Discussion Paper

No. 2013-8 | January 28, 2013
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.

Paper submitted to the special issue
Economic Perspectives Challenging Financialization, Inequality and Crises

 

Data Set

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The data set for this article can be found at: http://hdl.handle.net/1902.1/20294

JEL Classification

D21 L10 G14 F01

Cite As

Philipp Mundt, Niels Förster, Simone Alfarano, and Mishael Milaković (2013). The Real Versus the Financial Economy: A Global Tale of Stability Versus Volatility. Economics Discussion Papers, No 2013-8, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2013-8

Assessment



Comments and Questions


Anonymous - Referee Report 1
October 29, 2013 - 14:36

See attached file


Anonymous - Referee Report 2
November 04, 2013 - 14:20

See attached file


Philipp Mundt, Niels Förster, Simone Alfarano, and Mishael Milaković - Responses to referee reports
January 02, 2014 - 09:57

see attached files


Philipp Mundt, Niels Förster, Simone Alfarano, and Mishael Milaković - Revised Version
February 04, 2014 - 09:37

See attached file


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