Historically, financial activities have emerged at the same time as market activities. Silver trade has always been closely linked to its production and exchange. From the thirteenth century onwards, as commerce intensified, there were almost advances in modern finance.
In fact, can we imagine a business world without finance? Not everyone was able to adjust the risk they took to suit their financial instruments and risk taste.
Productive projects that were the real engines of economic growth would have to invest only their own savings. Suffice it to say that investment will be extremely limited and growth will be almost zero.
We can summarize the different functions of finance as follows:
- It is a wealth transfer function over time. It deprives itself of using some of the currency to purchase goods. Thus, a saver may choose to invest this currency in financial instruments.
– It is a risk management function. These are the risks that an individual actor in an operation takes to transfer wealth over time. Finance allows to reduce individual risks by dividing them and passing them on to other individuals. It makes it possible to resist risk less because the risk in question is less important to them. Finance allows everyone to choose the risk-return ratio that suits them.
- It is the function of collecting wealth in a pool. The scale allows a single individual to finance projects that would exceed his fortune. Even a very wealthy individual may prefer to diversify their investments in order to reduce risks.
- It is an information function. Some financial institutions, especially organized markets, produce publicly available information that is not only financial but also narrowly productive, useful for guiding individuals' choices.
– It is a mediation function. In other words, we can say the organization of the payment system. For all theoretical rigor, the settlement function can be separated from the financial functions. For some economists, this is highly desirable. However, this settlement function from the beginning has been taken over by financial players such as banks today. Through them, the mediation function is also closely linked to monetary creation and finance.
In short, the primary functions of finance are to collect scattered savings and allocate them to investment projects of greater scale and risk than individual wealth can reach.
This is to offer a wide variety of vehicles with savings and different profitability. Risk pairs thus organize a broad foreign exchange market for the risks inherent in any productive investment.
The development, diversification and specialization of financial activities thus become the main source of the increase in the wealth of nations.
Finance in itself is the site of a social division of labor and encourages it in other areas. Therefore, it undoubtedly contributes to the increase of wealth.
Economic life is divided into three levels: material civilization, economy (ie production) and capitalism (where financial activities are concentrated). A hierarchy is then established between the three, with each level drawing wealth from the level immediately below.
The prices of financial assets are purely subjective as long as they arise only from predictions and visions for the future.
These expectations can change suddenly, and prices can change with them. Crises periodically clean up the financial system.
They adjust the expectations of the actors according to the value of the securities they hold. Because their expectations always tend to be excessive.
The problem is that these crises spread to the rest of the economy rather than redistribute the cards among players in the financial markets.
It causes significant income transfers and hits people who really have nothing to do with all its might.
To understand the roots of the controversy it has spawned today, we must first start with a few key features of finance, and then point out how they are embodied in modern finance.
No financial asset is secure enough to guarantee the value of the amount of money it allows to receive in the future. Even a flat-rate U.S. Treasury buyer bears the risk of U.S. inflation.
So, any financial asset is a simple promise of future income. The owner should always try to assess the expected return and the risk associated with that expectation.
If it is rational, it should analyze the risk-return ratio of all securities offered in the markets. He should always ask himself if it is in his own interest, for example, if he would sell one of the securities he had to buy.
Of course, one can try to base the assessment of the expected return and risk of a title on the use of data presented in the past: company history, industry, country, economic world, etc.
Therefore, investors in financial markets are very eager for new information that can change their assessment of current assets. But its unpredictable part is absolutely irreducible.
The future value of a financial asset, strictly speaking, is always subject to an improbable, irreducible set of ultimate, macroeconomic and political uncertainties.
Their current value depends only on the expectations that actors form today with regard to their future value.