On Financialization: the Nature of the Vampire Squid*
As I understand it, Michael Hudson argues that modern capitalism has experienced a transformation whereby industrial capitalist production has been subordinated to finance. This, Michael argues, goes contrary to Marx’s expectation that, as capitalism develops, industrial capitalists become the dominant group among all capitalists, whereas banking and finance becomes subservient to former.
Jerry Epstein, from Amherst, Tom Palley, and others have made similar claims. Finance — portrayed (more or less adequately) as a bundle of largely unproductive, wasteful, if not outright criminal activities, consisting of trafficking with legal claims that entitle people to future economic gains— may benefit a few wealthy individuals, but at the expense of greater macroeconomic fragility and risk for the rest of us.
In this context, the notion of finance advanced is that of fraudulent activities that violate not only the alleged norms of market competition, but also basic legal and ethical standards — even if the increasing power of finance does not wind up reshaping legislation, policymaking, and the ethical and aesthetic views of the populace to their advantage. So, finance capitalism is associated with, to the point of being undistinguishable from, swindle, fraud, white-collar criminal behavior.
I am not going to argue here that finance is not all that. In one of the last pages of the volume I of Capital, Marx has a quote saying that “capital eschews no profit.” The higher the return, the greater the willingness to ignore norms, trample the law, and go rogue. But that applies to any capitalist activity, productive of wealth or not.
No social order, no economic regime, can be solely or chiefly based on theft. What an individual, group, or class appropriates has to exist as wealth, i.e. it has to be reproduced as wealth in the first place. Capitalism has proved to be the most exploitative mode of production in history, but the essential characteristic of capitalism is not exploitation. Its essential characteristic is the particular way in which exploitation is effected. It is through market exchange that a massive systematic exploitation takes place under the guise of a voluntary exchange of equivalent commodities between legally equal individuals. To be sure, this “normal” form of exploitation is always accompanied by abuse, fraud, and other “anomalies.” Furthermore, the abuses are magnified by the explosive energy that capitalism unleashes (guns are more effective in killing people than sticks or stones), by the increasingly powerful hardware that capitalism makes and puts in the hands of the swindlers. However, the real problem of capitalism is not its abuses, but its uses — its normal modus operandi.
If finance has gotten fat in modern times, it is because fatty food exist. And this fatty food — the actual material wealth that feeds financial capital —is made, built, maintained, stored, produced anew continuously. If the rentiers can live off their rents, interests, dividends, and capital gains, and these are getting bigger, it is because somebody produces recurrently the expanded wealth the rentiers appropriate in these forms.
Again, if theft and fraud can fetch ever bigger masses of wealth, it is because people, working people, produce that much increasing wealth. This is often hidden from view when we focus on finance, monetary phenomena, etc. Wealth cannot be produced by shuffling and reshuffling claims of ownership (money, stocks, bonds, and other forms of legal ownership). Wealth is only redistributed that way. Wealth has to be produced the hard way — it takes time, and physical means of production, and the sweat and concentrated attention and effort of workers: actual human beings. The more formidable finance appears as a device to extract and appropriate wealth by the few, the more we should infer that wealth is being produced and reproduced at a massive and expanded scale.
Now, if we are in the business of exposing capitalism, because we want it overthrown, then it is fair to denounce its abuses. Because these abuses are inherent to capitalism; they are a part of its normal modus operandi. These abuses are fair material for agitation. However, if we are trying to understand the true nature of capitalism, so we can build a better society, then the focus on the excesses of capitalism leaves the impression that normal capitalism is okay. What we used to call propaganda (i.e. study, theoretical investigation, deeper reflection on the issues) needs to focus on the uses. Because the misleading, populist implication one gets from the stories about financialization as anomalous is that the abuses can be removed, a sane capitalism is possible, if only finance is contained, if banking becomes again a boring business, if Main Street is left alone while Wall Street is checked.
I strongly disagree with this.
In my view, finance is parasitic, because all capital is parasitic. All capital is parasitic, whether involved in productive pursuits or not, because the source of all property gain is what Marx called surplus value: unpaid labor.
Regarding the facts of what some authors call “financialization” — the disproportionate growth of the financial sector, at the expense of productive activities — I will limit my remarks to the following:
1. All individual capitals are required to conduct operations involving money, funding of activities, the management or allocation of its assets, including the most “liquid” ones (the ones closer to money). Just like John Jay College, having to provide schooling to young people, needs to manage its physical facilities, its building, which requires dealing with electrical systems, boilers, walls, roofs, plumbing, air conditioners, etc. It can be a hassle. In Capital, Marx noted that — in part, at least — the development of modern banking consists of centralizing, streamlining, rationalizing these functions. Thus, individual capitals can largely farm out these activities to specialized centers, banks, fund managers, etc. At the macro level, this process actually reduces unproductive activities that, otherwise, individual capitals would have to carry out anyway, at the micro level. The economic statistics clearly show the expansion of the financial sector, its share in the entire economy, but they do not reflect the reduction of hassle and unproductive pursuits at the micro level that financial organizations, enjoying scale economies, can manage in a more centralized and thus efficient manner. Not for the benefit of society, but for the benefit of capital — i.e. to reduce the wasteful expenditure of surplus value. So, we may see the tip of the iceberg, the FIRE sector going from 10% to 20% of GDP in a few decades, but we don’t see the submerged part. (This is not to deny that the concentration of these money-management and credit functions in banking capital entails a concentration of capital, and hence a concentration of power, capable of reshaping legislation and politics. But that is the result of any kind of concentrated capital.)
2. Capitalism is a global order. Just because we see finance in New York, London, Tokyo, Frankfurt, or Zurich expand dramatically, that does not mean that we should link it only with industrial production in the U.S., the UK, Japan, Germany, or Switzerland. In the last few decades, some large massive countries (like China, India, Brazil, etc.) have experienced an extraordinary expansion in their productive activities. Finance is global. Financial capital in these metropolises may result from the farming out of myriad micro-level unproductive activities the world over. Taking into consideration the previous point, considering things globally: Has global finance in the last fifty years expanded faster than other branches of the global economy? Has “financial” capital, as conventionally categorized (e.g. the FIRE sector under the BEA NIPA system), grown faster than other concentrated forms of capital (e.g. industrial and commercial capital)? This is a question that needs to be settled empirically. My conjecture is that — once we frame things the right way — the answer is “No.” The growth of financial capital in metropolitan areas — I argue — is only the most visible (phenomenic), but not necessarily the most essential, manifestation of a process of massive expansion of capitalist production at a global scale.
3. This disproportionate expansion is to some extent not unique to finance, but also characteristic of other “services” in the economy. In fact, if we look at the BEA NIPA statistics, one will notice that the growth of the weight of finance in aggregate GDP or employment or gross output, or whatever measure one may use, in the last fifty years, has been more modest than the expansion of nonfinancial services (education, health care, arts, entertainment, hospitality and restaurant industries, professional business services). How come? The explanation is the so-called “Baumol cost disease.” Before Baumol, Marx in Capital (I, ch. 15, §6, table and last few paragraphs, pp. 574–5 Penguin ed.) refers exactly to this very phenomenon. [Update: Re. the “Baumol cost disease” broadly understood, it should be noted also that the expansion of real-estate wealth has much to do with the increase of rents that results from the expansion of industrial and commercial capital. See Capital (III, part VI) for the notion of the “value of land” as capitalized surplus value, which prior to its appropriation as rent by the landholder must be viewed as alienated labor under the direct purview of capital.]
4. Which type of human activities are truly productive and which nonproductive? Certain functions that appear under the official rubric of finance (again, e.g. FIRE under the NIPA) are in fact productive and essential to any type of society. They are not only productive of surplus value (productive in the capitalist sense), but productive of value (productive in the commodity-production sense) and also productive of use value (productive in the general human sense). Even perfect communism would require “insurance” provision against hurricanes, it would require housing, reserve against contingencies, the provision of resources to activities that will only yield fruits many years down the road, etc. This is why, in fact, we should view the hypertrophy of finance just like we view the hypertrophy of the U.S. private health care and private education industries, i.e. as a social failure, a failure of the economic (market-based) and political institutions of our capitalist society. Our capitalist society is failing to provide for those basic necessities of people in the most rational way, and instead we have private capital taking over these functions and running with the booty.
In conclusion, when we take all that into account, then financialization becomes a cyclical phenomenon, an issue of competition among the capitalists, certainly important to us in the left, in its consequences, etc., but not the key structural aspect in the modern development of capitalism that some thinkers deem it to be. [Update: This does not mean that financialization is “cyclical” in the sense of the short “business cycles” but in the sense of longer “waves” in the historical development of capitalism. Cf. David Laibman’s Deep History for a good description of these longer fluctuations that coincide with broad, global technological changes as well as drastic shifts in the global class balance of forces. The process of “financialization” is largely, I argue, a phenomenon linked to the phase that some authors called of “neoliberal capitalism,” e.g. the period between the 1970s and up to the recent crisis.]
[Update: When I was preparing this talk, I downloaded the Forbes world billionaire list and coded each wealthy individuals by sector of fortune origination (“finance” vs. “nonfinance”). Any individual who owed her/his wealth even partially to any industry related to money dealing, credit issuance, banking, insurance, real estate, financial market wheeling and dealing, venture capital, etc. I coded as “finance” and the rest as “nonfinance.” I found that the percentage of billionaires that made their riches in broadly categorized “finance” sector was significantly smaller than the proportion of FIRE in US GDP today (around 20%). It seems clear to me that the true “masters of the universe” are not the Blankfein, Dimon, Lewis, and Cohn types. No, in fact, the true “masters of the universe” are the Gates, Slim, Ellison, and Walton types. (I included people like Bloomberg as being in “finance” when he clearly made his fortune out of the news media, communications, and data analysis businesses.)]
[*] On May 31, at the 2014 Left Forum held in John Jay College (CUNY), I participated in a discussion on Financial Parasitism: Understanding the “Great Vampire Squid” along with my respected colleagues Michael Perelman and Michael Hudson, chaired by my friend David Laibman. These were my prepared remarks.
