From Wikipedia, the free encyclopedia
|This article may require cleanup to meet Wikipedia's quality standards. Please improve this article if you can. (April 2008)|
|This article may contain original research. Please improve it by verifying the claims made and adding references. Statements consisting only of original research may be removed. More details may be available on the talk page. (March 2009)|
A FIRE economy is any economy based primarily on the paper intensive sectors of Finance, Insurance, and Real Estate (FIRE).
It's New York City's largest industry and a prominent part of the service industry in the U.S. overall economy and other Western, developed countries. FIRE activities are unique in that they generate relatively large profit margins with little productive resources or capital employed other than people and paper.
In recent years, FIRE has created a positive-feedback loop for rapid suburban development in the U.S. as new real estate developments generate finance (mortgage) activities and associated insurance activity. This activity in turn creates demand for yet further real estate development and the cycle feeds upon itself.
This term is used in the financial press and blogs; its origin is in the realm of North American industrial classification. "Finance, Insurance, and Real Estate" is the title of 1992 U.S. Census Bureau Standard Industrial Classification (SIC) Division H. Its coverage was "All domestic establishments that provide financial, insurance, or real estate services." Its coverage was elaborated in two-digit SIC codes 60 through 67. The SIC was replaced by the North American (Canada, USA, Mexico) Industry Classification System (NAICS) starting in 1997. The SIC had ten top-level divisions, NAICS has twenty. The new NAICS essentially split the old Division H into code 52 Finance and Insurance and code 53 Real Estate and Rental and Leasing.
The newer NAIC two-digit codes, 52 and 53, are extensively elaborated – down to the five-digit level. They remain largely unchanged in the 2007 NAICS drill down chart whose details are this for code 52 and this for code 53.
The second use of the term derives from the study of financial capital and income – as opposed to industrial capital and income. To characterize the so-called financial services industries, economists carved out part of the SIC/NAIS breakdown of types of industry: finance, insurance, and real estate. They contracted this to FIRE, deliberately invoking the negative connotations which were, at least then, contrary to conventional wisdom. The following table elaborates on this dichotomy in the header row and gives examples in ensuing rows.
|Financial sector, note 1)||Real / Productive / Industrial Sector, note 2)||Theses||Authority|
|Finance, insurance and real estate (FIRE) at the top||Labor at the bottom||Political reform to bring market prices in line with socially necessary cost-value was the great economic issue of the 19th century. The labor theory of intrinsic cost-value found its counterpart in the theory of economic rent: land rent, monopoly price gouging, interest and other returns to special privilege that increased market prices purely by institutional property claims. Prior to World War I, the classical economists, the American Progressives, and others involved in discourse on political economy understood free markets to mean markets free of economic rent and interest – free of rentier overhead charges and monopoly pricing, free of land-rent, free of interest paid to bankers and wealthy financial institutions, and free of taxes to support an oligarchy. Free of 'free lunches'. A "free market" was an active political creation and required regulatory vigilance. Since World War I, the term free markets has gradually come to mean markets free of public regulation and free of empowered bureaucrats. In the redefinition of free market self-regulatory organizations rather than oversight and regulation by government implement any structuring or procedures necessary to maintain fair and orderly markets.||Michael Hudson. Orwellian Doublethink: "Nationalize the banks." "Free Markets." – The language of deception|
|"Financial capital"||"Productive capital"||Capricious changes in marginal productivity, whether up or down, destroy productive capital. In the vast literature of mainstream economics there is not one sentence written about the deleterious effects of destabilizing interest rates on the value of industrial capital. This stems from a deliberate confusion between (productive) capital and credit. The present banking crisis is the result of wiping out the capital of the financial sector, through the same process that has wiped out the capital of the producing sector: the Federal Reserve's deliberate and declared policy to drive down interest rates.||Antal Fekete Fekete home page|
|"Unearned income" / "predatory wealth"||Income from "industry and labor"||Most capital gains are land-value gains. The big players do not want their profits in rent, which is taxed as ordinary income, but in capital gains, taxed at a lower rate … in the era of progressive taxation more than two centuries of classical economic analysis had shown the logic of taxing predatory wealth (land ownership, monopoly rights and financial claims on the economy) rather than labor and industry. The objective was to tax all forms of income not necessary for production to take place. The early income tax captured such "unearned income." To minimize their tax liability in an epoch when they were the major parties being taxed, the FIRE sector opposed government spending as such, including public services, medical care and even basic infrastructure. This set financial and property interests in opposition to those of industry and labor. Ever since the United States enacted its first modern income tax in 1913, finance and its major clients – real estate and monopolies – have lobbied to distort the tax code to make their gains tax-exempt.||Michael Hudson. The Next Big Bail Outs: State, Local and Private Pensions|
|"Finance-based economy"||"Economy based on production"||Future finance-based consumption … is limited by our ability to keep pumping lower and lower yields, which in the past have led to higher and higher TIPS, home, stock, and associated asset prices. "…during the past five years wealth has come more from finance-based miracles than those based on productivity."||Bill Gross|
|Unearned income||Earned income||No theses required||These terms are definitional with respect to financial income and real income respectively.|
1) Financial capital is money, particularly money based on debt, rather than money which is a commodity such as silver. Financial income is interest on debt or capital gains based on rising asset prices.
2) Real capital is factories, commodities, intellectual property, and relevant labor pool. Real income is the value added on goods and services produced, or the money paid for such.
The term may be subtly pejorative as the major output of a FIRE economy is paper; there is thus a corresponding implication of paper burning, or of paper fueling a fire – indicating perhaps a false sense of economic well being upon which these economies are based.
Much criticism exists on the internet and in the blogosphere for the shifting of the U.S. economy to a FIRE economy at the expense of a manufacturing and export-based economy. As the consumer of last resort, many believe that the United States has eschewed productive elements of its economy in favor of consumption to its long term detriment. A common theme of these criticisms is that FIRE is really a non productive, paper-based system in which participants trade pieces of paper and are not in fact involved in any real productive activity.
Particularly after 1973 … pundits of the status quo hailed the proliferation of the "FIRE" (finance, insurance, real estate) economy as the coming of a new "service" "post-industrial" economy that would replace the old "smokestack" economy and the jobs lost through plant closings, restructuring, and down-sizing … Loren Goldner
Examples of FIRE economies
- New York City
- Richmond, VA
- ^ Fiat Currency: Destroyer Of (Industrial) Capital
- ^ An Unhappy New Year
- ^ Bill Gross of PIMCO discussed the concept of an economy based on finance versus production using the term "Finance Based Economy" in 2006.
- ^ This was written in 2005
- ^ According to Adam Smith free market means "free of unearned income".