Understanding Contemporary Capitalism, Part 2

Neoliberal Capitalism, Financialized Capitalism, or Globalized Capitalism?

David Kotz, Guest Blogger

David Kotz is a professor of economics at the University of Massachusetts-Amherst and the author of The Rise and Fall of Neoliberal Capitalism (Harvard University Press, 2015). This is the second installment of a two-part series based on his book. Part 1 is available here.

While it is widely agreed that capitalist economies underwent significant change after around 1980, there are different interpretations of the new form of capitalism that emerged. There is no agreement about the best organizing concept for post-1980 capitalism. Some view it as financialized capitalism, some as globalized capitalism, and some as neoliberal capitalism. These different conceptions of contemporary capitalism have implications for our understanding of the problems it has produced, including the financial and economic crisis that emerged from it in 2008. Focusing on the U.S. economy, I presented a case in part 1 that “neoliberal capitalism” is the best overall concept for understanding the form of capitalism that arose around 1980. Here, I deal more specifically with the shortcomings of alternative interpretations – focused on the concepts of “financialization” and “globalization,” respectively.

Why Not “Financialization”?

Some economists view “financialization” as the best overall concept for understanding contemporary capitalism. Financialization can best be understood, however, as an outgrowth of neoliberal capitalism. The rise in financial profit, which gave the financial sector a place of growing importance in the economy, came quite late in the neoliberal era. As figure 2 shows, only after 1989 did financial profit begin a long and steep climb, interrupted by a fall in the mid 1990s, and then a sharp rise to a remarkable 40% of total profit in the early 2000s. It was only in the 2000s that financialization fully blossomed. At that time, commentators noted, Wall Street was beginning to draw a large percentage of elite college graduates.

The “financialization” of the U.S. economy in recent decades, important though it is, was itself driven by neoliberal restructuring. The neoliberal institutional structure, including financial deregulation, enabled financial institutions to appropriate a growing share of profits. Furthermore, financialization cannot account for many of the most important economic developments in contemporary capitalism. It cannot explain the dramatic shift in capital-labor relations from acceptance of compromise by the capitalists to a striving by capitalists to fully dominate labor.. It cannot explain the sharp rise in inequality. And it cannot explain the deepening globalization of capitalism.

Why Not “Globalization”?

Like financialization, “globalization” has been presented by some analysts as the best framework for understanding the contemporary form of capitalism. Capitalism has, indeed, become significantly more integrated on a world scale in recent decades, including the emergence of global value chains and a truly global production process in some sectors.

The degree of globalization of capitalism has gone through ups and downs in history. Capitalism became increasingly globalized in the decades prior to World War I. Then the cataclysm of two world wars and the Great Depression reversed the trend, and capitalism became less globally integrated over that period.  After World War II, the process of globalization resumed, gradually at first. Around the late 1960s, globalization accelerated somewhat measured by world exports relative to world GDP, as figure 3 shows. After 1986 the trend became more sharply upward. Thus, in contrast to financialization, which emerged later than neoliberalism, the globalization process in this era began before neoliberalism emerged, although globalization accelerated in the neoliberal era, particularly after 1990.

However, many of the most important features of capitalism since 1980 cannot be understood or explained based on globalization any more than they can be on the basis of financialization. Globalization cannot fully explain the rapidly rising inequality in the contemporary era, which has been quite extreme in the United States yet milder even in some other countries, such as Germany, that are more integrated into the global economy. Globalization cannot explain the financialization process and the rise of a speculatively-oriented financial sector, nor can it explain the series of large asset bubbles. Like financialization, globalization has been an important feature of neoliberal capitalism, but it is not its defining feature.

Neoliberalism as the Key Concept

Both financialization and globalization are fundamental tendencies in capitalism. Financial institutions have an ever-present tendency to move into speculative and risky activities to gain the high profits of such pursuits. Even more so, globalization is a tendency present from the rise of capitalism, since the capital accumulation drive always spurs expansion across national boundaries. Then why do these phenomena characterize one era of capitalism more than another?

Both of these tendencies can be obstructed for long periods of time, or released, depending on the prevailing institutional form of capitalism. Financialization was held in check from the mid 1930s to 1980 by financial regulation, and globalization was hindered from World War I until the 1960s by the world wars, the Great Depression, and then the state regulation of trade and international investment allowed under the post-World War II Bretton Woods monetary system. The neoliberal restructuring starting in the late 1970s can explain all of the key economic developments in contemporary capitalism, with the processes of financialization and globalization—released by neoliberal capitalism—forming a part of the account.

These differences in analysis are  important, since they represent different views of the basic characteristics of the current era of capitalism and different diagnoses of the origins of the current crisis. Proposals to overcome the current crisis that focus only on reigning in financialization or reconfiguring globalization would be insufficient unless part of a restructuring that replaces neoliberalism with something new.

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One Response to “Understanding Contemporary Capitalism, Part 2”

  1. Kris Alman MD says:

    Thank you for these essays. I wrote the following on Naked Capitalism site:

    Great post. I have been baffled by the use of the term “neoliberalization.”

    What about the “neocon”? Is the neocon the neoliberal who takes advantage of the negative externalities of perpetual war? (Are there Venn diagrams that can explain these neoeconomic terms?) Indeed, how much of our economy is driven by negative externalities? Crises begets predatory behavior, clothed by doublespeak like “opportunity” or “creative destruction.”

    Yet there’s nothing stopping negative externalities because they are included in GDP metrics–the measure of economic “wellness.” After 9/11, Bush reminded that we must shop. Americans are valued as consumers.

    I hate how a patient has become a “consumer” of health care. In health care, “wellness” is just another product to consume. With neoliberalism at the heart of American economics, I can’t imagine there will ever be any real attempt rein in health care costs. We depend on sickness (real and imagined) to keep our economy humming. “Prevention” is the tail that wags the dog as doctors chase more and more false positives and respond to lower thresholds for “abnormalities”.

    The globalization piece is the narrative of “free” trade. Import cheap goods that outsource more jobs and keep prices down to artificially lower the cost of living. The plutocrats’ narrative is that when corporations move into poor countries with jobs this levels the playing field globally. (Never mind their tendency to uproot when those pesky citizens demand better pay and work conditions!) This, of course, takes a huge toll on the environment when we ship goods that could easily be manufactured here.

    It means we extract more resources to create more landfills. And “waterfills” and “airfills”. We use technology to engineer our way out of our big messes. More chemicals are dumped into our land, water and air–with trade secrets obfuscating what these chemicals are and whether they are harmful. Fracking, glyphosate for GMOs, etc.

    Can neoliberalization die of natural causes?

    Maybe we can we bring it to Oregon for death with indignity? (No capital punishment in Texas for neoliberalization… pun intended.)

    You see, I’m getting really worried that we’ve passed the tipping point when economics collision with natural ecosystems is irreversible… And that makes this mama bear really mad!