Last week I made a bold claim that the US economy was skewed to favor bankers. That is a very broad statement, and I wanted to explain what I meant by that. I am describing an approach where I look at the financial world from a big picture perspective. So today we are going to talk about the big picture and how it impacts your financial decisions. Watch now!
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My approach to money always starts with theoretical finance. Theoretical Finance is an approach to money that defines math equations that underlie all transactions. If you wanted to define business, you can boil business activities down to a handful of math equations. Then you can take those equations and use them to create pricing models or decision making tools. The goal is to understand and define how money works. The more accurate your equations are, the more effective you are going to be in business.
So that is my approach to this channel. I want to figure out how money works and how we can get better with it.
If that is our goal, you have to look at the big picture perspective. When you look at how humanity has developed through all of time there has been many different types of economic systems that have developed. The US economy is just one type of economic system, and it is a very specific type. When you line up all these different economic systems there is a wide range of different options, and the US is all the way over on one side. Now I am not saying the US economy is good or bad. Personally I think it is pretty good. But the problem remains, that we have these math equations that not only need to work to explain the US economy, but can also provide commentary on all these other kinds of economic structures. The goal is to understand how money works. Why do people make transactions?
Let me give you one example of a different type of economy that exists in the world today. This economy is called the gift economy. You will find this economy in very remote isolated locations that have remained separate from the global economy. Specifically, this is located on islands in the Pacific Ocean in places like Papua New Guinea. In these places, the whole economic system is based on your ability to give things away. Your status, power, and wealth is determined by how much you can give to other people. That is completely different from the US economy. The US economy is based on the accumulation of profit.
Now you might argue the gift economy is an isolated incident, but that is not true. You can go throughout history and find a lot of examples of gift economies. For instance, Native American economies before the United States were also gift economies. You became chief of the tribe based on your ability to support the other tribe members. It was a gift economy.
The reason the US economy is based on profit, is because of history. People originally came to the US in search of profit. When you look at the original settlements like Jamestown, you find that Jamestown was a corporation with shares of stock. The point of Jamestown, was that there was gold in America, and Jamestown was there to make a profit for shareholders. Now it turns out there was no gold, but there was tobacco and Jamestown became a huge success. The US economy has developed around the idea of accumulating profit.
So when you look at economic history you have vastly different economic systems: from the gift economy to the profit driven economy and everything in between. How do you look at that and explain how money works? I am going to give you my recommendation. Just so that you are aware, what I am about to say is very controversial in Theoretical Finance in the academic world. Productivity is more important than profit. Productivity generates wealth in BOTH the gift economy and the profit driven economy. The reason this is controversial, is because bankers hate this idea, because it means less profit for them. This is also the reason why I get so worked up over financial metrics like Earnings Per Share. Because Earnings Per Share only considers profit, which is only part of the story. Productivity metrics make it easier to focus on longer term time horizons.
Let us bring this back to you today as a business leader. In the last video we talked about the example of corporate giving. Corporate giving is a very difficult decision to make in the framework of a profit driven economy. We are going to do a thought experiment today. Do me a favor and think about your business today, and forget about profit. Don’t freak out. This is just a temporary thing. Image that your job as a business person is to increase your status by giving. This includes giving to your employees and giving to your community. You are a focus point of productivity that generates wealth for your stakeholders. Do you see how this change in perspective can impact your decision on corporate giving? My point is that knowledge of history, anthropology, and theoretical finance can help you have a more nuanced understanding of your role as a business person and help you make better decisions.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.