On Sept. 26, the Political Economy Project — a professor-led interdisciplinary organization that hosts talks on economics, politics and philosophy — featured economics professor Meir Kohn for a lecture titled, “Is Finance Theft?” The talk, which was attended by approximately 80 community members, was the first of six lectures in a year-long PEP series called “Understanding the Economy.”
In his lecture, Kohn spoke about the financial sector’s positive contributions to the economy — such as increasing the availability and reliability of capital. He also addressed criticisms of “financialization,” or the rapid growth of the finance sector and related jobs. While Kohn noted that “antipathy to finance” has been “longstanding,” he emphasized the potential economic benefits.
“[Finance is] a lot of rich people taking a lot of money for doing nothing — that’s not generally very popular,” he said. “ … What I want to do is to persuade you that they’re wrong and [understanding] what finance does is a good place to start.”
In his lecture, Kohn defined finance as the facilitation of exchange by controlling the flow of money and investments.
“Finance allocates savings to the most productive investments,” he said. “They go to the most worthy and highest return investments because they can offer a higher return.”
Financial markets act as an intermediary between the two parties in a contract to ensure that promises are upheld, Kohn explained. According to Kohn, there are two types of finance: relationship financing and financing by strangers. The latter must be mediated to ensure repayment.
“When you’re providing financing, you’re giving money in exchange for promises,” Kohn said. “You can see the problem. Promises aren’t always kept.”
Those issues can be mitigated by a reliable intermediary, according to Kohn.
Finance and finance facilitation give providers another benefit: liquidity. The providers’ cash on hand then grants accessibility to their invested savings.
“If you’re going to provide financing to somebody, they need to have the money for a known period of time,” Kohn said. “Often, it’s a fairly long period of time and sometimes it’s shorter, but they need to know how long they have the money for and when they have to repay it.”
Kohn added that financing also allows “borrowers” to afford services, such as housing and higher education, through mortgages and student loans. Meanwhile, “providers” invest their money by granting these loans. Since liquidity incentivizes acting as a provider, more people will opt to finance with strangers, Kohn said.
Through this provision of capital, Kohn argues, firms receive the funding needed for development and implementation into society. Without funding, society cannot benefit from innovation, Kohn said.
According to Kohn, China was unable to finance the use of new technology during the 19th century because of high interest rates. As a result, this hindered progress in harnessing the power of the Industrial Revolution to modernize the economy, Kohn said.
“[Technology] starts to affect the economy when people actually adopt the technology and, as we’ve just seen, adopting the technology generally involves financing,” Kohn said.
Venture capital — a more modern application of financing, in which the provider receives equity in exchange for capital — has been integral to the growth of new technology conglomerates, Kohn added.
Xintian Wang, an exchange student from University College London, said she “really liked” the opportunity to hear from Kohn because the lecture challenged her preexisting notions about the financial sector.
“I have this kind of unfair cynical attitude toward how the finance sector operates, and I wanted to hear the other side,” Wang said. “What are the counterarguments to this and am I right to think this way?”
Jiayuan Kong, another exchange student from UCL, expressed concerns about the impact of modern innovation, such as artificial intelligence, on finance.
“I think nowadays things have changed,” she said.
According to PEP director Henry Clark, the PEP series aims to “provide a synoptic view” of finance and the economy. Other events will include a conversation with former Federal Reserve Chairman Lawrence Summers on Oct. 21 and a “Marriage and the Economy” lecture with economist Melissa Kearney.
“[Finance is] a topic that is naturally misunderstood,” Clark said. “We look at finance casually, and we think people are making lots of money for doing essentially nothing.”
Kohn will also deliver the second lecture in the series, titled “There is No Malthusian Trap (the Trap is Predation),” on Oct. 17.
