The Era of Financialization, Part 3

This is the third part of a four-part interview with Costas Lapavitsas, author of Financialised Capitalism: Expansion and Crisis (Maia Ediciones, 2009) and Profiting Without Producing: How Finance Exploits Us All (Verso, 2014). This part considers financialization in relation, first, with industrial and commercial enterprise and, second, with the household. It then turns to the main consequences of financialization, in terms of economic stability, development, and inequality. (See the earlier parts of the interview here and here.)

Costas Lapavitsas, Guest Blogger

Part 3

Dollars & Sense: 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 per cent 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.

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