User:Msrasnw/Real Economy

From: Jurriaan Bendien  Date: Mon Nov 17 2008 - 16:36:40 EST Just briefly, I think the original distinction is probably between the "real economy" and "finance activities", and it was traditionally used in this sense by traders in stocks, securities and currency, to refer to the relationship between finance transactions and the production/consumption of tangible goods and services. The basic reason for the distinction is that the circuit of trade in financial claims, and the circuit of trade in products and services, may gain a relative autonomy from each other - money could circulate in various ways with different impacts on production and consumption, or no impact at all. Classical political economy therefore already made such a distinction, which Marx took over, but archaeologists tell me the basic idea of it is actually very ancient. The distinction also surfaces in the Kuznets/NBER discussions in the 1930s and 1940s, in the context of measuring capital formation (where capital is said to be "formed" when savings deposits are used for investment purposes, often investment in production), and in measuring gross product. This necessitated distinctions between physical assets, financial assets and more or less fiduciary assets. We can value something according to the price it actually fetches, but we can also value something according to a theory of how it should be valued, or a mix of the two. The "factors of production" theory on which the gross product account (centered on GDP) is based tries to straddle conceptually three main processes: 1) that more comes out of economic activity than went into it (economic growth); 2) that money is made from economic activity (accumulation, or income generation); 3) that economic activity adds new value (value creation, or wealth creation in some sense). But in theorising this more rigorously, the factor theory largely abstracts from social relations and from property relations to provide a "neutral" description (although it sectorizes the economy according to legal-institutional characteristics). Economic activity can then be theorised really only in terms of economic exchange (trade) of different items: formally you are "economically active" if you (at least potentially) engage in trade of land, labour, capital, other assets or consumables. Almost anything that generates income qualifies as economic activity. As a corollary, it seems that new value is generated by trade itself (business is defined by trade of some sort), and it is indeed an explicit national accounting principle that no new value can be generated by a unilateral "transfer" of resources, although it might represent an income. The science of economics then becomes the "self-awareness of markets", depicted primarily in terms of relationships between price movements of traded items, at the micro and macro level. Thus, an "economy" consist of agents trading things in a market territory. This kind of interpretation however makes it difficult in practice to distinguish rigorously between aggregate production, distribution, circulation and consumption (fuzzy, overlapping concepts), or between the redistribution of capital and net additions to capital (also fuzzy concepts), yet, doing so is essential if you want to establish quantitatively the net new wealth, net new capital, or net new products and services. From an individual point of view these things seem more obvious, than they do from a social or macro point of view. The grossing and netting of production and capital flows is accomplished statistically with the aid of a whole series of conceptual conventions (categorization rules) which try to operationalize the theory empirically in such a way that a formally consistent categorical system results. But this is done at the expense of tautological definitions (transactions are simply grouped and allocated according to a standard grid of concepts), and at the expense of a distorted representation of actual business practice (because the concepts simpify the actual complexity of transactions). In this context, the "real economy" then begins to refer to actual (tangible) investment, production or consumption of goods and services, traded at prices actually charged and paid, and to "fundamental values" which exist regardless of over-pricing or under-pricing (of speculative volatility). The more however financial activity gains independence of trade in tangible goods and services through the expansion of the credit system ("financial intermediation"), the more a circuit of transactions emerges which just involves transfers of funds, often borrowed via-via by impersonal institutions/organisations, from one account to another, without this necessarily having any clear relationship to a corresponding circuit of transactions involving traded products, or even any important, direct effect on it - in the end, all you can really see is the effect that income is gained here and lost there, or that assets are built up here and reduced there. Furthermore, the bigger the credit volume, the more pricing policies get to be based on the probability of developments in the future; these prices may not even refer to any actually existing asset value, but may be fiduciary or hypothetical prices. In that case, it becomes much more difficult to see what the relationship is between financial transactions, and the real behaviour of real people - in part, because the transactors themselves are often not even people, but impersonal organisations of various kinds. Then the "real economy" often begins to refer to the actual, observable economic interactions that actual people personally engage in. From there, the growing sophistication of trade, and the variegated terms on which things are traded globally makes the question "what the real economy contrasts with", increasingly vague: you could draw various distinctions between real vs fictitious, real vs virtual, real vs intangible, real vs financial, real vs ideal, real vs nominal, real vs hyper-real, real versus informal, real versus new, and so on. The point to remember in all this however is that the contrast between the "real economy", and another economy which is not "real" in some sense, is mainly ideological, it grows out of the reifying effects of commercial relations. In reality, there is only one economy, in which all transactions, interactions and activities are real, even if they exist only as an idea. It is just that economic theory, working with outdated categories suffering the defects referred to previously, is unable to form an integrated understanding of it which is fully consistent, resulting in eclectic concepts and fuzzy concepts to denote something about what is really going on in an overall sense - often in a way which reveals something here, only to hide something there, according to political interests. So, in a sense people refer to the "real economy" nowadays because they don't understand the "other" economy. The real economy is what they can actually experience themselves, yet, they know another economic level exists beyond what they can experience or make sense of. A superficial thinker, meeting a fuzzy concept (for example, "toxic", "iconic", "transformative"), is likely to dismiss it as pure nonsense or simply a buzzword, but I think a Marxian scholar has to explain the causes for why the concept is fuzzy in the first instance. Jurriaan