Financialization: The Economics of Finance Capital Domination

Financialization

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He has published in numerous academic journals, and written for The Atlantic Monthly, American Prospect and Nation magazines. His numerous op-eds are posted on his website www. Palley holds a B. The classical role of net investment after accounting for replacing depreciated equipment in the theory of capitalist development is clear. At the firm level, it is only net investment that absorbs investment-seeking surplus corresponding to the undistributed and untaxed profits of firms—since the remainder of gross investment is replacement investment covered by capital consumption allowances.

In consequence, undistributed accounting profits, if not taxed away, would lack the traditional offsets [effective demand in the form of net investment], at least in a closed economy. It was net investment in the private sector that was once the major driver of the capitalist economy, absorbing a growing economic surplus. The faltering of such investment as a percent of GDP in the early s with brief exceptions in the late s—early s, and late s , signaled that the economy was unable to absorb all of the investment-seeking surplus that it was generating, and thus marked the onset of deepening stagnation in the real economy of goods and services.

The whole problem has gotten worse over time. Nine out of the ten years with the lowest net non-residential fixed investment as a percent of GDP over the last half century up through were in the s and s. Between and , in only one year—, just before the stock market crash—did the percent of GDP represented by net private non-residential fixed investment reach the average for —79 4. This failure to invest is clearly not due to a lack of investment-seeking surplus.

Financialization - The Economics of Finance Capital Domination (Paperback)

What has mainly kept things from getting worse in the last few decades as a result of the decline of net investment and limits on civilian government spending has been soaring finance. This has provided a considerable outlet for economic surplus in what is called FIRE finance, insurance, and real estate , employing many new people in this non-productive sector of the economy, while also indirectly stimulating demand through the impact of asset appreciation the wealth effect.

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Aside from finance, the main stimulus to the economy, in recent years, has been military spending. The supplementary budget to pay for the current wars in Iraq and Afghanistan, not part of the official defense budget, is itself larger than the combined military budgets of Russia and China. The defense budget for fiscal is the largest since the second world war. But, even the stimulus offered by such gargantuan military spending is not enough today to lift U. Hence, the economy has become more and more dependent on financialization as the key vehicle of growth.

Pointing in to this dramatically changed economic condition in a talk to Harvard economic graduate students, Sweezy stated:. In the old days finance was treated as a modest helper of production. It tended to take on a life of its own and generate speculative excesses in the late stages of business cycle expansions. As a rule these episodes were of brief duration and had no lasting effects on the structure and functioning of the economy. In contrast, what has happened in recent years is the growth of a relatively independent financial sector, not in a period of overheating but on the contrary in a period of high-level stagnation high-level because of the support provided to the economy by the militarily oriented public sector in which private industry is profitable but lacks incentives to expand, hence stagnation of private real investment.

But since corporations and their shareholders are doing well and, as always, are eager to expand their capital, they pour money into the financial markets, which respond by expanding their capacity to handle these growing sums and offering attractive new kinds of financial instruments.

Such a process began in the s and really took off in the s. By the end of the decade, the old structure of the economy, consisting of a production system served by a modest financial adjunct, had given way to a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system. That, in essence, is what we have now. From this perspective, capitalism in its monopoly-finance capital phase has become increasingly reliant on the ballooning of the credit-debt system in order to escape the worst aspects of stagnation.

Moreover, nothing in the financialization process itself offers a way out of this vicious spiral. Today the bursting of two bubbles within seven years in the center of the capitalist system points to a crisis of financialization, behind which lurks deep stagnation, with no visible way out of the trap at present other than the blowing of further bubbles. The foregoing argument leads to the conclusion that stagnation generates financialization, which is the main means by which the system continues to limp along at present.

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But it needs to be noted that recent work by some radical economists in the United States has pointed to the diametrically opposite conclusion: that financialization generates stagnation. In this view it is financialization rather than stagnation that appears to be the real problem. In all countries except the U.

Additionally, growth also appears to show a slowing trend so that growth in the s was higher than in the s, which in turn was higher than in the s. There is no doubt that a prolonged deep stagnation could well emerge at the end of a financial bubble, i. After all, this is what happened in Japan following the bursting of its real estate-stock market asset bubble in The problem is that the financialization process has stalled and with it the growth it generated.

There are just so many profitable outlets for capital in the real economy of goods and services. A very narrow limit exists with regard to the number of profit-generating opportunities associated with the creation of new or expanded automobile or appliance manufacturers, hair salons, fast food outlets, and so on. Under these circumstances of a capital accumulation process that lacks profitable outlets and constantly stalls, the amassing of more and more debt and the inflation of asset prices that this produces is a powerful lever, as we have seen, in stimulating growth.

Conversely any slowdown in the ballooning of debt threatens that growth. This is not to say that debt should be regarded as a cure-all. To the contrary, for the weak underlying economy of today no amount of debt stimulus is enough. Still, as important as financialization has become in the contemporary economy, this should not blind us to the fact that the real problem lies elsewhere: in the whole system of class exploitation rooted in production. In this sense financialization is merely a way of compensating for the underlying disease affecting capital accumulation itself.

The well-meaning critique of financialization advanced by Palley, Orhangazi, and others on the left is aimed at the re-regulation of the financial system, and elimination of some of the worst aspects of neoliberalism that have emerged in the age of monopoly-finance capital. The clear intention is to create a new financial architecture that will stabilize the economy and protect wage labor. But if the foregoing argument is correct, such endeavors to re-regulate finance are likely to fail in their main objectives, since any serious attempt to reign in the financial system risks destabilizing the whole regime of accumulation, which constantly needs financialization to soar to ever higher levels.

The hard truth of the matter is that the regime of monopoly-finance capital is designed to benefit a tiny group of oligopolists who dominate both production and finance.

A relatively small number of individuals and corporations control huge pools of capital and find no other way to continue to make money on the required scale than through a heavy reliance on finance and speculation. This is a deep-seated contradiction intrinsic to the development of capitalism itself. If the goal is to advance the needs of humanity as a whole, the world will sooner or later have to embrace an alternative system.

Arrighi, Giovanni. Adam Smith in Beijing. London-New York: Verso. The Long Twentieth Century. Baragar Fletcher and Chernomas Robert. International Journal of Political Economy, Vol.

Sharpe, New York. Baran, Paul and Paul M. New York: Monthly Review Press. Braudel, Fernand. Civilization and Capitalism, 15thth Century. The Perspective of the World. Berkeley: University of California Press. Chesnais, Francois. La mondialisation du capital. Paris: Syros.

De Brunhoff, Suzanne In Financialization and the World Economy , ed. Gerald A. Cheltenham, U. Fisher, Irving. Foster, John B.

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The Great Financial Crisis. Galbraith, John. The New Industrial State. New York: New American Library. Giraud, Pierre-Noel. Le commerce des promesses. Paris: Editions du Seuil. Imperialismo y ley del valor. Mexico City: Editorial Nuestro Tiempo.

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