Why are you working in finance? It’s the kind of question you might be asked if you interview for a new job. It’s also the sort of question you might be asked by an inquiring and argumentative relative who equates finance with all that’s wrong with the world and has drunk more than two glasses of wine.
What do you say? You can go for the blunt option (“The money”). Or, you can go for the weirdly evangelical HSBC graduate recruitment video option (“I am captain and I was put here to lead, in everything we do I make sure we succeed. When it comes to one on one, I get the job done, I create solutions to the problems everyone else is running frum (sic). Late night negotiator, ambition accelerator, you can tall me the tailor: I connect people to opportunities…”)
Or you can just baffle them with facts, and hope they return to their wine.
If you choose the latter, Money Changes Everything, by William N. Goetzmann at Yale University will furnish you all the facts you need. Published earlier this year, it comprises 584 pages on the development of modern finance, along with an explanation of why the world we live in would be very different without it.
Assuming you don’t want to spend Christmas reading all 584 pages, here’s the deeply summarized version. It should be sufficient to deflect further interrogation.
1. Finance has been integral to human development for the past 5,000 years
This is Goetzmann’s main thesis, and he spends most of his 584 pages trying to substantiate it. For example, he says some of the early evidence for financial systems comes from the third Ur dynasty of around 1,200 BCE: an ancient clay tablet contains a financial model which allowed livestock owners to forecast potential growth in the size of their herds, and the profits that would result.
Finance is nothing new, and without it Goetzmann says explorers would never have traveled the world and complex societies would never have emerged. Financial crashes are nothing new either – there was a financial crisis in 33AD when Roman property prices crashed and the Roman treasury had to step in.
Without finance, Goetzmann says there would never have been world exploration, or the development of complex societies and long distance trade.
2. Finance is an enabler of time travel
More freakily, Goetzmann argues that finance changed the way human beings operated in time. “It moves economic value forward and backward through time,” he says. ” Think about a mortgage. It converts a homebuyer’s promise of thirty years of future monthly payments into a lump sum of money in the present. A mortgage is so commonplace that it is hard to fully appreciate it. A homebuyer can suddenly conjure up a fortune he or she does not have.
“In essence, financial technology is a time machine we have built ourselves. It can’t move people through time, but it can move their money. As a result, it alters the economic position of our current and future selves.”
Interest is one of the most important components of finance, says Goetzmann: it incentivizes lending and facilitates debt. Without debt, a farmer who discovered his store of food was spoiled a month before the harvest might starve. Thanks to debt, he can take out a loan and feed himself: “It substitutes for the spoiled grain— it has the effect of moving the future harvest to the present.”
3. Finance has opened our minds
Because finance has allowed humanity to move between present and future, Goetzmann says it’s reprogrammed human brains: “Finance has stretched the ability of humans to imagine and calculate the future. It has also demanded a deeper understanding and quantification of the past, because history is the fundamental basis for making future predictions. Finance has increasingly made us creatures of time. Financial architecture exists in— and shapes— the possibilities of the temporal dimension.”
4. Finance reallocates risk and capital
Finance enables individuals and corporations to handle risk. Ultimately, it’s about probability: “The mathematics of probability can be thought of as an organized approach to the unknown. Finance deals with the unknown future.”
Finance allows insurance against risky events, it also makes, “a different kind of future possible,” by matching up capital with entrepreneurs to generate higher future value.
5. Finance stops us living in a world where only the independently wealthy can be entrepreneurs
Without finance, only rich people could start businesses. “Finance removes the prerequisite of wealth from entrepreneurship. It feeds capital to potentially productive projects regardless of whether or not the entrepreneur is rich. In this sense, finance broadly disseminates the economic advantages of wealth,” says Goetzmann.
6. Without finance, there would be no cities
A bartering economy based upon mutual favours is fine in small communities where people lend tools and time in the expectation of, “reciprocity in the future.” It doesn’t work in larger communities and cities. Nor does it work in an environment where everyone has a different profession and different skills: here. bartering needs to be formalized in the form of money and finance, says Goetzmann. Without finance, he says we’d all be living in rural hamlets.
7. Without finance, you wouldn’t have a pension
Lastly, and most importantly, without finance it wouldn’t be possible to make the inter-temporal calculations necessary for pension provisions. By facilitating universal provision for an uncertain future, Goetzmann says finance allowed human populations to grow exponentially. – The danger here being that humanity could become the victim of its own success.