Why the World Thinks That Finance Negatively Affects the World Economy

In the last few decades, the financial sector has completely lost its focus on the real economy. We need a

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Finance should be understood not only as the financial handling of money or risk management, but as the management of all the assets a company or government has.

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As several economists agree; economics is the science of choice. It studies how people choose to use scarce or limited production resources to produce goods and distribute them to their present or future consumption so that the individuals’ needs are satisfied.

If we relate the functioning of the economy to any society, we necessarily need to link economics with other sciences so that its global function is complete. Otherwise, if we ignore financial control, planning, monetary and material resources, among other activities, an economic crisis could follow; and, thus, we are led to believe that finance is a negative factor in society.

Globalization

Today, finance leads the process called “globalization”; a process that enjoys unprecedented visibility and prestige. The scale of these changes inevitably raise questions about the true nature of change. Is it a purely quantitative phenomenon, or are we facing a completely new technological and political situation in which the relationship between financial activities and other political, social and economic areas are important for the welfare of the world economy?

57% of respondents do not agree that financial innovation boosts economic growth.

According to a survey taken by readers of The Economist, 57% of them do not agree that financial innovation boosts economic growth. Moreover, when asked to what degree they think the US financial system benefits or hurts the US economy, 48% responded that finance hurts the US economy, while 34% said that if benefits it.

The Common Good

How can we account for this response?  The recent explosive growth of the influence and importance of the financial sector implies a profound change in the relationship between finance and the pursuit of the common good. The idea of the “common good” covers two different interests: on the one hand, the social interest, which raises the question of how the financial sector contributes to the community; and secondly, the personal interest, raising the question of how finance contributes to the growth and self-realization of each and every member of our society.

The influence and importance of the financial sector implies a profound change in the relationship between finance and the pursuit of the common good.

In an evolutionary view of social norms, one of the possible roles of social prestige is to fill the gap between the (perceived) social and private returns of various activities. For example, being part of a nonprofit organization that fights for women’s rights has a high level of social return but low private returns. Consequently, organizations involved in such causes are viewed more favorably by society than, for example, organizations involved in tax-dodging, which has a high private return but negative social reward.

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In general, many financial organizations have a much higher level of private return than the perceived social return, and if we add the current economic crisis into the mix, all of these factors lead to envy and public resentment towards finance.

Changing Perceptions

However, this resentment cannot be the only cause of this wrong perception. There are too many facts that point to the abuse of the financial system, which are perceived as “cultural corruption” rather than just bad financial decisions. This “cultural corruption” is becoming a sickness from the very inside of the financial system and most of us cannot see it.

While legislation and regulation may direct the better use of finance, it’s the responsibility of the financial sector operator to use their power to rebalance the economy. This assumption has given way to the Financial Hacking movement: visionary people who use financial power, technology and different tools to change and impact the economy in a significant way. Examples include crowd funding, shareholder activism, Dissent Hedge funds and sustainable investment funds, such as the Norwegian Pension Government Fund.

It’s the responsibility of the financial sector operator to use their power to rebalance the economy.

The financial Hacking movement’s goal is to shift the cultural background of the financial system, from schizophrenic and testosterone-driven decision making, without social and environmental responsibility, to a more open, disclosed and social-environmental financial sector.

Once the financial system understands that the butterfly effect is only a fairy tale or an option strategy, we will probably have more enlightened action. In fact, in the past, there were some financial systems that were created with the intention to have a positive economic impact, through risk trade protection and the financing of new opportunities.  For example, the Dutch East Company, founded in 1602, used the financial system to find multiple investors to finance its project, or the Osaka Exchange, in 1600, that created the first future contracts to protect the risk involved in rice trading.

Investing in the Real Economy

However, in the last few decades, it seems that the financial sector has completely lost its focus on the real economy by focusing only on monetary results. Money shouldn’t be pursued as the final goal because it is the mere consequence of our action to have an impact on the world. If we put money before impact, we will probably have money in the short-term, but will obtain only disastrous consequences in the economy, environment, and social life in the long-term; and, finally, we will also have a negative impact in our portfolio.

We need a call for change and this change must be real.

We need a call for change and this change must be real. We cannot act like Pontius Pilate, who simply washed his hands of responsibility, nor do some kind of philanthropic charity work to wash our soul after we have invested in businesses that are annihilating the Amazon Forest. It doesn’t work this way.

It’s about getting involved, taking into account the solutions to the problems that we can provide, before taking action. The most important role remains in our hands. The more traders, investors and users will actively demand, get involved, and invest in disclosed, transparent and responsible companies, the more companies like this one will rise, and thus change the culture of finance. You can become a small financial hacker.

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