The Fruits of Civilization (26-10) Finance

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Before continuing economic history, an interlude to introduce the basic concepts behind finance, and so better understand the roots of the economic malaise in which developed economies stewed from 2008 for several years, and which still affect economic dynamics.

Finance

A business that makes nothing but money is a poor kind of business. ~ Henry Ford in 1914

Industrialization brought the need for capital to the fore. In the century and a half since, making money from money has grown into an industry that dominates developed economies. From a historical perspective, it is as if the cart is the force before the horse.

The business of corporate America is no longer business – it is finance. ~ American economic analyst Rana Foroohar

An intertwined network of financial institutions evolved with the expansion of transnational liquidity. Now a global money parade seeks speculative returns instead of investment in real assets. The quick return is prized, the steady cash stream spurned.

Excess liquidity must be invested somewhere. ~ Jack Rasmus

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Finance evolved from accounting millennia ago: the tracking of goods and other assets, as well as liabilities. The most basic accounting equation, commonly called a balance sheet, balances a ledger of positive and negative economic value.

Assets = Liabilities + Capital

This equation is the basis of double-entry bookkeeping. For every transaction, total credits equal total debits.

Capital is to economics what energy is to physics: the means for productivity. This is the broad thrust of the term capital as used by economists.

For individuals, capital equates to wealth (net worth).

For businesses, capital equals owners’ equity: the owners’ stake in an enterprise. In dissolution, capital amounts to the leftovers after liabilities have been taken care of.

A liability is an obligation or debt that an economic entity has to an outsider. A liability in the present arose from a past event and is expected to be settled in the future by an economic outflow. Liabilities represent a creditor’s claim on a business’ assets.

An asset is an economic resource: anything, tangible or not, owned or controlled that has a positive economic value.

An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. ~ International Accounting Standards Board

Intangible assets are nonphysical resources which provide an advantage in doing business. Goodwill/reputation and intellectual property, such as patents, trademarks, and copyrights, may be intangible assets.

Intangible assets are invariably illiquid: there is no quick or easy way to redeem their value. In recent years, investors have increasingly grown skeptical of intangible assets as being worth much.

Employees, which are arguably the most valuable resource any company has, are not considered assets, as only insufficient control can be applied to corporate serfs.