Alan Kring Productions and Associations with Emergent Light Studio presents
the Illinois State Collegiate Compendium, academic lectures in business and economics.
This is Business Finance, FIL 190 for spring semester 2024.
Introduction to Finance
Today, introduction to finance. See how my voice changes to professional? Yeah.
I'm a badass about that.
Finance is a sub-discipline of economics.
Now you'll hear some people say, well, it's actually accounting. No, it's not.
Accounting is an abomination hated by God.
I guarantee you, I've taught accounting. God hated me.
I don't disrespect them. Well, yes, I do.
We need accounting data, but we cannot use accounting data as it is presented
because accounting data has one critical flaw that we cannot abide in finance.
That critical flaw is that accounting uses historical information.
And we don't care about history.
We care about what is about to happen.
And that cannot be captured in numbers that come from the past.
We can see faint shadows of what is to come, but most of what we have to work with
is the state that it is in now.
You see, because, and we'll give you an example, in stock markets.
Stock markets are what are called Markovian processes.
It's like a chess board.
When you walk up to a chess board at a game in progress,
it does not matter at all how the pieces got to where they are.
All that matters is what the optimal move is from where you are at this point in time.
Nothing about how this pawn got to there or anything like that. It doesn't matter.
And that's the way it is with stock prices, bond prices, future prices, options prices.
All that matters is what you can do from where you are now
and what the best you can do is from where you are now.
A side note here is that we are raw capitalists.
We, oh, I hear we've got socialists. Oh, no, we don't. We're capitalists.
We work on the assumption that greed is good.
Well, actually, it doesn't matter whether it's good or not. That's how the world works.
You, sir, are a bread maker. You make bread.
You're the only bread maker in the whole town.
So what's your incentive to do anything really efficiently?
You just take some flour, throw it in. Oh, well, spilled a lot of that.
And you hire your lazy-ass brother here who sits in the basement and plays World of Warcraft
and eats Cheetos. Really, World of Warcraft? The old geezers game?
But why? You can pass along all these costs because no one can go anywhere else for bread except to you.
Now, you, madam, you look at him and you know.
Have you ever seen one of those people who just does not deserve to have the money they have?
Yeah, Elon Musk comes to mind.
So to... Oh, I shouldn't. I won't get into that.
Well, yeah, I will. Kanya comes to mind.
Okay. You know that he's wasteful.
All you would have to do is be careful with the resources you use.
You wouldn't waste flour. You'd measure and do everything carefully.
You wouldn't hire him. You would hire only people who are productive.
Certainly not you, but no. Okay.
But you would simply be using your resources more efficiently.
And that means you could charge a lower price.
That is called static efficiency.
Static efficiency, using your resources more efficiently.
Just using your resources and not wasting anything.
And then comes you.
You say, look at her. I can do better.
What I'll do is I'm going to buy machines and replace some people.
I'm going to change the lighting patterns so that we're not using LEDs.
So that will bring down our costs instead of the old-fashioned lights.
I'm going to use a computerized system to do the workflow management.
That is a technological change.
Now you hear this word technology, and it's used so narrowly now that it is laughable.
Technology in your home. Technology in your car. Technology in your ass.
No. Technology, people say, oh, it has to do with computers. No, it doesn't.
Technology is merely how you arrange the factors of production.
Technology is how you arrange the factors of production.
We've had technology since even before humans.
Technology is advanced. The Neanderthals went to the Clovis technology.
Before them, the primates, the lower primates, went to using stones from using their hands.
Technology has been a part of the animal experience since the dawn of time.
All we're doing is using some more technologies, some different technologies, different arrangements of factors of production.
Guess what? I was talking about a new technology that has just come on the scene.
It's not computers. It's artificial intelligence, which will replace a factor of production called human capital.
That's a very new technology.
But you're going to use a new technology and you're going to bring down costs through that new technology.
And therefore, you can charge a lower price than she does.
That's called dynamic efficiency.
Dynamic efficiency is changing technology to create efficiency.
Changing your technology, how you arrange the factors of production.
But there's something important in all of this.
You weren't making bread because you love people.
You were making bread to make money.
No, I don't want no money. I just love me people.
And you did not take away him, his customers, because you love people.
We believe in our customers. They're the most important part of our business. All bullshit.
We are in the business of making money and you didn't do it because you wanted people.
People need nutritious food at a low price.
You did it because you wanted to take away her business for yourself.
You wanted to drive her out of business and break her.
And you, you poor sorry son of a bitch, you were dead.
It was all over for you. Not because you love people, but because you wanted money.
That's all there is to it. Don't lie.
Come to grips with what we are.
Greed is not evil. Greed is good. Greed is clarifying.
It is how we make efficiency in the most efficient way.
Is through trying to find a way to make a buck.
That's important for you to come to grips with.
Is that we are raw capitalists. That doesn't mean, okay let's get back to this.
You now have control of the bread market in your town.
But what happens if your bread tastes like ass?
You got a sign. Our bread tastes like ass.
Mom takes her boy and no mommy I was having a pretty thing like ass.
I don't want a sandwich out of that. Oh shut up.
Kids starving in other countries would love to have an ass sandwich.
No, you can't do that.
You see there is a stop on our greed.
Sometimes it is the consumers that stop us.
Sometimes it has to be a larger daddy like a government.
If we can't control ourselves properly.
Sooner or later though there is a stop on us.
We hope. It can sometimes get pretty bad.
But you have to appreciate that in our markets we are driven by this greed reality.
But at the same time we can't go too far because that actually takes us off the edge.
When we go too far with the greed motive.
Another thing begins to play into it. We'll talk about that later.
So understand though that in the world that you are going to be in.
And I assume that most of you are going to be either entrepreneurs or you are going to work in a corporation.
The focus is on maximizing the welfare of the owners.
The wealth of the owners.
Because they are the ones who can fire you.
Those owners in a public corporation are called. Well let me ask you this.
Sir, what are the owners in a corporation called?
The shareholders or the stockholders. That's right.
Notice that word stakeholders isn't there.
The stakeholders, well the stakeholders are the employees, Mother Earth and Happy Bunnies.
Reality is that the owners are the ones, you are the one who can fire me.
Not Mother Gaia. Not anything like that.
You are what I care about.
And I must maximize your wealth.
And that is by maximizing your stock price.
To the extent that we cannot do that, then the owners should, unfortunately sometimes in our system they can't.
But they should fire us and replace us with a new technology.
A better board of directors.
That's the reality of it.
Our goal is to maximize the wealth of our shareholders in a public corporation.
Or in any corporation.
You maximize the wealth of the owners.
Because they are the ones who can directly take you out and replace you.
Just like happens in production. In efficiency.
First static and then dynamic efficiency.
This sounds harsh.
But it is how we focus.
We don't have multiple goals out there.
We have one goal.
And we have to recognize that sometimes those other constituencies can get in our way.
And absent shooting them, which I don't encourage.
We have to accommodate them to calm them down so they don't interfere with our production.
So we do have to have a balancing act involved there.
But the primary goal of the corporation is to maximize the wealth of the shareholders.
And to do that we must keep our focus on this enlightened self-interest.
As Adam Smith several centuries ago called it.
This principle that we are in business to benefit the owners.
And through that process the world becomes better.
In our, in the time, actually in the time that I've been alive.
We have gone from a world where starvation was the reality of about a third to almost half of the humans on earth.
We now are at the point where starvation that happens is not the result of our productive ability.
It's almost entirely the result of our distribution systems.
It is a little bit challenging right now because a few years ago we had an excess surplus of food globally.
That would have covered the world's population for about six months.
It has shrunk down to about six weeks now.
So there's a problem there.
But all these wars, they really get in the way of efficient distribution.
As you probably know from the big brouhaha first in Ukraine and now in the Middle East.
It really interferes with the ability we have to do what is best for everybody and for ourselves as business people.
So you have to keep that in mind that war is good for some businesses.
There's no question about that.
But it really sucks when you're trying to achieve that kind of ideal efficiency of production, distribution and all of that.
So there you are on that part of it.
The harshness of the subject is not really all that important.
In finance we are focused on numbers.
Everything must be quantifiable.
Madam, I might hurt your feelings.
But until you can tell me a dollar amount, well, I don't care.
You see, in finance all we care about is what is called liquidated value.
You have to tell me a number.
Give me a number and we'll work with it.
Math doesn't work with feelings and sentiments.
It works with numbers and with calculations.
What I'm going to show you in this course, I think every formula I show you in this course derives from physics.
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.
Wait a minute, you ripped that off, didn't you?
No, we came up with it on our own.
Well, maybe you did, maybe you didn't.
But you see, we are actually working with the principles that are universal.
So it's not a question of, well, that's just your opinion.
No, this is the opinion of everything from galaxies to intermediate vector bosons in the quantum world.
So keep that in mind.
Now, another thing is that I am trying to get you to the face of corporate life.
Twenty years ago, I would have ranted and raged and farted, you must use the formulas and do hand calculations.
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,
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.
And I'll still sometimes pull up a financial calculator.
But right now, Excel is the world, the financial system of the world is sitting on the shoulders of Excel.
So that's where you're going to learn how to do things, to get your calculations.
We're going to build templates together to get through the quiz and midterm and final questions.
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.
I've still got 10 minutes here, calm down.
Now, the thing here is about that, accounting.
Have you had an accounting course yet? Have any of you had your accounting?
Are they still using tables in there to find present values of annuities?
You have to go to the back and find those four digit numbers.
Dear God.
That clock is 10 minutes slow.
Okay, it is.
I've got 20 minutes, you guys don't need to go to your next class.
Really, that clock is 10 minutes slow? Well, let me fix that right now.
Okay, but anyway, we're going to use Excel.
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.
Okay, now that's all I have for you today. I thank you.