Financialization means that today’s capitalism is fundamentally different from the capitalism that governments had to regulate 40 years ago.
The financial sector has always been important to capitalism. And the work of French economist Tomas Piketty shows capitalism has always had a general tendency to increase inequality absent corrective government interventions. This is simply because the rate of return on capital generally exceeds the rate of economic growth. Returns on assets, like real estate and shares are disproportionately held by the wealthy. Because they rise faster than overall economic growth, the overall proportion of total wealth held by the rich must increase relative to everybody else.
But recent decades have witnessed an unprecedented expansion of financial activities, the rapid growth of financial sector profits, permeation of the economy and society by financial relations, and domination of economic policy by the concerns of the financial sector.
The productive sector in mature economies has exhibited mediocre growth performance, profit rates have remained below the levels of the 1950s and 1960s, unemployment and inequality have generally risen and become persistent, and real wages have shown no tendency to rise in a sustained manner.
Financialisation elevates the significance of the financial sector relative to the real sector; a decreasing proportion of bank loans end up in the real economy. Instead, they bid up share prices and the cost of property. Economic growth is increasingly driven by financial markets. The lower and middle classes keep working more for less, and finance has gone from a tool used to provide capital for the production economy to an end in itself, where speculators can even make a living off public and private debt.
As Dr. Matilde Massó, Marie Curie Research Fellow at the University of Leeds puts it, “financial capitalism is far less equitable and distributive than the productive economy at the heart of the economic growth between 1950 and 1970. Dividends and financial investments rise while salaries and long-term investments in equipment, plant, and machinery go down or keep steady.” The result is a growing salary gap between the top and bottom segments of corporations, as well as increasingly precarious employment.
It used to be thought that capitalism could sustain itself simply through productive investment in new technologies, innovation, new markets, etc. There was a substantial element of truth to this story. There were always dips in the business cycle requiring some government stimulus. But the system did seem to have its own strong, internal dynamism.
However, the GFC of 2008, as well as the current recession, both indicate that today’s capitalism seems to require a new element to sustain it. Josh Frydenberg can laud Thatcher and Reagan as much as he likes. His actions speak louder than his words. Despite claims to the contrary the economic system everywhere, including China and India, as well as the mature economies, has become dependent upon large government- in particular upon massive injections of credit into the system.
A bit of counter-cyclical Keynesian economic stimulus through moderate increases in government spending and the central banks lowering of interest rates no longer seems sufficient. Rather massive amounts of credit need to be injected into the system by central banks to bail out ailing corporations, especially larger ones that are “too big to fail”.
As a consequence of all of this, governments, corporations, and households now carry more debt than ever. In the US and UK central banks are now buying up corporate debt for the first time in their histories. A handful of companies Facebook, Google, Netflix, Amazon, Microsoft have done well. But many large corporations in the S&P 500 are now dependent upon this support from the state for their continued existence.
Both the Coalition and Labor assure us that the current increase in government debt will wither away gradually when the economy returns to growth. Increased taxation revenues from economic growth will enable the debt to be repaid without the need to actually increase tax rates. This is what happened after WWII. Left-wing think tanks such as Per Capita and Australia Institute also say economic growth will enable us to pay down debt.
For example, Emma Dawson from Per Capita has written:
“At the end of the second world war, Australia’s debt was equivalent to over 120% of GDP, but Australians were not paying off this debt for generations…Strong economic growth effectively shrank the war debt as a proportion of GDP, so that it was returned to pre-war levels in just 10 years.”
But the world is a different place now.
After WWII every developed nation aimed for full employment. Unemployment, with the absence of welfare, had led to the rise of fascism, Nazism, and communism. Most countries nationalized some of the commanding heights of the economy and made it hard to move money abroad. This increased domestic investment and there was high employment and high wage growth. Unions were recognized by big capital. There were high taxes at the top end of the income scale.
Labour’s share of national income increased. In 1963 it peaked at 65%. (Today it is around 56% across the G20 countries).
Problems developed in the 1970s. Full employment led to increases in median wages. Skilled labour especially, became very expensive and this was passed on in higher prices, which in turn fuelled broader wage demands. Strong unions led to frequent labour strikes. Double-digit wage push inflation led to capital strikes/ and lack of investment. Inflation was also aggravated by oil price hikes. Growth rates fell and unemployment increased while prices continued to rise- this was known as “stagflation”.
The response at this time was Thatcher and Reagan. They commenced the neo-liberal revolution. But many of their economic prescriptions were ultimately also adopted by center-left parties: Central bank control over interest rates, privatization, deregulation, and increased limits on union power, was a global phenomenon.
With weakened unions, the need to compete with overseas labour, and new technology, wages stagnated across the developed world. With stagnating wages, demand could only be maintained through an expansion of credit. Banks lent out huge amounts of money, which, because wages were so stagnant, they could not recover. Sub-prime lending and derivatives- the bundling up of bad loans into new tradeable financial instruments- was basically just a manifestation of the overall expansion of credit. This resulted in the 2008 global financial crisis.
A massive bailout of the banks and other institutions followed. According to economist Mark Blyth, $17 trillion dollars was spent basically bailing out the assets of the top 1%. Government bought up the banks’ bad assets in exchange for cash the government simply created in countries such as the USA and UK where the government still controls the issue of its own paper and digital currency.
Most people still have no appreciation of the extent of the bailout. It resulted in an increase of 20% in the global money supply and yet inflation did not result. The bailout is overwhelmingly responsible for the increase in government debt as a proportion of GDP dwarfing other factors such as war and social security.
The Rudd government, almost alone in the world, sheltered Australia from the effects of the 2008 recession. But in Australia too, wealth inequality has increased. The Oxfam Report, Growing Gulf Between Work and Wealth, shows the level of wealth held by Australia’s richest 1% grew to 23% in 2017, up from 22% the year before, with the top 1% owning more wealth than the bottom 70% of Australians combined.
The post-war economic recovery was largely consumer-led. But levels of household debt are much higher now than they were in the immediate post-war years both in Australia and abroad. The ratio of household debt to GDP in the USA was around 40-50% in the ’60s and ’70s. It is now 106%. It is over 124% in Australia.
If consumers cannot lead economic recovery now and the private sector will not invest in capacity expansion in a flagging economy, then there is only one other option. Governments who have the power to increase the supply of money need to do so. And this is precisely what has occurred. But instead of pumping more money into the financial sector, they need to invest in projects that will lift the productive capacity of the economy. If the money just goes into the financial sector much of it will just inflate asset and share prices- another bubble that will eventually burst.
Maybe our debt will wither away as predicted, as it did after WWII. History tends to repeat itself.
But it does not always. And it depends, at least in part, on where the new money is spent.