values, and human foibles, in a grander design for society. Financial innovations, from practitioners, self regulatory organisations and government regulators, are still needed. Young people who feel a moral obligation to exert leadership for positive good in society should well consider finance as a field to enter now. It puts them on the cutting edge where human activities are moulded and directed, it gets them involved in the minutiae of activities that are privately valued, but often little talked about in most public discourse, and in opportunities to improve these activities. And there is real beauty in doing that. Robert J. Shiller is the Arthur M. Okun professor of economics at Yale. His new book Finance and the Good Society is published by Princeton University Press in April and videos of his complete financial markets course are free to the public at http://oyc.yale.edu/economics/shiller

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