The rise of finance across the world economy in recent decades and its spectacular fall from grace as the crisis of 2008 unfolded has given birth to the notion of financialisation in academic circles, particularly among heterodox economists. Grace Blakeley, economics commentator for the New Statesman magazine, research fellow at the IPPR think tank and a rising star on the radical left here in the UK, has written an accessible book which attempts to make sense of this phenomenon and attempts to overcome it. Stolen – How to Save the World from Financialisation is aimed at the intelligent layman rather than being an academic work.
In the book, Blakeley explores the recent history of financialisation and the increasing power of finance in society and its damaging economic, social and political impact, focusing mainly on the UK. She also proposes a solution: democratic socialism. In two posts, of which this is the first, I explore some of the thinking in the book and elsewhere on financialisation and its consequences, as well as potential solutions which aim to mitigate or remove its deleterious nature.
There is plenty of material out there to consider, but in Part 1 I will limit myself to Blakeley’s book, the July special issue of the Cambridge Journal of Economics (CJE) on Towards Financialisation and the rise of the New Capitalism and some of the ideas of Michael Pettis and Michael Roberts.
In Part 2, I will critique Blakeley’s proffered solution, democratic socialism, drawing on ideas from Geoffrey Hodgson’s latest book Is Socialism Feasible? As well as discussing Hodgson’s alternative political philosophy, which he has called liberal solidarity, another new book will be mentioned: Rethinking Britain – Policy Ideas for the Many, in which a large number of prominent left thinkers put forward all sorts of potential ideas for a social democratic programme in the UK.
The term itself remains contested, but a number of authors in the July CJE, as well as Blakeley, use Gerald Epstein’s definition:
“the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.”
Blakeley elaborates on this:
“In other words, financialisation means more and bigger financial institutions – from banks, to hedge funds, to pension funds – wielding a much greater influence over other economic actors – from consumers, to businesses, to the state. The growth of finance has led to the emergence of a new economic model – financialisation represents a deep, structural change in how the economy works.”
In Stolen, Blakeley describes the economic history relevant to the rise of finance since the war, focusing mainly on the UK. From the Bretton Woods conference in 1945, through the ‘Golden Age of Capitalism’, the crisis of the Keynesian social democratic consensus in the 1970s and the rise of neoliberal politics and finance, the right wing governments of Margaret Thatcher and John Major, the New Labour of Tony Blair and Gordon Brown, to the crisis of 2008, she does a nice job of putting it all together in an accessible and forthright manner.
Throughout the book she emphasises the destructive consequences of financialisation. In particular, as many radical economists have argued, it has contributed to reduced or stagnant wage growth, especially for those at the lower end of the income distribution, and rising profits which have enriched and empowered elite rentiers and capitalists at the top. This has increased inequality, financial and economic instability, and undermined the conditions required for a healthy democracy.
Thatcher’s neoliberal agenda of deregulation and privatisation and her attack on trade union power were intended to shift the balance of power in society away from organised labour and towards capital. The consequences have transformed the nature and functioning of capitalism in the UK.
Rather than companies using rising profits mainly to raise wages and reinvest in new capacity and technology, in recent decades a greater share has flowed to shareholders and CEOs. Since those on higher incomes tend to consume a smaller share of what they receive than those on more modest incomes, growth in consumption, the largest expenditure category in aggregate demand, has become dependent on growth in private debt rather than being sustained by rising wages for the majority.
This process has raised inequality and, as Blakeley puts it, a larger share of income has become ‘stuck’ at the top, since it tends to be saved rather than consumed. This has weakened the sustainable drivers of aggregate demand and investment, slowing overall growth in output and productivity.
Firms have increasingly shifted from a model of using profits to ‘retain and reinvest’, through a developing culture of ‘downsize and distribute’ to one of ‘merge and monopolise’. This has increased the economic and political power of a few dominant firms and their owners, raising profits in the short term, but once again discouraging new investment, and enabling a greater degree of tax avoidance.
Households, corporations and the state have all become gradually financialised, while growth, particularly in the UK and US, has become dependent on debt-fueled consumption and asset price bubbles.
As well as the economic history lesson, there is a range of theory in the book. Blakeley draws from Marx’s ideas on the key role of the balance of class power between capital and labour, or those who own most of the private means of production and those who rely on selling their ability to work.
She provides some mention of dialectics and the social scientific concepts of the relationship between structure and agency in socioeconomic and political change. Keynes’ fundamental ideas on uncertainty, aggregate demand and investment as drivers of the business cycle are in there. So too is Kalecki’s prophetic argument that businessmen would react against the increasing class power of the workers in an economy at full employment, where the threat of the sack ceases to become an effective disciplinary tool. Minsky’s important notion that (economic and financial) ‘stability is destabilising’ is also outlined.
Key to Blakeley’s hopes for a better society beyond one that is so heavily financialised, with all its associated problems, is the idea that the crisis of 2008 and the years since then have demonstrated that capitalism is dying. This crisis therefore provides an opportunity for progressive human agency in the form of political struggle by the many to radically transform the system, rather than merely reform it. So change is inevitable, but its direction needs to be driven by political action to create a new system, what she calls democratic socialism.
Other causes and consequences
The recent special issue of the CJE is also dedicated to the topic of financialisation. Some of its articles explore in more detail the causes and consequences of the phenomenon in ways that go beyond Blakeley’s book, while others examine potential directions for reform (to be discussed in Part 2).
One piece explores the financial stress that has risen among the working class, as illustrated by the increasing incidence of such factors as bankruptcy and being late on financial payments. Another looks at how the increasing fragility and instability of the financial system has been driven by banks’ attempts to break free of Great Depression-era restrictions on size, activities undertaken and financial markets, giving rise to the ‘too-big-to-manage megabank-centred’ shadow banking system.
Another piece argues that demographic change in the form of an ageing population in rich countries, alongside the neoliberal restructuring of capitalism, has fueled the growth in capital markets, asset management, and money and derivatives markets. There may therefore be limits to attempts to turn the clock back and ‘definancialise’ the system, at least under capitalism. Rather financialisation can be seen as a relatively permanent structural change that needs to be managed in order to mitigate its potentially damaging effects.
Finally, there is the issue of global imbalances and macroeconomic regime shifts. In countries such as the US and UK, growth in recent decades has tended to be driven by private debt-led demand, reflected in large and sustained current account deficits and the accumulation of private debt. The necessary flipside of this has been countries running current account surpluses, such as Germany, Japan and China. Their export-led mercantilism has proven to be unsustainable and is part of the deeper causes of the 2008 crisis and the generally sluggish economic recovery that has followed.
The issue of the unwinding of these global imbalances has been emphasised by Michael Pettis in his book The Great Rebalancing. There he argues that the ‘global savings glut’ and repressed consumption relative to production, particularly in the major current account surplus economies, have led to unsustainable rises in private debt and financial fragility in other countries.
Contrary to a number of authors, Pettis argues that the deregulation of finance is not the primary culprit in the case of the financial crisis, since historically such crises have occurred under all sorts of regimes. Rather the imbalances between consumption and production and the resulting capital flows between the major economies are to blame.
In his view, real economic factors and the impact of specific government policies are at the root of the problems. Rising inequalities of income and wealth have repressed consumption relative to production and created a savings glut in a number of major economies; rather than being invested in productive activity, surplus savings have found their way into speculative activity at home, or abroad via their export to countries with more developed financial markets such as the UK and US where they have fueled a debt-led growth in consumption and booming asset prices, particularly housing.
All this does tend to ignore the near absence of financial crises during the post-war Golden Age and the increasing incidence since the collapse of the Bretton Woods system and financial deregulation. Having said that, the pressures for deregulation could still have arisen due to the inadequacies of Bretton Woods itself in managing the global economy.
Michael Roberts, in his review of Blakeley’s book, also pins the blame for the 2008 crisis, and indeed all capitalist crises, on real rather than financial factors, namely the falling rate of profit in the economy as a whole. In his view, falling profit rates in the productive sectors of the economy can create pressure for money to flow into financial markets in the form of ‘fictitious capital’ searching for higher returns. This can lead to rises in private debt, the growth of the financial sector and ultimately increased financial fragility. When this can no longer be sustained, the underlying trend in the rate of profit reasserts itself, and an economic crisis results.
All the authors above would seem to agree that, whether as cause or consequence of financialisation, high and rising inequalities of income and wealth will tend to undermine democracy as the principle of one-person, one-vote gives way to the dominance of one-dollar, one-vote, increasingly shifting power to the few at the top of society. The greater the degree of inequality, the greater potential for this effect.
Extreme inequality negatively affects economic performance, as well as political stability. Socialists such as Blakeley and Roberts want to overturn the entire system, arguing that reform while preserving capitalist institutions will not be enough. Pettis and a number of the contributors to the CJE favour reforms to capitalism itself.
For Blakeley, the balance of power in society has shifted away from labour towards capital and unproductive rentiers in a way that is both fundamentally unjust and damaging. The path to democratic socialism is her suggested way of shifting things back and building something much better. But would this be possible? Or is a reformed capitalism both more feasible and desirable? I will explore these issues in Part 2.