What are economics, markets,

finance, money?

 Economics and markets

The economy as an activity, inside a system

An economy (of a country for example) is a set of human and social activities
that are related
to the production, distribution, trade and consumption of goods
and services

An economy operates: in the frame of an economic system. The most known
ones are subsistence economy,  feudalism, corporatism, state economy and

We see that those systems evolved according to the times and places,
usually in parallel with:

Political systems

Technological evolutions (steam machines, shipping container, telecoms
    and computers had deep impacts on economic structures).


Economics as a science

Economics is a field of knowledge that studies how economies work.

Its research methods use as well historical analysis and statistics as
mathematical modeling and, on a small scale, polls and experimental tools.

As resources (*) are usually scarce compared to human needs and wishes,
economics focuses its investigationson identifying the choices  made by the
"economic agents" (**)
, and the consequences of those decisions

(*) natural resources, work, money, products, services...

(**) firms, consumers, investors, workers, communities and states.

Economics research methods and practical decision-making tools use
historical analysis, surveys, statistics, mathematical modeling and, on a small
scale, experimental tools.

Economics cannot be a fully predictive "hard science" as the economy is like
various complex dynamical systems, and even more those where human
reactions are implied and not always known in advance, a land of


The case of markets 

One of the important subfield of economic studies are markets.

Markets are places where economic players exchange
their goods, services and assets, not to forget more
personal valuables such as work and talents, in a given
quantity at a given price.

Here, economics tries to understand what criteria economic market players
use to make their decisions, how the market works and what are the economic

This is the field of microeconomics.

On the other hand, macroeconomics deals with the aggregates of an economic
zone (country...) or sector of activity: production, investment, consumption, i
nflation, foreign trade....

It deals also with the theories about their equilibrium and their evolution.

Finance and assets

Finance is a section of economics (as a science) and at the same time (as
an activity) a sector of the economy.

Instead of covering all goods and services it focuses on those considered as
, tradable or not.


Return vs. Risk

Finance studies and addresses the ways in which individuals, businesses
and organizations raise, allocate and use monetary resources over time,
taking into account the returns and risks entailed in their projects.
As a verb, "to finance" is to provide funds for this.

Finance includes:

  • The study of money (see below)

  • The study of other assets (securities, properties, loans, deposits, 
    commodities,  currencies...) and liabilities (they are assets of
    economic agents acting as counterpart),

  • Also the related operations and contracts (spot and future
    operations, derivatives) :
    see a succinct description of those
    financial instruments

  • The management and control of those assets / liabilities,

  • The origins and destinations of funds,

  • The returns and risks of funds and assets.

It can be divided into several subfields:

  • Market finance (financial markets and financial institutions),

  • Banking (deposits and loans)

  • Insurance (damages, health, pension, life...)

  • Corporate finance (investment, debt, cash management, results...),

  • Public finance (states and communities budgets),

  • Personal finance (portfolio, debts, income...).

What is "capital"? A stock? A stock market?

The notion of capital has largely evolved over time, since the day when "capita"
in Latin meant "head of cattle".

It is now at the same time:

The procurement and creation of means of production (not only
equipments) of goods and services

This is done by or for an organization, generally a firm, that accepts the
risk of its project.

Sometimes, but on a small scale, the direct ownership of those means
by private persons (small business),

But more and more often, their ownership of financial instruments,

Those "capital assets" are more and more diversified, and have become
easily tradable

on the   "capital market".

This is how capital ownership diffused / percolated in a much larger
population than just a "class".

As for the value of those assets it is based, not on their acquisition
cost, but on the perception of their future return and risk
of loss

Therefore, whatever the old visions of some classical economists,
      "Capital" is a notion that is defined better by looking forwards
       than backwards.

A consequence is that capital is not just "accumulation".

As society, economy and markets are dynamical system, liable
to frequent and often large upside and downside variations,
portions of capital can appear one day and disappear another
To see capital as a vested interest for eternity would be illusory.

Stock, (or share, equity) is the name of the financial instrument that is the
most representative of capital, as a portion of the ownership of a corporate

Some are publicly traded in stock markets, one of the types of capital markets.


Capital, capitalism an financialization

The diversification of financial instruments lead to some dissolving of
capital (equity and in some measure stable debt) in finance in general
(financialization), with less and less own capital (equity) or at least
stable funds, and more and more borrowed and volatile capital
(overleverage), and even monetary creation.

Although capitalist ethics is to take risks with one's own money, this
"capitalism without capital" tended to transfer the risk to other people
and even the whole society.

Those practices are now questioned in relation with the famous
"subprimecrisis", of which it was obviously the main factor.

The fashion is now (2008 - 2014) in reducing debt (deleveraging)
and transfer temporarily some of it and some financial risk) to the State.
After that "back to the State" phase comes a "back to (real) capital and
" one. Hoping it lasts!


Language confusions in economics:
      the example of value

Sometimes for ideological reasons, people, including commentators and economists,
tend to have anchoring and framing biases that make them confuse various notions,
which might be linked somewhat, but are far from being identical.

The fact that every school of thoughts added its own, usually narrow, approach,
makesit difficult to unravel the ball of strings

When it is no longer clear what we are talking about, when definitions are
mixed up, no wonder that reasoning is perturbed and that there is a lot of
conflicts between various schools of thoughts.

The example of value

Confusions are frequent about what is value.

Value is essentially an estimate of
the potential or desirable price.

That estimate is done:

Either in a subjective way, by any person according to its expectations
   or even its wishes,

Or in a theoretical way ("fair" price, "intrinsic" value) by analysts using
   specific standards

That makes already several different notions. But also, value is often confused

Objective value.

Price (market value or, in some cases, administrative

As it is usually publicly known (except when a black market exists)
it is the most objective data the reality that can be seen.

It depends on how well the market works or the administration
It can also be influenced by irrational behaviors.
But it keeps being the reality.

Subjective value.

Utility or ophelimity (economic satisfaction),

It is a personal value that somebody estimates or feels according to

its own perceptions, needs, preferences and possibilities).

Usage value, a kind of utility extended to the whole population, based
   on theoretical assumptions.

Social utility, a close concept that extends the utility notion to the
   "common good". This raises the question of who could judge what it is.

Or an element of cost (work value).

Some history about economic value

Many economists gave their own approaches of economic value, some of them
with quite a narrow view.

Daniel Bernoulli was the first to link value to utility and more specifically
    to risk attitude.

This idea is still used, for example to define a financial value, or more
precisely an expected financial utility.

The Physiocrats considered that only agriculture produced economic
    value, and that industry and trade did not add any.

This misconception still exists in another form, as some consider that
only products-generating industries (agriculture and manufacturing),
and not the service activities, bring economic value.

This is ignoring that in developed countries 70% or 80% of the economic
activity, thus of production (as measured by the GDP - Gross Domestic
of those territories) is made of services.

Adam Smith, Pareto and Marx related economic value only to the
   quantity of work needed.

This was ignoring the utility factor

Economic value and factors of production

Far from stating,
as the above quoted economists thought, that the value of
goods and services originates only from the soil (and natural resources), or
the quantity of work (in extreme cases work can even be destructive if what
it produces has less value than what is used to produce it),  it supposes a
convergence of all factors of production that help to satisfy needs or
desires (
economic utility).

In our modern economy, those factors are,

of course work and natural resources

the invested capital,

knowledge and abilities (a form of capital),

initiatives, innovations and risk taking

the structures of production (legal, organizational)

See more details on those factors in the "Virtual aspects..." section below

What is growth?

Economic growth is often considered as a quantitative accumulation.

But this is only a part of the story, maybe not the most important one nowadays.

Actually, the economy is a "dynamical system" subject to "percolations" that
take place above "critical thresholds".

They create changes of rhythm (acceleration / deceleration) but, and this is
something more crucial, "qualitative jumps"

that bring "emerging properties".

Economic growth in the 21st century

For example, nowadays, at least in developed countries, the share of
"material goods" in the economy is less and less important, as the lion's
share of production is made more and more of services.

This is true of all industries: some are ascending, some are declining.
All knowledge-related activities are the new stars. Even in emerging
Welcome to the "postindustrial" economy!

Also globalization, by multiplying trade opportunities, allows growth
to extend to more and more countries (the "emerging countries"

The danger is that many protectionists propose to break that virtuous
General protectionism, under the pretence to fight the economic crisis, is
what made it much longer and deeper in the 1930-1940 decade.

The environment issues (pollution, raw material and fossil fuel
exhaustion...) will not be solved by "degrowth" as some ideologues try to
impose it (*) but by favoring the mutation and growth or future-oriented
sectors of activities.

By the way, the evolution of market prices (they rise for natural
resources, they decrease for high tech goods and services) helps to
reach that goal.

The black point is that some emerging countries have to develop
physical resource-intensive and energy-intensive industries (and
agriculture), to satisfy the basic needs of their population and avoid
unemployment. But it can be done wisely, so as to limit their own
environmental problems.

(*) Well, they have the right to do it for themselves, and also to give
tips to spare resources. But some movements see here the opportunity
to propose a new collectivism.

Virtual aspects of economics, capital, work, money...

Nowadays we live more and more in a world of ideas.

We often hear that "virtual reality" is intruding more and more in society in general as
well as in everybody's life.

A phenomenon that is not limited to "advanced" countries.

That "virtualization" impacts more and more the economy, a domain of social activity
among others. Here, the phenomenon is not limited to the reductive new economy
concept, focused on communication technologies. It is not limited either to the more
extensive concept of behavioral economics.

It has consequences on about  all aspects of the economy, such as:

Products and services - except those which satisfy basic material needs - have
   an important mental content.

This involves cognition and emotions, for those who purchase them, who
receive them or who create and supply them,

Prices result for a big part from an equilibrium reached between subjective

Besides, money is nowadays and has been for a long time, since gold and
   silver coins are no more in use,
an abstract and immaterial being.

What is money? (see the link)

Three roles and two forms

Money is an economic instrument made to 1) exchange (to pay, to give...), 2) to
and 3) to keep value.

It has two forms:

The main one, "sight" bank account balances, (used with transfers,
payment cards...). It is also called "bank money" and is well
    adapted to be
used as "electronic cash".

And physical cash (banknotes/coins) which role is more and more
    It is also called "fiat money".

It can be legally defined as a commitment based on other commitments

Money is created by the banking system, essentially as a counterpart of a myriad
of borrowers' commitments.

The banking system commits itself to make that money acceptable and usable (as
payment notably...).

Those contractual commitments can be considered as the collateral of depositors
(and ndirectly banknote bearers).

Central banks, which control that creation (and which also issue directly the "fiat
money"), and are lenders of last resort add another level of warranty.

States and their taxpayers are the ultimate guarantors in case the banking
system cannot face its own commitment to money holders.

Monetary policy

Each central bank is responsible to control how a specific money unit (Euro, US
dollar, Mexican peso, or whatever) is issued by the banking system of the related

It regulates the quantity and price (interbank interest rate, to simplify, and, for
some central banks, the foreign exchange rate) of that money.

It is usually considered, here again to simplify, that too much credit and money
might  bring consumer price inflation and /or asset bubbles, and that not enough
money might  bring deflation / recession and/or underinvestment / asset crashes.

 More details in my "what is money" article

Work includes more and more knowledge, organization, communication,
    preferences, conception, heuristics, money flows, etc.

Capital (see above) is not only, unlike classical economists thought,

* a portion of human work which had been saved (instead of consumed),
retained, accumulated...
* or even a "class" of people dedicated to enslave another one, as pretends
   extreme theories that consider capital as a
"social domination" tool.

Capital is an economic "riches" (like products and services) and a specific

Its value, which measures to what extent it is present among other riches, is not
directly based on the price of the physical equipment used for production.

It depends largely on less tangible elements such as the company's goodwill,
anticipation of gains and the equity investor preferences....

The capital-work duet does not cover the whole range of factors of

production (which include also inventiveness, subjectivity, knowledge...).

Between you and me, how strange that many economists still did not
fully understood what the present world is, which creates biases in
their reasoning.

Artists, and some scientists (neurosciences...) understood this before
Cleric and gurus also (here it is a bit more worrying).

Same thing for philosophers,psychologists and sociologists (although
often with ideological prejudices and quarrels between schools).
Let us not forget that emotions, immediate satisfactions and
, are often what triggers decisions, sorry for the
economic man
who sees only rational calculations.

Economists from all schools might be too materialistic, they might
need to play virtual economy games on the internet, of course with
the utmost moderation, better not shift fully into other dimensions
and end up as immaterial ectoplasms in parallel universes ;-).

Towards a World currency?

Or at least, as a start, a world monetary standard (WOMOST)

and a World monetary institution (WOM0I)

=> see my article: Towards a world currency


World Monetary Standard


World Monetary Institution

* Reference and pivot for all

  Forex quotations. Compatible

   with floating exchange rates.

* Self standing value, independent

   standard based neither on precious

   metals nor currency basket.

* Also quotation tool for bonds,
   contracts, commodities

* Democratic federal
   cooperative statute

* Mission 1: Supervisor of the world
   financial and banking system, including

   "sovereign" aspects.

   Legal power to put in check any
   monetary and  financial excess.

* Mission 2 : Central bank of
   central banks
(reserve pool and
   liquidity supply bank)


Other topics in economics (essays)

Yin-Yang and 67-33 cursor theory in economics

New economy

GDP indexed bonds

Economic psychology / sociology (Behavioral economics)

Not to forget Hot economic topics

and  My economic articles transferred from Google Knol


This page last update: 28/07/15

Last page:
Behav. fin

Disclaimer / Avertissement légal