Costas Lapavitsas Discusses the Financialization of Capitalism
Professor Costas Lapavitsas, School of Oriental and African Studies. (Photo: UNCTAD)
The neoliberal capture of the state has laid the ground for the financialization of capitalism, a stage of capitalism that cannot be reversed without developing new methods of public provision in housing, education, health, pensions and the other sources financialization has used to create profit.
This is the crux of the argument advanced in Costas Lapavitsas’s latest work, Profiting without Producing: How Finance Exploits Us All, recently released by Verso Books.
With this book, Lapavitsas sheds much light into one of the most misunderstood processes in the evolution of capitalism, correcting in the process the tendency on the part of many “progressive” economists to regard regulation as the ultimate solution to the exploitative nature of finance capital. For Lapavitsas, the struggle against finance capital is simultaneously a struggle against capitalism and for democratic socialism. This interview is also appearing in the Greek Sunday newspaperEleftherotypia.
Costas Lapavitsas is a professor of economics at the School of Oriental and African Studies, University of London. He is the author, co-author and editor of scores of books, including Financialization in Crisis, Crisis in the Eurozone and Development Policy in the Twentieth-First Century: Beyond the Post-Washington Consensus. He has published hundreds of articles and is a regular contributor to The Guardian.
C.J. Polychroniou: The landscape of contemporary capitalism has been shaped by neoliberalism, globalization and financialization. Your new book deals with the financialization of capitalism. First, what does financialization mean for you, and in what ways does it represent a new feature of capitalism?
Costas Lapavitsas: For me, financialization represents a new historical period in the development of capitalism. Marxist political economy typically recognizes three great periods: laissez-faire capitalism around the middle of the 19th century, monopoly capitalism toward the end of the 19th century and imperialism that lasted perhaps until the Second World War. The 70 years since the war have been very difficult to categorize, not least because of the extraordinary Long Boom that lasted until the early 1970s, with unprecedented growth rates, rising incomes and greater equality. The Long Boom has been followed by four decades of indifferent growth, often stagnant incomes and rising inequality. In my view, financialization is a term that adequately characterizes this period. Its dominant feature has been the extraordinary rise of finance, which has come to penetrate areas of economic and social activity previously relatively distant to it.
More specifically, I understand financialization as a historical period characterized by three closely related tendencies at the molecular level of capitalist accumulation. First, big industrial and commercial capital has become “financialized,” i.e. it has ample retained profits to finance investment but often uses the funds to engage in financial transactions with a view to extracting financial profit. Second, big banks engage less in lending to big capital, while seeking profits by transacting in financial markets as well as by dealing with individuals and households. Third, households have been drawn into the orbit of formal finance, both to borrow and to hold financial assets. A key reason is the retreat of public provision in housing, education, health, pensions, and so on, typically replaced by private provision. Private finance has emerged as the mediator of access to these very important goods and services for households and individual workers.
How does finacialization relate to the other two forces in contemporary capitalism – neoliberalism and globalization?
I see neoliberalism as an ideological framework that has critically shaped economic theory and policy during the last four decades. It has determined the institutional setting of financialization through, above all, the deregulation of financial and labor markets. I find Mirowski’s argument that neoliberalism is not the enemy of the state and nor does it genuinely ascribe to the simple opposition “state versus market,” very persuasive. Neoliberalism is, rather, about capturing and using the state to achieve pro-market changes across society. The neoliberal capture of the state has laid the ground for the financialization of capitalism. To be more accurate, financialization would have been impossible without the state. Globalization, on the other hand, is much more difficult to pin down either as force or as concept. There has certainly been growth of global commodity markets and considerable foreign direct investment during the last four decades, facilitating the internationalization of production. The most striking aspect of globalization, however, has been the explosion of financial markets and lending. Even foreign direct investment to a large extent refers to establishment of banking facilities abroad. Globalization, then, appears to me as a notable feature of the historical period of financialization.
The rise of financialization coincides with the deindustrialization process in the United States in the early 1970s. Do you see a link between the rise of financialization and the decline of industry?
In historical terms, there is little doubt that financialization has been accompanied by lower rates of both accumulation and productivity growth. During this period, real accumulation has been plagued by difficulties, while financial accumulation has had explosive growth. Yet, I do not think that the difficulties of real accumulation are fundamentally due to the explosion of finance. They have deeper roots related to the “forces of production,” including new technologies in information and telecommunications, changing labor skills and new forms of corporate organization. In the course of financialization, the new “forces of production” have not contributed to dynamic and sustained expansion of real accumulation, but they have encouraged the explosive growth of finance.
I do not subscribe to the view that “good” industry is opposed to “bad” finance. Relations between the two are far more complex and nuanced, reflecting mutual dependence as well as opposition. I sympathize with Hilferding’s and Lenin’s classical Marxist approach to imperialism claiming that industrial and financial capital have developed a symbiotic relationship in advanced capitalism. At the same time, I do not find that during the period of financialization, industry and finance have melded together to form “finance capital,” i.e., the special form of capital that was thought to characterize the period of imperialism. Rather, contemporary industrial capital is increasingly independent of banking capital – certainly among large enterprises – and is able to finance investment out of retained profits. Yet, big business has become “financialized,” that is it engages in financial transactions on its own account with a view to extracting financial profit. The “financialization” of big business has affected its internal organization and its long-term investment strategies in negative ways.
While financial transactions have increased substantially in the past 30 or so years, the contribution of the finance industry to GDP is in single digits. Yet finance capital, as the subtitle of your book blatantly states, exploits the rest of society. What makes financial markets so inefficient and finance capital so exploitative?
Finance is an intermediary and does not, strictly speaking, contribute to the fresh flows of value. More than that, it currently makes a limited contribution to employment and thus to the standard measurement of GDP. In my view, this is related to the extraordinary role of new technologies that have transformed the operations of finance without commensurately expanding employment. Furthermore, the internal organization of the private banking firm and the mobilization of the labor of bank workers leaves a lot to be desired in terms of efficiency. The image of private finance being at the frontier of progress because it deploys new technology is deeply misleading – it operates inefficiently on the whole. Last, but far from least, what exactly is the commensurate benefit to society from placing highly skilled labor and expensive technology at the disposal of financial markets? What is the great benefit from being able to arbitrage and set derivatives prices in split seconds across the world?
The remarkable thing about finance, however, is that it is not simply inefficient but also exploitative in ways that industrial capital cannot be. It is a primordial capitalist activity that long predates the establishment of industrial capitalism and has retained its ancient predatory outlook. Finance can extract profits from any money income and stock of money – its profits are not limited to the fresh flows of value produced annually. During the past four decades, it has become expert at making zero-sum profits that involve transfers from one economic agent to another. Financial profits have become an incredible proportion of total profits – particularly in the USA for which we have relevant data. The exploitative outlook of finance in relation to households and individual workers is also evident. This is a characteristic feature of financialization and marks it out as a historical period in the development of capitalism.
In some of the literature on financialization, there are hints of the emergence of a particular class grouping with the power to shape the direction of mature capitalist economies in ways conducive to the interests of that social class. In post-Keynesian analysis, for example, financialization is based on the concept of the rentier, and the regulation of banks and the finance industry is seen as the only viable solution to avoiding future financial crises. Your financialization thesis, however, which draws its insights mostly from Marxist political economy, implies that what is going on is something more profound and with far more serious implications for policy making than the regulation remedy suggests. Could you elaborate on the question of class analysis and financialization from the perspective adopted in your book?
The rentier is a very old category found in Classical Political Economy, Keynesianism and other currents of thought, even in Marxism. The term essentially refers to a section of the capitalist class that does not engage in production but makes its money capital available for lending. Rentiers draw their remuneration primarily in the form of interest, which is part of the profit generated in production. It is natural to assume that this type of remuneration would create an opposition between the “functioning” capitalist and the rentier and between “good” industry and “bad” finance.
In my view, financialization does not represent the return of the rentier, if there ever was a period during which capitalism was dominated by rentiers. The financial system has grown enormously by mobilizing idle money across the face of society, not simply by drawing funds from a putative rentier section of the capitalist class. Moreover, financial profit – based on interest – accrues to broad social layers and not primarily to a rentier group. There is no persuasive evidence that contemporary capitalism is dominated by rentiers, and certainly not in the classical mold.
At the same time, the explosive growth of finance has led to profound changes in social stratification. Enormous incomes accrue to a thin layer of people associated with finance, but not necessarily through the lending of money or by making money capital available to accumulation in other ways. Instead, financial profits accrue due to the beneficiary’s function in relation to the financial system and often take the form of income from work, rather that payment for ownership of capital. Bonuses are the most egregious – but far from the only – form of such remuneration. There is an aspect of “rent” to such returns, but they derive in good part from function relative to the financial system rather than simply the ownership of money capital.
These modern rentiers, if we can call them that, rely on the state to maintain their ability to extract financial profit. Mere regulatory change would not dislodge them. They have positioned themselves pivotally in relation to policy making and actively shape it to serve their interests. It is far from accidental that the main concern of the US state in 2008-09 was to restore financial profits, which it did successfully. The ability of the state to control the issuing of legal tender and to mobilize tax revenues has been placed at the disposal of this group. Moreover, modern rentiers, precisely because they are not related to the classical ones, can make enormous profits even when the rate of interest is driven to zero by the central bank. This appears to be one of the great paradoxes of financialization, but the paradox disappears when financial profit is conceived in the way I am suggesting.
If regulation is an ill-conceived approach to deal with the problem of financialized capitalism, what other realistic alternative are there?
The period of financialization, contrary to what is often believed, has been characterized by a surfeit of regulation. It is true that there has also been extensive deregulation, mostly by removing controls on the level of interest, on the functional specialization of financial institutions, and on the international activities of finance. Lifting these controls has been instrumental to finance expanding enormously, both domestically and abroad. But at the same time there has been a great deal of fresh regulation of the activities of individual financial institutions, particularly of banks. The Basel Agreements, focusing on capital adequacy, are typical of this trend.
The characteristic feature of the new regulation is that it has been shaped by the financial institutions themselves, and its purpose has been to ensure the ability of the financial system to grow and extract profits. It has not contributed in the slightest to avoiding financial bubbles nor to imposing the costs of financial crises onto those responsible for them. On the contrary, contemporary regulation has led to society bearing the brunt of financial disasters, while private individuals associated with finance have reaped the benefits of expansion. Society has little to expect from more regulation of the type we have known for four decades now.
In confronting financialization, it is vital to start with the recognition that it does not represent “progress” in human affairs. Financialization does not amount to a socially productive expansion of the forces of production that could potentially benefit society, if it was brought under control through a series of bold measures and interventions. Financialization ought to be reversed. To this purpose, regulation alone is not enough, particularly when one bears in mind that financialization is a historical period of capitalism. Confronting it inevitably raises issues of ownership, but also of broader policy and social relations.
There is, of course, no question that regulatory controls ought to be applied to the international flows of capital as well as to the activities of banks. Regulatory controls must also be applied to interest rates. But it is clear that for such regulation to be effective, there must also be intervention in the sphere of international money to control exchange rates. If interest and exchange rates were controlled, a body blow would be delivered to financial markets, particularly derivatives markets. It is apparent, however, that this kind of intervention would be impossible without also expanding public ownership in the economy, including among financial institutions. I do not mean simply nationalizing banks, but introducing new public financial institutions that would operate on a communal and associational basis and would be democratically controlled and permeated by a spirit of public service. It follows that changes of this kind would go directly against the core of capitalist relations in society. Opposing capitalist relations would be vital to reversing the financialization of households, which clearly requires new methods of public provision in housing, education, health, pensions and so on. In short, reversing financialization is no less than reshaping economy and society in an anticapitalist direction. For me, it is an integral part of the struggle for socialism today.