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Becky: Hey everybody! Welcome back to EnglishClass101.com. This is Culture Class, Season 3, Lesson 20 -The Top 5 Most Influential Thinkers in Finance. I’m Becky.
Eric: And I’m Eric. In this lesson, we'll talk about five finance specialists who have influenced the finance industry as well as the world economy. Let’s get to it!
Becky: Number 5 in our Top 5 Most Influential Thinkers in Finance is Hyman Minsky.
Eric: Hyman Minsky was an American economist who was one of the first to develop a theory that explained the ups and downs of a capitalist economic system.
Becky: In his lifetime he had seen two world wars, the Great Depression, and the Cold War.
Eric: Each of these events, and many others, inspired Minsky to research specifically how financial crises occur.
Becky: Minsky’s theories were among the first to connect speculation of future prices with economic downturns.
Eric: Speculation is when you “guess” at what a particular product will be worth in the future, and then make investment decisions based on that guess.
Becky: In general, there’s nothing wrong with speculation. However, as Minsky theorized, too much speculation would cause the financial system to collapse.
Eric: He was also one of the first economists to theorize that any economy has cycles of prosperity and crisis. Economists refer to these as “booms” and “busts,” referring to the way that economies can rapidly expand and then, suddenly, contract.
Becky: He also theorized that this boom or bust cycle will always happen unless some kind of central government controls the economy to some degree.
Eric: Many economists explain the financial crisis of 2008-2009 using Minsky’s theories.
Becky: That’s very interesting. So who’s next on our list?
Eric: Number 4 of our top 5 most influential thinkers in finance is Alan Greenspan.
Becky: Alan Greenspan is an economist and served as the chairman of the Federal Reserve for almost 20 years.
Eric: For those of you unfamiliar with the Federal Reserve, 20 years is a very long time. Usually, Federal Reserve chairmen serve for much shorter terms.
Becky: During his time, Alan Greenspan was one of the most respected economists in the world. While he was chairman of the Federal Reserve, the United States saw unprecedented financial growth and expansion.
Eric: I remember watching a news report about the US economy in 2005 and one of the economists commented about Alan Greenspan’s role in the United States economy.
Becky: Really? What did he say?
Eric: He said that Alan Greenspan was an exceptionally influential chairman of the Federal Reserve.
Becky: Among economists, he was viewed as almost a rock star, and if there were an economic Hall of Fame, his spot was guaranteed years ago.
Eric: That’s some pretty high praise. I’ve never thought of economists as rock stars before.
Becky: Neither have I, but they’re not my words (laughs). That’s straight from the mouth of another economist!
Eric: That’s very interesting. Why is he considered such a "rock star?"
Becky: Well, it had to do with the results he produced. He had an uncanny ability to predict what would happen in the economic markets and establish policy that would either minimize the problems or maximize the benefits.
Eric: That's right. For example, in the early 2000s a series of corporate scandals and 9-11 caused serious problems in the US economy. Greenspan lowered the interest rate on loans to just 1%. Having access to such low interest rates helped companies keep functioning because they could borrow extra money.
Becky: However, after the 2007-2009 recession in the United States, many people blame Alan Greenspan for creating policies that caused the recession. For example, some say his policies made money too "easy" for people to get. That made people take out loans too easily, which caused the sub-prime housing market to collapse. Okay, who’s next on our list?
Eric: Number 3 of our top 5 most influential thinkers in finance is Joseph Schumpeter.
Becky: Joseph Schumpeter was an economist and political scientist. He’s most famous for his discussions on the evolution of capitalism and business cycles.
Eric: Schumpeter popularized the phrase “creative destruction.” He was heavily influenced by Karl Marx, who talks about “creative destruction,” but never uses the phrase.
Becky: It’s this idea of creative destruction that is the greatest criticism of capitalism as an economic model.
Eric: According to Schumpeter, capitalism functions in a series of cycles that are dependent on new technologies, new products, and new businesses being introduced into the system.
Becky: Without everything constantly and consistently being new, capitalism stops functioning. However, the constant “newness” destroys the old things.
Eric: Which is where he gets his term “creative destruction.” As new things are created, they destroy the old things. That renewal improves the standard of living.
Becky: Most economists that support capitalism believe this to be a positive attribute of capitalism. This kind of change and creative destruction, Schumpeter believed, was enabled by financial resources available to entrepreneurs in a properly functioning capitalist society. The financial system, then, plays a key role in this process, which is itself the key to economic growth.
Eric: Their largest concern then, as economists, is to ensure that this kind of renewal can happen constantly. This is one of the reasons monopolies are so hated by many economists. Monopolies tend to stagnate the economy; they prevent this process of renewal from happening.
Becky: Schumpeter was different because he brought forward the idea that a short-term monopoly can actually be good, as it can foster innovation and investment. In other words, people have to innovate and invest to compete with the monopoly.
Eric: That’s right, which brings us to our next person.
Becky: Number 2 of our Top 5 Most Influential Thinkers in Finance is Alexander Hamilton.
Eric: Alexander Hamilton was one of the Founding Fathers of the United States and the first United States Secretary of the Treasury.
Becky: Alexander Hamilton is an important figure in American history for many reasons.
Eric: But as for finance, probably his most significant contribution was the creation of the US National Bank and the national currency, the dollar.
Becky: In 1789, the young United States of America was in terrible debt from the Revolutionary War. Each state had individual debts with many countries, and each state had its own currency.
Eric: Many of the states were bankrupt and simply refused to pay back their debts. This made almost all currency in the United States worthless.
Becky: Alexander Hamilton proposed that the Federal Government assume the debts of the states and form a National Bank and National Currency. The National Bank would receive taxes from the states and pay the debt with the National Currency.
Eric: That’s why the $10 bill has a picture of Alexander Hamilton.
Becky: And who’s our last person?
Eric: Number 1 of our Top 5 Most Influential Thinkers in Finance is Milton Friedman.
Becky: Friedman was intuitive and began his career by criticizing the government’s economic policies of the time.
Eric: He was praised for his ability to explain and understand free markets and the many facets that affect how they function.
Becky: His perception won him the respect of economists all around the world.
Eric: For example, the British magazine The Economist named Milton Friedman as the most influential economist of the past 100 years.
Becky: That’s an impressive title even when compared to winning the Nobel Prize in economics, which he also did.
Eric: His criticisms were far too complex to be covered within the scope of this lesson, but he basically said that governments should not be actively involved in regulating capitalism or free markets, except in extreme circumstances.
Becky: They should instead focus on balancing the flow of money. This monetary philosophy is called monetarism and some identify Friedman as the father of monetarism. Monetarism states that when the supply of money is too large for the economy, it will cause inflation. You'll remember from previous lessons that inflation is very bad.
Eric: So, one of the main ways for governments to control inflation is by controlling the supply of money.
Becky: Exactly. For his work, he was appointed as an economic advisor to President Ronald Reagan and led the economics department at the University of Chicago for more than a decade.
Eric: He’s also written more books and articles than can be easily counted, and he’s among the most quoted economists in recent history.
Becky: Not everyone agrees with him, and for that matter, he wasn’t always right. But he was right very often and his theories have influenced economists, businesses and world leaders all over the globe.
Eric: There you have it, the top 5 most influential thinkers in Finance. That’s all for this lesson.
Becky: Thanks for listening, and we’ll see you next time!
Eric: Bye!