Understanding and Balancing the Dual Attributes of Finance: A Return to the Essence of Finance and the Value Orientation of Its Dual Nature

Abstract: The international trend of finance returning to its essence is well recognized, yet interpretations of the "essence" vary. While summarizing practice and generalizing it is a method of "seeking common ground," delving into the essential attributes of finance and exploring its inherent laws is another method of "searching for the way." As a social economic practice, the guidelines of financial behavior have never been solely determined by the possessors or demanders of economic resources, or even financial intermediaries (financial institutions), since its inception. Even when the state (government) participates in financial activities (including the use of financial instruments and markets), it cannot act capriciously. The increasing regularization of financial activities and behaviors implies that the commercial nature inherently contains more and more prominent social attributes. The history of financial evolution is a history of the organic integration of social and commercial attributes. How to balance the relationship between these two "cornerstones" not only forms the core of micro-financial operations and management but also determines the future macro perspective of financial value orientation.

Keywords: Return to the Essence of Finance, Financial Commercial Attributes, Financial Social Attributes, Financial Value Orientation

After the 2008 international financial crisis, the international community widely called for the financial industry to return to its essence, and regulatory authorities introduced a series of regulatory measures for this return. Many financial institutions also made corresponding strategic adjustments. However, in the global trend of finance returning to its essence, there are also doubts about what exactly is the "essence of finance." Is the return to the essence of finance a temporary measure to cope with public opinion, or is it due to the inherent laws of finance itself? The confusion in practice has led to theoretical disputes, all of which ultimately focus on how to understand the "essence" of financial attributes.

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I. Understanding the Essential Attributes of Finance Deepens with Practice

As an academic category, the connotation and extension of finance also change with the evolution of financial practices. However, no matter how it changes, there are several most basic decisive elements that always exist; otherwise, finance would not be finance. First, there is a mismatch in time and space and quantity between the possession and demand of economic resources distributed among different economic entities. Second, the reallocation of economic resources must be a transactional act, and the essence of the transaction is to conditionally transfer or conditionally acquire the right to use economic resources. Third, whether to transfer and under what conditions depends on the degree of understanding of economic resource demanders by the owners of economic resources. Fourth, the larger the market scale, the more difficult it is for one-to-one economic resource reallocation models to meet demand, and the matching of multiple supply and demand entities increases the difficulty and cost of information processing, leading to the emergence of financial service institutions. Fifth, as a commercial activity that emerged with social division of labor, financial services inherently possess uncertainty. Balancing safety, liquidity, and profitability—the "three principles"—are the summary and distillation of a century of experience and lessons in the operation and development of the financial industry, representing the essence of its commercial attributes. From the era of great navigation to the era of mechanized mass production and then to the information age, the banking industry, as the main body of the financial industry, has always adhered to the "three principles" and extended them, becoming the commercial attributes of the financial industry and an unbreakable rule. However, as a social economic practice, financial behavior has never been solely determined by the possessors or demanders of economic resources, or even financial intermediaries (financial institutions), since its inception. Even when the state (government) participates in financial activities (including the use of financial instruments and markets), it cannot act capriciously. The increasing regularization of financial activities and behaviors implies that the commercial nature inherently contains more and more prominent social attributes.

From the perspective of the banking industry, banks have continuously formed the three principles of prudent operation since their inception. The Basel New Capital Accord formed after each financial crisis, and various operational principles and regulatory arrangements formed to ensure bank safety, have been the focus of hundreds of years of theory and practice in commercial bank management and supervision. The vast majority of attention has been on how to make a bank sustainable, avoiding (or at least minimizing) the external effects of bankruptcy. If people's understanding of the financial attributes of banks continues to deepen, it is not only reflected in actively grasping the commercial attributes but also in passively adapting (being forced to adjust their commercial behavior after the fact) to regulatory requirements with social attributes. However, as the most extensive social economic activity based on credit, banks have had distinct social attributes from the beginning. Focusing only on the commercial value of banks and neglecting their social value can have inestimable negative effects. When every bank is desperately pursuing its own commercial value, the ideal of a market economy where "subjectively for oneself, objectively for others" does not automatically appear. It can even lead to a huge financial bubble through extreme financial self-circulation, ultimately triggering a crisis. From the early Medici Bank, known as the driving force behind the Renaissance, which went bankrupt due to a liquidity crisis, to the prestigious British aristocratic bank Barings Bank, which collapsed due to huge trading losses at the end of the 20th century, and the bankruptcy of Merrill Lynch during the 2007 subprime crisis, the disastrous consequences of overemphasizing profitability and neglecting liquidity management and risk control are deeply exposed, all indicating that a comprehensive understanding of commercial principles itself has social significance. At the end of the 20th century, the Basel Capital Accord took to the historical stage. The first version of the Basel Capital Accord in July 1988, the second version completed in 2004, and the third version of the Basel Capital Framework in 2017, each upgrade has promoted significant progress in the scope, connotation, and technology of bank risk management. In essence, it is still the core of the "three principles," but our understanding of the financial commercial attributes "three principles" is constantly deepening, and more social attributes are endowed through financial regulation.

The realization of financial concepts breaking through from commercial principles to social principles, and ultimately achieving a mutual consideration and organic unity of commercial and social principles, is not only necessary in reality but also supported by a realistic foundation. The 2007 subprime crisis and the subsequent international financial crisis that swept the globe have made politicians, financiers, and financial practitioners increasingly重视金融的社会属性。According to the author's observations and exchanges with industry peers (including international experts), in addition to adhering to the commercial "three principles" in financial activities, at least several behaviors that lead to crisis social risks should be avoided: First, avoid the spillover of internal operational and management risks, and when it is necessary to spill over, the scope of risk contagion should be controllable and self-absorbable. Second, avoid promoting financial products that ordinary people cannot understand to society, and profiting from information asymmetry (especially false information) is contrary to financial ethics. Third, avoid the preference for financial high-endization, financial institutions must understand social pain points and market concerns, and actively serve social needs. Fourth, avoid significant damage to specific environments and specific social areas by financial projects, and improve the social assessment and environmental protection assessment before project implementation. Of course, whether these social risks that should be avoided constitute the relevant principles of financial social attributes still need to be reached, but the social driving force of financial development is indeed becoming more and more obvious. For example, in the era of great navigation, the first financial function that appeared was to adapt to the needs of commodity transaction payment and settlement services; the capital accumulation needs during the industrial revolution and the era of mechanized mass production have given birth to the credit intermediary and credit creation functions of finance; with the development of information technology and economic development, financial functions continue to enrich, expand and improve, asset restructuring, price discovery, risk dispersion, resource allocation, and multiplier effects continue to appear in the financial function list. A stable financial system plays an important role in mobilizing savings, promoting the effective allocation of investment, and smoothing economic fluctuations originating from non-financial factors. By keenly capturing social needs and rationally taking risks, the financial system plays an increasingly important role in promoting optimal economic growth and improving the standard of living in society.

The history of financial evolution is a history of the organic integration of social and commercial attributes. Overemphasizing social or commercial aspects can lead to the negative social nature of finance. The coordination, consideration, and dynamic balance of the two have witnessed the development and growth of the financial industry and the virtuous cycle of socio-economic development.

II. The process of China's financial reform shows that the understanding of the essence of finance has national characteristics.The theory of financial intermediation generally advocates that the fundamental financial functions undertaken by banks are payment settlement and fund transactions, and they continuously expand their business based on this foundation. The classical financial intermediary theory in the mid-18th century believed that finance, by acting as a credit intermediary, plays a role in transferring and redistributing social capital and improving capital efficiency. It grants loans based on accepting deposits without creating credit. In the 1970s of the 19th century, John Law proposed the "credit creation" theory, suggesting that banks providing credit is equivalent to creating money, creating wealth, and promoting economic growth. Within this theoretical framework, as the understanding of financial functions further deepens, financial intermediaries not only supply financial capital but also provide a mechanism for identifying and screening the value of social division of labor, enabling types of division of labor with higher value and better efficiency to obtain financial support, thereby promoting and leading the evolution of social division of labor. This is particularly evident in the positive role of the financial system in promoting technological innovation and economic growth.

Since the 1960s, due to skepticism about the neoclassical "zero transaction cost strange world," the institutional finance school has proposed theories of information asymmetry and transaction costs of financial intermediaries, arguing that there would be no existence of financial intermediaries in a market without transaction costs. Financial intermediaries reduce social transaction costs by coordinating the financial needs of lenders and borrowers, known as "financial intermediary technology." Information asymmetry leads to widespread adverse selection, and the advantage of financial intermediaries is to reduce the costs of adverse selection, including search costs, verification costs, supervision costs, and participation costs. The origins of various transaction costs are closely related to two of humanity's innate characteristics—bounded rationality and opportunism. At the end of the 20th century, the vigorous development of financial innovation gave rise to the value creation theory of finance, which posits that financial intermediaries increase the value of both lenders and borrowers by reducing participation costs and expanding financial services, and value addition is the main driving force for the development of financial intermediaries.

In summary, existing financial intermediary theories reveal the essence of financial services in the social and economic operation from multiple levels and perspectives, focusing on the "collective rationality" side of finance: by reducing transaction costs of real economic activities through the intermediary role of finance to achieve value addition; by credit creation and value discovery, supporting national economic strategies, guiding industrial structure adjustment, promoting the application of scientific and technological innovation, accelerating technology diffusion, and promoting economic growth.

Entering the second half of the 20th century, the rise of the financial liberalization wave and the increasingly frequent financial crises have increasingly clearly demonstrated the other side of financial irrationality, and the theory of financial fragility began to emerge and attract widespread attention. As the foundation of traditional financial economic theory, Adam Smith's "invisible hand" pursues individual interests as a positive theoretical element. The aggregation of individual rationality to the social level will automatically lead to the emergence of public goods. However, are market individuals really completely rational? Opening the financial history, the market is filled with irrational behaviors such as animal spirits and adverse selection of microeconomic subjects, and phenomena like "bad money drives out good money" and financial fraud are not uncommon. Even if all individuals in the market are completely rational, it does not guarantee the rationality of the entire financial system. Suppose that at the micro level, individual financial institutions have financially prudent rational behavior, but all financial institutions act with consistency, which may affect the stability of the financial system at the macro level (pro-cyclicality). If superimposed with market internal mechanisms such as herd effects and risk contagion, the collective unconscious rational individual operations will cause huge market fluctuations, and it is inevitable to brew a crisis.

The author has analyzed this aspect in 2017. The financial industry is a special industry that creates and operates credit and risk, with typical externalities and high information asymmetry. The logic of finance itself determines that the cost of market mechanism correction is very high, even to the extent that it is unbearable. Only by relying on the government's effective intervention in the form of regulation can it be eliminated. This is the origin and original intention of financial regulation.

First, while financial intermediaries play an intermediary role, they also form the transfer and concentration of risks. The essence of finance is credit, and the credit system is inherently a double-edged sword. While facilitating the efficient concentration of production and capital, it also becomes a powerful lever for risk concentration, thus paving a "shortcut" to financial crises. While customers transfer benefits to financial institutions, risks also transfer and concentrate in financial institutions. The size of the risk depends on customer credit. Credit is constantly changing, credit can be established or broken, full of uncertainty, and risk management is like "dancing on the tip of a knife." The financial industry is an industry that operates risks, and the core is the balance of risk and return. The deeper and more open the market economy, the more developed the financial market, the more diverse the risk forms, the more complex the risk mechanisms, and the more challenging the balance of individual financial institutions' risks and returns. In the game of risk and return, the temptation of current returns is often greater than the worry about future risks. In terms of risk-taking, financial institutions always have inexhaustible motivation. In the absence of financial regulation, the market mechanism will inevitably lead to "bad money drives out good money," and the elimination of prudent operators will lead to the increasing accumulation of risks in the financial system. The financial system needs to achieve financial functions through the concentration of risks, and it must reduce risks through a non-market mechanism, that is, regulation.

Second, financial asset prices and credit growth have self-reinforcing functions and pro-cyclic characteristics. This self-reinforcing mechanism will cause the financial industry to swing between financial excess and financial supply shortage, requiring regulation to intervene in a counter-cyclical manner, to flatten the peaks and fill the valleys, and to smooth fluctuations. Due to the existence of leverage in the financial system, asset price fluctuations will form cyclical shocks to the financial system. When asset prices rise, the value of collateral increases, financial institutions expand credit, the scale of social credit expands, and the optimistic economic situation promotes further rises in asset prices. The positive feedback self-reinforcement allows this process to continue until expectations are reversed. Conversely, when asset prices fall, the devaluation of collateral leads to credit contraction, causing asset prices to fall further, forming a negative feedback self-reinforcement. This leverage-supported self-reinforcing mechanism will lead to excessive financial prosperity and excessive tightening during crises. This point has been exposed in every crisis, and it is necessary for the government to intervene and implement counter-cyclical financial regulation to break this cycle.

Third, finance has the risk of contagion and huge negative externalities. The existence of financial externalities cannot rely on market mechanisms to "internalize" responsibility, and only government intervention can avoid the crisis brought by risk spillover. In the modern financial system with greatly increased transmission, cross, and correlation, macro financial risks are no longer a simple addition of individual risks. Risks always explode at the weakest link in the financial system and are gradually amplified and strengthened through the inherent leverage mechanism in the system, affecting the entire financial market and all financial institutions, leading to systemic financial risks and seriously threatening all aspects of social and economic life. Since financial institutions are only responsible for their own institutions and not for the overall market risk, their own expansion behavior is prone to hidden dangers of systemic risk. To avoid unbearable consequences, the government must intervene.

Fourth, the value exchange function of finance across time and space faces the risk of information asymmetry. The dislocation of time and space brings severe information asymmetry, making it difficult for market entities to self-manage better like barter, requiring government intervention to maintain market order and protect consumer rights. Unlike the cash on delivery or simultaneous exchange of goods and money in commodity transactions, financial transactions involve the exchange of value (cash flow) across periods, that is, the exchange of currently determined cash flows and uncertain future cash flows. Due to the time span involved in financial transactions, fraudsters often escape before their actions are discovered. In addition, time itself is valuable for financial products, so the losses caused by fraudulent behavior will be greater. Derivative product transactions have become a heavy disaster area for financial fraud precisely because the final trading parties and intermediaries are often far apart. Due to the separation of time and space, derivative product transactions are often troubled by fraud, misguidance, false profit promises, and other behaviors. Other unfair or deceptive financial transaction behaviors include false transactions, sham transactions, abuse of market information, and trading ahead of customers based on confidential intelligence obtained from transaction orders, which cause investors to lose part or all of their investments.

IV. The key to determining the future financial value orientation is to balance the dual attributes.Observing financial practices both domestically and internationally, despite the continuous evolution and deepening understanding of the nature of finance, two "cornerstone" elements have become increasingly clear. How to balance the relationship between these two "cornerstones" not only forms the core of micro-financial operations and management but also determines the future macro perspective on the value orientation of finance.

Firstly, the commercial attribute is the foundation of finance's existence, but the understanding of the commercial attribute must be comprehensive and accurate. Without the commercial attribute, finance would not be finance. Any theory or ideology that denies the commercial attribute of finance is a fundamental subversion of the underlying financial logic. However, the understanding of the commercial attribute cannot be simplified or extreme; the core is the understanding of the "conditions" of "conditional transfer." In the direct finance model, resource demanders are responsible for fully disclosing relevant information about their financing needs and bearing legal responsibilities for information disclosure and integrity; resource providers should have the ability to analyze this information and bear economic losses for the operational risks and defaults of borrowers. In the indirect financing model, financial intermediaries must bear economic losses for the operational risks and defaults of borrowers. Therefore, the financial institution's ability to analyze the financing needs, performance capabilities, and debt repayment intentions of borrowers becomes an important "precondition."

Secondly, the social attribute is also an endogenous attribute of finance, not a derivative or additional attribute that emerges with social and economic development. On one hand, whether in the direct financing model based on financial markets or in the indirect financial model mediated by financial institutions, risk spillover is an objectively existing endogenous financial gene. How to avoid financial risk spillover and the resulting social and economic turmoil or even crises has become the basic requirement of the whole society for financial entities and behaviors. On the other hand, the non-equilibrium distribution of savings surplus and deficit in time and space, as well as the asymmetry of financing capabilities, means that unequal and unfair financial opportunities objectively exist. This kind of financial inequality and unfairness will not only exacerbate economic imbalances but also lead to the accumulation of social contradictions and disrupt normal social and economic operations. Therefore, financial entities must adhere to commercial principles while not being confined to narrow commercial principles; they should actively take on social responsibilities and balance the internal consistency between social responsibilities and commercial principles.

Thirdly, the balance and coordination between social and commercial attributes have a solid business logic foundation and technological progress support. Firstly, resolving information asymmetry and serving the real economy are the core competencies of finance. Dualistic finance, characterized by big data-driven and large platform operations, significantly enhances risk management capabilities, market expansion capabilities, and the ability to serve the real economy through customer holographic portraits and precise allocation of financial resources, achieving a new level of balance in safety, profitability, and liquidity. Compared to traditional finance, the connotation of financial services is deepening, the level of service is increasing, and the methods of service are becoming more diverse. However, the underlying logic of finance in resolving information asymmetry remains unchanged, the original intention of financial liquidity to benefit the real economy and the people remains unchanged, and the mission to serve national construction remains unchanged. Secondly, financial services to the real economy have shifted from demand-following to supply-driven. The transformation of economic and social development methods means that the original passive, follow-up, and quantity-based expansion model of finance is no longer sustainable. The inclusive and shared attributes of finance focus on social livelihood, using modern technological capabilities to actively empower customers and assist society. While helping customers solve problems and create value, it also gains customers and expands benefits. Supply-driven strategies should have different approaches for different customer groups, reflected in leading the C-end, empowering the B-end, and connecting the G-end. Lastly, coordination and balance have shifted from passive to conscious. In the production function of dualistic finance, strategic factors and platform attributes have been added, focusing on social pain points, and using platform-based operations to unblock industrial bottlenecks, showing a distinct social consciousness. In terms of value orientation, dualistic finance has abandoned the self-thinking habit of overly emphasizing responsibility to capital and economic benefits, and has shifted to progressing with people's livelihood, sharing with the public, pursuing value growth, and committing to establishing a new service system relying on technological empowerment, and extending empowerment to society, which is more sustainable.

Dualistic finance theory provides solutions to many practical dilemmas of finance itself. The "sword of Damocles" of financial crises, the "Achilles' heel" of excessive credit, the global challenge of inclusive finance, the "mountain" of small and micro enterprise financing, and the "law of the jungle" and "animal spirit" prevalent in the financial market, among other issues that traditional financial theories cannot effectively solve, are precisely the starting point for the rise of dualistic finance.

Dualistic finance interprets the connotation and path of financial supply-side reform. Improving the quality and efficiency of financial supply is an urgent requirement for financial transformation and development under new circumstances. The practice of dualistic finance has made beneficial explorations for financial supply-side theory. First, by actively empowering society, it pursues value growth in inclusiveness, greenness, harmony, fairness, technology, and sharing. Second, it shifts from passive response to proactive action. Financial services to the real economy should not be one-sidedly understood as being subordinate to the real economy, merely providing financial support in a "passive" manner, but need to play a role in a "proactive" manner. Faced with new situations in the economy and finance and new changes in the main social contradictions, "do finance beyond finance," "use the gentle scalpel of finance to solve social pain points and difficulties." Actively undertake ESG responsibilities, more actively and effectively incorporate the fulfillment of corporate social responsibilities and the practice of social morality into management processes, actively serve the public, and give back to society. Third, it shifts from a financial intermediary to a comprehensive service provider. Upgrading and expanding financial "intermediary technology," integrating the advantages of customer insights, flexible production, centralized operations, and platform-based operations accumulated in the digital transformation of finance, and organically integrating them into the industrial chain and value chain of enterprises, enhancing the collaborative innovation capabilities of the ecosystem through open cooperation and industry-academia-research docking, and helping industries transform, consumption upgrade, and government capacity change. Fourth, it shifts from financial venue services to ubiquitous financial services. Currently, the support of financial technology for the ubiquity of financial services is still in the development stage, and there is still a large room for development in the future. The ubiquitous financial model that organically integrates commercial and social attributes based on the progress of financial technology will not only make financial development more sustainable but will also become the basic value pursuit of the industry.