My gentle readers will know that I often struggle with economic terminology, both because I find usages are so vague, various, and poorly defined, and because I’m trying to understand fundamental terms’ fundamental meanings. Today I’d like to home in on one of the most fundamental — “assets” — and something even more fundamental that underpins it: “ownership.”
I’ll start with what I think is a usefully precise, technical, term-of-art definition:
Asset. n. A labeled numeric entry on the lefthand side of a balance sheet, designating the value of a claim (necessarily, designated in a unit of account).
This thing called an “asset” only exists, only can exist, on a balance sheet. It’s purely an accounting term, and the entity only exists within an accounting construct. There’s no other meaning for the term. (Making it a usefully precise definition.)
This is contrary to the vernacular, where a house or a drill press is called an asset. (In this technical context these are more usefully called “goods” or “real goods” or “capital goods.”) Because really: how can both a house and the labeled tally of a claim on that house both be called “assets”?
“Financial assets” are distinguished in that they have related, offsetting liabilities on the righthand side of other balance sheets. That’s what defines the term. They’re claims on claims — claims against that other balance sheet’s assets/claims. That’s why there’s a liability entry over there. It’s the right side making a claim against the left side, on behalf of that other balance sheet that holds the asset. As such, financial assets only represent indirect (and variously contingent) claims on real goods, one or more claim-steps removed from claims on the goods themselves.
Purely “real” or nonfinancial assets have no such offsetting claims on other balance sheets. In theory, they represent direct claims on real goods.
That seemingly simple distinction, though, is far from simple when you start exploring it carefully.
To that end, consider the fundamental nature of “claims,” hence the nature and import of “ownership” and “property rights.” Full credit here to Matt Bruenig, who delivered the Aha! understandings for me on these topics — clear and (mutually) coherent definitions and explanations for concepts I’d been worrying at for years.
Mostly simply, ownership is an exclusionary legal claim. Ownership says you may have a picnic on your front lawn — which seems inclusionary, but that’s only meaningful because you may exclude anyone else from doing so. And you may invoke violence (farmed out to the police) to enforce that right of exclusion. As Matt has said so well, a modern ownership claim is best viewed as a violence voucher issued by government.
This imparts a decidedly sinister aspect to the lefthand side of balance sheets — a tally sheet of violence vouchers?
So now to return, with that understanding, to the notion of real vs financial assets. In large, in aggregate, in the big national or global picture, both types of assets ultimately constitute claims on real goods. Someone holding zero real/nonfinancial assets but significant financial assets can make an immediate and successful claim on a new Maserati — a very “real” good. Everyone else is excluded from claiming that Maserati.
If this exclusionary notion is safe, in a very real sense your “real,” “nonfinancial” asset claim is actually offset by a liability — on the (EverybodyElseIn)TheWorld balance sheet. Call the entry “Stuff that we’re excluded from touching.” If all those exclusionary claims wall off AllTheGoodStuff with violence, we’re talking a very real liability indeed — even though this imaginary World Balance Sheet doesn’t, and practically probably can’t, exist.
This notional balance sheet may seem crazy and outlandish to us. But our ownership, property-rights, and “asset” structures do and have seemed equally outlandish to other cultures:
…fee-simple ownership is not the only basis for ownership and possession of land. Many eastern cultures and tribal cultures throughout the world follow the “communal property system” in which ownership of land belongs to the entire social/political unit, like the tribe, families, bands, and nations.
From the inside, ideologies always look like common sense.