Home In-Depth Feature Where did “Personal Finance” come from?

Where did “Personal Finance” come from?

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By Bob Hall | March 30th, 2017

Money and finance are integral to life since the dawn of time. We take you on a journey that delves into historical inflection points and developments that had a substantial effect on personal finance and the typical perception of money.

Insurance and Risk Management

Risk management is very important in personal finance. Any society with a semblance of order will have laypeople and merchants who, in addition to direct costs, necessarily incur risk of financial strain or even ruin in their line of work.

Risk management is very important in personal finance. Any society with a semblance of order will have laypeople and merchants who, in addition to direct costs, necessarily incur risk of financial strain or even ruin in their line of work.

Ancient China developed a system of shipping that divided a trader’s wares among several vessels. This is diversification plain and simple, and it was prevalent throughout the history of China and much of the Far East. Insurance and related personal finance instruments are much easier to develop, implement, and take advantage of in times of stability and peace. General chaos, mistrust, or other societal uncertainty curtails the diversity and robustness of personal finance instruments. This was true in ancient China, Hammurabi’s code in Mesopotamia, and is true everywhere from antiquity to today.

Insurance as a personal or commercial finance tool is a rather complex financial instrument. For all the formalism and codification it may entail, such financial instruments as insurance rely on a large degree of trust that the society, currency and overall “system” will continue for at least the duration of an insurance contract or claim.

Currencies and Barter

We are used to dealing with finance in terms of currencies such as dollars and euros. However, many people resort to barter economies that have been surprisingly efficient and complex. This is especially interesting given the stereotypical notion that barter is a primitive, clumsy system. The reality is a bit more subtle. Reasons people and cultures prefer barter include:

• Stability in the face of fluctuating or uncertain currency value, like in present-day Venezuela.

• Social cohesion. “Gift” and “trade” become intermingled, just as a gift today has a social and emotional worth beyond its explicit monetary value.

In the Middle Ages, stratified social classification resulted in peasants paying a portion of their labor as rent in exchange for stability and protection from outside threats. Enduring currencies were not established or prevalent. It was much easier for everyone involved to conduct pay through bartered items such as crafted goods and tools, clothes, or food. Labor has been bartered directly by the payer, or through delivery of another’s labor. An official granting use of his soldiers or workmen to a trading partner or higher-ranking agent would be an example of this kind of barter.

This manner of barter is far from “primitive.” In much of the pre-modern world, any rational person would have found this kind of dealing preferable to trading in currencies. In that time and cultural context, currencies had tentative purchasing power retention and were far more vulnerable to loss, theft and other mismanagement.

Historical Snapshot

Throughout history, certain names stand out for their insight into finance. Western contributions to financial development are well-known, while an influential but lesser-known figure is the Islamic thinker Ibn Khaldun. Khaldun is important as he was one of the first medieval thinkers to formulate robust theories of labor and earnings, financial incentives, and social cohesion. His “Al-Muqademah” (The Introduction) outlines the benefits of division of labor A classic example centers on a farmer striving to produce crops for sustenance. Alone, a series of isolated farmers will fail in their task. However, combined and specialized labor related to farm work can result in the same people producing far more than all of them need. Division of labor and specialization as means to wealth accumulation is a prominent thesis of The Introduction. Other insights included a formulation for supply, demand, and price virtually the same as is studied today. Wise taxation schemes predate the Laffer curve by centuries, and had a tremendous impact on how much was produced and what earnings were retained.

Impact of Modern Economic Thought

Over time, personal finance became more and more familiar to today’s experience. Currencies became far more important than bartering for most transactions. Nation-states that nurtured classically liberal economic policies produced a measure of security and social stability unknown to previous generations. However, the prosperity and increased connections between people and communities sometimes morphed into an impulse for modern social collectivism and an associated disdain for market-friendly policies in favor of socialism.

Though seemingly benign, socialism as a financial policy typically produced results very much at odds with people’s financial goals and general well-being. In his “Road to Serfdom” F. A. Hayek made the connection between socialist finance and general upheaval that, as Nazi Germany demonstrated, hurt tremendously not only in terms of wealth, but even national survival.

A distaste for nearly-omnipotent state interference, such as displayed by Hayek and other market-friendly advocates, does not mean regulatory negligence or indifference. Questions of contract disputes, fraud or other misconduct, cultural events, help for the sick, elderly, and disabled, as well as environmental concerns can all be reconciled with abundant opportunities for personal financial success. This holds true today and throughout history. In this regard, modern thinkers such as Hayek are in tune with economic theorists of past generations such as Ibn Khaldun.

New Developments

In recent times, two new variables relating to personal finance have come to dominate people’s interaction with money. The first is a massive injection of unsecured credit into the consumer economy. Unsecured credit lines and personal loans have become ubiquitous. Secondly, relentless automation results in widespread anxiety about job security. Even lower-wage labor in other parts of the world such as China eventually succumbs to higher wage pressure and consequent incentive for automation.

The history of personal finance is a subset of the history of money, economic thought, barter, trade, and conquest. Important historical snapshots had a tremendous impact on the financial dynamics among people throughout the world and through spans of millennia. Some staples of personal finance have included insurance, loans, barter, and currency-based transactions. These remain critical today, but the rise of unsecured loans and credit lines are rapidly becoming the front lines of many financial transactions.

Questions, Comments, or Suggestions? Email me at bob.hall@thenewsreflection.com

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