Tuesday, 19 December 2017

Confronting the power of finance: towards definancialisation

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

Tuesday, 11 July 2017

Bad work will persist in spite of the Taylor Review

The government’s independent review on modern working practices in the UK contains some important messages. Put together by Matthew Taylor, head of the RSA think tank and former policy chief to Tony Blair, the review highlights the fact that job creation alone is not sufficient to create a “thriving economy and fair society”. Rather, progress is also needed to create “better jobs”. The focus on the quality of work underscores a broader goal to promote “good quality work for all”.

But the review stops short of recommending major changes in employment regulation and adopts an approach that is ostensibly business-friendly. Beyond the high principles, there is a failure to tackle the underlying causes and drivers of bad work. The fact that the government has welcomed the review speaks to its essential conservatism.

Paying the price for higher employment

The years since the 2007-08 crisis have seen employment rise to record levels in the UK. This situation would imply a favourable environment for workers to improve their pay and their terms and conditions of work. Higher employment, in theory, means that workers have stronger bargaining power to gain concessions from employers. Yet, in practice, the opposite has occurred. Workers have had to forgo both higher pay and job security to gain access to and maintain employment.

The UK is the only country in the EU where employment has risen at the same time as real pay has fallen. The flexible labour market has delivered to employers the labour they require at lower rates of real pay. For workers, it has delivered work that is barely able to cover the cost of living.

The review recognises how the country’s move to full employment has been at the expense of more low quality jobs. Workers have been required to become self-employed and to take jobs in the so-called “gig economy” to make ends meet. These forms of employment have not only yielded poor financial outcomes for workers; they have also meant greater insecurity, exploitation and control by bosses.

“Bad work” (insecure, exploitative and controlling), the review says, has wider economic and social impacts. It erodes the health and well-being of workers. It also holds back productivity – the amount workers produce per hour – and makes the economy in general less productive. Resolving bad work is therefore seen as key to overcoming the UK’s productivity deficit and as a vital ingredient in building a more cohesive and participatory society.

Beyond full employment, in short, the goal should be to maximise “good work”.

What’s recommended

The review recommends changes to the status and entitlement of workers in the gig economy. There is a new recommended category of “dependent contractor”, which sits somewhere between full time employed and self employed status, and is designed to prevent bogus forms of self-employment.

There are also recommendations to make it easier for gig workers to gain benefits such as sick and holiday pay. Plus, it is recommended that agency workers and those on zero hours contracts gain the “right to request” a more formal working relationship after a 12-month period.

To many, the recommendations will appear too timid. Why not outlaw all zero hours contracts, for example? Others may argue that the recommendations are simply harmonising existing workers’ rights – they are bringing gig work up to what is a minimum standard of labour protection and are downplaying issues of the non-enforcement of existing legislation.

Unions have declared their disappointment that the report is no game-changer. A sentiment that is likely to be shared by many millions of UK workers who will continue to face real hardships at work.

Power matters

The review resists imposing greater costs on employers. It refers to the fact that “the ‘employment wedge’ (the additional, largely non-wage, costs associated with taking someone on as an employee) is already high and we should avoid increasing it further”. The stress is on exhorting businesses to change – a policy stance that has failed over many decades to deliver a better deal for workers at work.

There is also a scapegoating of the low paid for working cash-in-hand, but no condemnation of the bosses of big corporations for not paying tax. This unbalanced commentary suggests a review that favours businesses more than workers.

Theresa May declared that the review is consistent with her commitment to “make Britain a country that works not for a privileged few, but for everyone”. Yet, her government lacks the political will to tackle the injustices at work and beyond. The need to protect and promote workers’ rights goes against the grain of the market-based approach that May’s government avows.

“‘The British way’ works and we don’t need to overhaul the system”, proclaims the review. Yet, years of “the British way” have brought us a low wage economy wherein employers lack the incentives to invest in labour and workers lack the power to push for progressive reform. The system, in truth, is broken and needs overhauling if Britain is ever to achieve higher quality work for all.

The review, in policy terms, looks destined to change very little. Indeed, it can be seen to reinforce the view that vested interests still rule in UK workplaces, frustrating progress towards fairness and dignity at work.

*** This article was originally posted at the Conversation

Friday, 13 January 2017

A crisis in economics? If only it were true

The Bank of England’s chief economist, Andy Haldane, recently criticised his very own profession. This led to a bout of soul searching for economists as we face, again, the familiar criticism that nobody predicted the 2008 financial crisis (in fact, some economists did) and reflect on whether the subject is being taught properly at school and university.

Yet Haldane’s criticisms are less severe than they might first appear. Indeed they remain largely innocuous at the level of economic prediction.

To his credit, Haldane made some effort to highlight more deep-seated problems in economics. These problems relate to issues of theory and method. They are also related to an unwillingness to allow dissent within economics and to open up to other disciplines.

Unwittingly, however, he distracts attention away from these problems by focusing on the issue of forecasting and misses the opportunity to ram home the point that economics is flawed in a fundamental sense. Better forecasts cannot exonerate economics from its failings now and in the past.

Weak and off-target

Economics should be in crisis. But in reality it is not. Rather, economics remains largely the same as it was before the financial crisis – in effect, it remains just as problematic now as in the past. This is an issue not just for economics but for society as a whole, given the enduring power and influence of the discipline on policy and public life.

To think of economics in terms of forecasting is to limit its nature and scope. Economics ought to be about explanation. It should be able to make sense of the world beyond forecasts of the future. It is not clear that as it exists now, economics is able to understand the world in its present form. To this extent, it cannot help understand the frequency and depth of crises.

Economists remain committed to a particular approach to theory building in which mathematical models are all that count. They are often too abstract to be tested and exist as formal abstractions with no connection to the real world. For example, some macroeconomic models before the crisis were so out of touch with reality they excluded the existence of banks. No wonder the crisis came as a surprise.

As things stand, there is little chance that economics will open up to the ideas and methods of other disciplines. Instead, the discipline has embraced a project of “economic imperialism” seeking to colonise other social sciences. Genuine interdisciplinary debate has lost out in this process.

Haldane’s criticisms of economics, therefore, remain weak and off target. He calls for economics to learn from meteorology. That way it can improve its forecasts. What he misses is the need for radical change at the level of theory and method. He misses the need for economics to embrace reform that turns it into a social science which explains the world as it actually is – not a device for better predicting the economic weather.

Alternatives exist

To be sure, Haldane questioned standard economic assumptions such as that of all actors being perfectly rational. He has also encouraged the use of alternative methods like agent-based modelling, which offers a more realistic view of individual behaviour. Yet, his proposals for reform are limited and weak. The notion that economics might need to be reworked from first principles and rebuilt as a more open and less formal social science remains implicit in his criticisms.

Alternative economic ideas do exist. They exist among dissenting heterodox economists, but they remain on the fringes of economics debate, without any real influence on the core discipline itself.

This fact is probably a surprise to most. Surely the crisis has led to a rebirth in the study of great economic thinkers like Marx, Keynes, and Hayek? After all, these thinkers studied in detail the economic system including its crisis-prone nature.

The sad truth is that this rebirth hasn’t happened. In fact, any rebirth has been stifled by the insularity of the economics discipline. Economic dissenters like Marx, Keynes, and Hayek are still more likely to be studied by scholars outside of economics than within it.

So while Haldane is correct to call for reform in economics he misses the barriers to reform and the need to overcome them. He misses how economics has stifled dissent and how the restructuring of economics requires root-and-branch reform in the way that economics is studied. We need economists that are not better weather forecasters but rather committed social scientists concerned with addressing and resolving real-world problems on an ongoing basis.

*** This blog also appeared at the Conversation