The science of finance

To finance is to advance means, to make oneself or others capable.

Too often, even a hard worker does not earn enough to support his or her family, has not really been trained, except by himself and some friends or colleagues, and has neither good tools nor safe working conditions .

Good wages, training, good equipment and safety impose costs that can not always be covered by previous revenues. So we have to advance funds. In other words, we have to finance our project. If we advance the funds ourselves, it is self-financing, if others bring their funds, it is external financing. The science of finance studies how human beings finance their projects.

The financing of a project can be conceived in real terms: what are the raw materials, the supplies, the labor force and the capital goods that must be advanced to launch the project, until its revenues are sufficient to cover its costs? It can also be conceived in monetary terms: what are the sums of money needed to buy these raw materials, these supplies and this labor force, and to rent or buy these capital goods?

In project :

The global financial system

Summary

We want to finance the most profitable projects. We must therefore be able to evaluate them beforehand. Evaluation of projects presents the most basic principles of economic and financial evaluation. It explains the dual origin of economic value, use value and exchange value, the creation of value by composition of projects, options, because it is perhaps the most important concept for economic evaluation, because our wealth is essentially a wealth of options, the net present value of certain and uncertain projects, and the economic value of the common order. The subject of project evaluation is further developed in a supplementary chapter (not yet written) devoted to risk assessment.

Inequalities in front of finance explains the origin of interest rates and other property income, which make the financial system very unequal, since it privileges the owners to the detriment of the less fortunate. Finance sometimes makes it possible to partially correct certain economic inequalities by offering means of entrepreneurship, but even so it remains profoundly inegalitarian.

It seems that to advance funds it is necessary to dispose of it in advance. But it is to count without the banking system capable of advancing funds that are created at the very moment they are loaned. It looks like counterfeit money, but it's very different, because money is created in exchange for promises of repayment. How can we create money from scratch? shows how the banking system works and why money creation is not necessarily an evil. Money can be created to meet the real investment needs and the ability of the economy to engage in profitable projects. A good project is a sufficient guarantee to legitimize the creation of the money that finances it.

To benefit from sustainable prosperity, economies must navigate between two pitfalls, too little investment, lack of private investors or of sufficient money creation, and too much investment, because of the exaggerated optimism of private investors or an excess of money creation. Financing the economy presents the basic knowledge that shows how to proceed, and why it is difficult. It emphasizes the importance of countercyclical monetary and fiscal policies. Paradoxically the state has to spend less when it earns more and it has to spend more when it earns less.

This book is translated from La science de la finance.