10 Financial Formulas that Changed the World

10 Financial Formulas that Changed the World
July 30, 2014

From the commercialization of agriculture over 10,000 years ago, to the annual doubling of computing power in our own era, business has catalyzed human progress as no other lever or institution.

Several megatrends – expressible as financial formulas –have literally changed the world:

  1. Agriculture Becomes a Business (ca. 10,000 BC) - As the last Ice Age retreated some 12,000 years ago, dryer climates enabled tribes to settle down, cultivate crops, and domesticate livestock. Surpluses were sometimes traded among neighboring tribes. Commerce is born.

  2. Currency Emerges (ca. 1200 BC) – Agricultural commodities like grain and cattle were bulky, making barter difficult. (Just imagine stuffing a yak into your loincloth pocket!) There had to be a better way to store and transport value. The solution emerged in China around 1200 BC in the form of highly prized cowrie shells — the world’s first known currency. Two centuries later, bronze and copper versions of these shells emerged as the first coins in broad circulation.

  3. Middle Class Takes Root (12th - 14th centuries AD) – When Rome fell in the 5th Century AD, Europe grew stagnant, and 600 years passed before travel, commerce and urban life reawakened. New weapons – like the longbow – helped topple knights and lift the common man. Waves of bubonic plague slashed the population, making survivors more valuable. Craftsmen and traders were especially valued in the growing towns, and they formed guilds to set standards and promote commerce. Staking out new demographic terrain between the nobility and serfs, these guild members became the world’s first middle class. Unfortunately for them, sitcoms and fast-food were still 900 years in the future.

  4. Modern Commercial Banking Arises (14th – 15th centuries) – The explosion of European commerce in the 14th and 15th centuries required new sources of funding for merchants and traders. To meet this need, wealthy Italian families like Medici and Bardi — in Renaissance cities like Florence and Venice — found loopholes in the Catholic usury laws to reap vast profits. In the process, they laid the foundation for modern commercial banking.

  5. The Stock Company Emerges as a New Economic Model (17th century) – In 1602, the Dutch East India Company secured a royal monopoly on Asian trade and promptly floated the world’s first public stock offering. Investors funded the company’s trade voyages in exchange for a share of the profits. How profitable were these voyages? Very. The company paid regular dividends to investors of 12% to 63% from 1602 through 1696, creating a model for corporate development that would be emulated, and envied, through our own time. It has been rumored — but never proven — that Warren Buffet was one of the East India Company’s first investors.

  6. Slavery is Abolished Around the Globe (1800-1870 AD) – It’s a tragic fact that human bondage was practiced continually for over 100,000 years. As industrialization in the 18th and 19th centuries reduced the economic excuse for slavery — and the Enlightenment spread the idea of personal liberty — abolitionist calls where heard around the globe. Revolutionary France was the first major nation to abolish slavery in 1794, followed by England in 1833. The United States finally ended slavery in the 1860’s, during its Civil War. Ironically, only 3% of the young men who fought for the South in that war were slave owners. Slavery had long repressed their wages, yet they fought to the death to sustain it. Ironically, once it was dismantled for good, both wages and economic output grew at rates previously unimaginable. Put simply, the global abolition of slavery is the most significant economic – and moral – advance in human history.

  7. The Emergence of Free Trade (19th – 20th centuries) – Have you heard the expression “every man for himself?” During the 16th through 18th centuries, it summed up the economic relationship among leading nations. Called “mercantilism,” it was a philosophy that viewed wealth as finite and urged nations to hoard it. Mercantilism drove protectionist trade policies that produced enduring economic stagnation. In 1776, Adam Smith challenged the mercantilist model in his groundbreaking work, The Wealth of Nations. He suggested that the “invisible hand” of an unregulated private economy would stimulate personal initiative and fuel sustainable growth. It took nearly two centuries for free trade to replace mercantilism across much of the globe. And while protectionism is still practiced to a limited degree by many countries (including China and the US), and sanctions are used as part of financial warfare, the transformational impact of free trade has been proven time and again.

  8. The Melding of Socialism and Capitalism (20th – 21st centuries) – While Adam Smith’s call for free markets was a clear step forward, his faith in the benevolence of the “invisible hand” proved terribly naïve. For left to police itself, industrial capitalism in the 19th and early 20th centuries became a grim nightmare for most workers. Not surprisingly, there was pushback from 19th century thinkers like Karl Marx, who published Das Kapital, in 1867. In this famous — or infamous, depending on your politics — book, Marx assessed the real-life workings of industrial capitalism and observed that its driving force was the exploitation of labor. Metaphorically, it was the invisible hand forced through the sausage-grinder. Marx deserves credit for his compassion, but his belief in a socialist paradise was as naïve and unattainable as were the perfect outcomes to be shaped by Smith’s “invisible hand.”

    The reality, of course, lies smack between each man’s extreme idealism. Unregulated capitalism stacks the deck wildly in favor of the ownership class, producing too many losers at the bottom and a whole class of nepotistic winners at the top. Unchecked communism, on the other hand, stifles individual initiative and entrusts the central government with far too much economic and social planning authority. One needs look no further than the failed Soviet state to see the folly of unalloyed socialism.

    What neither man foresaw, but what history has served up in its comic wisdom, is a surprisingly workable hybrid of the two systems. To a large degree in every Scandinavian nation today — and to a lesser, but still significant degree elsewhere in Europe, America and Asia — we see the compassion and safety net of socialism fused to the dynamism of free market capitalism. One needs look no further than the Medicare and Social Security entitlements in the US, nor the free market success story of a company like Volvo in Sweden, to see this capitalist-socialist hybrid working today. Factor in the democratizing influence of global web communications — and the rise of a younger generation that is reluctant to judge or polarize through the use of “isms” — and it’s clear this historic hybrid will only strengthen and refine over time.

  9. Moore’s Law (1965 and continuing) – Gordon Moore is the Intel co-founder who observed in 1965 that the number of transistors per square inch on integrated circuit boards had doubled each year since their invention. He went on to predict that this trend would continue for the foreseeable future, and when that occurred, it became known as “Moore’s Law.” In recent years, this doubling timeframe grew to 18 months, where it has stabilized and is likely to remain for decades to come. The impact of Moore’s Law has already been vast, as evidenced by the ever-growing power and versatility of personal computing and mobile communications devices, and by the rapid spread of broadband Internet across the planet. This spread is dissolving national borders, while flattening economic barriers to billions of people around the globe. And what about the future impact of Moore’s Law? It is almost incalculable, as the doubling of data density every year or two means the very tools we use to create tomorrow’s technology are also improving at a breakneck pace today. All of which leads to one inescapable conclusion: we ain’t seen nothin’ yet!

  10. The World Wide Web – Our personal and professional lives are so dependent on the Internet that it’s hard to believe the “web” has been around for just thirty years. Its story begins with two inventions – the transistor in 1947 and electronic computer in 1951 – that set the stage for work on packet switching technology during the 1960’s. So while Americans played Beatles records and argued over the Viet Nam war, government-funded projects like ARPANET (Advanced Research Projects Agency Network) created the TCP Internet Protocol that forms the basis for today’s Internet. Once packet switching was standardized and personal computers had become commonplace, the Internet spread like wildfire across the globe. Ever-growing bandwidth, better browsing and search tools, and more affordable, intuitive computers made the web a continually better place to shop, learn and communicate. Meanwhile, breakthroughs in mobile computing made the Internet portable, so billions of people — and nearly all the institutions and recreations that matter to them — are now interconnected 24x7x365.

Put simply, twelve millennia after the first cow was traded for the first basket of wheat, the world has become one interconnected civilization. How’s that for a financial formula?

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