Financial markets allocate capital efficiently from "summary" of Principles of Economics by Saifedean Ammous
The essential function of financial markets is to direct capital to where it can be most efficiently used. In a market economy, resources are scarce and must be allocated in a way that maximizes their utility. When individuals and institutions save money, they are essentially deferring consumption and making their resources available for investment. Financial markets play a crucial role in facilitating this process by connecting savers with borrowers in need of capital. Through the mechanism of interest rates, financial markets help determine the price of capital and signal to entrepreneurs where resources should be allocated. When interest rates are low, it indicates that there is an abundance of savings relative to investment opportunities, prompting businesses to expand and invest in new projects. Conversely, high interest rates suggest a scarcity of savings, leading businesses to cut back on investment and focus...
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