Is There Such a Thing as ‘The Real Economy’?

On this week’s edition of Novara Aaron Bastani and James Butler discuss the idea of the ‘real economy’ as being independent from the supposedly ‘unreal’ financial economy. Does this binary still cohere with the observable workings of contemporary production in the 21st century?


It has been claimed by a number of economic historians and historical sociologists, such as Charles Kindleberger and Giovanni Arrighi, that financial crises are situated at a precise moment of the economic cycle, contemporaneous with a decline in profit margins in the ‘real economy’ as a consequence of market saturation and heightened competition across lines. Within this context ‘financialisation’, most particularly in the 20th century, is understood as an attempt by  capital to find the same or higher levels of return than it previously enjoyed but which are no longer available in the ‘real economy’.

Such an account of financial crises and their ‘natural’ incidence in the economic process fits with the invocations of OECD policy makers and commentators, in light of the Global Financial Crisis of 2007/8 and the subsequent and ongoing ‘Long Recession‘, of the need to ‘re-balance’ the economy away from the previously dominant ‘FIRE’ industries (especially in those economies such as Spain, Ireland, the United Kingdom and the United States) towards manufacturing and ‘making things’. Such a position regards financial capital, while no doubt necessary for optimal capital allocation, as somewhat parasitic on industrial capital and that such parasitism is capable of being remediated by political directorates (i.e. them).

These demands for re-balancing are heard nowhere more frequently than in the United Kingdom where they traverse the entire political spectrum from the ideologically desiccated mouths of Keynesians such as Robert Skidelsky to George Osborne and even far-left ‘revolutionary socialist’ groups. Despite differences the account here remains the same, the real and financial economy exercise a particular relationship to one another which has become ‘unbalanced’ and which now requires restoration.

For others such a binary does not accurately depict the role of finance in the functioning of the contemporary global economy. These critics claim that unlike those historical cycles observed by Kindleberger et al. the functioning of the financial and ‘real’ economy have now become mutually constitutive.

As Marrazzi puts it,

The process of financialization that led to the crisis we are living in now is distinct from all other phases of financialization historically recorded in the twentieth century”.

But what does this mean? Marrazzi goes on to add,

“The financial economy today is pervasive, that is, it spreads across the entire economic cycle, co-existing with it, so to speak, from start to finish. Figuratively speaking, finance is present even when you go shopping at the supermarket and use your credit card. The automobile industry, to give only one example, functions entirely upon credit mechanisms (installments, leasing, etc.), so that the problems of a General Motors have just as much to do with the production of cars as, if not above all, with the weakness of GMAC, its branch specializing in consumer credit, indispensable for selling their products to consumers. This means that we are in a historical period in which finance is cosubstantial with the very production of goods and services. In addition to industrial profits not reinvested in instrumental capital and in wages, the sources fueling today’s financialization have multiplied: there are profits deriving from the returns of dividends and royalties from offshore investments; flows of interest coming from Third World debt to which flows of interest on international bank loans to emerging countries are added; flows of interest on international bank loans to the emerging countries; surplus-values derived from raw materials; the sums accumulated by individuals and wealthy families invested in stock markets, retirement and investment funds. The multiplication and extension of the sources and agents of “interest-bearing capital” are, without a doubt, one of the distinctive, unforeseen and problematic traits of this new financial capitalism, especially if we reflect upon the possibility or impossibility of modifying this system, of “re-financing” it, reestablishing a “more balanced” relation between the real and financial economies.”

Elsewhere Giovanni Arrighi writes,

“As Greta Krippner has shown on the basis of a thorough analysis of the available evidence, not only had the share of total US corporate profits accounted for by finance, insurance, and real estate (FIRE) in the 1980s nearly caught up with and, in 1990, overtaken the share accounted for by manufacturing, but that more importantly, in the 1970s and 1980s, non-financial firms themselves sharply increased their investment in financial assets relative to that in plants and equipment becoming increasingly dependent on financial sources of revenue and profit relative to that earned from productive activities. Particularly significant is Krippner’s finding that manufacturing not only dominates but leads this trend towards the “financialization” of the non-financial economy.”Krippner is therefore claiming that the financial economy  – corporate bond issuances, asset-backed securities and so on is now no longer identifiably extricable from the functioning of actors in manufacturing and elsewhere. The example of GMAC within General Motors is the most glaring example of a whole paradigm which appears to be entirely elided in mainstream and even ‘radical’ accounts of the present conditions.”

Within such conditions, ignored by those even within radical milieus, what would a counter-cyclical ‘stimulus’ even mean? Is it possible?

As Robert Shiller has pointed out any potential ‘stimulus’ that might hope to work in the present context would focus on job creation rather than GDP. This would include, but would not be exclusively limited to, the remuneration of previously unpaid work – such as care and domestic work and cognitive labour. Do we see within such a proposal a perhaps unconscious recognition of the necessity of an ever expanding ambit of ‘free labour‘ within what has been variously described as ‘post-fordism‘, ‘restructured capital’ and ‘network culture’ as highlighted by Virno, Terranova and others? Would a Keynesian stimulus within this new set of parameters thus seek to remunerate unpaid work, does it understand the increasing removal of paid ‘work’ from the overall production process?

Such a solution is not entirely at odds with the claim made by Paolo Virno in ‘Thesis 4’ in his ‘Ten Theses on Post-Fordism’,

“The old distinction between “labor” and “non-labor” ends up in the distinction between remunerated life and non-remunerated life. The border between these two lives is arbitrary, changeable, subject to political decision making.”

Is the recognition of this border as only constituted by ‘political decision-making’ re-affirmed by Schiller’s article in the NYT? In which case is it plausible that Keynesians, in the medium term, will begin to critically examine the possibility of a guaranteed social wage in recognition of the fact that as Virno points out in Thesis 3 (picking up from Karl Marx in the ‘Fragment on Machines’) that work and the wage relation is becoming increasingly decoupled from the production process?

The Impossibility of ‘Jobs and Re-industrialisation’

Any demanded ‘re-balancing is of course coupled with the invocation to ‘re-industrialise’. While the possibility of such re-industrialisation is questionable, it is clear that any claim that re-industrialisation will create a significant amount of jobs is, to be blunt, deluded.

It is a common misconception that the ‘de-industrialisation’ of high-GDP countries such as the UK and the US can be blamed on the industrialisation of previously low-GDP countries such as China since the early 1970’s. In fact between 1993 and 2006 China did not create any new jobs in manufacturing with the total number of workers in the sector staying constantly at around 110 million. This was in spite of the fact that Chinese GDP grew by over 300% in the period, with the country becoming a world leader in the manufacture and export of a variety of goods. Contrary to what one might reasonably presume the number of people actively engaged in industrial production as a percentage of the global population has not increased since the early 1970s. Increased output has instead been consequent to greater levels of automation and more efficient techniques for production and distribution of goods – all minimising the total amount of necessary human labour to what will continue to be expanding production. A point frequently glossed over in discussions of the ‘Third Industrial Revolution’.

The very nature of ‘(re)industrialising’ would therefore be to reduce to the bare minimum the human element (variable or circulating capital) within the production process in favour of an ever increasing proportion of fixed or constant capital (what Marx referred to as ‘changes in the organic composition of capital’). Given such a tendency how does ‘re-balancing’ and ‘re-industrialisation’ constitute a plan for jobs?

The Move to ‘Financialisation’ Was a Necessity After The Crisis of the Mid-1970s

The need to ‘re-balance’ implies of course the idea that there was a certain moment when the real and the financial economies were in a state of sustainable equilibrium – with the macroeconomic and finance see-saw tilting in neither direction. Such a claim is contentious and to our estimation incorrect, although recourse to the referent of a historical capitalist idyll ‘the golden age’ is understandable.  Nevertheless, a more pernicious claim than even this is the one that claims that such previous equilibrium, with it’s balance between labour and capital, profitability and wages, was broken as a consequence of the ‘greed’ of corporations and ‘bankers’. The problem it is claimed, is one of private vice over public virtue.

Our response is that such a conclusion is incorrect and that after the crisis of the mid-1970s where one observes a crisis of profitability in precisely those countries which ‘re-structured’ first and with the greatest intensity, the United States and the United Kingdom, the move to ‘financialisation’ was entirely imperative in order to restore profitability to the system and undermine the political power of labour-based movements adroit and accustomed to fighting within the terrain of nationally embedded ‘Fordist’ production. Such events were thus not catalysed by greed but were instead entirely necessary to maintain the integrity of profitability and therefore the existing mode of production.


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