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.
Financialisation
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.
