“Financialisation” is an insightful concept when thinking about the modern economy, and how it has changed over the course of the last fifty years. It is something discussed in particular in Greta Krippner’s book “Capitalizing on Crisis” (Krippner 2011).
According to Krippner “financialisation” is associated with a post-industrial economy, and means:
“a broad based transformation in which financial activities… have become increasingly dominant… over the last several decades.”
(Krippner 2011, p.2)
Krippner outlines an example of this process in practice analysing changes in the US economy from the 1960s to the 2000s. Successive policy changes in response to developments in the real economy led to the highly developed financial economy of the 2000s.
In practice this means the corporations come to rely on increasingly on the income from financial investments for their profits, and less on the return on investment in productive industry. Krippner quotes a 2006 study of the Ford Motor Company generating profit primarily by selling loans to purchase cars rather than from the sales of the cars themselves (Krippner 2011, p.3).
This is a fundamental change in how the economy functions, reducing investment in production as companies instead chase profitable financial investments. The system becomes increasingly disconnected from the ‘real’ economy and prone to oscillation and crisis. It’s a process that Marx touches on in Volume 3 of Capital when he describes ‘fictitious capital’, speculation, and the credit system. As more money is invested, the banks use it to create more ‘fictitious’ capital to create more investments and so as the system begins to spiral out of control. It was a process like this which drove asset prices for ‘subprime’ US real estate to unsustainable levels leading to the global financial crisis of 2007-9.
Michael Roberts takes up a similar theme in his analysis of the economy since 2007. His focus is on how companies need to search for different sources of profit as they try to survive a declining rate of profit overall, something which is a standard part of Marx’s analysis of a capitalist economy.
“After 2000, the rate of profit based on net worth remained under the rate against tangible assets for the first time on record, suggesting that the “financial” part of the assets of the capitalist sector became a significant obstacle to the recovery in capital accumulation.”
(Roberts 2016, p.122)
“Profit margins for the large companies are near all-time highs and cash reserves have accumulated, but there is little corresponding investment in the real economy; instead, it is in dividends, stock buybacks, and speculation in financial assets—and, of course, a revival of the property markets.”
(Roberts 2016, p.144)
There is little doubt that weak productive investment is driving poor ‘real world’ economic performance. Analysis by the UCL Institute for Innovation and Public Purposes suggests that “at the root of the UK’s weak economic performance is a low rate of investment“.
“The UK banking sector has largely retreated from funding productive activity in the real economy, and is instead focused on financing and trading existing assets.”
Krippner’s view that individual policy decisions designed to tackle an isolated problem have resulted in long term and fundamental changes to the functioning of the economy also complements David Harvey’s view on how capitalism handles crises. For Harvey, building on Marx, capitalism is an inherently unstable system with a number of points where crises can form for different underlying reasons. When a crisis occurs, the response tends to address the immediate short term problem by moving the point of tension elsewhere in the system to re-emerge later.
This is exactly the process that Krippner describes in the US. Policy responses developed in reaction to a present crisis put the economy on the path to the next pinch point and the next crisis, each widening and deepening the influence of finance on the economy as a whole.
“Financialisation” then is a concept that helps the analysis of the modern debt-laden economy both as a response to the tendency of the rate of profit to fall (Roberts) and as a means to avoid an incipient crisis while unintentionally preparing the ground for the next (Harvey).
Krippner, Greta Capitalizing on Crisis (Harvard University Press, Cambridge Massachusetts, 2011)
Roberts, Michael The Long Depression (Haymarket Books, Chicago, 2016)
Harvey, David Marx, Capital and the Madness of Economic Reason (Profile Books, London, 2017)
Macfarlane, L State investment banks as a source of patient strategic finance in the UK (online) (UCL Institute for Innovation and Public Purpose, https://www.ucl.ac.uk/bartlett/public-purpose/state-investment-banks-source-patient-strategic-finance-uk, accessed 19 January 2018)
Marx, Karl Capital Volume 3 (Penguin, London, 1981)