Fictitious Economy
The fictitious economy (also called the virtual economy in some translations, or the financial economy) refers to the sphere of economic activity centred on financial assets and instruments—such as stocks, bonds, derivatives, and other securities—rather than on the production and exchange of real goods and services. The term is often used in contrast to the real economy.[1]
Definition
The fictitious economy describes economic activity that is based on financial claims rather than on underlying production. The term, associated with the analysis of financialization, highlights the potential for financial activity to expand far beyond the needs of the real economy, driven by speculation and leverage. It draws on the distinction, emphasised by some economists, between fictitious capital—claims on future production—and the real capital used in production.[1]
Characteristics
| Feature | Description |
|---|---|
| Instruments | Stocks, bonds, derivatives, and other financial assets. |
| Driver | Expectations of capital gains and speculation. |
| Growth | Can expand much faster than the real economy. |
| Risk | Prone to bubbles, volatility, and systemic crises. |
Relationship to the real economy
A well-functioning financial sector allocates capital to productive uses, supporting the real economy. But an excessively large or speculative financial sector can misallocate capital, generate asset bubbles, and transmit shocks, as occurred in the global financial crisis of 2008. The relationship between the real and financial economies is central to debates over financial regulation and economic policy.[1]