Table Of Content1
2015
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CONTENTS
PART 1 FINANCIALIZATION: THEORETICAL ANALYSIS AND HISTORICAL PRECEDENTS
1 INTRODUCTION: THE RISE AND RISE OF FINANCE
2 APPROACHING FINANCIALIZATION: LITERATURE AND THEORY
3 THE FIRST WAVE OF FINANCIAL ASCENDANCY: MARXIST THEORETICAL RESPONSES
PART 2 POLITICAL ECONOMY OF FINANCIALIZATION
4 THE MONETARY BASIS OF FINANCIALIZED CAPITALISM
5 THE FLUID TERRAIN OF FINANCIALIZATION: FINANCE AND THE CAPITALIST ECONOMY
6 THE CONUNDRUM OF FINANCIAL PROFIT
PART 3 EMPIRICAL AND HISTORICAL FEATURES OF FINANCIALIZATION
7 THE CONTEXT OF FINANCIALIZED ACCUMULATION
8 UNDERLYING TENDENCIES AND VARIABLE FORMS: MATURE AND SUBORDINATE
FINANCIALIZATION
9 TENDING TO CRISIS: GIGANTIC TURMOIL BREAKS OUT IN 2007
10 CONTROLLING FINANCE
Bibliography
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PREFACE
The 2000s were an extraordinary period for finance in terms of prices, profits, and volume of
transactions, but also in terms of influence and arrogance. By the middle of the decade a
vast bubble had been inflated in the US and the UK, the bursting of which could not be
reliably timed but whose aftermath was likely to be devastating. Trivial as this point might
seem in 2013, it was almost impossible to convey it at the time to specialists and students of
finance, and even to activists and socialists. Public perceptions were dominated by the so-
called expert skills of the financial system in ‘slicing and dicing’ risk, and by the putative
wisdom of the ‘Great Moderation’ in inflation policy. Structural crises were a thing of the
past, or of the developing world, not of mature countries, where institutions were strong
and economists well trained. It seemed that finance had discovered the perpetuum mobile
of profit making.
By the middle of the first decade of the new century, it was also apparent that the
processes under way amounted to more than financial excess. The bubble reflected
profound changes in the conduct of non-financial enterprises, banks, and households. After
years of financial ascendancy, the agents of capitalist accumulation assigned to financial
operations a weight that was historically unprecedented. Finance was pivotal to profit
making and to organizing everyday life, but also to determining economic policy as a whole.
Mature capitalism had become financialized.
This book was initially conceived in that context, and its aim was to analyse the
ascendancy of finance and the concomitant financialization of capitalism. By bringing to bear
previous work on money and finance, the intention was to develop a theoretical analysis of
financialization with clear Marxist characteristics. It was to be a book that would draw on
Anglo-Saxon political economy and Japanese Uno Marxism, while being familiar with
mainstream theory of money and finance. It would thus contribute to filling the hole still
gaping in political economy in this field.
As is often the case with plans of this sort, reality intervened. In August 2007 the US
money market had a heart attack, and in August–September 2008 the global financial
system had a near-death experience. The bubble had indeed burst and a catastrophe was in
the offing. The destructive influence of finance on the rest of the economy had become
evident, as had the role of the state in supporting and promoting financialization. More than
that, however, it soon became clear that this was a structural crisis that would not go away
quickly. The bursting of the bubble had ushered in a crisis of financialization that cast fresh
light on the historic transformation of mature capitalism during the preceding decades. It
became necessary to re-examine the underlying tendencies of financialization, focusing in
particular on the sources of financial profit. The book would have to be delayed.
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And then in 2010–2012 the crisis took an even more dangerous turn. States had become
perilously exposed to debt because recession had reduced tax revenues, while rescuing
finance had imposed fresh costs on the exchequer. A bubble inflated by private capital had
resulted in a crisis of public finance. Rising state indebtedness created turmoil of
extraordinary ferocity in the eurozone, bringing into sharp relief the split between core and
periphery, pushing several peripheral countries toward default, and threatening a break-up
of the monetary union. The spectre of a gigantic crisis hung over the world economy. It
became clear that financialization would have to be rethought still further in view of its
monetary dimension, particularly the precariousness of its domestic and international
monetary underpinnings.
The crisis was far from over at the time of writing this book. However, the temptation had
to be resisted to delay publication still further in the expectation that other important
features of financialization would emerge. It was time to submit to the public sphere the
analysis of the structural and historical content of financialization, even if that meant trying
to hit a moving target. The monetary and financial aspects of the transformation of
capitalism during the last four decades have been increasingly discussed by political
economy, particularly its Marxist strain. This book has a distinctive argument to make
regarding financialization, including particularly the predatory and expropriating character of
financial profit and its implications for social stratification. Light could thus be shed on the
tendency to crisis that has characterized financialization since its inception.
In offering thanks for help with preparing this book, I must first acknowledge that too
many debts are owed to too many people to thank them all by name. Still, Makoto Itoh must
be thanked personally, not so much for helping directly but for his unstinting intellectual
support over many years. If only other senior political economists shared his generosity of
spirit. I must also thank Tomohiko Sekine for sparing the time to discuss with me difficult
issues of capitalist accumulation on several occasions. The finer points of Unoist Marxism
were far easier to grasp with such teachers. Thanks should also be addressed to many other
Japanese political economists who have been friends, colleagues and interlocutors to me
over long years. Iroiro to osewa ni narimashite, hontou ni arigatou gozaimashita.
It is also necessary to thank members of Research on Money and Finance to whom I owe
intellectual and practical debts. RMF came to life when the bubble of the 2000s burst, and I
am proud to say that its input in international debate has been significant. Back in 2010, it
was impossible to imagine the full extent of the storm hitting Europe, but we gave a good
account of ourselves despite having very few resources. Without the lively spirit of inquiry of
RMF members, the analysis of financialization would have been much harder to undertake.
In this respect I should single out Iren Levina whose persistent intellectual curiosity and
facility with data helped shape the arguments of this book. Special thanks are also due to
Eugenia Pires, Jeff Powell, Juan Painceira and Jo Michell for help with the bibliography and
the data despite heavy pressures of life and work.
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One of the few positive outcomes of financialization has been the resurgence of Marxist
analysis of money and finance. It is not so long ago that these issues were a minority pursuit
among Marxist political economists, particularly in the Anglo-Saxon tradition. Things are now
very different as a new generation is entering the lists. Things are still more different as
activists and socialists have come to realize the specific gravity of finance in contemporary
capitalism. There are growing political and social demands for an effective response to the
disasters created by financialization. This book is intended as a theoretical contribution to
the debate in the hope that it would also contribute to confronting financialization in
practice. The opposition to contemporary capitalism will only gain if Marxist theory
continues its resurgence.
London
January 2013
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Part 1
FINANCIALIZATION: THEORETICAL ANALYSIS AND HISTORICAL PRECEDENTS
1. INTRODUCTION: THE RISE AND RISE OF FINANCE
A peculiar crisis
In the summer of 2007 several mature capitalist economies entered a period of instability of
historic proportions. The first intimations of economic malfunctioning had appeared in the
US in the summer of 2006, as the housing market started to fall, demand weakened, and
profitability took a turn for the worse. But actual crisis conditions emerged only in August
2007, after a spasm had traversed the international money markets, making liquidity hard to
obtain among banks. During the following twelve months, financial conditions became
progressively worse, while production, consumption, and trade essentially marked time. And
then, in August–September 2008, a ferocious financial storm broke out: international banks
failed, credit disappeared, and money became almost impossible to obtain on a private
basis.
Collapse of much of the US financial system, and by extension much of global finance, was
avoided only through state intervention supplying banks with liquidity and capital, all drawn
from public resources. Nonetheless, the world economy entered a sharp recession in 2008–
2009, at the end of which conditions of rapid accumulation failed to be restored across
developed countries. On the contrary, the tightness of public revenue due to recession, as
well as the public expenditures required to rescue finance and forestall economic collapse,
created large fiscal deficits in several countries.
The result was the emergence of a crisis of public debt after 2010, which assumed a
particularly severe form in Europe. The crisis of public debt has had two implications, both
pregnant with risks for capitalist accumulation across the world. First, it has menaced banks
holding the public bonds of states that have had difficulties in meeting their obligations;
hence, the crisis has threatened to return to the financial system whence it has emanated.
Second, and far more dangerously, the crisis of public debt has directly affected the cohesion
of the European Monetary Union. If the common currency created by the European Union
collapsed, it is likely that there would be an unprecedented global disturbance.
The crisis of the 2000s will prove fertile ground for economic historians for decades to
come with regard to both its causes and consequences. However, the crisis has already had
one definite outcome: it has finally lifted the curtain on the transformation of mature and
developing capitalist economies during the last three decades, confirming the pivotal role of
finance, both domestically and internationally. Financial capital permeates economic
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activity, and interacts with financial markets in ways capable of generating enormous profits
but also precipitating global crises. In terms that will be used throughout this book,
contemporary capitalism is ‘financialized’ and the turmoil commencing in 2007 is a crisis of
‘financialization’.
The economic processes – and the social relations – characteristic of financialization
represent a milestone in the development of capitalism. The catalyst of crisis in 2007 was
speculative mortgage lending to the poorest workers in the US during the 2000s, the loans
being subsequently traded in ‘securitized’ form in global financial markets. It is hard to
exaggerate what an extraordinary fact this is. Under conditions of classical, nineteenth-
century capitalism it would have been unthinkable for a global disruption of accumulation to
materialize because of debts incurred by workers, including the poorest. But this is precisely
what has happened under conditions of financialized capitalism, an economic and social
system that is much more sophisticated than its nineteenth-century predecessor.
Financialization has emerged gradually during recent decades, and its content and
implications are the focus of this book. To be sure, capitalist economies are continually
restructured due to pressures of competition and to the underlying drive to maintain
profitability. However, some transformations have a distinctive historical significance, and
financialization is one of those. The change that has taken place in mature capitalist
economies and societies since the late 1970s requires appropriate attention to be paid to
finance. Consider the following features of financialization to substantiate this claim.
Context and structural aspects of financialization
Mature capitalism has been historically marked by deep transformations of economy and
society. Toward the end of the nineteenth century, for instance, there emerged new
methods of production in heavy industry, accompanied by the rise of monopolistic, joint-
stock enterprises. The change coincided with a long depression, 1873–96, and led to a
rebalancing of global productive power away from Britain and toward the US and Germany.
Similarly, at the end of the Second World War, mass consumption emerged across several
developed countries based on methods of mass production. A long boom occurred, lasting
until 1973–74, during which production became increasingly dominated by transnational
monopolistic enterprises, while finance operated under a system of controls domestically
and internationally. For nearly three decades, the US was the dominant economic force in
global production and trade.
The transformation represented by financialization is of a similar order of importance.
Since the 1970s, there have been profound changes in production methods deriving from
information and telecommunications technologies. Transnational enterprises have become
dominant over global production and international trade. The centre of gravity of global
productive capacity has partly shifted from mature economies in the West toward rising
economies in the East, primarily China. Meanwhile, the institutional framework of capitalist
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activity has been altered as deregulation has prevailed in important markets, above all, for
labour and finance. Throughout this period, accumulation has lacked dynamism in mature
countries, inequality was exacerbated, and crises have become sharper and more frequent.
The most striking feature of the period, however, has been the rise of finance, the start of
which can be usefully placed in the late 1970s. The financial sector had become
progressively larger in the 1950s and 1960s, while still operating within the regulatory
framework characteristic of the long post-war boom. However, even by the late 1970s, the
domestic and international importance of finance remained modest. The three decades that
followed have witnessed unprecedented expansion of financial activities, rapid growth of
financial profits, permeation of economy and society by financial relations, and domination
of economic policy by the concerns of the financial sector. At the same time, the productive
sector in mature countries has exhibited mediocre growth performance, profit rates have
remained below the levels of the 1950s and 1960s, unemployment has generally risen and
become persistent, and real wages have shown no tendency to rise in a sustained manner.
An asymmetry has emerged between the sphere of production and the ballooning sphere of
circulation.
The rise of finance has been predicated on a radical alteration of the monetary framework
of capitalist accumulation, both internationally and domestically. International monetary
conditions have been stamped by the collapse of the Bretton Woods Agreement in 1971–73.
Bretton Woods had enforced the convertibility of the US dollar into gold at $35 to the ounce,
thus fixing exchange rates during the long boom. Its collapse led to the gradual emergence
of alternative international monetary arrangements based on the US dollar functioning as
inconvertible quasi-world-money. The new arrangements have generated considerable
instability of exchange and interest rates, thereby spurring the growth of international
financial markets. Growth of international capital flows during the same period, partly in
response to exchange and interest rate instability, has led to financialization in developing
countries. Domestic monetary conditions, in contrast, have been marked by the steady
accumulation of power by central banks as controllers of credit money backed by the state.
Central banks have emerged as the dominant public institution of financialization, the
defender of the interests of the financial sector.
The ascendancy of central banks is hardly surprising, since financialization in general
would have been impossible without active and continuous intervention by the state.
Financialization has depended on the state to deregulate the financial system with regard to
prices, quantities, functions and cross-border flows of capital. Equally, financialization has
depended on the state to regulate the adequacy of own capital, the management of risk,
and the rules of competition among financial institutions. Even more decisively,
financialization has depended on the state to intervene periodically to underwrite the
solvency of banks, to provide extraordinary liquidity and to guarantee the deposits of the
public with banks.
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Ultimately, however, the rise of finance has resulted from changes deep within capitalist
accumulation. Three characteristic tendencies of accumulation in mature countries have
shaped financialization as a structural transformation of contemporary capitalism. First, non-
financial enterprises have become increasingly involved in financial processes on an
independent basis, often undertaking financial market transactions on own account. The
financialization of industrial and commercial enterprises has affected their profitability,
internal organization, and investment outlook. Non-financial enterprises have become
relatively more remote from banks and other financial institutions. Second, banks have
focused on transacting in open financial markets with the aim of making profits through
financial trading rather than through outright borrowing and lending. At the same time
banks have turned toward individual and household income as a source of profit, often
combining trading in open markets with lending to households, or collecting household
savings. Third, individuals and households have come increasingly to rely on the formal
financial system to facilitate access to vital goods and services, including housing, education,
health, and transport. The savings of households and individuals have also been increasingly
mobilized by the formal financial system.
The transformation of the conduct of non-financial enterprises, banks and households
constitutes the basis of financialization. Examining these relations theoretically and
empirically, and thus establishing the deeper content of financialized capitalism, is the main
task of this book. The concepts and methods deployed for the purpose derive from Marxist
political economy. To summarize, the capitalist economy is treated as a structured whole
that comprises different spheres of activity – namely production, circulation, and
distribution – among which production is dominant. Both production and circulation possess
their own internal logic, even though the two spheres are inextricably linked. Production
creates value; its motive is profit (surplus value) deriving from the exploitation of labour; its
aim is the accumulation of capital. Circulation does not create value; it results in profits, but
these derive mostly – though not exclusively – from redistributing surplus value. Finance is a
part of circulation, but also possesses mechanisms standing aside commodity trading and its
corresponding flows of money. The traded object of finance is loanable money capital, the
cornerstone of capitalist credit. Production, circulation and distribution give rise to class
relations, pivoting on the ownership of the means of production, but also determined by the
appropriation of profits.
Financialization reflects a growing asymmetry between production and circulation –
particularly the financial component of the latter – during the last three decades. The
asymmetry has arisen as the financial conduct of non-financial enterprises, banks and
households has gradually changed, thus fostering a range of aggregate phenomena of
financialization. A telling aspect of the transformation has been the rise of profits accruing
through financial transactions, including new forms of profit that could even be unrelated to
surplus value. This process is summed up as ‘financial expropriation’ in subsequent chapters.
New social layers have emerged as financial profit has burgeoned.
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