The Real Economy: Conceptualization and Dynamics

Abstract

In the economic literature one often encounters the reference to the real economy. The term is used to distinguish from the financial side of the economy, also known as the financial sector. Except mentioning this distinction, rarely attempts are made to explain the dynamics of the real economy and its interaction with the financial sector. There is also scanty pedagogical resources on the subject of the real economy, and it is not even mentioned in most of the introductory economics texts. Understanding and appreciating this dynamics has become vitally important with the increasing dominance of the financialization of the economy. 2008 economic crisis is a stark example of the impact of growing financialization, at the expense of the real economy. At the simplest level, the real economy can be conceptualized in terms of the dynamics of production, consumption, trade, technology, institution and human capital. In this conceptual paper, the dynamics of the real economy is explained and the implications of the dynamics are identified. In addition, conventional discourse about the real economy generally embraces the traditional categorization of the factors of production, where labor is reduced to just a factor of production. The real economy ultimately should be a human-centred enterprise and the pertinent discourse should acknowledge and reflect it. This paper places the dynamics of real economy in a human centered context. Also, from pedagogical perspective, it is important to embed the term real economy and financialization in IE texts and weave the concepts appropriately. This paper identifies relevant contexts where the real economy theme can be pertinently covered and illuminated during teaching IE courses.