The Era of Financialization, Part 1

This is the first part of 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).

Costas Lapavitsas, Guest Blogger

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.

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