What is finance for?

… is a question that is not asked often enough, not taught enough and not reflected upon enough.

Noah Smith reminds us that this question is very underrated:

We often forget this fact in the modern world of hedge funds and trading platforms, but finance is supposed to actually finance stuff. Ultimately, the purpose of finance is to channel capital to productive businesses so that the economy can grow. The “high finance” of fancy derivatives and ETFs and hedge funds and junk bonds and all that stuff is just a superstructure that’s built on the foundation of real productive assets. Sometimes the superstructure can outgrow the foundation and collapse, as we saw in 2008. But the foundation is still there.


That’s it, that’s today’s post.

If you are a student of finance (and even better, financial economics) I urge you to bring this paragraph up for discussion in class. Please.