Financialisation, like neoliberalism, is the buzz word among leftists and heterodox economists. It dominates leftist academic conferences and circles as the theme that supposedly explains crises, as well as a cause of rising inequality in modern capitalist economies particularly over the last 40 years. The latest manifestation of this financialisation hypothesis comes from Grace Blakeley, a British leftist economist, who appears to be a rising media star in the UK.
In a recent paper, she presented all the propositions of the financialisation school.
But what does the term ‘financialisation’ mean and does it add value to our understanding of the contradictions of modern capitalism and guide us to the right policy to change things? I don’t think so. This is because either the term is used so widely that it provides very little extra insight; or it is specified in such a way as to be both theoretically and empirically wrong.
The wide definition mainly quoted by the financialisation school was first offered by
Gerald Epstein. Epstein’s definition was
“financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.” As you can see, this tells us little beyond the obvious that we can see in the development of modern, mature capitalism in the 20th century.
But as Epstein says:
“some writers use the term ‘financialization’ to mean the ascendancy of ‘shareholder value’ as a mode of corporate governance; some use it to refer to the growing dominance of capital market financial systems over bank-based financial systems; some follow Hilferding’s lead and use the term ‘financialization’ to refer to the increasing political and economic power of a particular class grouping: the rentier class; for some financialization represents the explosion of financial trading with a myriad of new financial instruments; finally, for Krippner (who first used the term - MR
) herself, the term refers to a ‘pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production’”.
The content of financialisation under these terms takes us much further, especially
the Krippner approach. The Krippner definition takes us beyond Marx’s accumulation theory and into new territory where profit can come from other sources than from the exploitation of labour. Finance is the new and dominant exploiter, not capital as such. Thus finance is now the real enemy, not capitalism as such. And the instability and speculative nature of finance capital is the real cause of crises in capitalism, not any fall in the profitability of production of things and services, as Marx’s law of profitability argues.
As Stavros Mavroudeas puts it in his excellent new paper (
393982858-QMUL-2018-Financialisation-London), the ‘financialisation hypothesis’ reckons that
“money capital becomes totally independent from productive capital (as it can directly exploit labour through usury) and it remoulds the other fractions of capital according to its prerogatives.” And if
“financial profits are not a subdivision of surplus-value then…the theory of surplus-value is, at least, marginalized. Consequently, profitability (the main differentiae specificae of Marxist economic analysis vis-à-vis Neoclassical and Keynesian Economics) loses its centrality and interest is autonomised from it(i.e. from profit - MR).”
As Mavroudeas says, financialisation is really a post-Keynesian theme
“based on a theory of classes inherited from Keynes that dichotomises capitalists in two separate classes: industrialists and financiers.” The post-Keynesians are supposedly ‘radical’ followers of Keynes from the tradition of Keynesian-Marxists Joan Robinson and Michel Kalecki, who reject Marx’s theory of value based on the exploitation of labour and the law of the tendency of the rate of profit to fall. Instead, they have a distribution theory: crises are either the result of wages being too low (wage-led) or profits being too low (profit-led). Crises in the neoliberal period since the 1980s are ‘wage-led’. Increased (‘excessive’?) debt was a compensation mechanism to low wages, but only caused and exacerbated a financial crash later. Profitability had nothing to do with it.
As Mavroudeas explains, the hypothesis goes:
“The advent of neoliberalism in the 1980s transformed radically capitalism. Liberalisation and particularly financial liberalization led to financialisation (as finance was both deregulated and globalized). This caused a tremendous increase in financial leverage and financial profits but at the expense of growing instability. This resulted in the 2008 crisis, which is a purely financial one.”
Linking debt to the post-Keynesian distribution theory of crises follows from the theories of Hyman Minsky, radical Keynesian economist of the 1980s, that the finance sector is inherently unstable because
“the financial system necessary for capitalist vitality and vigor, which translates entrepreneurial animal spirits into effective demand investment, contains the potential for runaway expansion, powered by an investment boom.” The modern follower of Minsky,Steve Keen, puts it thus:
“capitalism is inherently flawed, being prone to booms, crises and depressions. This instability, in my view, is due to characteristics that the financial system must possess if it is to be consistent with full-blown capitalism.” Blakeley too follows closely the Minsky-Kalecki analysis and offers it as an improvement on or a modern revision of Marx.
Many in the financialisation school go onto argue that ‘financialisation’ has created a new source of profit (
secondary exploitation) that does not come from the exploitation of labour but from gouging money out workers and productive capitalists through financial commissions, fees, and interest charges (‘usury’). I have argued
in many posts that this is not Marx’s view.
Post-Keynesian authors and supporters of financialisation like
JW Mason refer to the work of mainstream economists like Mian and Siaf to support the idea that modern capitalist crises are the result of rising inequality, excessive household debt leading to financial instability and have nothing to do with the failure of profit ability in productive investment.
Mian and Sufi published a book, called the House of Debt, described by the ‘official’ proponent of Keynesian policies, Larry Summers, as the best book this century! In it, the authors argue that
“Recessions are not inevitable – they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt”.
For me, financialisation is a hypothesis that looks only at the surface phenomena of the financial crash and concludes that the Great Recession was the result of financial recklessness by unregulated banks or a ‘financial panic’. Marx recognised the role of credit and financial speculation. But for him, financial investment was a counteracting factor to the tendency for the rate of profit to fall in capitalist accumulation. Credit is necessary to lubricate the wheels of capitalist commerce, but when the returns from the exploitation of labour begin to drop off, credit turns into debt that cannot be repaid or at serviced. This is what the financialisation school cannot explain: why and when does credit turn into excessive debt?
UNCTAD is a UN research agency specialising in trade and investment trends.
It published a report on the move from investment in productive to financial assets. It was written by leading post-Keynesian economists. It found that companies used more of their profits to buy shares or pay our dividends to shareholders and so less was available productive investment. But again, this does not tell us why this started to happen from the 1980s.
In the current issue of Real World Economics Review, an on-line journal dominated by post-Keynesian analysis and the ‘financialisation’ school,
John Bolder considers the connection between the ‘productive and financial uses of credit’:
"up until the early 1980s, credit was used mostly to finance production of goods and services. Growth in credit from 1945 to 1980 was closely linked with growth in incomes. The incomes that were generated were then used to amortize and eventually extinguish the debt. This represented a healthy use of debt; it increased incomes and introduced negligible financial fragility." But from the 1980s,
“credit creation shifted toward asset-based transactions (e.g., real estate, equities bonds, etc.). This transition was also fuelled by the record-high (double-digit) interest rates in the early 1980s and the relatively low risk-adjusted returns on productive capital”.
‘Financialisation’ could be the word to describe this development. But note that Bolder recognises that it was fall in profitability ('low risk-adjusted returns on productive capital') in productive investment and the rise in interest costs that led to the switch to what Marx would call investment in fictitious capital. But this does not mean that finance capital is now the decisive factor in crises or slumps. Nor does it mean the Great Recession was just a financial crisis or a ‘Minsky moment’ (to refer to Hyman Minsky’s thesis that crises are a result of ‘financial instability’ alone). Crises always appear as monetary panics or financial collapses, because capitalism is a monetary economy. But that is only a symptom of the underlying cause of crises, namely the failure to make enough money!
Guglielmo Carchedi, in his excellent, but often ignored
Behind the Crisis states:
“The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”
Despite the claims of the financialisation school, the empirical evidence is just not there. For example, Mian and Sufi reckon that the Great Recession was immediately caused by a collapse in consumption. This is the traditional Keynesian view. But the Great Recession and the subsequent weak recovery was not the result of consumption contracting, but investment slumping (see my post,
https://thenextrecession.wordpress.com/2012/11/30/us-its-investment-not-consumption/)
.
