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Alan Kring Productions and Associations with Emergent Light Studio presents

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the Illinois State Collegiate Compendium, academic lectures in business and economics.

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This is Business Finance, FIL 190 for spring semester 2024.

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Introduction to Finance

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Today, introduction to finance. See how my voice changes to professional? Yeah.

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I'm a badass about that.

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Finance is a sub-discipline of economics.

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Now you'll hear some people say, well, it's actually accounting. No, it's not.

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Accounting is an abomination hated by God.

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I guarantee you, I've taught accounting. God hated me.

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I don't disrespect them. Well, yes, I do.

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We need accounting data, but we cannot use accounting data as it is presented

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because accounting data has one critical flaw that we cannot abide in finance.

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That critical flaw is that accounting uses historical information.

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And we don't care about history.

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We care about what is about to happen.

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And that cannot be captured in numbers that come from the past.

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We can see faint shadows of what is to come, but most of what we have to work with

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is the state that it is in now.

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You see, because, and we'll give you an example, in stock markets.

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Stock markets are what are called Markovian processes.

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It's like a chess board.

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When you walk up to a chess board at a game in progress,

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it does not matter at all how the pieces got to where they are.

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All that matters is what the optimal move is from where you are at this point in time.

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Nothing about how this pawn got to there or anything like that. It doesn't matter.

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And that's the way it is with stock prices, bond prices, future prices, options prices.

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All that matters is what you can do from where you are now

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and what the best you can do is from where you are now.

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A side note here is that we are raw capitalists.

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We, oh, I hear we've got socialists. Oh, no, we don't. We're capitalists.

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We work on the assumption that greed is good.

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Well, actually, it doesn't matter whether it's good or not. That's how the world works.

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You, sir, are a bread maker. You make bread.

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You're the only bread maker in the whole town.

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So what's your incentive to do anything really efficiently?

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You just take some flour, throw it in. Oh, well, spilled a lot of that.

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And you hire your lazy-ass brother here who sits in the basement and plays World of Warcraft

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and eats Cheetos. Really, World of Warcraft? The old geezers game?

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But why? You can pass along all these costs because no one can go anywhere else for bread except to you.

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Now, you, madam, you look at him and you know.

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Have you ever seen one of those people who just does not deserve to have the money they have?

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Yeah, Elon Musk comes to mind.

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So to... Oh, I shouldn't. I won't get into that.

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Well, yeah, I will. Kanya comes to mind.

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Okay. You know that he's wasteful.

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All you would have to do is be careful with the resources you use.

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You wouldn't waste flour. You'd measure and do everything carefully.

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You wouldn't hire him. You would hire only people who are productive.

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Certainly not you, but no. Okay.

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But you would simply be using your resources more efficiently.

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And that means you could charge a lower price.

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That is called static efficiency.

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Static efficiency, using your resources more efficiently.

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Just using your resources and not wasting anything.

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And then comes you.

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You say, look at her. I can do better.

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What I'll do is I'm going to buy machines and replace some people.

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I'm going to change the lighting patterns so that we're not using LEDs.

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So that will bring down our costs instead of the old-fashioned lights.

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I'm going to use a computerized system to do the workflow management.

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That is a technological change.

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Now you hear this word technology, and it's used so narrowly now that it is laughable.

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Technology in your home. Technology in your car. Technology in your ass.

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No. Technology, people say, oh, it has to do with computers. No, it doesn't.

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Technology is merely how you arrange the factors of production.

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Technology is how you arrange the factors of production.

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We've had technology since even before humans.

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Technology is advanced. The Neanderthals went to the Clovis technology.

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Before them, the primates, the lower primates, went to using stones from using their hands.

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Technology has been a part of the animal experience since the dawn of time.

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All we're doing is using some more technologies, some different technologies, different arrangements of factors of production.

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Guess what? I was talking about a new technology that has just come on the scene.

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It's not computers. It's artificial intelligence, which will replace a factor of production called human capital.

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That's a very new technology.

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But you're going to use a new technology and you're going to bring down costs through that new technology.

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And therefore, you can charge a lower price than she does.

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That's called dynamic efficiency.

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Dynamic efficiency is changing technology to create efficiency.

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Changing your technology, how you arrange the factors of production.

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But there's something important in all of this.

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You weren't making bread because you love people.

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You were making bread to make money.

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No, I don't want no money. I just love me people.

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And you did not take away him, his customers, because you love people.

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We believe in our customers. They're the most important part of our business. All bullshit.

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We are in the business of making money and you didn't do it because you wanted people.

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People need nutritious food at a low price.

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You did it because you wanted to take away her business for yourself.

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You wanted to drive her out of business and break her.

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And you, you poor sorry son of a bitch, you were dead.

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It was all over for you. Not because you love people, but because you wanted money.

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That's all there is to it. Don't lie.

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Come to grips with what we are.

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Greed is not evil. Greed is good. Greed is clarifying.

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It is how we make efficiency in the most efficient way.

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Is through trying to find a way to make a buck.

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That's important for you to come to grips with.

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Is that we are raw capitalists. That doesn't mean, okay let's get back to this.

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You now have control of the bread market in your town.

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But what happens if your bread tastes like ass?

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You got a sign. Our bread tastes like ass.

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Mom takes her boy and no mommy I was having a pretty thing like ass.

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I don't want a sandwich out of that. Oh shut up.

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Kids starving in other countries would love to have an ass sandwich.

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No, you can't do that.

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You see there is a stop on our greed.

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Sometimes it is the consumers that stop us.

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Sometimes it has to be a larger daddy like a government.

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If we can't control ourselves properly.

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Sooner or later though there is a stop on us.

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We hope. It can sometimes get pretty bad.

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But you have to appreciate that in our markets we are driven by this greed reality.

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But at the same time we can't go too far because that actually takes us off the edge.

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When we go too far with the greed motive.

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Another thing begins to play into it. We'll talk about that later.

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So understand though that in the world that you are going to be in.

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And I assume that most of you are going to be either entrepreneurs or you are going to work in a corporation.

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The focus is on maximizing the welfare of the owners.

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The wealth of the owners.

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Because they are the ones who can fire you.

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Those owners in a public corporation are called. Well let me ask you this.

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Sir, what are the owners in a corporation called?

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The shareholders or the stockholders. That's right.

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Notice that word stakeholders isn't there.

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The stakeholders, well the stakeholders are the employees, Mother Earth and Happy Bunnies.

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Reality is that the owners are the ones, you are the one who can fire me.

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Not Mother Gaia. Not anything like that.

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You are what I care about.

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And I must maximize your wealth.

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And that is by maximizing your stock price.

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To the extent that we cannot do that, then the owners should, unfortunately sometimes in our system they can't.

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But they should fire us and replace us with a new technology.

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A better board of directors.

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That's the reality of it.

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Our goal is to maximize the wealth of our shareholders in a public corporation.

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Or in any corporation.

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You maximize the wealth of the owners.

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Because they are the ones who can directly take you out and replace you.

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Just like happens in production. In efficiency.

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First static and then dynamic efficiency.

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This sounds harsh.

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But it is how we focus.

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We don't have multiple goals out there.

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We have one goal.

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And we have to recognize that sometimes those other constituencies can get in our way.

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And absent shooting them, which I don't encourage.

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We have to accommodate them to calm them down so they don't interfere with our production.

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So we do have to have a balancing act involved there.

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But the primary goal of the corporation is to maximize the wealth of the shareholders.

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And to do that we must keep our focus on this enlightened self-interest.

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As Adam Smith several centuries ago called it.

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This principle that we are in business to benefit the owners.

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And through that process the world becomes better.

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In our, in the time, actually in the time that I've been alive.

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We have gone from a world where starvation was the reality of about a third to almost half of the humans on earth.

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We now are at the point where starvation that happens is not the result of our productive ability.

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It's almost entirely the result of our distribution systems.

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It is a little bit challenging right now because a few years ago we had an excess surplus of food globally.

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That would have covered the world's population for about six months.

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It has shrunk down to about six weeks now.

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So there's a problem there.

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But all these wars, they really get in the way of efficient distribution.

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As you probably know from the big brouhaha first in Ukraine and now in the Middle East.

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It really interferes with the ability we have to do what is best for everybody and for ourselves as business people.

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So you have to keep that in mind that war is good for some businesses.

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There's no question about that.

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But it really sucks when you're trying to achieve that kind of ideal efficiency of production, distribution and all of that.

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So there you are on that part of it.

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The harshness of the subject is not really all that important.

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In finance we are focused on numbers.

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Everything must be quantifiable.

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Madam, I might hurt your feelings.

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But until you can tell me a dollar amount, well, I don't care.

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You see, in finance all we care about is what is called liquidated value.

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You have to tell me a number.

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Give me a number and we'll work with it.

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Math doesn't work with feelings and sentiments.

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It works with numbers and with calculations.

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What I'm going to show you in this course, I think every formula I show you in this course derives from physics.

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I mean, back in the time when I was in physics as a scientist, I mean, I look at the finance formula, I know that formula.

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Wait a minute, you ripped that off, didn't you?

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No, we came up with it on our own.

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Well, maybe you did, maybe you didn't.

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But you see, we are actually working with the principles that are universal.

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So it's not a question of, well, that's just your opinion.

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No, this is the opinion of everything from galaxies to intermediate vector bosons in the quantum world.

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So keep that in mind.

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Now, another thing is that I am trying to get you to the face of corporate life.

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Twenty years ago, I would have ranted and raged and farted, you must use the formulas and do hand calculations.

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Well, we moved on from that to the financial calculators, which I embraced and I said, well, we're going to show you the formula,

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but you really would be better at faster at this, in some cases insanely faster if you had a financial calculator to do this math.

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And I'll still sometimes pull up a financial calculator.

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But right now, Excel is the world, the financial system of the world is sitting on the shoulders of Excel.

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So that's where you're going to learn how to do things, to get your calculations.

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We're going to build templates together to get through the quiz and midterm and final questions.

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We're going to do that so that you're going to pull up your templates when a quiz or any kind of an assessment opens.

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I've still got 10 minutes here, calm down.

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Now, the thing here is about that, accounting.

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Have you had an accounting course yet? Have any of you had your accounting?

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Are they still using tables in there to find present values of annuities?

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You have to go to the back and find those four digit numbers.

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Dear God.

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That clock is 10 minutes slow.

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Okay, it is.

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I've got 20 minutes, you guys don't need to go to your next class.

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Really, that clock is 10 minutes slow? Well, let me fix that right now.

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Okay, but anyway, we're going to use Excel.

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That's one of the reasons I want you to be able to do that Excel is because you're going to be using that in my class.

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Okay, now that's all I have for you today. I thank you.