The Difference Between Real Wealth and Virtual Wealth
I’m a die-hard fan of Frederick Soddy.
While he’s famous for his work in chemistry, he also applied his knowledge to monetary issues. Many people dismiss him as a monetary crank because his theories do not fit within the hegemonic framework of neoclassical economics.
Herman Daly, Ecological Economist, has this to say about Soddy:
Soddy used concrete examples to demonstrate the flaw in economic thinking. A farmer who raises pigs faces biophysical limits on how many pigs he can take to market. But if that pig farmer took on debt – a promise to repay at a future date – he would in effect be issuing a claim or lien on his future production of pigs. If he borrowed the equivalent value of 100 pigs, he could represent the loan on his balance sheet as “-100 pigs.”
While debt as the farmer’s accounting entry is negative, negative pigs do not really exist. If the farmer should suffer a series of lean years and be unable to pay the interest, he might soon owe more pigs than could be raised on his farm. After a year, with interest looming, he’d show “-110 pigs”; in 5 years, “-161”; in 40 (assuming a patient bank), “-4526.” When the bank finally came to call on the pig farmer to collect repayment of its loan, it could well find that most of the virtual wealth that had grown so appealingly on its books had to be written off as a loss.
I’m thankful to Soddy for making the distinction between real and virtual wealth. Real wealth of things, assets, land, sheep, buildings and railways is a different category than bonds, stocks, debt and financial derivative instruments, which exist as claims against wealth. I’ll let Daly explain it to you.
