Roles of Finances
Finance plays many diverse roles in the human life. Let's see at least the most important ones.
The most obvious role of money is to serve as a universal equivalent in exchanging the goods and services.
This role is not the only one, however. Money is the information about the equivalents of exchange, about the comparative role of various values in society. (This idea was “borrowed” from Boris Zlotin, my TRIZ teacher). Interestingly, these “relative courses of values” are most often established spontaneously, i.e. not by “will” and conscious effort, but rather by some objective processes. Back in the Soviet times, there was no officially acknowledged inflation in the country. However, one economist found a universal indicator of inflation: a glass of sunflower seeds. Sunflower seeds were the product with an established demand and market. The technology for growing, harvesting and roasting has been well-developed. In short, all factors were within tight tolerances, even the price was the same across the entire Soviet Union: 10 kopeks (pennies) for a big glass, 5 pennies for a small glass. Only the size of the measuring glass changes. The smaller the glass was, the less the same five-penny coin value was in the country!
Another, again informational, role of money is a “credibility”. The English word credit means trust. How much can you trust this or that person? How much can you trust the promises of a company? It turned out that trust has a fairly clear quantitative measure, the monetary one: how much resources a society can trust to a person or company to implement their plans. Therefore, the stock exchange is such a reliable indicator of public confidence in a particular industry or company, therefore the “credit account” clearly separates those who can be trusted from those who cannot.
Back in 90-s I read an article about Bill Clinton’s attempt to reform the US tax system. The author wrote that the tax system reflects “what is desirable and what is not for society”, and accordingly, taxes encourage or punish various types of activities of individuals and organizations. Hence, the tax system in a fairly complex society must be commensurately complex, otherwise the society will lose a very strong, but “soft” regulatory mechanism. Here is another, imperceptible, but no less important informational role of financial systems: to make it clear to citizens and organizations which types of activities the government considers useful or harmful for society.
True, people impose on money another information function, "an indicator of status in society." I will not argue about the correctness and reliability of this information, I just note that such a function is performed by universal equivalent of exchange.
On the other hand, it is noted that the financial system in any more or less developed society is becoming more and more unstable, i.e. on the one hand, more mobile and with great capabilities, but, on the other hand, more sensitive to dangerous pre-crisis fluctuations that cannot be detected by any other “radars”.
If we admit that a systemic crisis, unlike the other two types of crisis, starts with the gradual loss of consumers' subconscious confidence in the capabilities of the old paradigm to further satisfy their needs better and better, it is not surprising that the confidence indicator is the first to respond to this growing distrust. Finance, as we saw, serves as such confidence indicator. And therefore, every time a systemic crisis approaches it is this financial (economic) system is the first to react and give everyone a danger signal. As a result, it seems to everyone that every systemic crisis has an economic nature. As you could see, this is nothing else but a fallacy when the “visible” part of crisis is taken for its root cause.
The instability of the financial system lies, for example, in the fact that banks, while issuing loans, are not required to keep in their vaults the full amount to cover the debt, only 10%. When social mechanisms work fine, this is enough for stability of the system. Moreover, this approach allows people to invest in growth and development much more than the amount of cash in bank vaults. On the other hand, with the slightest imperceptible failure in social mechanisms, this unstable model begins to fail first, thereby giving an alarm. It is the same with other economic mechanisms: just like the immunity system in our body at the slightest danger alarms us with pain, temperature, etc., so the economic mechanisms are responsive to fluctuations in consumer confidence in a particular industry.
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