The Era of Financialization

An Interview with Costas Lapavitsas: Parts 3 and 4

MAY/JUNE 2014

These are the last two parts 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. Find the first two parts here. 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). The interview was serialized at our sister blog Triple Crisis.

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?

Costas Lapavitsas: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% 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.

Part 4

Dollars & Sense: Do you anticipate, out of this crisis, there being a major restructuring of capitalism in high-income capitalist countries? There seem to be little signs of a dramatic change at this point, with the continuity of neoliberal policy and the financial sector still riding high. Should we be thinking of this era in terms of possibilities of a dramatic change in the way capitalism works?

Costas Lapavitsas: The crisis has not led to dramatic change from within. That’s clear now. When it was at its peak in 2008-2009, it was legitimate to expect that it might bring a profound change in outlook leading to a structural transformation of capitalism—effected from within the capitalist class, or from above, as it were.

The financializing layers have controlled policy—they have effected policy capture—and they have taken measures which basically defended the financial system and protected financialization. Financialization is continuing. It hasn’t gone away, it’s here. Many people expected financialization to come to an end because they saw financialization as a matter of policy, you see. Well, we now know that this isn’t the case. Financialization has continued, policy hasn’t changed, because the social interests embedded in finance and connected to financialization will not allow it to change. They have acted to protect themselves and have been successful at it.

Now, this doesn’t make financialization stable, for the reasons that I’ve outlined. Instability is there. Inequality is there. The system is deeply unstable, and yet is not changing. At the same time, at the level of ideology, we’ve got complete domination of neoliberalism, and it hasn’t been shaken in the universities, in the think-tanks, or in other ways. Our time is basically characterized by intellectual immobilism. Combined with the unstable outlook of economy and society, inequality and the inability to grow fast, we also have immobilism in policy. That’s where we are, and that’s how things can be expected to continue for a while at least.

D&S: You’ve argued that reregulation is not an adequate response. In light of this view, what sort of transformation is necessary, in terms of a broader anti-capitalist agenda? Fundamentally, are we talking about a transition to a distinctly different economic system from capitalism as we understand it?

CL: We’ve now come to the most difficult part, the crux of all this. In my view, we need to start with the problems of financialization as a historical period and what it has meant for capitalism, and then to decide how to confront it and what to do about it. First point to establish is that we need to reverse financialization. Not simply to overtake it, or to replace it, or anything like that. Financialization has to be reversed. We don’t need all this finance, and we don’t need all these financial modes, techniques, methods, and institutions in modern society. We need to reverse financialization. The question is how.

Clearly, regulation will be an important part of the process. I have said that financialization hasn’t been caused by regulation, and it isn’t simply a matter of policy, but that doesn’t mean that we don’t need to change policy. Obviously, we need to reregulate finance and we need to effect regulation with teeth regarding what financial institutions can do, where they can operate, the activities they can engage in, the prices they can charge, and the credit they can give. But if financialization has not been caused by regulation, then re-regulation is not enough, even if it has teeth. Financialization cannot be reversed by regulation alone. We need further important action. We need to reverse financialization at the level of nonfinancial corporations, we also need to change the way financial institutions work, and finally we need to change the conditions of the household.

As far as non-financial corporations are concerned – at the level of commercial and industrial enterprises – we need policies that create a new outlook for production and trade that puts investment and jobs at the forefront and puts financial game-playing right at the back. It is impossible, I would argue, to bring this change about without a new spirit of public intervention in the non-financial sector. More than that, it is important to re-establish public ownership in key areas of the non-financial sector, at the very least to facilitate general public intervention. So that’s the first element.

For banks, it is obvious that we need a different type of banking and financial system, not simply through regulating the practices of the current system but in terms of outlook in general. Here I would again argue that we need to consider ownership, not simply regulation. We need public financial institutions with a new public mandate, a new public spirit of operation that would engage in credit and other activities of finance on a different basis to the currently failed private finance. The new institutions would support production and employment but also allow people to use finance in a beneficial way in everyday life. The new structures of finance would thus avoid the cycles of bubble and burst that have caused so much social harm these last few years.

For households, finally, we need a broad range of interventions to reverse financialization. Above all there must be renewed public provision for housing, for education, for health, for insurance, for pensions. We need to make private finance retreat from these areas and we must establish public and communal mechanisms of provision. Obviously, that has to be accompanied by decisive redistribution of income and wealth, particularly as real wages have suffered for a long time.

Reversing financialization is much, much more than simply reregulating finance. It’s a new way of operating the public and the private elements of the economy. Reversal of financialization would seek new ways of organizing the public side of the economyby emphasizing the associational and communal dimensions of the economy. In effect, it would bring about a wholesale transformation of the economy in an anti-capitalist direction. Basically, the changes that I’ve mentioned above tend to be anti-capitalist. So, reversing financialization is a vital part of a global anti-capitalist strategy. To me, reversing financialization it a fundamental part of the struggle for socialism, and of opening up fresh avenues towards socialism for this century.

Costas 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). The interview was serialized at our sister blog Triple Crisis

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