Assets

The material wealth of society is ultimately determined by the productive capacity of its economy, that is, the goods and services its members can create. This capacity is function of real assets of the economy: the land, buildings, equipment, and knowledge that can be used to produce goods and services.

In contrast to such real assets are financial assets such as stocks and bonds. Such securities are not more than sheets of paper or, more likely, computer entries and do not directly contribute to the productive capacity of the economy. Instead, these assets are the means by which individuals in well-developed economies hold their claims on real assets. Financial assets are claims to the income generated by real assets (or claims on income from the government). If we cannot own our own auto plant (a real asset), we can still buy shares in Honda or Toyota (financial assets) and, thereby, share in the income derived from the production of automobiles.

While real assets generate net income to the economy, financial assets simply define the allocation of income or wealth among investors. Individuals can choose between consuming their wealth today or investing for the future. If they choose to invest, they may place their wealth in financial assets by purchasing various securities. When investors buy these securities from companies, the firms use the money so raised to pay for real assets, such as plant, equipment, technology, or inventory. So investors’ returns on securities ultimately come from the income produced by the real assets that were financed by the issuance of those securities.