This in turn contributes to widespread, and probably not entirely accidental, public ignorance of and alienation from the financial industry. Ignorance and alienation that was useful enough for motivating the Occupy movement, but which ultimately leaves people mystified by finance. This mystification only serves to cement the power of financiers, because even their most vocal critics and most dependant customers (often enough the same people) do not have a good understanding of what financiers do, or even what finance really is. One sees this reflected in discourse about "complex financial instruments" like derivatives and credit default swaps that "almost no one really understands." This despite the fact that futures and options (the most common kind of derivatives) as well the infamous credit default swaps are actually relatively straightforward financial instruments, even if their specific contractual details can become somewhat technical.
In an interview last year, Robert Schiller (recent winner of the economics non-Nobel prize), said the following in an interview:
“When you think ‘finance’, most people think ‘make money’, ‘get rich’, you should instead think ‘financing activities’, things that people do together that are important to them, achieving goals that are shared by groups of people, financing activities is what it is all about. And the underlying problem is that just about anything that we think is important to do can’t be done by one person. You needs groups of people and you need resources, various things that are produced in other countries that would be inputs to your activities. And the organization generally has to last for years and years to achieve the goal. So it has to have some kind of continuity of support from people and resources, and that support is called ‘financing’; so that is what it is all about.”This illustrates well the intended function of the financial industry to wider society, but it also, importantly, illustrates the wide variety of forms finance can take. As Schiller suggests, almost anything worth doing will require many different quantities and qualities of resources, often enough more resources than the people who would do it have at that particular moment, let alone what they might need in an unforseen eventuality. Fortunately, at that same time there are probably people somewhere with more resources than they need for what they wish to pursue then. If those in the second group could lend their surplus to those in the first group and receive a cut, everyone could be better off (assuming the activities are as successful as its participants imagine, and no one unexpectedly comes to need their resources back early).
Of course, it is rarely so simple that the resources are simply transferred and, hopefully, eventually returned. More likely in a modern economy is that those with resources to spare do not know those short of resources let alone trust them with potentially large amounts of their wealth. Even if they did, they may very well lack the time or knowledge to realistically assess whether or not the proposed projects are likely to be worth the risk and temporary sacrifice. Enter the role of financiers, individuals who make it their living to find those with extra resources and borrow from them and lend these resources to those who need them. Since they intend on a share of the profits and support many ventures regularly, they can spend the time and money necessary to investigate opportunities and decide if they are worth the time and the risk. They pay those they borrow from and charge those to whom they lend. The (hopefully positive) difference or "spread" pays the costs of their searching.
I want to be careful not to overstate the point and be precisely clear about what I am saying; accordingly I think it is important to emphasize two caveats. Firstly, there are many possible institutions that can be set up to do this, and there really is no reason to think that the financial industry we have today is necessarily the most effective or desirable way of achieving this end. Considering the recent financial crisis, its economic aftermath, and that little seems to have changed in response, I think it is hardly unreasonable to critically examine whether or not our social-financial machinery is really adequate, while remaining conscious that there are reasons for its existence beyond mere greed.
Secondly, despite its media and national accounting prominence, the investment of surplus resources into financial instruments will be amongst the last places many will find it reasonable to direct accumulated resources. What do I mean by this?
If surplus resources are taken to mean any resources above ones present level of consumption, then is nearly tautological that the rich will tend to have more resources and therefore have more available to invest, unless consumption increases one to one with income (it doesn't). More importantly, remember that the goal of finance is to redistribute extra resources between parties that do not necessarily know, care about, or trust each other. There are plenty of things of things that individuals, both alone and organized with others, will find reasonable to do with extra resources, before they see fit to make them available to strangers, even if the institutions set up to facilitate this are adequate. For example, in Poor Economics Abhijit Banerjee and Esther Duflo suggest that one of the most important ways that poor people save is spending extra time and money on DIY home improvements and construction. Considering that many of the individuals they discuss actually start living in their houses before they are completely built, it is simply inaccurate to suggest that their low rates of financial savings are because of meer myopia (or, to use more polite technical terminology, a high time-discount rate). While they may lack surpluses upon surpluses of resources to invest in many financial savings instruments; this does not mean that they are not making considerable tradeoffs of time and money in the present in order to reap the returns later, i.e. saving. Education is another important example of this kind of non-financial investment.
These investments are too often ignored when tabulating national accounts. If an individual is lucky their actual money spent on tools and materials may, at least, be counted as expenditure on consumer durables, even if its classification as "consumption" is questionable. The heart of the problem is that saving via financial instruments, is not the same thing as saving, i.e. making investments now for future payoffs. It is not entirely untrue to say that financial institutions help people allocate their savings, but it is important to understand that they represent a much larger share of some peoples savings than others, in particular those people lucky enough to have enough wealth to have already maxed out the savings options in their own immediate environment. While having an adequately developed financial infrastructure is useful, it is only relevant to a certain lucky few.
We must keep all of this in mind when we seek to analyze, develop, and organize social economies.
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