Society loathes the investor, and it’s quite clear why. They seem to profit off pure luck and others’ hard work, and very tellingly, their income is legally called unearned. Additionally, their irresponsibility and greed have caused the Great Depression and the Great Recession, resulting in a fervent anti-Wall Street movement. But in reality, they actually render a great service to the economy. In this article I will explain why I think this is.
A Crucial Role in Company Growth
The most fundamental job of the investor is to select the companies and industries that, he or she thinks, have great potential. While this seems to contribute nothing to the economy, it actually funds worthy startups which grow the economy and increase the quality life: startups, usually, don’t have a large amount of cash in the bank, and that prevents them from growing or even staying afloat. But these startups can remedy their cash-flow problem by selling stocks or bonds of the company.
To whom can they sell these seemingly risky securities? Investors, of course. Only the investor has the money and willingness to back these potentially invaluable startups, and the practice of relying on funding from investors is ubiquitous; Facebook, Google, Snapchat, and essentially every major tech company have raised the funds needed to run their company this way, and undoubtedly their products have benefitted us as well as the investors.
A Crucial Role in Banking
Investors also make banking possible. We take for granted the ability to store your wealth in a bank and earn interest on it. But banks can only carry out this function by employing investors. Investors take the money you and I store in the bank and invest it so as to make enough revenue to pay the interest and make a profit. If banks had no investing sector, they would be unable to store and grow our wealth and as a result, they would either not exist or exist only as a branch of government, preventing the current institutions we have which facilitate our everyday lives.
What investors do with the money in the bank also benefits us; they take that money and invest it back into the community by issuing loans. These loans go to businesses who use that money to start up their company, as talked about previously, but also these loans go to normal people who use that money to invest in their lives – by building a house, or buying a car. Nonetheless, they stimulate the economy and increase the GDP. Thus a small change in the supply of money can change the total GDP drastically, by investors re-investing the money whenever its put in a bank. This function of investing is so pronounced that macroeconomics has a word to describe it: the money-multiplier effect.
A Crucial Role in Public Policy
Furthermore, investors are critical to the economic policy of the government. The government’s monetary policy relies on its ability to control the money supply, utilizing three methods: changing the discount rate, changing the reserve ratio, and open market operations. The discount rate is the rate at which banks can borrow from the Federal Reserve; The reserve ratio is the ratio of the deposits banks must keep in their vaults; and open market operations are buying and selling securities in the financial market. While the first doesn’t directly deal with investors, the second and third do. Investors enact the re-investing of money in banks, as described above, and the purchase and sale of bonds. So essentially they carry out monetary policy.
Interestingly enough, the operational function probably isn’t the most important role the investors serve to public policy, for they also help direct the policy itself. The past three chief economic advisers to the president were investors before the stepped into the public arena, and the news is filled with investors giving their take on the current economic policy and how it will affect the stability and growth of the economy, criticizing when criticism is needed, praising when praise is warranted. They are the indicators to public policy; when they get giddy, the politicians get worried.
Investing, to the eye of the outside observer, seems to contribute little to society, but it actually serves a crucial role in the economy. Investors give companies limitless growth opportunities that they would lack without investment. Investors help facilitate the flow of funds to those who need it and uphold the institutions of banking. Investors promote monetarily and fiscally smart policies, while questioning those that are not. Truly, we would all be poorer without the investor.