All money is a matter of belief.— Adam Smith
To many, finance is a nebulous term. It’s a term that gets thrown around quite often in our vernacular and it is something most of us take for granted. But what is finance? And more importantly, why should one care about finance? I decided to start this blog because I believe these are questions that are worthy of consideration. This inaugural post is about addressing these questions at a high level and establishing a foundation for this blog. Inevitably, all questions in finance, regardless of technicality, revert to these fundamental questions. Therefore, this post will serve as the point of departure for a myriad of interrelated topics and discussions.
So, what is finance? Let’s begin with a literal definition – finance means to “make an end.” This definition implies that all finance is supposed to serve the function of settling agreements. Essentially, finance can be thought of as a vehicle used for the purpose of transferring resources from one actor to another. How is this done? The simplest way to describe a financial system is that it serves as an intermediary for the transfer of purchasing power, and these transfers take place through transactions. More specifically, these transfers determine the allocation of assets and liabilities over space and time – often under conditions of risk and uncertainty. Put more directly, finance is the art and science of money management.
Why is this important? It’s important because finance permeates – it has an impact at the personal level, at the business level, at the state level, the national level, and most importantly, the global level. Finance is in many ways, the tie that binds. At levels small and large, the ability to effectively manage and deploy capital is essential because this is the means by which we facilitate material outcomes. Moreover, the financial system in which we are all participants is increasingly globally integrated. The implication of this is that we are all connected in unprecedented ways – personally, financially, and politically.
Ultimately, the point I intend to make here is that finance is a far-reaching concept with tangible impacts. For better or worse, we are all participants in a global financial system that dictates certain elements of our lives. The less one knows about this system, the more likely one is to be swept up in it. Conversely, the more one knows about the system, the more capable one is to act within it.