The Real Versus the Financial Economy: A Global Tale of Stability Versus Volatility
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Title
The Real Versus the Financial Economy: A Global Tale of Stability Versus VolatilityDate
2014Publisher
Dennis J. SnowerISSN
1864-6042Type
info:eu-repo/semantics/articlePublisher version
http://www.economics-ejournal.org/economics/journalarticles/2014-17Version
info:eu-repo/semantics/publishedVersionAbstract
The question how the real and the financial side of a capitalist economy relate to each other
has been a frequently recurring topic in the history of economic thought. Our paper addresses
this question from the ... [+]
The question how the real and the financial side of a capitalist economy relate to each other
has been a frequently recurring topic in the history of economic thought. Our paper addresses
this question from the viewpoint that capital ultimately seeks returns from its perpetual
reallocation and essentially faces two choices: it can either be “entrepreneurially” allocated to
real economic activity, or it can be “financially” invested in legal claims against such activity.
Adopting such a perspective, we study here how real and financial returns relate to each
other over the past fifteen years, both within and across countries, by considering more than
30,000 publicly traded firms in more than forty countries that stand for 70% of the global
population and about 90% of world income. We compare the average rates of return to both
types of investment and their respective volatilities. While average returns, perhaps somewhat
surprisingly, turn out to be roughly equal across the two domains, the volatility of financial
returns exceeds ‘real volatility’ by an order of magnitude. From a systemic point of view, these
findings raise the question why capital would seek out financial investments in the first place. [-]
Is part of
Economics: The Open-Access, Open-Assessment E-Journal, 2014, vol. 8, núm. 2014-17Rights
info:eu-repo/semantics/openAccess
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