Monday, 12 March 2012

Real Economics versus Finance

The Question
Some time ago a colleague asked me to spell out, clearly and simply, the difference between Social Credit and Monetary Reform. To which I gave the following answer: To every difficult and complicated question there is an answer which is simple, easy to understand – and wrong. Nevertheless, after long deliberation, I think I may be able to give a better response.  

The Answer
Social credit theory draws a clear distinction between the real economy and the financial economy. Since there is no necessary, i.e., proven or scientifically established, relationship between the two, it follows that reform of the money system will not, on its own account, result in reform of the real economy.


Although the answer is not wrong, it may be difficult to understand. So steeped are we in the ways of the world as we are taught in schools, colleges and the experiences of everyday life, that it is difficult to sift fact from pure fiction. The fact is, there are two economies, the real economy and the financial economy. When we are told by the news media that ‘the economy’ is doing well, it means that the financial economy is doing well. Hence we are led to assume that the real economy is doing well, when it may well be doing very badly indeed.

The real economy consists of all the goods and services available to humanity within a given area on the earth’s surface, in a town, a county, a province, a country or the world as a whole. Material goods produced for sale on the market form a part of the real economy. But they form only a small part of the real economy as a whole, an economy which comprises the land, the seas, the sky, the rainfall, the minerals under the earth, and all plant, animal and human life forms. Although the real economy can exist without the financial economy, the reverse does not hold true.

The financial economy is the money-value economy. It accounts only those things which are exchanged for money. Thus the gifts of nature, the forest trees, the growing plants, the sunlight, have no value unless or until they come into the supply chain of the financial economy. Two curious facts follow from this. Firstly, the financial economy fails to take into account the existence of certain goods and services vital to its survival. These include not only the gifts of nature, enormous in themselves, but also the vast swathes of the labour of human hand, eye and brain which falls outside market forces. And secondly, the financial economy does put a high money value on certain ‘financial products’ which have no real value whatsoever.

Monetary reform which does not reform our understanding of the true relationship between the real and the financial economies is a waste of time and can only result in frustration.


  1. Hello Frances,

    I have come across your page by doing a Google search on “financial economy” vs “real economy”, as I am writing a post on the subject. I was first intrigued by the name of your blog on which I must congratulate you: it is very smart.

    Your post is quite interesting. You have the merit, unlike most people who differentiate between financial and real economy, to provide a definition of the two concepts, and one which is certainly more refined than others that I have read so far (such as the Longman Business English Dictionary quoted by the FT).

    As we are dealing with definitions, I may not allow myself to qualify yours as correct or not. However, I may still look provide some critical comments.

    Let’s start with a question - You defined the financial economy as the “money-value economy”, but I do not see any reference to the concept of “value”, money or otherwise in your definition of the real economy; is that an omission or is it that valuation as no place in the real economy? If so, isn’t that the “real” difference between the two concepts? That with the concept of “real economy” one wants to refer to the concrete things whereas with the “financial economy” or “money value economy” as you put it, one as to deal with the collective discrete appreciation of the relative benefit derived from those concrete things? And isn’t this discrete valuation exercise a necessity of human organisation and activity, unless you wish (or believe) that value is set by an omniscient entity?

    An additional comment, or maybe, a necessary clarification: an item does not need to be directly exchanged for money to enter into the “supply chain of the financial economy” and be taken account of. Let’s take the example of air which may fall into your category of gifts of nature. Everything else being equal, we can compare the price of a house in Town A where air quality is good, with that of a similar house in Town B which suffers from air pollution. The value of the first house will be higher than that of the second house. The “financial economy” therefore finds its way to reflect the benefit or utility of air quality, without it being something that can directly be exchanged for money. For utility and value are two related yet distinct concept which can easily but wrongly be amalgamated when one looks for “an answer which is simple, easy to understand” :-)
    As you will have understood I do not share your view but very much respect your endeavour.


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