The financialisation of capitalism began in the 1970s and is now firmly established.
The financialisation of capitalism began in the 1970s and is now firmly established
The structural problems within the UK and other mature economies were brought to the surface during and after the financial crisis of 2007-9. In my new paper, State and finance in financialised capitalism for the Centre for Labour and Social Studies (Class), I argue that these problems are inherent to contemporary mature capitalism and have to do, above all, with the process of financialisation and the state’s active role in supporting this process.
The financialisation of capitalism refers to the unprecedented rise of finance in terms of magnitude, penetration and influence over policy, society, and the economy. This transformation began in the 1970s and during the following four decades financialisation established itself in a variety of forms.
New patterns of economic, financial and ultimately political power spread across the global economy. It has been a period of extraordinary income inequality, wiping out all of the gains that came in the period following the Second World War.
Inequality increased in income terms, but also in terms of the share of national income between capital and labour. The highest ranks of the income distribution have taken the bulk of the productivity gains of the last four decades, to a large extent by using the financial system to extract enormous incomes.
Financialisation has occurred at three levels – in non-financial enterprises, banks, and households.
First, large, non-financial industrial or commercial companies have become more independent of banks. They possess huge amounts of cash through retained profits and increasingly use that cash to engage in financial transactions without the need to involve banks.
Second, banks have engaged less in the traditional business of lending for investment and production, and have redirected their activities towards transacting in financial assets.
Third, households and individual workers have been drawn into the formal financial system supplementing their low wages with increased borrowing. Across the world, working people who have traditionally met their basic needs through state provision of public services have seen that state provision retreat and private provision take its place – again forcing more reliance on private finance and the financial system.
What has become clear about these processes is that financialisation of mature economies would have been inconceivable without the facilitating and enabling role of the state. The neo-liberal ideology of the last four decades has ostensibly treated state intervention in the economy with extreme suspicion, but the reality has been very different. Finance has come to depend thoroughly on the state for its operations, indeed for its very survival.
Intervention by the state has taken several forms. These have included offering guarantees to bank deposits, boosting the capital of banks out of tax income and implicitly guaranteeing bank survival through the ‘too big to fail doctrine’. The state has fostered financialisation by altering the regulatory framework of finance and importantly by handing a dominant role to central banks enabling them to provide liquidity to the banking system and influence interest rates.
Confronting financialisation must start from the realisation that it is a deeply rooted development, a historic transformation that could potentially be reversed, but the task would be far from easy. The state will need to take a new approach and regulation alone will not be enough to confront financialisation.
The question of public ownership and public mechanisms of intervention over financial institutions and other areas of the economy must also be placed on the agenda. My paper for Class outlines several possibilities for how this could be done.
If these were adopted it would be a vital step to reversing the ascendancy of finance, while also laying the foundations for a broader transformation of the economy in the interests of the many.
Professor Costas Lapavitsas is a leading professor of Economics at the School of Oriental and African Studies, University of London, and also sits on the National Advisory Panel of ClassLike this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by becoming a Left Foot Forward Supporter today.