Finance vs. Economics - what's the difference?

A post in the Cent community recently contained this as one of it's main tenets: finance and economics are not the same thing (though people might think that they are). The author is correct.

Here's the way I wrap my brain around these things.

The difference, in one sentence:

Economics is about choices, finance is about money.

Economics is a wider umbrella, a bigger tent. Underneath, lies finance (as well as many other things). We, of course, make lots of choices daily with our money. We decide on things like what to spend our money on, or to hold onto it. We decide how to earn money. We decide how to invest it or to put it in a mayonnaise jar and bury it in the yard. We are concerned about inflation and devaluation of our money.

All of these things dealing with money, are naturally part of economics because all involve decisions or choices. Even the inflation and devaluation pertains to choices...a federal reserve makes choices about printing money and spending and monetary policy tricks, all of which are decisions.

Economics is all about choices, and more particularly, about trade-offs. You cannot have it all. :(



Image source: Unsplash

A simple example in real life

I really like the term "home economics" and that course, which unfortunately is no longer taught in American schools because it has been given a negative connotation. But, the term works. "Home ec", traditionally, was taken by girls who were taught and learned about things like cooking and sewing. But, the terrific part of home ec was the "household management" part of the course. Again, traditionally in the U.S., the men went to work to earn money for the family and the women stayed home and ran the household. Things have changed, of course, but this is largely how it was done roughly up through the 1950s and 60s. Dad's paycheck was turned over to Mom to operate the home. Decisions had to be made: groceries, doctor visits, school expenses, repairs, an upcoming birthday party, on and on endlessly. The paycheck was finite, the list of things that needed to be done was endless. Decisions, choices, and trade-offs (economics) would have to be made.

Home economics helped girls learn skills which influenced the decisions that would be made in their households.

If a child tore open a pair of jeans doing a split on the playground, a new pair of jeans could be purchased. Of course, that would mean not getting something else on the list, like a new pair of shoes. A better option would be to use that sewing skill to mend the jeans. Now, the shoes could still be purchased. Home economics allowed the parent to choose to better manage her money, her finances. By deciding to not spend on new jeans, but put her utility in sewing to use, the family's well-being was better off.

A side note

As a boy in the seventh or eighth grade, my school had everyone take "the wheel". The wheel was 9 weeks to try out four different courses: metal shop, music, wood shop, and home economics. Both boys and girls took these courses and it was great. In home ec, the culmination project was a "wedding" that all classes put together. My school had ages 12 up to 18 (small town school), and one of the older guys and girl were "getting married". The upshot, students made the wedding gown and bridesmaids dresses, students laid out the menu and cooked the food, students did the flowers, a budget was laid out and estimated, etc. At the end, we had a "ceremony" during school. It was a ton of work, but fun (especially for us younger kids who didn't have to do much, yet still got to eat the cake).

Suppose there wasn't enough money to buy enough cake and ice cream for everyone, you had to pick one. The finance part is the money, the economics part is cake or ice cream.

So, finance = money, economics = choices.






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Ecency