Casinos and government sponsored lotteries are selling hope, only. But financial services provide real benefits. Today I want to talk about those benefits, apart from the most obvious one, namely to facilitate payments between all members of a society.
Resource Allocation
The financial service industry allows us to move resources along a time line. Banks do this by selling investment products and by providing funds for those, who can use them productively. In one sentence: help us to use economic resources where they serve us best.
Humans cannot exist without moving resources through time. Every child needs to grow and learn before creating value and earning income. Thus the generic provider of financial services is the family. Parents care for their children and hope to get in return care when they are old.
Handling Cycles
Financial Service companies help us to allocate resources as needed along economic cycles. One example is a life insurance company. You pay a small amount every month for a very long time. In exchange we receive monthly payments after retiring. We use financial services to smooth out other types of economic cycles as well.
Examples are:
- yearly seasons
- product life cycles
- economic cycles of boom and bust
Every economic cycle contains a time to invest and another period to profit. Financial services let us keep resources for later use and allow us to focus your resources where they promise best results.
How is this done? People are born and die, new projects are started and concluded every single day. Some produce currently more resources than they consume. This happens most often in the middle of a life cycle. Others need a current net input of resources. The results can be smoothed by connecting people and projects in different phases.
Speculation
Seasonal cycles and boom/bust cycles of the economy need another type of financial services, the accumulation of tangible goods. For example surplus farm products are stored in summer and autumn. We eat them in winter and spring. Almost no fresh food grows in Europe in January, but hungry mouths are still around.
The Bible describes an archetypical economic boom and bust cycle: The seven fat and the seven meager years, managed by Joseph who stored food in warehouses. The ugly word for his behaviour is “speculation.” But people do not hate the food provided by a person with foresight. In truth they hate their own myopia, which can be cured at times using services provided by speculators, although for a hefty price.