Policy Research in Macroeconomics

Understanding and confronting financialisation

The rise of finance during the last four decades is the most prominent feature of contemporary capitalism. Finance has grown enormously in terms of assets and profits, its markets and institutions have become global, its concerns dictate economic policy, its influence shapes the political process. Non-financial enterprises may borrow less from banks, but engage in financial activities to earn profits. Finance has also permeated the lives of individuals and households in unprecedented ways. Private financial institutions now determine the choices made by millions in housing, education, and health, and even influence the ethics, morality and customs of everyday life. Contemporary capitalism can rightly be called ‘financialised’.

The gigantic crisis of 2007-9 has brought to the fore the financialisation of capitalism. The crisis emanated out of a vast financial bubble in the USA, pivoting mostly on real estate, involving loans to the poorest US workers, and fostering manic financial alchemy that secured trading profits, fees and commissions for banks. The bursting of the bubble threw the global economy into a recession that subsequently required a vast mobilisation of social resources to be tackled. Policy makers aimed to protect financial profits, a task they achieved by driving interest rates close to zero, while also making public funds available to the financial system. The costs of the crisis were borne by society as a whole through persistent austerity and wage restraint. 

In the summer of 2008, when the crisis was at its sharpest, it briefly looked as if there might be significant changes to mainstream economic theory and policy. There was talk of a ‘Minsky moment’ and even radical-sounding policy ideas about controlling finance. Unfortunately, normal service was soon resumed and mainstream economics continued to preach the virtues of the market, typically ascribing economic ills to (often imaginary) faults of the state. Five years after the crisis, economic theory appears not have noticed any structural changes in capitalism, and nor any weaknesses in its own approach to capitalism. Even worse, little of substance has changed in the realm of policy and financialisation continues to reign unchallenged.

Equally striking, however, has been the response of Marxist political economy to the most gigantic turmoil of world capitalism since the end of the World War II. Marxist theory was initially at a loss as to what to say, but it soon began to produce arguments that sounded remarkably as if nothing novel had actually taken place. For many, the cause of the crisis is – apparently – the tendency of the rate of profit to fall, implying that the roots of the turmoil lie in production and finance is merely an epiphenomenon. Focusing on finance, presumably, runs the risk of treating the crisis as the outcome of mistaken policy rather than a development deeply rooted in the social relations of capitalism. Harsh as it might sound, there is a strange symmetry between such Marxist arguments and the intellectual immobility of neoclassical economics.

Facts, however, are stubborn things. Try as one might, it is simply impossible to put together a convincing explanation of the gigantic crisis of 2007-9 based on the tendency of the rate of profit to fall, even if a commonly agreed measurement of the rate of profit could (ever) be arrived at. There was no fall of the rate of profit prior to the crisis that was remotely commensurate with the turmoil that actually occurred, not to mention the protracted difficulties of accumulation that followed. To be sure, the long-term performance of the rate of profit has remained problematic in recent decades, and that is indeed a characteristic feature of financialised capitalism. But the long-term trend of the rate of profit does not amount to a theory of crisis.

Five years after the crisis, the reality of mature capitalist countries is grim. Financialisation continues unchallenged, mainstream economics is completely bereft of new ideas, and class tensions are on the rise, particularly in Europe. Heterodox thinking, with Marxism at its core, has a vital role to play in analysing the state of contemporary capitalism and in offering fresh ideas on policy and action. But for that, it must first acknowledge financialisation and treat it with the seriousness it deserves.

The crisis that shook global capitalism in 2007-9 is a crisis of financialisation. It resulted from a vast financial bubble in 2001-7 that matched the extraordinary rise and transformation of finance in the preceding period. The crisis was certainly not merely the result of monetary and credit policy, but reflected the profound structural financialisation of contemporary capitalism. For the same reason, the crisis has cast fresh light on a range of radical policies that are urgently required to confront and reverse financialisation: public ownership and control over financial institutions, public investment, preventing productive enterprises from playing games in financial markets, reducing the exposure of households to private finance for housing, health, education, pensions and so on. Measures of this type are intrinsically anticapitalist, opening new avenues for the communal and associational organisation of society. Reversing financialisation could open new paths toward socialism.

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