PAPER ECONOMY:The paper economy is that part of the economy that involves legal claims and financial markets. Legal claims represent ownership or control of physical assets. Financial markets are used to exchange legal claims.
Markets, exchanges, and other assorted economic activities that deal with legal or paper claims on physical assets rather than the physical assets. The vast majority of activities for the paper economy take place through financial markets. The paper economy complements production and consumption activities of the real economy that involve product markets and resource markets.
Although the paper economy is not directly involved with production and consumption activities of the real economy, it provides critical complementary support. For example, the paper economy makes it possible for a business firm to acquire the funds used for capital investment and for a consumer to acquire the funds used to purchase durable goods. Without the paper economy such expenditures are difficult if not impossible.
The paper economy exchanges legal claims through financial markets. Legal claims represent ownership or control of real or physical assets. Some examples of legal claims are corporate stocks, government bonds, money, bank statements, and mortgage contracts. Each gives the owner claim to real goods or resources. For example, the 10 shares of OmniConglomerate stock owned by Duncan Thurly gives him a claim to the productive assets of OmniConglomerate. If this company should go bankrupt, then Duncan can claim some of their assets.
Of course, given that OmniConglomerate has over 100 million shares of stock outstanding, Duncan's 10 shares gives him an exceedingly small claim, but a claim nonetheless.
Real or Paper?
The real (or physical) economy involves the goods and resources, the physical production used to satisfy wants and needs. The paper (or financial) economy is legal claims on these physical goods and resources. The term "paper economy" is used because these legal claims historically have been documented using pieces of paper.
However, in modern times the paper economy might be better termed the "electronic economy." The paper of the past has largely given way to electronic data storage. Many legal claims are recorded as entries in computerized accounting systems.
The paper economy involves the exchange of legal claims through financial markets. Financial markets are one of three basic types of markets in the economy. The other two are product markets and resource markets. Product and resource markets exchange the goods, services, and resources making up the real side of the economy and which are directly involved with production and consumption activities.
In contrast, financial markets trade the legal claims that represent ownership of the goods, services, and resources exchanged in product and resource markets. Most notably, when legal claims are exchanged, income is diverted. Those buying legal claims give up income and those selling legal claims obtain income.
An important diversion facilitated by the exchange of legal claims is that from the household sector to the business and government sectors. The household sector buys legal claims as a means of saving income. The business and government sectors sell legal claims as a means of obtaining income used to finance investment expenditures and government purchases.
Suppose, for example, that Duncan Thurly deposits his $243 paycheck in OmniBank. He gives the bank $243 of income, and in exchange, the bank gives him a paper legal claim (the bank account statement). They owe him $243. In effect, by buying this $243 legal claim he has made a $243 loan to the bank. He has supplied $243 of his income to the financial markets.
On the other side of this financial market, the OmniBank has sold Duncan a $243 legal claim, and in so doing has taken possession of $243 worth of his income. They have borrowed his $243.
In all likelihood OmniBank combines this $243 with income obtained from other bank customers and engage in another legal claim exchange. The Wacky Willy Company comes in on one side of this second exchange, seeking a $1 million loan to construct a new Stuffed Amigo production plant. Wacky Willy sells OmniBank a legal claim, that is a loan agreement or promissory note, in exchange for the $1 million. OmniBank is then on the buying side as it gives The Wacky Willy Company $1 million in exchange for the legal claim.