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Financial Economy vs. Real Economy

April 7th, 2008

Received an email from someone on Wall Street, who saw the last post and suggested that I clarify a distinction between the financial economy and “the real economy”. Since the difference has not been much talked about, and because it is important, I wanted to add his comments separately:

One point that I think needs to be borne in mind is the difference between the financial economy and the real economy. In China’s case, the financial economy is not integrated into the global economy (you can’t move large sums in to invest or repatriate or invest-out large sums without bureaucratic approval and good reasons), which is one reason people say Western financial conditions have limited impact on China.  This is why many large financial firms are clamoring to get into China, not only because it’s a promising new market but because it represents diversification in the way few overseas markets do these days.  As far as the real economy of imports and exports etc. goes, I think there’s little doubt that China is significantly integrated into the global trading system, for good and for ill.

Speaking of these comments about a global system — for good or for ill — I wanted to turn China gamers onto a book that addresses the risks associated with an increasingly interconnected global economy. Here is a description of the book, End of the Line, by Barry C. Lynn:

Lynn observes, “Our corporations have built the most efficient system of production the world has even seen, perfectly calibrated to a world in which nothing bad ever happens.” Yet, bad things happen all the time, from natural disasters and wars to human error. The American people are relying on a global industrial system, which has serious structural flaws, and Lynn offers a thought-provoking perspective on the system’s winners and those at risk. We learn that while academics, investors, and customers view the global production system with enthusiasm, it is a disaster for many, including pension and health-insurance beneficiaries, and it shifts the power over wages and work environment from workers to investors. In reality we already live in a global system, and the author recommends using economic tools to correct the system’s failings. Since we are participants in a production system that is not controlled by any one company or any one country, this will be a challenge.

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