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1HOW MONEY TURNOVER AFFECTS THE CREDIT PROCESSES
Adam Smith defended the idea that the market was born spontaneously. The market would be inherent in human activity. "Natural inclination to all people: to barter and exchange one thing for another". Exchange is therefore at the origin of the organization of human societies, even before capitalism appeared. The market emerged from its marginality between the twelfth and eighteenth centuries in Western societies, when it could be organized, monitored, regulated. The market is therefore a matter for institutions. It is considered that the economy is developing in the direction of systematization and structuring while not having an exact classification (humanities or technical science), and yet it should be understood that despite the accuracy of economics from the point of view of mathematics, this matter is still not accurate and moderately abstract. The main economic problem is the limited resources with an infinite need for them, which is what many economists are trying to "mitigate" by developing theories and patterns of actions where a need for something is the motive of economic activity. It is evident that the amount of money in the world is limited which means that it is possible that people use the exact same banknotes all over the world but what is the chance to have the same bill two times per life? This article provides the economic basis for understanding the beforementioned probability and it's bound with credit system which is quite important in the modern society.
Keywords
Credit, money turnover, behavioral economics, lending cycle, human factor
AUTHOR
Artemiy A. Pogrebnyak,
Second-year student, University of Clermont Auvergne 26 Av. Léon Blum, 63000, Clermont-Ferrand, France artem713s@icloud.com
1. Introduction
1.1. Economic basis
The economy is trying to answer the questions:
1. What to produce?
2. How to produce?
3. For whom to produce?
Behavioral economics is aimed at explaining people's behaviour in specific situations to understand and prevent the causes of economic crises, as well as to explain human nature in general. So, in general, it can be concluded that economics brings people closer to understanding themselves and others.
Each decision made by an individual is based on a method that consists of comparing the costs and benefits of each possible alternative in order to make the decision that seems (at the time of decision-making) the most rational possible in the sense that the alternative chosen is the one for which the benefits outweigh the costs the most. The question of the rationality of the individual is fundamental in economics.
The opportunity cost measures what you have to give up to get something. The cost of each decision taken must take into account the fact that the resources mobilized for one decision are lost for another.
1.2. Economic machine
Adam Smith's notion of the "invisible hand" founded neoclassical microeconomics. A higher natural order would make it possible to organize economic activities for the community's well-being.
It is not the kindness of the butcher, the baker or the beer merchant from whom we are waiting for our dinner, but the care they take for their interests.
The selfish individual is led by an invisible hand to advance an end that is not part of his intention. By pursuing personal interest, a person is often more effective for the society, rather than if he really aimed at contributing into this community.
The market of pure and perfect competition (PPC) corresponds to this intuition of Adam Smith. Neoclassical economists have established the conditions (mathematical in particular) for the existence of this type of market.
The functioning of "neoclassical" markets is based on the rationality of economic agents. It is based on the autonomy of decision-making and on a behavior of maximization of their individual interests. Consumers maximize their satisfaction through the act of consumption, and producers maximize their profit through the act of production.
In the neoclassical microeconomics, consumer behavior is assumed to be "rational". In reality, the rationality of consumers is limited. The consumer does not have the ability to consider all the possible choices to make an optimal choice, the choice that maximizes his satisfaction. Therefore, an individual will only make a satisfactory choice based on the information readily available and the time he has to make this choice. Several experiments confirm the "irrationality" of consumer choices.
2. Money turnover and income
2.1 Banknote turnover
In this section, a certain postulate will be proved, which will be used to substantiate subsequent statements. Let's call it Postulate-1. According to this affirmation, the money that the one spends, another person gains, which means that after a certain cycle exact money unit can be returned to the first owner. So, let's say there is a state Z. The state Z is a legal, democratic organization of social and legal authority, whose actions are aimed at performing a number of functions. As in many states, State Z has an internal and external economy, and to prove the Postulate-1 (the expenses of one individual are the incomes of another), it will be necessary to consider only the internal component.
To begin, that Postulate-1 is true given that the money supply put into circulation on the territory of the state is distributed among its residents (citizens), that is, money passes "from hand to hand" and there is even a possibility that they will return to the same owner more than once.
Let's prove it:
The following grounds to prove the fact that the bills (banknotes) can be returned to the owner who once exchanged them:
1. A bill (banknote) can be in circulation for no more than two years (then it is replaced by another due to unsuitability).
2. There are 3 billion bills (banknotes) of the same denomination in circulation (for example, 5000).
3. Every month a person receives 100 bills (banknotes) and spends 100 bills (banknotes).
So, a person has 100 banknotes. In the first month, he gives them all away (let's say it was set "A") and received 100 new ones. After a month, the probability of receiving at
least one banknote from set "A" is equal to P1 = 1 - (3x130i-9100)100 (subtraction from one the probability of getting 100 bills, none of which were in set "A"), which is approximately P1 = 0.0000033333278333393.
Now the next month comes and the person has given 100 banknotes again. There are now 200 banknotes in set "A" (given ones). Let's calculate the same probability of getting
at least one bill from set "A": P2 = 1-(3x109~Q200)100 = 0.00000666 66446667145 7770. To cal-
2 v 3x109 J
culate the probability of receiving a banknote from set "A" for the first and second month, the formula P12 = P2(1 - P1) + P1 is used.
Let us continue such an operation and calculate this probability in 2 years (24 months). In set A there will be 100 x 24 = 2400 bills. Then P24 = P24 * (1 - P23) + P23 =
(. /3x109-2400\100\ . , /3x109-2300\100\ , . /3x109-2300\10° _ r .. .. r . .
i1 - (-0-H H1 -1 + Hx-H J + 1 - Hx-H = 0.000156654. This
number is less than 0,01 (1%).
2.2. Probability of getting 1 same banknote 2 times during life
Overall, after getting 0.000156654 as the probability of receiving th same banknote 2 times per 2 years, this cycle continues further. Moreover, according to the condition, the turnover of these banknotes "A" ceases to increase. Continuing further, then by 876 months (73rd year of life-the average life expectancy in the world), the probability of 0.36748967 will turn out. Likewise, every third person at least once held in their hands a bill that they used earlier in country Z.
2.3. Income differentiation
However, for proof, the case is presented when Postulate-1 means that if one person begins to earn more, then the entire population will experience the slightest increase in income. Money exchange (purchases / sales) takes place every day in country Z, which composes a certain part of the country's economy. At the same time, this process needs an example: a worker at a factory, let's say for the manufacture of radio components, worked for a month and received a salary (personal income) equal to, for example, 2000 units. Immediately, the worker goes to the store to buy the necessary products and, let us say, he gives 40% of his income, which is 800 units, to the seller in order to purchase the necessary goods for a month. Now imagine that the company has increased its productivity and, consequently, has increased the salaries of its employees. Let's say now a worker gets 2200 units. According to the fundamental economic and psychological foundation: the more money a person has, the more he spends (of course, it cannot be argued that this is always true for everyone, but in general, single exceptions can be ignored since they do not significantly affect the overall picture).
Therefore, even without comprehending that a person is tend to spend more with an increase in income. Let us imagine that a worker spends the same 40% of income despite the temptation to supplement the list of goods. So, the worker will already spend 880 units on his purchases which means the seller began to receive additional 80 units. Hence, it is clear that with the growth of one's expenses, the income of the another one grows, and it happens in many spheres of human life due to the general interconnection.
3. Credit and money turnover
3.1. Lending and its role in macroeconomics
The formation of the credit process has its roots in ancient times in Egypt. Credit is one of the most important because of its irreplaceability, and probably the least understood part of the economy because of its variability. The lending process allows you to expand the labor market by adding creditors and debtors to consumers and seller, where creditors want to increase their available capital while debtors want to buy what is currently unavailable to them (real estate, business) in terms of their monetary volume. When the debtor undertakes to pay the borrowed amount of money to the creditor, which must be legally supported, a loan is formed between them. After the conclusion of the loan agreement, the loan turns into debt, which is the creditor's asset and the debtor's obligation. So, the loan is significant because, according to the Postulate-1 (the expenses of one are the incomes of another), a person can have a larger personal income in a short time, which, consequently, increases the incomes of others. Of course, it is clear that this is a very slight increase, but if there are a plenty of debtors, this leads to the increase in the volume of money turnover in the state. Consequently, considering the whole situation as a chain of successive events, an infinite cycle of four stages appears: loan, expenses, production, income.
3.2. Cycles of money
For instance, considering the example taken while describing Postulate-1, the salary can be replaced by a loan (there is no difference what is the source of money for this cycle). Therefore, after a person borrows some money, he or she spends it (expenses). Expenses of a one is the part of another person's income (in this example it is considered that person who borrows does not simply give money to another person but spends it in different kinds of market or invests it in business). Hence, the part of this person's income is spent on production (in case of spending money for goods, money spent for them are spent to buy new goods (production); in case of spending money on business, the loan is spent on production directly). The money spent on "production" compose the part for income of people who worked (market stuff in the first case and the supplier, for example, in the second case).
/ \
Loan (borrowing)
/-\
Expences
Production
Since loans in cycles are constant and after one cycle another one comes, then, continuing the chain of cycles, it can be represented as:
Or graphically:
GRAPH 1. LONG-TERM ECONOMIC DEVELOPMENT
This hierarchical arrangement of cycles is not accidental. It takes into account the fact that every time incomes grow due to borrowing of funds. This production cycle should be considered in the long term since the entire process takes some time.
However, considering the lending process in this way, a wave-like curve (then growing, then decreasing) appears since the loan allows to consume more than a person produces at the time of its acquisition and forces to consume less than a person produces at the time of its repayment.
GRAPH 2. LONG-TERM AND MIDDLE-TERM ECONOMIC DEVELOPMENT
Debt fluctuations last from five to ten years, and their total cyclicity (from crisis to crisis) is 75-100 years. Let's put three graphs on top of each other.
A short-term loan model combined with a long-term loan model which is applied for a productivity model. So, it can be concluded that the above graph gives an approximate idea of the relationship between credit and people's incomes, which makes up the main money supply in the world.
GDP Growth a
Regarding the system of functions from a mathematical point of view, then it is worth noting that the functions are defined from 0 to ~ or (0;+~), since production is never zero, otherwise it is not production. Also, the "general" function is increasing, neither even nor odd.
Thus, credit is an integral part of economic science.
4. Psychological components of the economy
4.1. Securities and psychological aspects
According to experts, the securities market is a poorly organized crowd that constantly argues about the rise or fall of prices. Stocks are assets that are evidence of property relations between issuers and owners, which reproduce the procedure for their sale in the course of financial transactions.
An effective stock market is a market where people who do not have insider information about a company cannot make a profit other than normal profit, and where it is difficult to make this profit even for people with insider information since prices in an effective market instantly react to the receipt of information.
Usually, financiers believe that the value of stocks, most often "shares", depends on the actions of companies (and not only those that are directly related to the enterprise, but also those that relate to the personal lives of their heads). However, the value of shares often does not depend on the work of the company itself, but on what the masses think about this work. Hence, the misinformation can either dramatically increase the value of shares or make an organization bankrupt.
So, the value of shares directly depends on rumors, on what opinion consumers and owners of assets have. This process can be explained with the following example: a company X has issued shares that allow shareholders to participate in the general voting and indirectly manage the organization. Let the company (its board of directors) own 80% of the shares, and some other company Y wants to merge the companies (for this, it is enough
—>
Time
GRAPH 3. LONG-TERM, MIDDLE-TERM AND SHORT-TERM ECONOMIC DEVELOPMENT
to take a controlling stake in company X-51% of the shares). The price for a controlling stake in company X does not suit company Y, or even company X does not want to merge. After that, company Y decides to falsify some documents allegedly reflecting the impending collapse of company X or decides to independently provide such data based on the past of organization X (respectively negative). Perceiving all this, those 20% of the shares that belong to external natural persons and legal entities are cashed out by their owners and the price per share drops sharply. Therefore, investments (a significant part of the capital of organization X) decrease, which leads to the fact that the company cannot be secured financially (pay salaries, engage in entrepreneurship). Then company Y comes to their rescue and "kindly" buys up the larger percentage of shares at a low price and, thereby, carries out the merger. From this example, it is perfectly clear that a simple rumor can increase the percentage of unemployed in a country and, consequently, lower its GDP.
With the help of shares the following processes are realized:
- Mobilization of funds to finance targeted state and local programs
- Maintenance of the turnover of ownership rights to financial assets;
- Financing of the state budget deficit;
- Exchange between individuals and legal entities.
In general, there are different types and, consequently, different names of securities, but they represent the same goal-the expansion of the world economic system in terms of exchange. In other words, securities represent an additional monetary unit. Shares are liquid, which allows them to be quickly sold or converted into money.
4.2 The human factor in credit
The human factor is the ability of an individual to make a decision in a given situation, using the qualities inherent to a human being (illogicality, irrationality, fallacy).
Human factors in economics are factors that are differently related to different behavior (choice) of a person and are often devoid of logic (a person uses a minimum of logic to make a choice).
In general, the human factor is very unusual within the framework of economics in the sense that economics provides for the rational behavior of an individual, but economics is not an exact science, and the illogicality of human actions fits within its boundaries.
Consider the lending process. A person takes out a loan to meet their needs at a given time. Often, due to ignorance about the possibilities of obtaining a loan, people criticize loans, but it should be clearly understood that loans are provided by banks only because of their desire to make money on it, and they do everything to make it happen. So, banks impose many levels that ensure their security in economic terms (take into account the earnings of a potential debtor, alternate options for paying the debt, the purpose of obtaining a loan, etc.). However, often people make loans with banks because of their irrationality and excessive desire to satisfy their needs. So, people take loans for an apartment, a car, or a phone, not realizing that if they just save money for these goods, they will save. Therefore, with such ill-considered actions, the country suffers potential losses since if the debtor's loan was invested in a self-paying sphere, this would cause an increase in the state's GDP and wages (according to Postulate-1).
Thus, the irrationality of people forces them to overpay the banks themselves, which in any case remain the winners.
5. Conclusion
Behavioral economics is quite complex and unpredictable since people behave differently in different situations, and it is quite difficult to choose a one hundred percent pattern of actions that correspond for everyone.
The research on the influence of the amount of money in society and its impact on legal lending via banks shows that the ability of people to lend some money is quite useful. From that point of view, when a person who has money and does not have an idea gives finances to a person with no money but with a big idea so everybody can beneficiate from this. Moreover, money turnover affects the credit process indeed due to the fact that the financial liquidity aids to bring money to different groups of the society.
William Shakespeare wrote: "What a masterful creation - a man! How noble of mind! How limitless in his abilities, appearances, and movements! How precise and wonderful in action! How like an angel he is in deep comprehension! How he looks like a certain god! The beauty of the universe! The crown of all living things!"
This quote is a concentration of accurate descriptions of the individual as a whole. Shakespeare was not alone in his admiration for the human mind. Each of people thinks exactly in the way that is presented above and similar ideas about a person are reflected in economics since its key idea is rationality. And from this point of view, everybody is an economist to some extent.
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