Social engineering, again.

The New Financial Order: Risk in the Twenty-First Century By Robert J. Shiller Princeton University Pres US$29.95

Money as a unit of exchange has failed, says Robert J. Shiller, a professor of economics at Yale University. Shiller bases his argument on volatility of money, its persistent cycles of inflation and deflation. As an example, he points to a curious fact. A computer search of English-language periodicals during the 20th century finds that the word "inflation" was the most frequently used economic term. In those same periodicals, the word "inflation" appeared more times than "sex."

In his previous best seller, Irrational Exuberance, published in the spring of 2000, Shiller argued that the public obsession with stock market investments was causing significant volatility in the financial system. The burst of the Internet bubble and the subsequent decline in stock values, as well as financial planning based on the stock market, gave truth to his prophecy. The stock market, Shiller says in his new book, is not for everyone. Very few become rich on Wall Street, he writes, and it is irrational to think that stocks will always go up.

Shiller's vision of a new financial order, however, proposes a contradictory expansion of markets to reduce the economic risk that individuals and countries face. Shiller argues for a real revolution in the management of financial risk, through insurance. There are currently only a limited number of financial protections for risks such as poor health, loss of life and disasters. Shiller believes such safeguards could be extended to cover risks such as the depreciation of property value, increases in unemployment or lower-than-expected incomes. Economic phenomena such as the impoverishment of the United States' inner cities since the 1970s, caused by the middle and upper class flight to the suburbs, might have been avoided with insurance against the loss of urban residential property value.

Shiller envisions a safer and more organized world in the future, one in which developing countries could over come external debt loads through contracts with wealthy nations based on gross domestic product, not growth expectations. Individuals could protect themselves from choosing the wrong career and personal assets would be shielded from a sudden increase in inflation. In the same way that life and health insurance notably improved the quality of life about 100 years ago, Shiller believes these new insurance products would improve the way in which we live.

Negotiated risk. Modern information technology would play a significant role in the establishment of Shiller's new financial order. Dizzying advances in technology would allow for the creation of global markets to negotiate risk from an individual level up to large corporations and countries. People would carry transponders that would send information about their everyday activity to be stored in "global risk information databases." Thanks to development in electronic coding, this information would be protected from unauthorized snoops. Informal economies and tax evasion could be eliminated.

Yet Shiller asks this rhetorical question. Do we want to live in this brave new world? Aside from the clear political and technical obstacles to successfully implement Shiller's plan, the author himself recognizes that the public may not wish to finance or even become part of the enhanced security model he proposes. Historically, people have shown a reluctance to pay for things like life insurance. Usually, people only buy life insurance once they begin to see it as an investment rather than as an added expense. In order to soften initial public resistance, the author suggests "psychological framing" or, effectively, indoctrination. "What we need" Shiller writes, "might be called human financial engineering." Mental manipulations, however, added to electronic monitoring of personal activity, are nothing more than social engineering and police supervision of the failed utopias of the past.

COMMENTS? WRITE: [e-mail]

Excerpt from The New Financial Order:

"The underground economy, the shadow economy where transactions are informal and made in cash to evade taxes, has apparently been growing in many countries in the last half century. But there is reason to expect that it will decline in the future.

The new world of digital information networks can make it increasingly difficult for people to hide, dissemble, cheat, and evade. The amount of information available continues to grow, and it is increasingly susceptible to computer analysis by the computerized surveillance of authorities."