The financialization of life


Costas Lapavitsas is a professor in economics at the University of London School of Oriental and African Studies. He teaches the political economy of finance, and he’s a regular columnist for «The Guardian».

Costas Lapavitsas speaks to an audience at The Real News about how finance controls the global economy:

„I will present to you some ideas that I have dealt with in my new book, ‹Profiting without Producing›, which has just come out, which discuss finance and the rise of finance.

I think it’s fair to say and all of us would agree that finance has an extraordinary presence in contemporary mature economies. It’s very clear in the case of the U.S., but equally clear in the case of the United Kingdom, where I live, Japan, about which I know quite a bit, Germany, and so on. There’s no question at all about it. Finance is a sector of the economy in mature countries which has grown enormously in terms of size relative to the rest of the economy, in terms of penetration into everyday lives of ordinary people, but also small and medium businesses and just about everybody.

And in terms of policy influence, finance clearly influences economic policy on a national level in country after country. The interests of finance are paramount in forming economic policy. So that is clear. Finance has become extraordinarily powerful. And that, in a sense, is the first immediate way in which we can understand financialization. Something has happened there, and modern mature capitalism appears to have financialized.

Now, what is this financialization? The best I can do right now is to give you the gist of this argument of mine in my book. And I will come clean immediately and tell you that I think financialization is basically a profound historical transformation of modern capitalism. This is the way I understand it. It’s a profound historical transformation that really began in the 1970s, and it’s now been running for about four decades.

How to understand, then, the profound historical transformation, how to go about it, what concepts do we need? I think we need first of all to look at some economic processes, some economic change that is taking place, fundamental economic change, and then we need to look at some changes in politics and institutions and combine the two in order to grasp the historical change.

So let me start with economic changes, the economic foundations of this transformation. I think there are three key root changes here.

The first, funnily enough, doesn’t relate to finance itself, but it relates to industry and commerce. In other words, it relates to nonfinancial economic activity. One must start there to understand the historical transformation. So what has happened to big business in particular? Well, what’s happened to big business is very interesting. Two things have happened to it. First, big business has become increasingly capable of financing investment out of retained earnings. It retains its profits, and on a net basis it finances investment pretty much out of that. Of course, it still uses banks, but it doesn’t rely on banks on a net basis to finance investment. That gives it independence, a certain degree of independence from banks.

In addition to that, big business has made so much in retained profits – currently U.S. big business is sitting on piles of cash. It has made so much in retained profits that it can use those funds to play financial games, to engage in financial transactions and financial activities on its own account. So big business has financialized. The key element that we’ve got to understand first is the financialization of big business. Large enterprises have acquired some of the character of financial institutions, have become bank-like, and they engage in these transactions, and they change the structure of their own organization as they do that. So that’s the first thing.

Second economic change, and very, very important, too, relates to banks. If big businesses is doing that, banks must do something else to make profit. Banks are profit-making institutions. So if big business becomes increasingly independent of banks, banks must do something else. What have banks done? It’s very clear what they’ve done. They lend less to businesses for investment and so on, and they play more games in the financial markets. They become transactors in financial assets, and they make profits increasingly not from lending but from fees, commissions, and trading. They become traders in financial assets.

At the same time, banks have also turn households. Households have become a very profitable activity of banks, a new activity. This is a new phenomenon in the development of capitalism. So that much about banks.

The third change has to do with households, workers, ordinary people. And what we see there in the last three to four decades is that ordinary people have been qdrawn into the former financial system like never before. Households have become financialized. Finance has become a fundamental part of household life – like I say, like never before.

Why is that? Partly because wages have been stagnant. And therefore – I mean, nowhere more stagnant than in this country. I mean, real wages have been absolutely flat in this country for decades. So partly because of that, people have turned to debt. But also people have got assets, financial assets.

So the financialization of everyday life, of households, is a bit of a complex story. What is actually happening there, I think, is not simply that you borrow in order to consume. That also happens. It’s a more complex story than that. What is actually happening is people need access to health, education, housing, and a variety of other needs. Every country has systems of provision for these things. Each country differs from the next country, but pretty much there are similarities. These modes of provision have historically, traditionally, incorporated public provision, some methods of public provision, for everything – for housing, for health, for education, and so on. What we’ve witnessed the last three to four decades is a retreat of public provision. Public provision has retreated. Private provision has taken its place. As this is happened, finance has emerged as the facilitator of that. So we turn to private provision to solve our housing needs, our health needs, our education needs, and finance makes profits out of that, basically, without having any skills in doing these things. So this to me is the financialization of households, the third major trend.

So non-financials have financialized, banks have changed, and households have been drawn into the financial system. These changes together have basically transformed the economy, transformed the foundations of the economy. This is a new type of capitalism.

At the same time, we’ve had changes in institutions and in ideology. These you would have heard about and you would be familiar with. The changes in institutions are very clear. We’ve had wave after wave of deregulation. Labor market has become more deregulated, and financial markets have become more deregulated.

And in addition to deregulation what we’ve had is the rise of the ideology of neoliberalism. Deregulation goes hand in hand with neoliberalism, the idea that the market is good, the state is bad. In this country, this is a very powerfully held idea, more powerfully here than anywhere else. Actually, it’s extraordinary how powerful this perception is and how a lot of social issues are understood in this way.

The point I want to make you is that neoliberalism is very, very powerful and sustains financialization, but neoliberalism is not really about asserting the merits of the market over the state. Actually, it’s more complex than that and it’s more crafty than that, because neoliberals are not the enemies of the state. Neoliberals want to take over the state. The actual content of neoliberal ideology is to take over the state and to use the state to protect the market, to make the market bigger, to effect market-favoring, market-conducive changes. So this has also been going on the last three to four decades. And that to me is the core of financialization.

So what have we got after four decades of this? These changes, seen very clearly in the United States, have created, firstly, a deeply unequal country, a deeply unequal society. Financialization is fundamentally about inequality. We see this inequality in terms of income, where the top 10 percent and the top 1 percent draw an extraordinary proportion of income annually. But we see it in terms of the functional distribution, the distribution of income between capital and labor, where labor has lost – and lost dramatically – during the last three to four decades in this country and in just about every other mature capitalist country that has financialized.

So this is a deeply unequal system. It generates inequality. Finance has acted as a key lever in increasing it inequality. Finance is a vital mechanism in increasing inequality. You can see it in terms of the profits it creates. Financial profit has become a huge part of total profit through these activities that I’ve just discussed by markets, households, and so on – a huge part of total profit. And the rich in this country and elsewhere typically become rich through financial methods; the way in which you acquire great wealth and you cream off the surplus is basically through financial methods, through access to financial assets, privileged ways of trading financial assets, and privileged position in of the financial system that allows you to extract vast returns, which appear as salaries and wages, in other words, remuneration for labor. Come on. What kind of remuneration for labor is this allows someone to draw tens of millions of dollars annually? For what kind of labor? This isn’t labor. This is a kind of rent, this is a kind of surplus accruing because of power and position in the financial system or access to finance. And that is typical of financialization in this country and elsewhere.

This is a deeply unequal system. It isn’t just unequal; it’s also a deeply unstable system. Financialized capitalism is also deeply unstable. I don’t need to go in depth into this. All I need to do is refer you to the crisis of 2007-2009, which is a crisis of financialization if there ever was one. And this basically shows you what financialization is very, very clearly. That crisis was global, systemic. The entire system came very close to collapse. And it was structural. It was deep. It wasn’t because of some accident. This was a crisis, then, of financialization. And where did it come from? As Paul said just a few minutes ago, strikingly enough, it came out of the financial system and out of lending to the poorest sections of the United States working class. It’s an extraordinary thing. And historically we’ve never seen anything like it, that lending to workers, and particularly to poor workers, could destroy the capitalist system. I mean, if you told people in the 19th century that something like that could happen, they would be astounded. They would tell you, there’s no way. And yet that’s what nearly happened a few years back. And that’s an indication of how unstable the financialized capitalism is. It’s a deeply unstable system.

I don’t want to say more about the crisis. We’ll probably discuss it in question-and-answer.

What I want to move on to is how the crisis was dealt with, because that shows us another important aspect of financialization. So who dealt with the crisis? Was it the financial institutions themselves? Was it big business? No. It was a state, the state that is supposed to be the enemy of all good, the state that’s supposed to be the force that destroys economies and so on. It was actually the state that quite clearly was mobilized to deal with the crisis and to rescue financialization.

How did state do it? In three ways. The state used three levers do it. First, the state drove interest rates down to zero, practically zero. Which interest rates? Public interest rates, right, the interest rates charged by the central bank, which is effectively a public bank. That’s what it is, just because – and the people who ran it are public employees, basically. Some public interest rates were driven down to zero.

By driving interest rates down to zero, you create profits for banks. That’s what you do. You’re manufacturing profits for banks. It’s a subsidy. It’s a huge subsidy to banks given by the public. That’s basically what’s happening. So that’s the first thing that the state did.

The second thing the state did was to create liquidity for the financial system. How? By printingn money, basically. What kind of money? Public money, of course. Once again, public liquidity, the credit and the trust of the American people, was used to create liquidity, which was made available to banks.

And the third way in which the crisis was resolved was by making capital available to banks. What is capital? Tax income, effectively. The tax income of the American people again – and other people – was mobilized to support the banks. In other words, the state rescued financialization, protected the profits of banks by using levers of public intervention. Who carried the cost of this? Working people, because the other side of the coin was of course the imposition of austerity, the rise of unemployment, problems with incomes, problems with social spending, and so on. You can see it in this country, too. You can see it very, very clearly in Europe and elsewhere. So the state intervenes, rescues financialization, prevents significant change, and passes the cost on to working people. The class nature of what’s been happening and the class nature of finance is very, very clear, it seems to me.

Now, I’m running out of time. Because Paul is a hard taskmaster, he’s only allowed me 15 minutes. So in the remaining five minutes I want to mention and broach some ideas about what can be done about financialization, which is something that I know that a lot of you would be interested in.

Now, what to do about financialization if this is such a deeply rooted historical development? Traditionally, people who like to think of progressive measures, changing the world in a progressive direction, like to consider the changes that the capitalist system produces by itself, as it were, and separate the progressive components from the problematic components, and wish to retain the progressive component and do something with it. So, for instance, capitalism can improve the productivity of labor. It can create big factories, it can create big, great means of transit, and so on. These are good things for society. We wish to maintain them but transform them.

If we think along those lines about financialization, we would be disappointed, because from my perspective it’s actually next to nothing that’s worth preserving about financialization – from financialization. Next to nothing. What exactly is the benefit to society? What’s the social benefit from a lot of highly trained PhDs in physics using exceptionally expensive technology across the world to be able to set derivatives prices in a split second? Why set them in a split second? Set them in an hour. Set them in a day. Never set them at all. What’s the benefit? I can’t see the social benefit from this at all, and there is no social benefit that can be identified.

So it seems to me that the attitude towards financialization in that context should not be to preserve what is good and scrap the rest; it should be to reverse it. Financialization is one of these unique instances in historical development that calls for reversal. It must be reversed.

How? What does reversal mean, though? Let’s think about that, and let’s think about it generally, and then see if it has any kind of applicability to particular cases like a big city and so on.

Well, a reversal cannot be simply the result of regulation. I want to come clean and say that. Regulation is very important. Re-regulating and severely regulating finance is very important, and we need regulation of activities and so on. But if, as I’ve argued, financialization is a deeply rooted historical thing, clearly regulation alone is not enough. We need to do something about the roots of it. What does that mean? Well, obviously, we need to intervene at the level of big business. If big business is financialized and that’s a big element in financialization, then we need to do something about big business in the first place. What do we need there? Well, we need public policy of investment, because big business doesn’t particularly invest. We need public policy of intervention for big business to stop it from making financial profits and playing financial games. We need public policy that would actually encourage enterprises to change their structures, move them away from looking towards the stock market and start thinking about jobs, growth, investment, and so on. These are difficult ideas, but you see the difficulty of reversing financialization. We must start at that level. Right? We need public policy at that level. So that’s first, that’s the first thing.

Then we need to think about banks and financial institutions. Yes, we need to re-regulate them. But as I’ve argued already, regulation is not enough. We need to think of essentially the failure of private banking, ’cause it has failed and it’s been rescued by the state, and we need to think seriously about public banking and public financial institutions. It’s about time the idea of public financial institutions was put on the table in a serious way. What does that mean? Not simply nationalizing the banks. That happens in country after country, capitalist country after capitalist country. And to a certain extent the United Kingdom nationalized its own banks, Sweden nationalized its own banks, and not very much changed. So we need to think of public banking – different approach. We need to think in terms of a public mandate for banks under public ownership, operated in a public spirit, organized in a different way, to begin to provide credit to a certain extent as a utility for consumption and so on. That doesn’t mean never repay credit back, of course. Credit must be repaid. But credit could be thought of as a public utility in that spirit. Public banks could also begin to approach the question of investment in a publicly spirited way and to spur investment, to create investment for growth and so on. So that much about banks.

And then households. What we do about financialization of households? It isn’t simply a case of reducing household debt. To a certain extent that’s happening now, because households are forced to pay back that debt because they cannot survive. That’s why the economy is not picking up as fast as it might have done. If the financialization of households is as complex as I indicated previously, we need a complex approach to deal with it. In other words, we need public mechanisms of provision to be reintroduced for housing, for health, for education, and for a whole host of other things that people need on an everyday basis so that they can stop relying on private finance, which basically exploits them and creates negative results in all these areas. We need think of innovative new, communally based ways and associational ways in which these fundamental needs of households could be met without relying on private finance.

In sum – and here I will finish – it seems to me that the more you think about how to reverse financialization, the more you realize that you need a broad program. This isn’t simply about finance. It’s actually about restructuring the whole of the economy. That’s how you would get rid of financialization. It’s about restructuring the whole of the economy in a complex way and in a way that would be fundamentally, I would argue, anticapitalist. There must be an anticapitalist element there, because this rampant capitalism over the last three or four decades on a financial basis has basically ruined economy after economy. So we need to think of programmatic ideas of this kind and we need to think in a democratic and associational way of how to apply them across economies and across societies. I think that’s the future. And the more we discuss it and the more closely we debate it, the better the ideas we’re going to get. That’s what I’ve got to say.

In old-fashioned terms, you were looking for the agent that will change the world. We’re looking for the force that will change the world. Well, the we that we should be looking towards these days is not the we of 50 years ago or 100 years ago.

Clearly, wage labor is a big part of this we, people who work for their wages, people who are employed by others on the basis of wages and have got their own forms of organization, their trade unions, and whatever other institutions they have. We start there, as we always do in a capitalist country. Wage labor is key.

But it isn’t just wage wage labor. Because finance has grown and penetrated so many areas of economic and social life, we need broader alliances. Wage labor must look towards parts of society that rely on small and medium businesses, which have actually been crushed by this. And they’re looking for new ways out. They’re looking for a way to survive. In other parts of the world – not in the United States, but in other parts of the world, wage labor in the small and medium businesses can look towards parts of agriculture, ’cause there are large agrarian classes that have been ruined by this contemporary capitalism”.



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