The Real Versus the Financial Economy: A Global Tale of Stability Versus Volatility

Abstract

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.

Agent-based simulation of macroeconomic systems

“…This result depends on the fact that both of them are affected by the evolution of profit and, in turn, it is affected by the price. The fact that the profit rate is autocorrelated confirms the analysis of the profit rate autocorrelation of profit rate US firms [Mundt et al, (2014), (2016)] .…”

“…We have chosen the period of 31 time because our aim is to compare our simulated data to the empirical data in [Mundt et al, (2014), (2016)]. The long-lived firms represent the 70% of total number of firms.…”

“…• to prove that an ABM is able to replicate the empirical distribution of the growth rate and profit rate that [Alfarano et al, (2008), (2012)] , [Mundt et al, (2014), (2016)] have found studing the real world data.…”

“…On the base of their empirical densities, the model is able to replicate, via simulation, the growth rate and profit rate dynamic in a new perspective, as studied by [Alfarano et. al (2008), (2012)] and [Mundt et al (2014), (2016)] . In this new perspective we use the Sub- Their model will guide our present investigation and analysis.…”

A statistichal equilibrium perspective on corporate profitability

“…41 The notion of a real vs. financial disconnect is, of course, well established in the literature, mostly revolving around excess volatility in financial markets (e.g. LeRoy and Porter, 1981;Livan et al, 2014;Mundt et al, 2014;Shiller, 1979Shiller, , 1981. 42 Again, notice that volatility is measured with respect tom for all firms.…”