6.2.1 What is finance?

Finance is often complex, but it uses a few basic tools. These tools are used in different ways by households, businesses, states, and international institutions. Each tool shapes how we access resources, manage risk, and plan for the future.

Every financial asset is also someone else’s liability. For example, a loan is an asset for the lender, a debt (liability) for the borrower. These linked promises connect people into a web of obligations or promises that depends on trust and shared expectations about the future.

In formal financial systems, many financial agreements become standardised. This means they can be written down in the same way, measured in clear amounts, and traded easily in financial markets. Investment agreements like shares and bonds are common examples. These financial products help shape how money flows through the economy and influence many decisions made by businesses, states, and investors.

• Shares (also called stocks or equity): represent part ownership in a company, and give the shareholder some (limited) power in the company. Shareholders may receive some of the profits, called dividends. Shares can be held privately, or they can be sold publicly on stock markets. Share prices change depending on the supply and demand of shares on the market, influenced by things like company profits. Shareholders can also earn money if they sell their shares for a higher price than they bought them.

• Bonds: buying a bond involves lending money to a company or a state. The borrower promises to repay later, with interest. Bonds don’t give ownership like shares, but they’re often seen as lower risk. Bondholders receive regular interest payments. State default (not paying) on bonds is rare, and if a company fails, bondholders are repaid before shareholders.

These are just two investment options among many. Shares involve equity financing, owning part of a company and sharing in its profits and its risks. Bonds are a form of debt financing, where the return is usually fixed, and the investor does not own part of the business. 

People and communities also invest time, care, land, and other resources in projects that support shared goals. These investments often do not aim for financial returns, but focus on building current and future wellbeing.

People and institutions use finance for many reasons. A family may need finance to buy a home. A business may need it to expand. A farmer may need it to buy seeds. A town might need it to build clean water systems. A national government may need it to respond to climate change.

Finance comes from many, often overlapping, sources in the economy:

• Individuals and households may lend or give money to relatives, invest in businesses directly, buy shares or bonds, or pay for insurance services. These include people with small savings as well as wealthy individuals who finance businesses or projects.

• Banks lend money to households, businesses, and states, and create new money when they do so (Section 6.1.3). People also hold money in savings accounts.

• States may finance themselves by creating money, collecting taxes, or selling bonds to borrow from investors (Section 6.3.6);

• Development banks and international institutions provide loans across borders to states and businesses;

• Institutional investors manage large pools of money for others. These include pension funds, insurance firms, and investment companies. They invest directly in businesses by taking partial ownership, buy shares and bonds in businesses, and lend to states.

• Asset managers are professionals or firms hired to manage investments for others. They do not usually own the money themselves but decide how and where to invest it. Asset managers may work for institutional investors or for individual clients. Some, like BlackRock or Vanguard, manage trillions in assets and have major influence on global finance.

• Philanthropists and charitable foundations provide finance through grants or donations. Unlike loans or investments, this money is usually given without expecting repayment or profit. Like other forms of finance, however, it still shapes which projects or people get access to money, and for what purposes.

Financial relationships can become very complex. For example, a household buys insurance. The insurance company invests the pooled money in bonds and shares to grow its funds. These layered relationships can offer resilience, like ecosystems with many interlinked parts. But they can also make risk harder to see when people, businesses, or states lose track of where their money flows or how it’s being used (Section 6.2.5 and Section 6.2.6). The value of these assets depends on what markets believe they are worth, a collective judgement that can change suddenly and bring financial system instability.

Finance is a powerful tool. It can help meet needs, manage risk, and build a better future. But how it works depends on the values, goals, and rules that shape it.

If we want an economy that meets everyone’s needs and respects the Earth’s limits, then our financial systems need to support those outcomes. Right now, many financial systems reward short-term profit instead of long-term wellbeing or sustainability. Unless finance is designed to serve people and planet, it can end up doing the opposite—deepening inequality, fuelling extraction, and ignoring future risks. So we have to ask:

• Who has access to finance?

• What goals are being financed?

• What rules shape financial relationships?

Finance is shaped by contracts, laws, policies, and social norms. These decide who gets access, what outcomes are valued, and under what conditions finance is given. Often, people and places most in need of finance are excluded because they are seen as too risky. Meanwhile, those with wealth and power access finance easily and use it to grow even richer and more powerful, an example of the success-to-the-successful system trap discussed in Section S.9. This deepens economic inequality and blocks regeneration.

In this Subtopic 6.2, you’ll explore how financial systems affect inequality, power, and risk. In the next Subtopic 6.3 (coming soon!), you’ll examine how we can redesign money and finance to serve people and planet.

Concept: Systems

Skills: Thinking skills (transfer)

Time: 30 minutes

Type: Individual, pairs, or small group

How Is Finance Organised?
Each scenario below shows a real-life example of finance in action. For each one, answer the following questions:

1. How is money moved across:

   • Time (e.g. used now, repaid later)

   • Space (e.g. across neighbourhoods, countries)

   • People or institutions (who gives, who receives)

2. What kind of relationship is involved? Choose one or more:

   • Personal trust (e.g. family, friends)

   • Formal contract (e.g. with a bank or government)

   • Shared agreement (e.g. a community or group arrangement)

You can write short answers or discuss them in pairs or groups.

Scenario 1:  Lulu wants to open a fruit stall in her neighbourhood. She doesn’t have enough money for the cart and the first batch of fruit. Her grandmother gives her a loan to help her start. Lulu agrees to repay the money slowly over the next 6 months using some of her profits.

Scenario 2: Salim’s brother lives in a different country. When Salim is injured in a biking accident, his brother sends money through a mobile app to help pay for hospital treatment.

Scenario 3: Ten fisher families in a coastal town pool a small amount of money each month into a fund. When a big storm damages two boats, those families receive money from the fund to repair them.

Scenario 4: A student from the countryside is accepted into a city university. The government offers her a student loan that covers tuition and living costs. She will begin repaying it once she starts working.

Scenario 5: A group of investors in one country puts money into a solar energy company in another country. The company will use the money to install solar panels in remote villages. The investors hope the project will bring clean energy and earn profits in future years.

Ideas for longer activities and projects are listed in Subtopic 6.5

• 6.1 How do you live if you don’t work? - An introduction to the financial sector in the CORE Economics textbook, describing the experiences of two people in different parts of the world and their use of different financial instruments to fund their current and future needs. Difficulty level: easy

• Unit 10: Banks, money and the credit market - An introduction to banks, money and credit from the the CORE Economics book The Economy: A South Asian Perspective. Difficulty level: medium.

• Unit 6: Stocks and bonds -  Short videos and articles from Khan Academy introducing shares (equity) and bonds (debt), including risk and returns. Difficulty level: easy.

• How insurance works – A quick explainer from Khan Academy of risk-pooling and premiums. Difficulty level: easy.

The CORE Econ Team. (2023). How do you live if you don’t work? In Unit 6: The financial sector - Debt, money, and financial markets. The Economy 2.0: Macroeconomics (Open access e-text). https://books.core-econ.org/the-economy/macroeconomics/06-financial-sector-01-how-do-you-live-if-you-dont-work.html

Jakab, Z., & Kumhof, M. (2018, October 26). Banks are not intermediaries of loanable funds: Facts, theory, and evidence (Staff Working Paper No. 761). Bank of England. https://www.bankofengland.co.uk/working-paper/2018/banks-are-not-intermediaries-of-loanable-funds-facts-theory-and-evidence

Martin, F. (2014). Money: The unauthorised biography. Vintage.

Pettifor, A. (2017). The production of money: How to break the power of bankers. Verso.

Reardon, J., Caporale, M. M. A., & Cato, M. S. (2018). Introducing a new economics: Pluralist, sustainable and Progressive. London: Pluto Press.

Coming soon!