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The world of finance and its contribution to our evolution as a society

Posted by SpringLivingMedellin on 26 de October de 2023

The role of finance in human history is a topic that often generates debate and controversy. Professor William N. Goetzman of the Yale School of Management offers an intriguing perspective in his book “Money Changes Everything: How Finance Made Civilization Possible”. According to his thesis, finance is the engine that has driven the advancement of civilization and contributed to the current state of society.

But how is it possible for anyone to make this claim when we often associate finance with problems such as real estate bubbles and other economic challenges? Isn’t finance often perceived as a tool of capitalist exploitation and bankers as villains? Let’s see how Goetzman approaches this question from a historical perspective.

The Foundations of Civilization

To understand the importance of finance in civilization, it is crucial to go back to the beginnings of recorded history. Traditionally, history is considered to begin with writing, marking the end of prehistory. Writing is a fundamental invention that allowed humankind to transmit information across time and space, leading to cumulative knowledge.

One of the earliest recorded writing systems was found in the Near East, known as protocuneiform writing. This system arose due to the accounting needs of the religious hierarchy. Labor specialization and the distribution of resources required a method of accounting. Writing made it possible to calculate how much food was needed to feed the population and how to distribute labor, which contributed to the growth of cities.

Currency and the Birth of Economics

Greek cities, among other civilizations, began to mint money, a milestone that revolutionized economic exchanges. Coinage facilitated trade and allowed the payment of wages to workers. Maritime contracts and specialized courts emerged that valued risk as a factor to be compensated, recognizing that certain activities were more dangerous and therefore required greater reward.

In China, Guan Zhong is identified as one of the earliest economists. China also minted currency and developed theories about its issuance and use in times of war. Marco Polo, in his travels from China, mentions the use of paper currency, which was implemented around 1100 AD. Paper money was accepted as a medium of exchange, even by those who could neither read nor write, thanks to images representing its value. However, over-issuance eventually led to hyperinflation and its disuse around 1425.

Financial Innovations in Venice

In Marco Polo’s hometown of Venice, bonds were invented to finance a battle against Constantinople in 1171. The Venetian government hoped to repay the borrowed money with the proceeds of the war, but they were defeated, showing the interconnection between finance and significant historical events.

In summary, Goetzman’s insight invites us to consider that finance has been an essential component in the advancement of civilization by facilitating economic organization and progress throughout history. Although we often associate finance with contemporary challenges, its influence on the evolution of humanity is undeniable.

Finance, often perceived as a field dominated by numbers and money, has a profound influence on the evolution of society. A telling example of this can be found in the emergence of bonds, which revolutionized the relationship between people and savings. Instead of paying them back, issuers paid 6% interest on the bonds, which made them a popular form of savings. This allowed people, for example, to buy bonds for a child who was unable to work and ensure a future income. This innovation spread quickly, making public debt a normal part of the economy.

In Toulouse, France, during the years 1372 and 1373, the first capitalist companies were created by merging several mills. These companies, which provided detailed information to shareholders on grain prices, profits and dividends, had a lasting impact. As they grew, they developed structures to address trust issues, such as differentiating between the CEO and the board of directors.

The history of finance is also marked by economic bubbles, which often lead to a negative perception of the financial field. The famous “tulip bubble” in the Netherlands is an early example. Despite its extravagance, this bubble also saw the emergence of financial derivatives, indicating a greater financial sophistication of the time.

Subsequently, the South Sea bubbles and the Great Depression arose, which increased distrust of finance. However, in contrast to the negative view, the Marquis de Condorcet presented an alternative in the form of a pension plan. This plan allowed people to contribute a certain amount and receive a guaranteed benefit in retirement, as opposed to Malthus’ theory, which predicted an increase in population over time.

Professor William N. Goetzman of the Yale School of Management argues that finance has had a positive impact on humanity throughout history. In his opinion, finance has been as beneficial as writing and mathematics, as it has facilitated economic organization and the progress of society. Finance, seen from this perspective, is not simply an instrument of wealth accumulation, but an engine of historical change that has influenced people’s lives in ways that often go unnoticed.

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