The Era of Financialization

 (Image <a href= via Shutterstock)” width=”400″ height=”267″ /> (Image via Shutterstock)This is a four-part interview with Costas Lapavitsas focusing on the era of financialization and the transformations at the “molecular” level of capitalism that are driving changes in economic performance and policy in both high-income and developing countries. Lapavitsas is a professor of economics at SOAS, University of London, and the author of Financialised Capitalism: Expansion and Crisis (Maia Ediciones, 2009) and Profiting Without Producing: How Finance Exploits Us All (Verso, 2014). The interview was conducted by Dollars & Sense co-editor Alejandro Reuss and was originally serialized on Triple Crisis blog.

Part 1

Dollars & Sense: Over the past few years we’ve heard more and more about the phenomenon of “financialization” in capitalist economies. This concept appears prominently in your writings. How would you define “financialization”?

Costas Lapavitsas: Well, it’s very easy to see the extraordinary growth of the financial sector, the growth of finance generally, and its penetration into so many areas of economic, social, and even political life. But that, to me, is not sufficient. That is not really an adequate definition. In my view—and this is basically what I argue in my recent book and other work that I’ve done previously—financialization has to be understood more deeply, as a systemic transformation of capitalism, as a historical period, basically. I understand it as a term that captures the transformation of capitalism in the last four decades. To me, this seems like a better term to capture what has actually happened to capitalism during the last four decades than, say, “globalization.”

Financialization indicates a systemic transformation that has basically three fundamental tendencies, which we can locate at the deepest level of the capitalist economy. First, we find that commercial and industrial enterprises have become financialized. In other words, they rely—the big ones, at least—less on banks. They have a lot of money capital, which is available for investment, but they don’t actually invest it directly, they use it for financial profit making. So in that way, they’ve acquired some financial capabilities themselves—they’ve become finance-like. They are financialized. The second tendency is that banks have been transformed; they do less straightforward money collecting and lending and more transacting in open markets, and more business with households. And the third tendency has to do with households themselves. Households have been sucked into the formal financial system. They rely more on it for borrowing, and they rely more on it for assets like pensions, insurance, and so on. They have become financialized, too. The reasons for this development are complex: Wages have been stagnant, real incomes have not been rising systematically, and at the same time, public provision in health, education, housing, and so many other fields has either not expanded or retreated. In that context, private provisioning has taken its place, and private provision has been mediated by private finance. Consequently, households have become financialized. These three tendencies taken together define, in a deep way, the financialization of contemporary capitalism and indicate a historic transformation—a major shift in the development of capitalism.

D&S: Some economists may talk about financialization as an outcome of particular government policies like the deregulation of the financial sector. But it sounds like you have a view of it that it’s a more profound trend in capitalist economies. Do you think that the features of financialization that you describe would likely have happened—at a greater or lesser pace—regardless of the particular policies adopted with respect to the financial sector?

CL: I understand fully that some economists, particularly in the United States, economists who are of a heterodox and critical persuasion, see financialization as the outcome of policy measures, particularly financial liberalization or deregulation which has allowed finance to expand. Incidentally, if one takes this position, it is easy to say that what we need to do to control financialization is to impose regulation again. To me, the transformation represented by financialization is far deeper, because one can observe financialization in the most unlikely places were policy has actually been quite different to the United States. It is possible to observe financializing behavior, particularly among large industrial and commercial enterprises, even in places that do not have the financial practices and outlook of the United States. To me, financialization is a deeper process than simply a government policy outcome. Precisely for this reason I’ve tried to put my finger on these three tendencies at the molecular level of capitalist accumulation, the level at which one should always start when one is trying to capture a historical period.

There are two more things I have to say, which add context and depth to my argument. The first is that policy alone, to my mind, can never explain the tendencies and characteristics of a long-lasting era. That’s just not possible. Policy can explain the particular turns and twists of economic performance. Policy by itself, however, cannot explain a profound transformation of the capitalist system because then the question becomes “where has this policy come from?”

Now, I understand that financial deregulation has been characteristic of the last few decades, and I agree that it has played a big role in sustaining financialization. But if it is claimed that deregulation has come about purely as a result of a change in policy—if we simply say “it’s happened because neoliberalism has triumphed”—then that would be a very shallow explanation, as far as I’m concerned. It is important also to ask about the underlying conditions that have made possible the triumph of neoliberalism, and there one will find, I believe, deeper tendencies, including those that I have identified. Capitalism has been changing spontaneously. In that context, financial deregulation became more feasible and began to be demanded by the agents of the capitalist economy. Once deregulation became a regime and it was implemented on a large scale, then that obviously accelerated financialization further. It’s a two-way process, but the starting point is the transformation at the grassroots, the fundamental transformation of capitalist accumulation, which is what really concerns me. That’s the first thing I want to say.

The second point I want to make, which might add further context, is that we observe financialization also in developing countries, or in countries which are at a different level of development than say, the mature countries, the United States, Japan, Germany, and so on. We observe financialization emerging in places like Brazil, Turkey, Korea, even in places like India and so on. It is happening even though we do not have policy changes similar to those of the United States, and we have very different social and economic conditions. It is then apparent that financialization is actually a deeper process that arises across the world and even differs among mature and developing capitalist countries. It’s a profound transformation that cannot simply be explained by policy alone. It is necessary to look at what is happening at the level of production, at the level of trade, at the level of the household, and so on—even in developing countries—in order to get a deeper understanding of this period.

Part Two

D&S: You’ve anticipated our question about whether financialization is exclusive to high-income capitalist countries or is also happening in developing countries. How is it different in developing countries?

CL: Financialization in developing countries is a recent phenomenon, which has begun to emerge in the last 15 years in full earnest. We see a number of middle-income countries that are financializing, and we have to look at it carefully to understand it. One thing that is immediately obvious is that, in mature countries, financialization has been accompanied by weak or indifferent performance of the real economy. Rates of growth have been weak, crises have been frequent, unemployment has been above historical trends. We see a problematic state of real accumulation in mature countries. But when we look at developing countries, it is possible to see countries with phenomenal financialization, where growth has been reasonably strong. Brazil has been financializing during the last ten years, and yet its growth rate has been significant. Turkey has been financializing and yet its growth rate has been significant, and so on. So financialization in developing countries is not the same as in mature countries, because typically in the last ten years, it’s been accompanied by significant rates of growth.

Where does the extraordinary growth of finance in developing countries come from? To my mind, it comes from the way in which these countries have been integrated into the world economy. Integration into the world economy in the last 15 years has relied on the ability to use the dollar to pay, since the dollar is the main means of payment in the world market. Huge reserves of dollars in the last 10 to 15 years have emerged in middle-income countries. It is well known that these reserves are very costly for developing countries, but I am just as interested in the side effect that they’ve had, namely to catalyze financialization in the countries accumulating reserves. In countries that hoard dollar reserves private banks acquire very liquid financial assets because the central banks sterilize the reserves. As domestic banks acquire liquid assets, they begin to play financial games and can do financial operations that they were not able to do before. Consequently, financial markets emerge with significant depth, and suddenly, after ten tears, say, the developing country has a large domestic financial sector where it didn’t have one before.

Foreign banks also enter, and they begin to deploy methods and practices which they’ve brought over from their own mature countries. Fairly rapidly, the domestic banking system also adopts these techniques and begins to operate in similar ways to foreign banks. What then emerges in places like Turkey, like South Africa, like Brazil and Korea, is a tremendous expansion of the financial system, the growth of banks, and banks engaging in transacting practices rather than borrowing and lending as well as banks moving towards households. Household indebtedness in those countries has increased very substantially in the last 10-15 years from nothing, from a very low base. So they’re financializing in this complex way. To me, this is subordinate financialization, deriving from mature country financialization mostly on account of the role of the dollar as world reserve money. It’s an indication of the global aspect of financialization, but also a sign of how different the process is in developing countries.

D&S: In periodizing contemporary capitalism, we commonly hear this referred to as the “neoliberal era,” maybe also the “era of globalization,” and you’ve proposed instead to think of it as the “era of financialization.” Do you see neoliberal policy and globalization as outgrowths of financialization? Do you see these as policy outcomes that are due to the particular political role of the financial sector, as distinctive from the rest of the capitalist class?

CL: We need again to think carefully here, because periodizing capitalism is a very difficult task. The “era of neoliberalism” to me doesn’t really say very much, because neoliberalism is an ideology. It’s a very important set of ideological practices and beliefs. When it becomes policy, it affects things considerably, but it still is an ideology. Therefore, it doesn’t define an era. It’s a bit like saying the “Keynesian era of capitalism.” Such a thing doesn’t exist. An era must be defined in terms of real, profound, material changes in capitalist accumulation, and neoliberalism is not that. To me, neoliberalism is the appropriate ideology of the financialization era, if you want me to push it further. It’s the ideology that sits best with the era of financialization.

Second point is, does globalization define an era? No, I don’t think it does, because what is globalization? When you actually look at it as an idea, you have considerable difficulties because it’s never been defined properly. To say that globalization is the global expansion of capital is not saying very much. Capital has always been global. It has always attempted to go global. Globalization does, of course, indicate the expansion of capitalism in recent decades, which is very important. But it doesn’t really define the era in any sense that I would recognize as meaningful. It’s a term that I also use in discussion, of course, but I wouldn’t use it to define a period in strict terms.

So we’re left with how to define the period still, the last four decades. What is it? To me, financialization serves this purpose admirably. That is, as long as financialization is understood along the lines that I’ve suggested, not simply as the growth of finance but as a transformation at the deepest level of capitalist accumulation. Industrial and commercial enterprises themselves have been changing, banks have been changing, the condition of individual workers has been changing, and these tendencies taken together have brought about the transformation of the historical period. That is, to me, how the classics of Marxism have always attempted to define periods in the history of capitalism. I’m following, basically, Hilferding, Lenin, and the classics of Marxism in this regard, in defining the current period.

Has the change come about because of the particular role of the financial system? No, I would argue. It has come because of the three tendencies I’ve identified at the roots of capitalist accumulation. Now, you might naturally ask, why have these tendencies come about? What I would say there is that we need to look even more deeply and think in terms of the forces and relations of production. We’ve got to think in terms of the deepest material development of capitalism, things like the technological revolution that has taken place in the last four decades, the transformation of work, and similarly basic factors of the economy. When we look at the technology, for instance, it is obvious that there has been a revolution in terms of information technology and telecommunications. But this revolution of technology has not led to successful and sustained growth of real accumulation. What it has done is to boost finance, and to transform the way in which finance and real accumulation interact. It’s also transformed labor, the way we work. The deepest roots of financialization, then, must be sought in the transformed interplay of the forces and relations of production.

Part Three

D&S: A striking aspect of your analysis of industrial and commercial enterprises is that, rather than simply becoming more reliant on bank finance, they have taken their own retained profits and begun to behave like financial companies. Rather than plow profits back into investment in their core businesses, they are instead placing bets on lots of different kinds of businesses. What accounts for that change in corporate behavior?

CL: In some ways, again, this is the deepest and most difficult issue with regard to financialization. Let me make one point clear: to capture financialization and to define it, we don’t really have to go into what determines the behavior of firms in this way. Financialization is middle-range theory. If I recognize the changed behavior of the corporation, that’s enough for understanding financialization. It’s good enough for middle-range theory. Now obviously you’re justifiedto ask this question: why are corporations changing their behavior in this way? And, there, I would go back at some point to technologies, labor, and so on—the forces and relations of production.

For several decades it’s been widely believed among the forces of the left, or other progressive forces, that productive capital tendsto become more dependent on banks. Many people still consider financialization a period in which big business has become more dependent on big banks, which is why you were a little surprised when I said that, actually, this is not true. And it’s not true because of the rise of retained profits that I have already mentioned. What we observe about large capital in the last hundred years—it is a long-term trend—is that the large corporations, the multinationals—the monopolies of Marxist terminology—are definitely capable of financing their investments from retained profits. And that’s very, very clear in the last four decades. In fact, during the last ten years, in the United States, but also in Japan, Germany, and elsewhere, big business has got so much money in terms of retained profits—and has been investing so little—that the money is holds is often 50% more than its investment needs on an annual basis. For this reason big business has become more independent of banks: if you borrow less from banks you become more independent. Obviously big businesses still interact heavily with banks, but they don’t depend on the banks for investment. They have become more independent of banks, and are using their own funds to make financial profits.

Why have things turned out this way? It probably has to do with the large corporate form of organization, which is different from the classical competitive capitalism of the 19th century. It has different forms of internal organization of labor, different forms of mobilizing profits and retaining profits. Corporate capital, joint-stock capital, is a very well-organized form of capital when you look at it as a unit, capable of confronting its financial needs and organizational needs very differently from a small owner-operated business. The other thing is the impact of new technologies and new labor practices over the last forty years. Information technologies and the intensification appear to have changed conditions regarding the financing of investment.

D&S: Now on the subject of households, a part of your analysis looks at their reliance on private means even for fundamentals like medical services and retirement, and ultimately the financialization of those aspects of life. Do you see a significant variation in this aspect of financialization between countries like the United States, that historically have had a smaller welfare state, versus say, the countries of Western Europe, which have had a more extensive welfare state?

CL: There is a difference, but it’s not as significant as your question implies. In my book, I examined households in quite some depth. There is no question that we find the financializing tendency across the four countries that concerned me—the United States, the United Kingdom, Japan, and Germany. Household financialization, consequently, appears to be a deep process of contemporary capitalism, which is what I argue. Nonetheless, for the reason that you are alluding to, that is, because household expenditure on the various aspects of everyday life—education, health, housing, and so on—is in a sense detached from the immediate needs of capital accumulation,yes, there are differences in the financializing tendencies at the level of the household.Germany hasn’t had a housing bubble in the last twenty years, if it ever had a truly major one. German households are financializing, but there has not been a housing bubble, so the condition of the German economy in the last four or five is significantly different from the condition of the U.S. and the UK economies. German households are not as heavily indebted or overindebted as U.S. and UK households, for instance. We do find these differences—you’re right. But they’re not sufficient to create a different outlook on the financialization of the household.

D&S: What do you see as the most important consequences of financialization? Most importantly, what are the most important negative consequences of financialization in terms of issues like income distribution, macroeconomic stability, economic development, and so forth?

CL: On the whole, financialization is a negative development. This is a period of capitalism that,in my view, actually has very little positive going for it. It has been marked by weak growth, stagnant or declining incomes, and profound economic instability leading to bubbles, crises, and so on. It’s also been a period of profound reorganization of work practices and deep insecurity of employment. It’s also been a period of work invading every aspect of personal life—it’s a piracy of free time by work, basically. So there is very little actually to commend this period in terms of well-being, living standards and so on.

The prevalence of finance within the economies that are financializing is in and of itself a form of social instability. Finance is always one step removed from the creation of profit at the foundations of capitalist accumulation. Finance is historically well known for being incredibly expansionary at times and incredibly contractionary at other times. It is well known for going through bubbles but also for the burst of these bubbles. Consequently, the growth of finance, and the penetration of economic and other aspects of social life by finance, has increased the instability of the capitalist economy in the last four decades. That is clearly a negative thing. The United States, for instance,has been through an incredible bubble and its burst in the last fifteen years, and several others before that.

As far as inequality is concerned, now, it has rocketed in the years of financialization. The transformation of work that has come about and the changed practices of employment have contributed to the rise of inequality. Strikingly, finance has become a key mechanism for the extraordinary extraction of profits. Financial profit, as of 2003, was 40% of total profit in the United States. This is an unprecedented phenomenon in the history of capitalism. Finance has become a mechanism for the extraction of extraordinary returns affecting not only people who are directly employed by finance, but also by people who might be employed in industry and are remunerated through financial mechanism, and that is a dimension of the financialization of industry. The CEOs and other decision makers in big business are remunerated through financial processes. Finance has become a lever and a field through which inequality has become prevalent in the last four decades. We can even talk about a layer of people who have emerged, who draw incredible returns by being connected to finance even though they themselves do not have money available for lending. They are people who get remunerated through finance by receiving payments that look like salaries and bonuses,through financial assets, and so on. It’s almost like a rentier group, but without the capital to lend. Rather, it this group’s pivot position within the financial system that allows it to extract huge profits.

Part Four

D&S: Do you anticipate, out of this crisis, there being a major restructuring of capitalism in high-income capitalist countries? There seem to be little signs of a dramatic change at this point, with the continuity of neoliberal policy and the financial sector still riding high. Should we be thinking of this era in terms of possibilities of a dramatic change in the way capitalism works?

CL: The crisis has not led to dramatic change from within. That’s clear now. When it was at its peak in 2008-2009, it was legitimate to expect that it might bring a profound change in outlook leading to a structural transformation of capitalism—effected from within the capitalist class, or from above, as it were.

The financializing layers have controlled policy—they have effected policy capture—and they have taken measures which basically defended the financial system and protected financialization. Financialization is continuing. It hasn’t gone away, it’s here. Many people expected financialization to come to an end because they saw financialization as a matter of policy, you see. Well, we now know that this isn’t the case. Financialization has continued, policy hasn’t changed, because the social interests embedded in finance and connected to financialization will not allow it to change. They have acted to protect themselves and have been successful at it.

Now, this doesn’t make financialization stable, for the reasons that I’ve outlined. Instability is there. Inequality is there. The system is deeply unstable, and yet is not changing. At the same time, at the level of ideology, we’ve got complete domination of neoliberalism, and it hasn’t been shaken in the universities, in the think-tanks, or in other ways. Our time is basically characterized by intellectual immobilism. Combined with the unstable outlook of economy and society, inequality and the inability to grow fast, we also have immobilism in policy. That’s where we are, and that’s how things can be expected to continue for a while at least.

D&S: You’ve argued that reregulation is not an adequate response. In light of this view, what sort of transformation is necessary, in terms of a broader anti-capitalist agenda? Fundamentally, are we talking about a transition to a distinctly different economic system from capitalism as we understand it?

CL: We’ve now come to the most difficult part, the crux of all this. In my view, we need to start with the problems of financialization as a historical period and what it has meant for capitalism, and then to decide how to confront it and what to do about it. First point to establish is that we need to reverse financialization. Not simply to overtake it, or to replace it, or anything like that. Financialization has to be reversed. We don’t need all this finance, and we don’t need all these financial modes, techniques, methods, and institutions in modern society. We need to reverse financialization. The question is how.

Clearly, regulation will be an important part of the process. I have said that financialization hasn’t been caused by regulation, and it isn’t simply a matter of policy, but that doesn’t mean that we don’t need to change policy. Obviously, we need to reregulate finance and we need to effect regulation with teeth regarding what financial institutions can do, where they can operate, the activities they can engage in, the prices they can charge, and the credit they can give. But if financialization has not been caused by regulation, then re-regulation is not enough, even if it has teeth. Financialization cannot be reversed by regulation alone. We need further important action. We need to reverse financialization at the level of nonfinancial corporations, we also need to change the way financial institutions work, and finally we need to change the conditions of the household.

As far as non-financial corporations are concerned – at the level of commercial and industrial enterprises – we need policies that create a new outlook for production and trade that puts investment and jobs at the forefront and puts financial game-playing right at the back. It is impossible, I would argue, to bring this change about without a new spirit of public intervention in the non-financial sector. More than that, it is important to re-establish public ownership in key areas of the non-financial sector, at the very least to facilitate general public intervention. So that’s the first element.

For banks, it is obvious that we need a different type of banking and financial system, not simply through regulating the practices of the current system but in terms of outlook in general. Here I would again argue that we need to consider ownership, not simply regulation. We need public financial institutions with a new public mandate, a new public spirit of operation that would engage in credit and other activities of finance on a different basis to the currently failed private finance. The new institutions would support production and employment but also allow people to use finance in a beneficial way in everyday life. The new structures of finance would thus avoid the cycles of bubble and burst that have caused so much social harm these last few years.

For households, finally, we need a broad range of interventions to reverse financialization. Above all there must be renewed public provision for housing, for education, for health, for insurance, for pensions. We need to make private finance retreat from these areas and we must establish public and communal mechanisms of provision. Obviously, that has to be accompanied by decisive redistribution of income and wealth, particularly as real wages have suffered for a long time.

Reversing financialization is much, much more than simply reregulating finance. It’s a new way of operating the public and the private elements of the economy. Reversal of financialization would seek new ways of organizing the public side of the economyby emphasizing the associational and communal dimensions of the economy. In effect, it would bring about a wholesale transformation of the economy in an anti-capitalist direction. Basically, the changes that I’ve mentioned above tend to be anti-capitalist. So, reversing financialization is a vital part of a global anti-capitalist strategy. To me, reversing financialization it a fundamental part of the struggle for socialism, and of opening up fresh avenues towards socialism for this century.