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Alan Crane Productions in association with the Emergent Lights 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 240 for spring semester 2024.

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Today, Foundations of Finance.

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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.

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And some people would prefer the accounting, some people would prefer the finance.

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But in any event, what we do in finance always works on the assumption of the rationality of the participants,

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the principals and the agents of any kind of financial transaction or financial matter.

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So that even though some people might not operate that way, at the margin,

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the people who matter are going to be those who take the rational approach.

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And there's been a little bit of revolution in that in the last five years about what constitutes rationality.

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And I'll get into that a little later in the course when I talk about behavioral finance.

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But for now, we are working on the assumption that we have that element of rationality involved.

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And part of... excuse me... you're not supposed to have anything but water, so this is water.

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And its name is Jack.

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God.

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Oh, okay.

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Now, that rationality drives our decision-making process.

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And I start with some basic overall parts to this.

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The idea that the future and the present and the future are all that matter in finance.

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Looking back at historical data, historical stock prices and things like that,

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are not going to get us anywhere in our field.

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And we are going to be measured by how well we can predict the future

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and how accurately in terms of best practices we do it.

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We don't deal too much in the short run.

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In responsible adulthood, we can't look at what is going to happen tomorrow.

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Should I invest today and cash out tomorrow?

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That's not what we're all about in our world.

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Corporations live forever, theoretically.

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We cannot worry about, well, what's the decision for tomorrow,

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unless we are looking at that as building the decisions that will affect long down the road.

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In this regard, you, madam, are a bread maker.

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You make bread.

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You're the only bread maker in town.

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Have I told you this story?

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Okay.

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Well, you see, as the only bread maker in town, you can be very sloppy

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because you can charge whatever price you need to.

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You can take flour and you're, oops, half of it fell on the floor.

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I've worked more for it this time.

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You can do that because there's no competition for you.

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You can hire your lazy ass brother here.

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He sits in the basement and eats Cheetos all day and plays World of Warcraft.

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Really, World of Warcraft, the elderly people's game?

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Do you even lift?

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I mean, you know, you've got these old expensive light bulbs

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and all this ancient machinery and all this,

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and you waste electricity, you waste flour, you waste other ingredients,

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but you are the only bread maker in town, so you can charge whatever you want for your bread.

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Well, in a case like that, sir, have you ever seen someone

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who doesn't deserve all the money he or she has?

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Hale and Must comes to mind. Kanya comes to mind.

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You've got to take that.

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You could get her business, but how?

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Well, obviously, you don't waste ingredients.

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You don't waste electricity.

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You measure carefully how much bread goes into the pan.

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You measure how much electricity, and you replace the old light bulbs with new light bulbs.

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You fire this lazy-ass guy who's sitting in the basement doing nothing

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except go down there and he said, these cheetos are delicious.

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You are moving efficiency, and the efficiency you are moving is called static efficiency.

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Static efficiency is using your existing resources more efficiently.

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Using the same resources, but using them the same way, but you're not wasting anything.

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That's static efficiency.

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You see it all the time in companies.

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You turn off these lights in the lunchroom when you're done, and all this kind of stuff.

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You're just not wasting.

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But there, we come to the next idea, the next important point.

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You, madam, and you see this loser making money.

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He's got all the business now.

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He took it away from her because he can charge lower prices because his costs aren't as high.

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Well, you say, well, okay, let's get this done.

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First of all, you're hiring people.

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We could have machines do this, like the kneading of the bread.

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And you could have a computer move the workflow along the production line.

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You could use these new LED light bulbs instead of the old-fashioned filament light bulbs.

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You could do all those things.

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That's a different kind of efficiency because you are changing the technology.

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Now, in your lives, you're hearing this word technology used in a very narrow way.

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Technology is all about computers.

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Technology in your home, technology in your car, technology in your ass.

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Yeah, that's not technology.

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Technology is how you arrange resources of production.

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The arrangement, how much you use of the different factors like land, labor, human capital, physical capital,

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all those kind of things.

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And technologies have been moving along since the dawn of humanity.

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Even the Neanderthals moved technology forward.

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The Clovis Point for weaponry, for spears.

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The bow and arrow.

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That was a new technology using different resources to create the output of the arrow killing the animal or the person or whatever.

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That's technology and you have done that.

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You have moved the technology forward.

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That's called dynamic efficiency.

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Dynamic efficiency is moving the technology, changing the way resources are used.

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Not just being careful about resources.

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You're actually changing what resources to use and how to arrange them in production.

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That's a new kind of efficiency.

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And so now you have done this.

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You have taken his business away from him because you can charge a lower price because you have a more efficient technology of production.

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But there's something behind this.

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You see, you, madam, didn't go into business because people need bread and you love people.

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That's what we all say in business.

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It's marketing.

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We care about our customers.

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They are number one to us.

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We care about Mother Earth.

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She is number one to us.

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Bullshit.

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You're in the business to make money, aren't you?

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Well, no, I don't want no money.

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Yes, you do. You do.

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And so did you.

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You didn't give a rat's ass about anyone but your own self.

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Be real about what you are.

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We are capitalists.

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We don't worry about the other person.

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We worry about ourself.

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You did the same thing.

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It wasn't about, well, I want to give nutritious food at a low price to my customers.

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No, you wanted to take his business away, drive him into bankruptcy, and make her go to a community college

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instead of to the institution that has the greatest professor who ever lived, and that's me.

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Do you understand what I'm trying to emphasize here?

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Greed is good.

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Greed clarifies.

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It forces us to be efficient in our resources and to drive us forward in our technologies.

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When we admit to our greed, we have made the first step toward controlling the world.

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We can say what we want to say to the people out there, but you are the leaders.

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You are the ones who will be the controllers.

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Now, there's a stop on this stuff.

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Greed, yes, absolutely.

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You win.

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But what happens if your bread tastes like ass?

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You've got to sign, our bread tastes like ass.

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Mom tries to take her kids in there.

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No, mommy, I don't want that bread.

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That bread tastes like ass.

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Oh, shut up.

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There's kids starving in other countries who'd love to have a butt sandwich right about now.

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If you understand that there are stops on it, they can be slow.

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They can be destructive in getting them into place.

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But if we don't stop ourselves from doing what is wrong and making butt bread is wrong, really,

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this is a pro tip, then the consumers will stop us.

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And if they can't stop us, if they're too stupid, then Uncle Sam will stop us.

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The government will come in and put a fist down on us.

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We don't want that.

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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.

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We control our greed through the process of profit maximization.

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And that's what this is about.

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In a capitalist system, profit maximization, wealth maximization, I should say, is all that matters.

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The owners of the company, whether you are the owners or the stockholders are the owners,

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whatever, or the fund managers are the owners, we answer to them.

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They are the shareholders.

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This idea that's become a pop fad, stakeholders, the employees are stakeholders, the consumers are stakeholders,

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Mother Gaia, Mother Earth is a stakeholder.

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No, the ones we answer to are the owners because they're the ones who can fire us.

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They're the ones who can kick us out and replace us with a better technology.

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You understand that.

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There are stops on it, but we have to appreciate that sometimes those are too slow and things get out of hand.

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But when you see companies acting, you ask them, are they acting in the best interest of their owners?

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And so we have to react to the consumers.

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We have to accommodate the employees.

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We have to reach out and see what we are doing to the environment only because they can put a stop to our goal,

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which is profit maximization.

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A good example of that is climate change.

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I don't give a rat's ass if you're a climate denier.

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The Fortune 500 companies are all reacting to the climate change.

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They're moving their production facilities off the coast.

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The big ag companies are working their butts off to get new GMOs that can withstand wild swings in weather,

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like we're having here in the Midwest, like we're having all over the world with the brush fires in Russia,

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with the drought. I teach in Central America in the summers.

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The Panama Canal is draining because there's a drought in a rainforest, for God's sake.

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Whoever heard of that?

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Yes, it's real and we have to accommodate it because our goal of profit maximization is going to be pretty lame

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if we don't have the resources, the factors of production to be able to maximize our profit.

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Even the oil companies that pump millions of dollars into climate change denial.

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Behind the scenes, they're getting ready for it.

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They're buying up the wind turbine companies.

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They're buying the alternate energy resource producers.

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They know it's coming.

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If there's still profit maximizers, they're going to do what has to be done, if necessary, behind the scenes.

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Whatever we tell the public, that's PR. What we do in the quiet rooms of our decision makers, that's the real deal.

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I have to have you ready to be in that role, to grow into it over time and not to fight it.

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If you like socialism, we've got some great countries. North Korea comes to mind.

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It's interesting about that because I teach for international studies as well.

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I teach delegations from developing countries.

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They oftentimes have business degrees or economics degrees.

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I go to them to teach them because they got their higher education, mainly in European stock, on the European model,

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which really is kind of socialist.

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They have to come here to hear me tell them the kill them all, let God sort it out story of capitalism.

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They kind of like it. They understand that it has to be that way, and they have to move toward this model.

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The problem is, it comes to the question, am I imposing a new kind of colonialism on them,

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a colonialism of conceptual framework of business?

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I don't worry about that as long as they pay me.

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But understand that when I go through this course, we are always asking, what does the rational agent do in this kind of situation?

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Take it like this. Suppose that there is a flood, and it imposes filthy water into the water system of a city.

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So in other words, drinkable water is no longer available.

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But you, sir, have bottled water.

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The supply of drinkable water has gone down. What are you going to do to the price of your bottled water?

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You're going to increase it. Why, you capitalist running dog son of a bitch.

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Exactly what you're going to do.

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And everyone is going to hate it. The government is going to come in and say, you're going to go to jail.

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Well, you know what? Here's the interesting thing about that. It's counterproductive.

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If they keep the price of water down, you're going to have your bottled water wiped out.

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And what are you going to do then when you have to go buy more bottled water from another city?

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You're going to have to pay the prevailing price.

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Your replacement cost is going to be higher.

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So you have to raise your price not because that original bottled water cost you more.

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It didn't when you bought it.

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But because replacing it will cost you a fortune.

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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?

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Painful, but that's the reality of what we think, what we see.

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Is that how the rabble rousers see it, how the do-gooder see it?

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No, they see him as the running capitalist dog son of a bitch.

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But in our world, we see it as a rational decision.

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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.

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You got it? That's the issue that is at hand in our world.

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Does that mean that we are all cruelty and all of that?

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Look at it this way.

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As capitalism took its grip in the eight, well, the eight-nineteenth and twentieth centuries in the developed world, we've done something amazing.

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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.

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We now have enough food to feed everyone in the world.

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Our problems are mostly distribution at this point.

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That is amazing.

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We can feed the world.

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We can make everyone's life better.

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But that comes at the price of recognizing that greed is the best motivator on earth.

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Oh, other than someone big with a bat who can beat your head in.

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That is the best motivator in the world for making everyone's life better.

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Adam Smith, the father of modern economics in the 1700s, called it enlightened self-interest.

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As we do better for ourselves, the way we do that is going to benefit everyone around us.

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And that's what we have accomplished in our lifetimes especially.

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Unfortunately, it can run amok.

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The next step will replace us because we are an inefficient machine.

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Welcome to the 21st century.

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It kind of sucks.

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But I'll make use so that you can at least survive there.

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That's all I have for you today.

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Go home.