The Economy:  Three Interpretations

In today’s complex world, understanding the various layers of economic activity is crucial for grasping the true nature of wealth, sustainability, and human well-being. The phrase “This real economy, which is energy-based, must be seen separately from the financial economy used by the establishment and classical economists, and the informal economy of localism” encapsulates a fundamental truth about how we perceive and interact with the systems that govern our lives. To fully comprehend this statement, it is essential to explore the distinctions between these three economies: the real, energy-based economy, the financial economy, and the informal economy rooted in localism.

The Real Economy: An Energy-Based Perspective

The real economy is grounded in the physical processes that sustain human life and the planet. It is fundamentally energy-based, as all economic activity ultimately depends on the transformation and consumption of energy. From the food we eat, grown through photosynthesis and human labour, to the goods we produce in factories powered by electricity, to the transportation networks that move people and products around the globe—energy is the indispensable foundation of all these activities.

The real economy is where tangible goods are produced, services are rendered, and the physical labour of human beings is directly involved in creating value. This economy is concerned with the material conditions of existence: the production of food, the construction of shelter, the provision of healthcare, and the manufacturing of tools and technologies. It is the domain where the inputs and outputs of human endeavour can be measured in terms of energy efficiency, resource use, and environmental impact.

In an energy-based economy, sustainability becomes a paramount concern. Since energy is a finite resource, its efficient use is critical to maintaining the balance of ecosystems and ensuring the long-term viability of human civilization. Therefore, The real economy is inextricably linked to the concept of ecological and economic sustainability. Understanding this connection is vital for addressing the environmental challenges of our time, such as climate change, resource depletion, and biodiversity loss.

The Financial Economy: A System of Abstractions

In contrast to the real economy, the financial economy is built on abstractions—currency, credit, stocks, bonds, and other financial instruments that represent value but are not inherently valuable. This system, which is heavily relied upon by the establishment and classical economists, operates on exchange, speculation, and profit maximization principles.

The financial economy is detached from the physical realities of energy and resources. It is driven by capital flows and influenced by perceptions, expectations, and market sentiment. Unlike the real economy, which is constrained by the physical limits of energy and resources, the financial economy can grow, contract, and fluctuate wildly based on human psychology and policy decisions. This detachment can lead to a disconnect between financial growth and the health of the real economy, as evidenced by phenomena such as financial bubbles, economic crises, and the growing disparity between financial wealth and real-world resources.

The financial economy is about 40% larger than the real economy.

In the financial economy, value is often created and destroyed in ways that do not directly correlate with producing or consuming authentic goods and services. For example, the value of a company’s stock can soar or plummet based on investor sentiment or market speculation, even if the company’s actual production and energy consumption remain unchanged. This creates a situation where financial growth does not necessarily indicate material well-being or sustainability improvements.

Moreover, the financial economy has become increasingly complex and globalized, with intricate networks of transactions and dependencies that can obscure the underlying realities of the real economy. The creation of sophisticated financial instruments, such as derivatives, has further abstracted financial transactions from their roots in the real economy, making the financial system prone to volatility and systemic risk. This complexity also makes it difficult for policymakers and the public to fully understand or control the financial economy, leading to economic power being concentrated in a few large financial institutions and individuals.

The Informal Economy: Localism and Mutual Benefit

The informal economy, often overlooked by mainstream economists, represents another crucial layer of economic activity. This economy is characterized by localism—economic transactions outside the formal market system, often within extended families, communities, and small networks. It is mainly unmeasured and unregulated, involving the direct exchange of labour, goods, and services without money or formal contracts.

The informal economy is deeply rooted in human relationships and community cooperation. It includes activities such as bartering, mutual aid, and voluntary work—activities that contribute significantly to the well-being of individuals and communities but are not captured by conventional economic metrics like GDP. For example, a neighbour might help another repair their home in exchange for childcare, or a community might collectively organize a food-sharing program. While not recorded in any financial ledger, these exchanges are essential to the social fabric and often provide a safety net for those marginalized by the formal economy.

As expressed in the informal economy, localism also has a solid connection to sustainability. By relying on local resources, knowledge, and skills, communities can reduce their dependence on global supply chains and the energy-intensive transportation of goods. This local focus can lead to more sustainable consumption patterns, as goods are produced and consumed closer to their source, minimizing energy use and environmental impact.

Interconnections and Tensions Between Economies

While these three economies—the real, energy-based economy, the financial economy, and the informal economy—can be conceptually separated, they are deeply interconnected in practice. The financial economy influences the real economy by determining access to capital and shaping investment decisions, affecting energy and resource allocation. The real economy, focusing on energy and material production, sets the limits within which the financial economy must ultimately operate. The informal economy, meanwhile, interacts with both the real and financial economies, often filling gaps left by formal markets and providing resilience in times of economic hardship.

However, tensions between these economies can also arise. The financial economy’s pursuit of profit can lead to exploiting the real economy’s resources, driving environmental degradation and unsustainable practices. This disconnect can also manifest in the neglect or undervaluation of the informal economy, where much of the social and environmental value is created without generating financial profit.

Furthermore, the financial economy’s emphasis on growth and accumulation can conflict with sustainability principles central to the real economy. Financial markets often prioritize short-term gains over long-term stability, leading to decisions that undermine ecological balance and the sustainable use of resources. For example, investments in fossil fuels might be financially profitable in the short term, but they contribute to long-term environmental harm and climate change, ultimately threatening the real economy’s ability to function.

The Path Forward: Integrating Economic Perspectives

To create a more just, sustainable, and resilient society, it is essential to integrate the perspectives of these three economies. Recognizing the importance of the real, energy-based economy can help reorient financial practices and policies toward sustainability. By aligning financial incentives with ecological realities, it is possible to promote investments in renewable energy, sustainable agriculture, and other areas supporting the long-term health of the planet and human communities.

At the same time, valuing and supporting the informal economy can strengthen social cohesion and provide a more inclusive foundation for economic well-being. Policies encouraging localism, such as community-supported agriculture or local currencies, can help build resilient economies less vulnerable to global financial shocks.

Ultimately, a holistic understanding of economics—one that sees the real economy, financial economy, and informal economy as interconnected yet distinct—offers a path toward a future where human and ecological well-being are prioritized over short-term financial gains. By acknowledging and addressing the limitations and potential of each economic layer, we can work toward a more balanced and sustainable world.