Since 1980 there has been a vast expansion of the economic power and centrality of financial service sector. Less well known is the simultaneous shift in the investment strategies of non-financial firms, at least in the US, toward investing in financial instruments of various sorts. By the early 2000s financial investments had risen to almost 30 percent of total assets in the U.S. private sector. In our on-going research we have tried to figure out if this shift in corporate investment strategies has been economically destructive. Our answer is that it has and that economic growth and U.S. standards of living have suffered as a result.
We already know that the concentration of wealth and power in the financial service industry has introduced fragility into the world economy, reduced both fixed investment and R&D, and increased inequality in the advanced economies. Instability, sector shifts and inequality are not, however, evidence that financialization has been harmful to general economic growth. In a capitalist system shocks, sectoral shifts and cyclic destruction, even rising inequality are not inconsistent with long run growth in standards of living.
It is possible that financial investment strategies, despite increasing inequality, lifted all boats. If this is what happened then the policy case against financialization is weakened considerably. On the other hand, if financialization of the non-finance sector is associated with decreased total production then contemporary movements toward a financialized non-finance sector are economically as well as socially destructive.
Prior to 1980 firms like GE and GM used debt financing of their products to support growth in market share. During this period we find that financial investments by non-finance firms were much lower and encouraged economic growth..
After 1980 many non-financial firms moved in more speculative directions, into stock, credit, currency and even derivative markets. After 1980 we find that financial investment strategies by non-financial corporations are associated with reductions in value added, as Figure 2 shows. We estimate that since 1980 financial investments on Main Street stripped the US economy of at least 3.9 percent of aggregate growth, or about three years of lost growth in GNP. For comparison sakes, the great recession of 2008 produced aggregate negative growth of 2.9 percent.
The Institute for New Economic Thinking (INET), was founded after the global financial crash by George Soros and a few fellow traveler financier/philanthropists to reframe the economics profession toward more plausible models. They hold the economics profession as at least partially responsible for the global crash, a position I share. Thus INET’s goal is to transform mainstream economic thought and by extension the policy models adopted by governments and central banks. This is clearly an unusual approach to policy and science development, a kind of terraforming from the outside-in. INET has a program of well-funded grants, conferences, and public relations vehicles (here is their YouTube channel). They even have a program for transforming the economics curriculum and another for graduate student participation in INET conferences.
The conference is populated by multiple economic Nobel Prize winners, young mainstream and older heterodox economists, policy economists, and a smattering of other scientists from sociology, political science, psychology, neuroscience, and even physics. Mysteriously, my co-author Ken-Hou Lin and I were invited. Who could resist?
David Spencer points to financialized capitalism as the new game in town. He suggests that capital has pursued financial investment strategies, increasing the flexibility of capital, reducing the bargaining power of labor and severing the relationship between production and profit. The latter reduces investment in the real economy, further undermining the need for labor. Spencer is writing from the point of view of the UK, but his basic analysis is consistent with the US experience. Jerry Davis has made an even broader argument for the US, not only has the financial principle replaced production in the strategies of firms and the financial service industry but has become an ascendant value in households and the state.
Ken-Hou Lin and I have been studying financialization’s links to US corporate behavior and think that the analysis of financialization requires recognizing more than two actors – capital and labor. There are varieties of “capital” actors in this game — financial service firms, short-term investors, long-term investors (e.g. pension funds), non-finance big corporations, and main street. There are also varieties of “labor” in our financialized capitalist system – workers, professional-managerial workers, executives and CEOs, and investment brokers. (And then there is the state, where the rules are written, which displays its own heterogeneity beyond the scope of our emerging expertise.) Where you sit in the system determines whether your power has grown of been undermined by financialization.
Arne Kalleberg. 2011. Good Jobs, Bad Jobs: The Rise of Polarized and Precarious Employment. New York: Russell Sage Press.
We are all aware that the work world has changed and continues to evolve. Most of us tell stories in our classrooms and research that suggests that these changes have generated increased inequality and less secure work, but our stories tend to be unsystematic, based on disjointed and partial research. In his new book Arne Kalleberg systematically examines the entire range of change in work in the US since the 1970s. The book is comprehensive in its approach, examining trends in income, security, job complexity and autonomy, and flexibility. In doing so it generates a series of social facts that should become the basic knowledge base for all other stories of social change in employment.
Last week I discussed the connection between the Occupy Wall Street protests and the long-term transfer of national income into the finance sector. Well the problem is worse than Wall Street’s power over the national economy and polity.
There really are two faces to financialization. The most familiar face is the dominance of the finance sector over the rest of us: the giant profits and bonuses at the big banks and investment houses and the instability generated by too big to fail but rapaciously imprudent financial services firms. The other face is the financialization of the rest of the economy. Greta Krippner figured this out first. Greta discovered that since the 1980s firms in the non-finance sector have increasingly invested, not in the production of goods and services, but in financial instruments. The productive economy, Main Street in some formulations, has increasingly abandoned production in favor of financial shenanigans. Finance related income, including interest, foreign exchange profits, and stock market investments have risen from about 1/8th of corporate profits to around 30%. In the manufacturing sector the move from production to financial strategies has been even more dramatic, rising to a ratio of finance revenue/profit as high as .60 after 2000.
For a while there it seemed to make sense: Saving the financial system was a matter of restoring bank profits to their pre-crisis levels. So, in the summer of 2010, it seemed like good news when US bank profits began to rise, returning to their pre-crisis levels. Now, however, this policy assumption has begun to be viewed in a different and more critical light. Now, Wall Street’s profits are being linked to the rise in US income inequality, and the regulatory and fiscal capture of the US government by the top 1%, as the Occupy Wall Street movement has christened today’s power elite. Do bank profits need to be high? How did they get so high anyway? And what do high bank profits do to our overall economy?