Alan Crane Productions in association with the Emergent Lights Studio presents
the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 240 for spring semester 2024.
Today, Foundations of Finance.
And in order to get us started in this, I do have to make it emphatic that the basis of finance is not the basis of accounting.
And some people would prefer the accounting, some people would prefer the finance.
But in any event, what we do in finance always works on the assumption of the rationality of the participants,
the principals and the agents of any kind of financial transaction or financial matter.
So that even though some people might not operate that way, at the margin,
the people who matter are going to be those who take the rational approach.
And there's been a little bit of revolution in that in the last five years about what constitutes rationality.
And I'll get into that a little later in the course when I talk about behavioral finance.
But for now, we are working on the assumption that we have that element of rationality involved.
And part of... excuse me... you're not supposed to have anything but water, so this is water.
And its name is Jack.
God.
Oh, okay.
Now, that rationality drives our decision-making process.
And I start with some basic overall parts to this.
The idea that the future and the present and the future are all that matter in finance.
Looking back at historical data, historical stock prices and things like that,
are not going to get us anywhere in our field.
And we are going to be measured by how well we can predict the future
and how accurately in terms of best practices we do it.
We don't deal too much in the short run.
In responsible adulthood, we can't look at what is going to happen tomorrow.
Should I invest today and cash out tomorrow?
That's not what we're all about in our world.
Corporations live forever, theoretically.
We cannot worry about, well, what's the decision for tomorrow,
unless we are looking at that as building the decisions that will affect long down the road.
In this regard, you, madam, are a bread maker.
You make bread.
You're the only bread maker in town.
Have I told you this story?
Okay.
Well, you see, as the only bread maker in town, you can be very sloppy
because you can charge whatever price you need to.
You can take flour and you're, oops, half of it fell on the floor.
I've worked more for it this time.
You can do that because there's no competition for you.
You can hire your lazy ass brother here.
He sits in the basement and eats Cheetos all day and plays World of Warcraft.
Really, World of Warcraft, the elderly people's game?
Do you even lift?
I mean, you know, you've got these old expensive light bulbs
and all this ancient machinery and all this,
and you waste electricity, you waste flour, you waste other ingredients,
but you are the only bread maker in town, so you can charge whatever you want for your bread.
Well, in a case like that, sir, have you ever seen someone
who doesn't deserve all the money he or she has?
Hale and Must comes to mind. Kanya comes to mind.
You've got to take that.
You could get her business, but how?
Well, obviously, you don't waste ingredients.
You don't waste electricity.
You measure carefully how much bread goes into the pan.
You measure how much electricity, and you replace the old light bulbs with new light bulbs.
You fire this lazy-ass guy who's sitting in the basement doing nothing
except go down there and he said, these cheetos are delicious.
You are moving efficiency, and the efficiency you are moving is called static efficiency.
Static efficiency is using your existing resources more efficiently.
Using the same resources, but using them the same way, but you're not wasting anything.
That's static efficiency.
You see it all the time in companies.
You turn off these lights in the lunchroom when you're done, and all this kind of stuff.
You're just not wasting.
But there, we come to the next idea, the next important point.
You, madam, and you see this loser making money.
He's got all the business now.
He took it away from her because he can charge lower prices because his costs aren't as high.
Well, you say, well, okay, let's get this done.
First of all, you're hiring people.
We could have machines do this, like the kneading of the bread.
And you could have a computer move the workflow along the production line.
You could use these new LED light bulbs instead of the old-fashioned filament light bulbs.
You could do all those things.
That's a different kind of efficiency because you are changing the technology.
Now, in your lives, you're hearing this word technology used in a very narrow way.
Technology is all about computers.
Technology in your home, technology in your car, technology in your ass.
Yeah, that's not technology.
Technology is how you arrange resources of production.
The arrangement, how much you use of the different factors like land, labor, human capital, physical capital,
all those kind of things.
And technologies have been moving along since the dawn of humanity.
Even the Neanderthals moved technology forward.
The Clovis Point for weaponry, for spears.
The bow and arrow.
That was a new technology using different resources to create the output of the arrow killing the animal or the person or whatever.
That's technology and you have done that.
You have moved the technology forward.
That's called dynamic efficiency.
Dynamic efficiency is moving the technology, changing the way resources are used.
Not just being careful about resources.
You're actually changing what resources to use and how to arrange them in production.
That's a new kind of efficiency.
And so now you have done this.
You have taken his business away from him because you can charge a lower price because you have a more efficient technology of production.
But there's something behind this.
You see, you, madam, didn't go into business because people need bread and you love people.
That's what we all say in business.
It's marketing.
We care about our customers.
They are number one to us.
We care about Mother Earth.
She is number one to us.
Bullshit.
You're in the business to make money, aren't you?
Well, no, I don't want no money.
Yes, you do. You do.
And so did you.
You didn't give a rat's ass about anyone but your own self.
Be real about what you are.
We are capitalists.
We don't worry about the other person.
We worry about ourself.
You did the same thing.
It wasn't about, well, I want to give nutritious food at a low price to my customers.
No, you wanted to take his business away, drive him into bankruptcy, and make her go to a community college
instead of to the institution that has the greatest professor who ever lived, and that's me.
Do you understand what I'm trying to emphasize here?
Greed is good.
Greed clarifies.
It forces us to be efficient in our resources and to drive us forward in our technologies.
When we admit to our greed, we have made the first step toward controlling the world.
We can say what we want to say to the people out there, but you are the leaders.
You are the ones who will be the controllers.
Now, there's a stop on this stuff.
Greed, yes, absolutely.
You win.
But what happens if your bread tastes like ass?
You've got to sign, our bread tastes like ass.
Mom tries to take her kids in there.
No, mommy, I don't want that bread.
That bread tastes like ass.
Oh, shut up.
There's kids starving in other countries who'd love to have a butt sandwich right about now.
If you understand that there are stops on it, they can be slow.
They can be destructive in getting them into place.
But if we don't stop ourselves from doing what is wrong and making butt bread is wrong, really,
this is a pro tip, then the consumers will stop us.
And if they can't stop us, if they're too stupid, then Uncle Sam will stop us.
The government will come in and put a fist down on us.
We don't want that.
We don't want it to get to the point where we have to have mommy or daddy come in and tell us what to do.
We control our greed through the process of profit maximization.
And that's what this is about.
In a capitalist system, profit maximization, wealth maximization, I should say, is all that matters.
The owners of the company, whether you are the owners or the stockholders are the owners,
whatever, or the fund managers are the owners, we answer to them.
They are the shareholders.
This idea that's become a pop fad, stakeholders, the employees are stakeholders, the consumers are stakeholders,
Mother Gaia, Mother Earth is a stakeholder.
No, the ones we answer to are the owners because they're the ones who can fire us.
They're the ones who can kick us out and replace us with a better technology.
You understand that.
There are stops on it, but we have to appreciate that sometimes those are too slow and things get out of hand.
But when you see companies acting, you ask them, are they acting in the best interest of their owners?
And so we have to react to the consumers.
We have to accommodate the employees.
We have to reach out and see what we are doing to the environment only because they can put a stop to our goal,
which is profit maximization.
A good example of that is climate change.
I don't give a rat's ass if you're a climate denier.
The Fortune 500 companies are all reacting to the climate change.
They're moving their production facilities off the coast.
The big ag companies are working their butts off to get new GMOs that can withstand wild swings in weather,
like we're having here in the Midwest, like we're having all over the world with the brush fires in Russia,
with the drought. I teach in Central America in the summers.
The Panama Canal is draining because there's a drought in a rainforest, for God's sake.
Whoever heard of that?
Yes, it's real and we have to accommodate it because our goal of profit maximization is going to be pretty lame
if we don't have the resources, the factors of production to be able to maximize our profit.
Even the oil companies that pump millions of dollars into climate change denial.
Behind the scenes, they're getting ready for it.
They're buying up the wind turbine companies.
They're buying the alternate energy resource producers.
They know it's coming.
If there's still profit maximizers, they're going to do what has to be done, if necessary, behind the scenes.
Whatever we tell the public, that's PR. What we do in the quiet rooms of our decision makers, that's the real deal.
I have to have you ready to be in that role, to grow into it over time and not to fight it.
If you like socialism, we've got some great countries. North Korea comes to mind.
It's interesting about that because I teach for international studies as well.
I teach delegations from developing countries.
They oftentimes have business degrees or economics degrees.
I go to them to teach them because they got their higher education, mainly in European stock, on the European model,
which really is kind of socialist.
They have to come here to hear me tell them the kill them all, let God sort it out story of capitalism.
They kind of like it. They understand that it has to be that way, and they have to move toward this model.
The problem is, it comes to the question, am I imposing a new kind of colonialism on them,
a colonialism of conceptual framework of business?
I don't worry about that as long as they pay me.
But understand that when I go through this course, we are always asking, what does the rational agent do in this kind of situation?
Take it like this. Suppose that there is a flood, and it imposes filthy water into the water system of a city.
So in other words, drinkable water is no longer available.
But you, sir, have bottled water.
The supply of drinkable water has gone down. What are you going to do to the price of your bottled water?
You're going to increase it. Why, you capitalist running dog son of a bitch.
Exactly what you're going to do.
And everyone is going to hate it. The government is going to come in and say, you're going to go to jail.
Well, you know what? Here's the interesting thing about that. It's counterproductive.
If they keep the price of water down, you're going to have your bottled water wiped out.
And what are you going to do then when you have to go buy more bottled water from another city?
You're going to have to pay the prevailing price.
Your replacement cost is going to be higher.
So you have to raise your price not because that original bottled water cost you more.
It didn't when you bought it.
But because replacing it will cost you a fortune.
And how are you going to pay it if you have a higher price for the water as you're selling it to those people who are thirsty?
Painful, but that's the reality of what we think, what we see.
Is that how the rabble rousers see it, how the do-gooder see it?
No, they see him as the running capitalist dog son of a bitch.
But in our world, we see it as a rational decision.
Because if you can't charge more for your water, you ain't going to bring no more water back in because you can't afford the replacement water to bring back in.
You got it? That's the issue that is at hand in our world.
Does that mean that we are all cruelty and all of that?
Look at it this way.
As capitalism took its grip in the eight, well, the eight-nineteenth and twentieth centuries in the developed world, we've done something amazing.
Even in my lifetime, when I was very young, we had about a quarter of the world's population was in starvation or semi-starvation.
We now have enough food to feed everyone in the world.
Our problems are mostly distribution at this point.
That is amazing.
We can feed the world.
We can make everyone's life better.
But that comes at the price of recognizing that greed is the best motivator on earth.
Oh, other than someone big with a bat who can beat your head in.
That is the best motivator in the world for making everyone's life better.
Adam Smith, the father of modern economics in the 1700s, called it enlightened self-interest.
As we do better for ourselves, the way we do that is going to benefit everyone around us.
And that's what we have accomplished in our lifetimes especially.
Unfortunately, it can run amok.
The next step will replace us because we are an inefficient machine.
Welcome to the 21st century.
It kind of sucks.
But I'll make use so that you can at least survive there.
That's all I have for you today.
Go home.