There’s No Such Thing As The Real Economy


Trading floors are just as real as factory floors because there’s no such thing as a “real economy.”

By this I mean that there’s no easily distinguishable difference between the “real” economy and some “other” economy that’s less real, or, not really real at all.

In this post, “easily distinguishable difference” is understood in terms of the essential aspects of an advanced economy at some point in its postindustrial phase, as opposed to political contexts in which “the real economy” is associated with “the daily lives of everyday people” and that “other” economy with the stock market, “The 1%,” and Wall Street.

Below are various conceptions of “the real economy” that I’ll have in mind throughout this analysis:

Economic Definition Of Real Economy. Defined.

The physical side of the economy dealing with goods, services and resources. This side is concerned with using resources to produce the goods and services that make the satisfaction of wants and needs possible. This should be contrasted with the paper economy, or financial side of the economy.

The Economic Glossary


“The Real Economy”

Here’s what I don’t know: How much will all this undermine what people call “the real economy”? Because although many of us have a rooting interest in Wall Street (via investments), our primary financial concerns involve jobs, housing, the day to day commerce of modern life. So that’s the next area to poke around: What’s happening on the streets?

The Washington Post | Joel Achenbach | 9/30/2008


“Do Financial Markets Matter for the Real Economy?”

After a frustrating 2015, the start of 2016 has been even more disappointing from the stock market, with the S&P 500 down by 8 percent after just two weeks. The new year has begun even worse in China, where markets are down 18 percent — and this is after a rollercoaster 2015 where equities rose by 54 per cent in the first half, only to lose it all a month later.

But the real economy has been devoid of such excitement. U.S. unemployment fell steadily from 6.6 percent to 5.6 percent over 2015, with quarterly GDP growth consistently between 3 and 4 per cent. And it’s the real economy which determines how many “actual” goods and services are bought, how many people are in work, and how much investment is undertaken. So do financial markets actually matter, or should we only pay attention to real measures?

The textbook answer is that financial markets are forward-looking, while real indicators are historic. Peaks and troughs in the stock market tell us about the real economy’s future prospects. But even under this argument, financial markets are merely a mirror — they passively reflect the economy, but do not actively affect it. As a rather blunt analogy, if a person dislikes the waistline reflected back at them, the solution is not to change the mirror but to change one’s habits. If true, then the US financial industry is $1.26 trillion wasted on a mirror which should be reallocated to bricks and mortar.

The Huffington Post | Alex Edmans | 1/18/2016

We’re expected to believe that there’s a resource or production side of the economy, and a “paper” or financial side, and that we can tell the difference between them. Further, we’re expected to believe that the former is real, while the latter is not.

Surely it’s occurred to the sort of reader who reads these sorts of sources that the word “real” is always used when discussing the real economy. But there’s no fixed designation for that “other” economy. I’ll refer to it as “virtual.”

Also note how mass media privileges the real over the virtual economy, as when columnist Matt Phillips of the Wall Street Journal writes of “the real economy”: “Real, you know, as in stuff being built, jammed into boxes and sent to customers.”

There’s nothing at all conceptual in this description. Every noun or verb is either a concrete thing or a physical action. After the Financial Crisis of 2008 and the complex shenanigans that made it possible, this is all that the real economy is supposed to be: things and actions ultimately reducible to labor and energy.

While there’s nothing more real than “the real” economy, the virtuality of the “virtual” economy is suspect simply because it’s not real and isn’t obviously reduced to any thing that’s real. And whereas the real can’t be anything but real, the virtual is fake because it can’t represent the real. It can only simulate the real. Consider “credit default swap,” “irrational exuberance,” “too big to fail,” and “quantitative easing” as a few infamous examples.

And yet, just because the era of extreme finance evoked by these simulations was created by and then collapsed inside computers doesn’t make them any less real.

So it’s here, at the point where the real/virtual distinction is pushed to its limit, that we see how impossible it is as a substantive description of our economy.

Any conception of a real economy that’s distinct from the virtual fails to consider the intimate connections between the physical world of factories and products and the digital world of finance and markets. Price discovery reduces all of these connections to money, at least 90% of which is loaned into existence (“out of nothing”) by banks, and thus is virtual.


So if, after labor and energy, the most basic aspect of our economy (the money creation process) is virtual, then “the real economy” isn’t nearly as real as we want to believe it is.

Producing goods and services is only possible because of the nexus of transactions, networks and ideologies that we think of as global capitalism. Ideology conditions us to believe that the real economy makes the virtual economy possible. However, the reverse—that our sense of a “real” economy is only possible because there’s a “virtual” economy that circulates capital through it—has been true at least since the advent of digital transactions and probably since the transition from the Bretton Woods version of the gold standard.

Perhaps it’s always been true that an economy has to be virtual, in the sense that any medium of exchange represents a debt and is ultimately backed by trust, obligation, and confidence.

Few of us, when we’re buying and selling, consider the irony that the virtual economy may be more real than “the real economy.”

Still, it’s all just “the economy.” However virtual it is, there’s nothing unreal about it.


IMAGE SOURCE: Eric Whitacre’s Virtual Choir

IMAGE SOURCE: What is money and why our current currency system will blow up


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