The tenth anniversary of the global financial crisis (GFC) should have been a time to reflect on the successes made in economic policy. It should have been a time to celebrate the progress made in building a more robust economic system that delivers benefits to the greater part of society.
Yet, ten years on, many of the same fragilities and inequities remain as before the GFC. The conditions for sustainable economic growth have continued to elude policy makers – indeed new tensions (e.g. low productivity and sluggish wage growth) have emerged, suggesting that lessons have not been learned from the past.
In the UK at least, economic growth remains reliant on consumer spending (and borrowing). Policies to revive investment and trade have largely failed and the UK economy remains, as in the past, unbalanced and unequal in its outcomes. The fall in real pay since the GFC is a stand out feature of the UK economy and highlights how the recovery in GDP has coincided with deepening hardship for many.
The problems of the UK, like those in some other countries, reflect on deeper issues relating to the dominance of a particular economic ideology. This ideology entails faith in the necessity of austerity, resists an active industrial policy, and gives autonomy to financial interests in the running of firms. The ideology is consistent with a ‘financialised capitalism’ that eschews higher investment and lower inequality in favour of higher shareholder returns and soaring incomes for the few. It is an ideology that ultimately results in more uneven growth and frequent crises.
If, as argued below, the many in society are to prosper in the future, our focus should be on de-financialising the economy.
The notion of ‘financialisation’ has developed out of heterodox economics and political economy. It captures the spectacular rise of financial activities, financial markets, and financial interests within economy, society, and culture. Financialisation has been a secular and global process over the past thirty years or so, recently encompassing the GFC and ensuing period of austerity in capitalist societies. It has though been highly variegated being more evident in certain countries (e.g. the UK and the US) than others and its nature and extent has reflected on the institutional environment within individual countries.
The sources of financialisation rest with shifts in policy and politics. Policies of deregulation and privatisation, implemented by national governments, have given power and influence to finance. The rise in finance has often been at the expense of the decline of industry and has coincided with rising inequality as the rewards from growth have flowed disproportionately to the owners of capital. At a political level, financialisation has been marked by a commitment to a laissez faire approach. Such an approach has been manifest in the greater reliance on markets and private transactions in the allocation of resources including basic utilities and in the emergence of a more individualistic culture.
Financialisation has also entailed shifts at the level of the firm and in corporate governance. In particular, it has been associated with the rise of the ‘shareholder value model’. The latter has privileged the interests of shareholders above those of other stakeholders, most notably workers. Indeed, the pursuit of shareholder value has implied cuts in labour costs, and in practice, has meant reduced wages and worse terms and conditions for workers.
The financialisation of firms has seen economic returns rise through financial engineering rather than real engineering. Owners have made money through buying back shares in their firms. Here money has been taken out of firms and used to enrich owners at the expense of reinvestment within the firms themselves. Workers, on the other hand, have faced squeezes on their real incomes and pressures to curb benefits (e.g. pensions), in the name of shareholder value maximisation.
The point is that contemporary capitalism has faced forces of financialisation that have pushed in the direction of a more unequal economy. These forces have meant enrichment for a few and hardship for the many. They have, though, created the conditions for crises and system breakdown – the GFC revealed the contradictions of financialisation and its potential to founder in a dramatic fashion.
Low productivity, low investment, and low wages: an unholy trinity
The period since the GFC, however, has seen the same conditions be reproduced in the economy. Financialisation, in this sense, has not been challenged – to the contrary, if anything, it has been renewed and reshaped. It has though created new problems in its wake, problems that once again promise future disruption and potentially crises.
Of all the problems that now exist, the stand out one remains the problem of low productivity. Globally, productivity has been sluggish and shows little sign of improvement. This is surprising, given the modern stress on the ‘rise of the robots’. Yet, ironically, the problem now seems to be one of a lack of automation – in short, robots are not advancing at a sufficiently rapid rate to boost productivity.
Low productivity is linked to two other problems, namely those of low wages and low investment. The lack of growth in productivity is holding back wage growth, while low investment is restraining productivity growth. There are also feedback effects, in the sense that low wages create disincentive effects for firms to invest in capital – why should firms bother investing in new technology when they can meet demand by hiring more cheaper priced labour? Low wages, too, create a disincentive for workers to expend higher effort and lead to a higher quit rate that harms productivity.
These problems have only been magnified by the rise of more precarious forms of employment. In the UK, for example, the rise of involuntary self-employment has created a more disposable workforce that employers can hire at will. Labour protections enjoyed by full time workers have been avoided in an effort to lower firm costs. The beneficiaries have been capital owners; the losers have been the owners of labour power. Indeed, the latter have suffered the longest squeeze in real wages for over a century and a half. The move to ‘full employment’ in the UK has been matched by a rise in poverty pay. It has also coincided with slow and lagging productivity growth – a problem that has exacerbated existing weaknesses of low pay.
The fundamental problem here is the political economy of capitalism. The fact that capital – in particular, financial capital – has power over labour makes it difficult to break free of the vicious cycle of low productivity, low investment, and low wages. Rather the unequal balance of power embeds and perpetuates this cycle in ways that create depressive conditions in economy and society.
Financialisation, in short, remains an impediment to sustaining growth with lower inequality. Indeed, its persistence makes it more likely that the economy will experience unbalanced growth, yet higher inequality, and ultimately a further crash. The prospect of another crisis puts into perspective the perversity of the system in which we continue to live.
De-financialising the economy
The answer to the problems of the system lie in system-reversal. It entails no less than the reversal of financialisation and the move to a ‘de-financialised’ state wherein the economy provides the conditions for sustainable economic growth and for enhanced well-being.
An economy that works for all is one that sets limits on the power of finance. It is an economy where policy makers enact policies to support industry, infrastructure, and technology in a direct way. It is one where the state provides certainty over investment and over the future course of the economy. It is one where the state takes the lead in ensuring that inequality is reduced and the ownership of productive assets is fairly and democratically distributed.
De-financialisation, in this sense, implies a proactive industrial policy, higher taxes on income and wealth, and changes in ownership. In the latter case, it implies a move away from the shareholder value model and towards a system of shared ownership with representation from workers on boards and in decision-making. In the UK, it means challenging the dominant power of finance and seeking ways to engage workers in ownership and management functions.
Addressing problems of low productivity, low wages, and low investment requires a holistic approach that tackles the failures of the financialised system of capitalism. It requires a move to a more democratic system wherein the interests of the many count for more than the few.
The barriers, economic as well as political, to de-financialisation are formidable. Indeed they necessitate fundamental institutional reform. Yet, these barriers should not deter us from seeking to overcome them. To the contrary, they should galvanise us to go forward in the pursuit of a better system that promises to secure a higher standard of living and of life for the majority.
*** This article was originally published at the European Financial Review