It is said that knowledge is power, but power over what or to do what?
Whatever the definition one comes up with, here I will dwell on power over ignorance.
Ignorance is dangerous. It is the basis of superstition which is also dangerous.
The knowledge, which is the subject of this piece, concerns the money economy in which we were dragged into since the advent of colonial rule.
It is incumbent upon everyone to at least have an elementary knowledge of structures of the economy.
Economists see an economy as divided into the real and the financial sector. One of the best known Cambridge University economist Professor Joan Robinson has been quoted as saying: â€œWhen an enterprise leads finance follows.â€
This is testified by the fact that when a bank decides to open a branch at a particular place, we can rest assured there is brisk economic activity taking placing there. Perhaps there are farms, shops or a mine that have been opened and thousands of people are working there.
Financial institutions such as banks, insurance firms, stock markets are a reflection of what is going on in the economy.
When banks charge high interest rates for loans this means there are big risks in economic activities.
Galloping inflation takes places because in the real sector, the supply of goods or products is not good and there are shortages of things on which people want to spend their money.
Correctly, we have attributed devaluation to inflation that is eroding our bank deposits, but there is another factor which is the inadequate of maize harvest Malawi experienced during the last rainy season.
Though the financial sector follows and does not precede the real sector, it performs the following important functions.
1.Â Â Providing payment services
It is okay to carry a few thousands of kwacha in your pocket to use in buying groceries. But when large sums of money are involved wise people avail themselves for services provided by banks. They pay their employees or creditors by cheques. This method is both more convenient and safer.
2.Â Â Matching savingsÂ and investments
There are people who deposit their earnings with commercial banks and there are those who borrow the money from banks for business purposes. Those who save do not often wish to use their savings in business. Through banks these savings are made available to those who need extra capital to operate their businesses. In this way, through both savings and investments, an economy grows. It is the financial institution that makes an economy to grow. Where there are no such institutions, people bury their money under mattresses where it earns
no interest and is liable to get stolen.
3.Â Â Sources of information
Where people are active in buying and selling stock and bonds, financial institutions provide information on the prices. Banks usually issue information on how the economy is performing. All this helps potential investors to make the right judgement.
4. Insurance and trading risks
In normal business life, we are exposed to risk of fires, robberies and death.
Insurance firms protect us from these hazards. They do not put all your eggs in one basket. People who have spared cash buy shares or securities not just in one firm but in several of them. This is facilitated by the stock market.
5.Â Â Facilitating asset liquidity
Once you have a share in a company you cannot go at any time you need the money to ask for it. Your money and other peopleâ€™s money have been used to purchase equipment or land. The only way to get your money is to ask someone else to buy your share. ItÂ is the stock market thatÂ provides this facility.
Governments use monetary and financial policies to achieve the macroeconomics to which they give priority. If government is mostly worried about inflation it will raise the interest rate to squeeze credit and reduce the quantum of money circulating in the economy. This policy tends to aggravate unemployment.
If the government wants to boost employment, it will reduce the central bank rate to make credit grants to business cheaper, encourage investment. While this creates more jobs at a certain point it could lead to inflation. Formerly, such a situation would arise only after full employment but these days economies are burdened with stagflations, inflation which exists even before full employment.