Welcome to my new blog about finance and economics for everyday life. In this blog you will find a combination of fun theory and practical application. I will write about how people can improve their individual financial situation and I will talk about some of the interesting political implications behind finance and economics. Whenever I address any subject, I like to be thorough and start at the beginning. I will create a foundation that I can use to build upon in later posts. So here we go.
What is finance? Finance is the management of money. What is money? It is a medium of exchange.
Would a lonely Adam in the Garden of Eden have any need for the concept of finance? No, because he would have no one with whom to exchange goods. Would Adam and Eve together have any need for the concept of finance? The answer is still no because Adam and Eve have no reason to exchange anything. Neither would want anything the other has since they both can get what they want with no effort in the Garden of Eden.
What would make Adam and Eve want to exchange? If they can get what they want with less effort by exchanging than if they tried to obtain it alone. After Adam and Eve left the Garden of Eden, effort was required to obtain food and clothing. Let's say hypothetically that Eve was better at making clothes. And let's say that Adam was better at gathering food. If each specialized in what they are better at, they would have more than if they both obtained food and clothing independently.
Now would they need a concept of finance? Not yet— because they exchange and share goods directly. They have no use for money.
Why would two people want to use money when they exchange? To answer this question, we need more than 2 characters. Imagine that Adam and Eve have lots of children and all of them specialize in different activities and they exchange with each other. Abel specializes in raising sheep, Cain specializes in producing carrots, and Methuselah specializes in making tunics. What if Cain wants a tunic but Methuselah does not want carrots. Cain cannot directly exchange with him. For Cain to exchange, he would have to get Abel to trade sheep for carrots so that he can then exchange sheep for a tunic. If Abel does not want carrots then Cain will have to make his own tunic, or find a fourth person that wants carrots and simultaneously has something that Abel wants so that Cain could trade with Abel, get sheep, and then trade with Methuselah.
This exchange between multiple people is much easier through the use of money. All parties would be better off if they could agree to use something as a medium of exchange. Money greatly reduces the cost of trading.
Now do Adam and Eve and their posterity need a concept of finance? In a very simplistic way, yes. We all need to understand the basics of finance to live better lives. Finance today is much more complex than this rudimentary story. But, ignoring finance would be one of the most expensive mistakes of all.