Abstract
Is finance-led capitalism politically sustainable? Finance-led growth regimes have been identified as unstable regimes of accumulation, and the question of whether they can be monitored by modes of regulation and thus be politically sustainable is highly debatable. This paper lists the pros and cons of arguments for their sustainability, and considers alternatives beyond the present situation of transition.
Introduction
A major issue in the analysis of the present development of our economies is to explain how the rise of the power of finance in the last two decades can be compatible with democracy. What was a rising concern at the turn of the 21st century has become a puzzling issue after the 2008 global financial crisis, when the extravagances of the financial sector that were clearly the origin of the crisis did not lead to strict policy measures to take the financial sector back to the good old ‘boring finance’ of the ‘golden years of capitalism’ – the three decades following the Second World War. Despite the fact that governments had to bail out some major financial institutions, the financial sector recovered its power within months. Projects to reform the finance sector are still on the agenda, but are clearly far from bringing finance back to its past, domesticated state. The causes for such resilience may be many. Above all, the extent of the internationalisation of economies in today’s world needs to be taken into account, together with the mobility of capital allowed by the diffusion of information and communication technologies and the development of professional networks. Never has ‘finance bashing’ been so widespread: from left to right, from ordinary people to professionals and politicians, most blame the greedy and risky behaviour of finance as causes of the global financial crisis and the ensuing economic recession.
This paper argues that one has first to distinguish the very process of economic development from which the financial sector draws its economic power from the political sustainability of such a ‘growth regime’, which is doubtful. This does not imply that finance is a paper tiger, since it obviously exerts significant influence; it simply implies that one has to clearly distinguish the economic logic on which it is based from the various political ties that allow its reproduction. If we have a finance-led capitalism in the economic sense, if it does not succeed in constructing strong political support in democratic societies, it may well not be a politically viable regime. To clarify this alternative, in the first section of this paper we examine what economists tend to call ‘finance-led regimes’. The second section looks at the political sustainability of such economic regimes, all of which seem to call for some kind of macro-social convention, reminiscent of the ones that were developed in the post-war period, even if conditions in the current period are not similarly dramatic. Turning to what has happened in the aftermath of the 2008 global financial crisis, the third section considers what factors could determine the resilience of this widely contested power of finance. To conclude, we attempt a tentative assessment of the conditions that could upset these ties and pave the way for a return to ‘normal’ finance.
Is finance-led capitalism more than a truism?
The rise in importance of finance in our developed economies over the past twenty years has led to an intensive use of the term ‘finance-led capitalism’. There are different truths in this labelling, depending on what one is using the term to refer to. There is in the first place a strictly economic reading of the phenomenon, which refers to a model in which the intermediation of finance plays a central role in the reproduction of the system. As a canonical description of the working of a system, this corresponds in the terminology of the regulation school to a regime of accumulation. The term ‘regime’ hints at a generic property of the scheme that could fit a variety of situations. As defined in Boehm and Punzo (2001), ‘a regime is a class of “dynamic” behaviors which are sufficiently similar from a qualitative point of view that they can be considered [as being generated] by variants of the same basic model.’ This implies that within a regime of accumulation, underlying changes are occurring that may over time lead to major breakdowns and changes of regime depending on the general context in which the system is functioning.
This raises two contextual issues. One concerns the ‘natural’ environment, and the other the political conditions. Those are external factors for the canonical accumulation regime under view, meaning that they may not be accounted for in the working of this model. A growth regime can only be considered as a sustainable mode of development if it is both environmentally and politically sustainable. Indeed, the notion of sustainable development, as specified in the Bruntland Report (see United Nations 1987), is based on three pillars: economic, political and environmental. The question of the environmental sustainability of a growth regime began to be raised in the early 1970s following the Meadows Report (1972) and a rising consciousness of environmental damage. The political sustainability of a capitalist growth regime is in effect an older issue, which has been raised through debates and conflicts throughout history. As distinct from the logic of economic relations, the political stance of a growth regime depends on the status of rights and politics in the societies in question. The notion of political regime should help to make such an assessment of political sustainability. However, there seem to be two understandings of what constitutes a political regime. A straightforward understanding describes the political structures and the ensuing distribution of power that make up a state. A more essentialist understanding of political regimes looks at the institutions, values and principles that define the playing field of politics over a period of time. In the first approach, readings of political regimes tend to be based on direct assessments of political structures and practices. The political regimes appear as variants of a canonical form (see the quote above from Boehm and Punzo, 2001). The second type of approach is more inclined to look at the broad macro conventions and sets of principles that have constituted successive forms of political life.
Such an essentialist reading of political regimes, which is central to grounding the modes of regulation in regulation theory, could more easily explain how some growth regimes turn out after a trial period to be politically unsustainable. The aftermath of the Second World War saw a turn towards such new political bases, forging the emergence of modern capitalism (à la Shonfield, as recalled in Section 2). In such accounts, some growth regimes can be politically unsustainable, meaning that no mode of regulation based on this political regime can tame the potential instabilities of the growth regime. Periods of such confrontation are in essence periods of transition, of not knowing whether a sustainable mode of development will emerge, in both economic and political terms. In terms of regulation theory, a mode of regulation has to emerge to ensure such compatibility.
But such accommodation cannot not occur overnight, and transition periods are bound to be observed between two modes of development. It follows that one may have finance-led growth regimes without being sure of their political sustainability. Many studies by economists, either post-Keynesian (Godley; Lavoie 2007; Le Heron; Mouakil 2008) or regulationist (Boyer 2000; Aglietta 2000) thus stress the instability of finance-led regimes of accumulation, leaving open the political sustainability of the modes of development that could follow. 1 Conversely, political scientists like Susan Strange (1986) tended to point to the political un-sustainability of the new mode of casino capitalism. The difference of perspective is important. The question of the political sustainability of a growth regime is in effect complex, as political conditions may evolve and growth regimes can, over time, induce changes in political regimes (whatever their definition). Democracies can live through a broad diversity of political regimes, and the forms of democracy are many, more or less enacted by the will of citizens. Some even claim that representative democracy has been greatly weakened by an excess of intermediations. Colin Crouch’s post-democracy thesis states that the political energy has gone out of the formal institutions of democracy (Crouch 2004). Moreover, comparative studies on the economic performance of democracies versus dictatorships cannot conclude that democratic forms of political regimes are superior(see Przeworski and Lemongi 1993). In other words, democracy in modern internationalised economies has shown a plasticity that sets in a new context the issue of political sustainability.
Let us summarise the argument to clarify what can be understood under the label of finance-led capitalism. First, it has to be distinguished from a finance-led growth regime, which in a regulationist perspective concerns a regime of accumulation in which finance plays a key role. Most authors stress the intrinsic instability of such an accumulation regime, which always requires a specific mode of regulation in order to control this economic process. The availability of such modes of regulation is largely conditioned by the inner properties of the political regime. To speak right away of finance-led capitalism in such a perspective is ambiguous. Either it refers to an intrinsic property of capitalism as led by a search for financial profit; or it wants to qualify a specific period in time in which the role of finance in the economic growth process has been able to become politically sustainable. In that last understanding of finance-led capitalism, the very process of financialisation that is associated with the growth process becomes a key specific factor that should explain why such a growth process has been or can become politically sustainable. Rapid growth in the field of SSF (social studies on finance) hints that financialisation can indeed have such potential impact, even if one is forced to say that SSF studies concern mainly the supply side of finance, and much less the demand side, which is a major factor regarding the political sustainability of a growth regime.
The issue of political sustainability thus requires the checking of the specific impacts of the present phase of financialisation. The present rise of the power of finance has accompanied a specifically pervasive role of finance in our societies. Citizens and entrepreneurs alike are concerned, since both have been confronted with the world of modern finance. An economy of debt has developed in which a rising number of households were led to borrow in order to maintain their living standards (or to escape poverty traps; see Figure 1 in statistical annex), while entrepreneurs had either to face rising competition, or in the case of listed firms, to meet rising profit-rate targets to comply with shareholder value requirements. 2 Risky loans to municipalities to refinance their debts are another example of the wide-ranging provision of ‘innovative’ financial services.
G-7 Household Indebtedness, 1998-09.
Also very telling of this pervasiveness of ‘modern finance’ are the various forms of financial activities that developed to sustain this extensive financial intermediation. Employment and capital in the financial sector have constantly increased in the last two decades of the 20th century along with the liberalisation of the sector, developing more or less uncontrolled and wild intermediaries. These include shadow banking activities, tax havens, and the intermediaries that distributed loans to people striving to escape poverty.
The modern capitalist process called ‘financialisation’ specifically refers to broad overall change in the provision and use of financial services. This raises new issues regarding the political sustainability of this process. Financial profit is by definition a driver of capitalism, so in that sense capitalism is always finance-led. But its political sustainability depends on how capitalism makes this profit. This has always been through conflict, and the dispute over the distribution of the surplus was a constant in the long history of the industrial form that relied upon the extensive use of labour to deliver financial profit. In modern history, the postwar arrangements (around macro conventions of full employment) took advantage of the uncertain conditions to set up a new norm of modern capitalism based on the diversity of national states. The question of a finance-led capitalism is thus whether we are going back to the very early times of a rather wild capitalism, or whether some new kind of macro conventions and values can emerge from the confrontation that will domesticate finance, while providing some common frame of development to countries that are now more interdependent than ever before.
Is a finance-led regime politically sustainable?
Is the logic of a finance-led accumulation so strong that it can accommodate all the possible transformations in our social relations? There is for many observers a paradox in the ability of the financial sector to capture such a large share of value added in the first decade of the 21st century, because this was an era of slow growth and rising unemployment in which finance had already earned a poor reputation. In the 1980s, when the liberalisation of finance began, economists largely thought that finance could help to steer economic growth. At the turn of the century, after the East Asian crisis of 1997 and the fall of the LCTM hedge fund in 1998, soon followed by the dot.com crisis on financial markets in 2001, opinions started to reverse (Bidhe 2009). After the global financial crisis of 2008, a sizeable share of the economics profession thought that the world had gone too far in this expansion of finance (Cecchetti and Kharoubi 2012). While by the mid 1990s, liberalisation had raised the share of gross operating surplus of the finance sector in the UK from 4 per cent to 8 per cent of total business operating surplus, the hyperactivity of the sector doubled that to 16 per cent by 2008, with a similar quadrupling in the US over the ’90s and 2000s (see Haldane 2010).
Indeed, this last decade has been so ‘productive’ for the financial sector that these results were achieved without any further growth of employment and capital in the sector (at least in the UK). No wonder that during this time public opinion developed a much stronger view of the extortionate power of finance. The middle and lower middle classes became more indebted, and speculative gains on mergers and acquisitions generated more bankruptcies and job losses in an aggressive form of Anglo-American capitalism.
3
These experiences all led to a majority of citizens feeling cheated by the financial sector. The obscene earnings of executives (as Obama qualified them) added to this, and public anger against the financial sector, largely echoed by politicians, was even acknowledged by key finance professionals. In September 2012, António Horta-Osório, the CEO of Lloyds Bank, said in a speech at the annual CBI dinner in Scotland, ‘The banking industry has done itself no favours. Issue by issue and scandal by scandal, the faith and trust in our industry has been eroded.’ In order to restore trust, ‘the industry must change. We must recast the banking model … retail and commercial banks should be simple and they should be boring’ (Telegraph, 2012). This opinion reveals such a level of hostility to finance that one wonders how strict reforms have not been passed right away to domesticate finance. This recalls Kalecki’s (1943) assessment of the possibility of capitalism to reform itself in order to ensure full employment:
‘Full employment capitalism’ will, of course, have to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.
The eventual failure of communism in the Eastern countries has reduced the possibility of such a radical outcome. Still, the strong antagonism towards finance should take its toll and force some changes, and all the more so in Anglo-Saxon countries which had in the past made such strong stands against the power of finance. The following quote is attributed to Thomas Jefferson:
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
When one takes notice of the current widespread hostility of public opinion towards the financial world, the first question that comes to mind on reading the views of Jefferson or Kalecki is why a sector under such heavy and open criticism has not been able to reform itself. After all, banks are major actors in the system, and many of them are partially state-owned and committed to collective obligations like those associated with ‘corporate social responsibility’ (see Capron and Petit 2011). Some of these financial institutions have adopted the ‘Equator Principles’, which are intended to ensure that the projects they finance are developed with a socially responsible and environmentally sound set of management practices. But despite such ex-ante differences in objectives, most parts of the financial sector have been drawn into speculative practices offering large increases in profits. In other words, they have not complied with the new financial practices that would bar them from such markets.
The 2008 crisis revealed this involvement, as many institutions with substantial public ownership were also trapped with toxic assets. Aglietta (1998) first thought that the weight of financial institutions committed to making sound investments like pension funds would be enough to set the financial sector on a reasonable path. But these pension funds represented only part of the investors, and their management rules forced them to invest in the supposed best interests of future pensioners. It was this that led them to follow the speculative runs of financial markets. The rise during the 2000s of shadow banking, to the point at which their liabilities exceed those of conventional banks (see Figure 2 in annex), is another sign of the global intricacy of the functioning of the financial sector. The sector turned out to be incapable of reforming itself. The prudential rules in Basel II, retained in Basel III after the 2008 crisis, confirmed this analysis. They set micro regulations, but are more hesitant regarding macro prudential rules (see the ongoing discussions around the Dodd Franck Act, or on the Banking Union in the EU), when these are more urgently needed to cope with the intrinsic instability of such a financial regime. This issue has been raised on many occasions, if only byMinsky (1977), but the question is why the regulatory powers did not take action to contain such obvious systemic risk.
Size of shadow banking sector liabilities and comparison with banking sector.
What are the political ties that allow finance-led capitalism to remain?
To understand why no drastic action was taken by governments and regulators, either to tame the financial sector or to limit the systemic risks its practices brought, one must account for the domination of the financial sector over other businesses. The managers of listed companies of all trades had to bow to financial markets to protect and promote the shareholder value of their firms, but they also had to secure access to funds to stay alive in the big game of mergers and acquisitions that developed in this period.
But this was not the only reason they supported modern finance. The rise in CEOs’ pay that accompanied the rise of this financialisation was also an important contributing factor. This rise started in the early 1980s with the liberalisation of the financial sector. At first it caused some concern in the financial world, as CEOs and traders competed with unprecedented rises that combined bonuses and wages. CEOs in other sectors just followed the trend, allowing business and financial services to set the norms. They spread the word that CEOs in good companies were well paid – and reciprocally that high levels of pay were a clear sign of a good company. Shareholders were convinced that such high payments of CEOs would be in their interests, and there was little dissent from this widespread view around the business world. The sums at stake were so enormous that they transformed the old managers of the good ‘industrial state’ à la Galbraith (1967) into the prime beneficiaries of a new period of primitive accumulation. This move helped to constitute a sizeable international elite of very rich people, new and old, strongly attached to the mobility of capital and to tax evasion. This elite constituted as important a political pillar of finance-led capitalism as the one we saw emerging at a global level in the past decade. This elite progressively diffused a new vision of ‘modern capitalism’ in which the financial sector appeared as the main centre of power. Indicative of the appeal of the sector were high levels of interest from students from the best universities, who planned to enter the financial world (see Colander 2010). This elite took powerful advantage of the inherent fiscal competition that accompanied the opening of the so-called ‘emerging economies’ to press for tax reduction. The neoliberal agenda in many ways supported their stance, and their freedoms and rights to accumulate new wealth that were realised through reduced taxes.
Politicians were initially slightly baffled by the size of the income of this elite, but they got used to it as the costs of election campaigns rose with the importance of the media. The 2008 financial crisis, suddenly raising as it did the levels of public indebtedness, tended to strengthen this hold of finance over the political class (Figure 3). Still, the battle is not yet settled, and the political sustainability of this specific finance-led capitalism remains uncertain. In stressing that they are the ‘99 per cent’, social movements like Occupy Wall Street put down a marker, and in stressing the contradiction of populist movements like the USA’s Tea Party supporting the top-earning 1 per cent, led to a reduction in those movements’ backing of more extreme versions of the neoliberal agenda.
Public debt levels
On top of the clear political support that this new class of very rich people brought to finance-led capitalism, one should also take into account the international organisation of the finance sector, in which large cities like London and New York play central roles. The self interest of these cities maintained an international division of labour in the financial world that was beneficial to them, and helped to build up strong support for the status quo. This provided political support for finance-led capitalism. The current era of financial globalisation has been characterised by the predominance of ‘Western finance’, even if this may not last long.
Another major factor providing comfort to finance-led capitalism could well be the role of this international elite in the coordination of the developed economies. Beyond public meetings such as the Davos Forum or the systematic open networking practices of banks like Goldman Sachs, the international networking role of this international elite appears to be a stabilising factor for citizens. The ‘Group of 30’ (see www.group30.org), an organisation of former and current central bankers, constitutes another example with their political and academic credentials. They are able to provide a link between the benefits of internationalisation (in terms of cheap goods and travel) and the looseness of international governance. But when financial scandals are attached to key players in this elite, the legitimacy of the sector is greatly reduced. The political sustainability of finance-led capitalism therefore remains an open issue.
An open issue?
The legitimacy of the finance-led regime of accumulation seems to be increasingly under attack, and from a range of directions.
The first of these is the deepening of the economic recession that followed the global financial crisis. Austerity plans imposed to reduce public debts have provoked waves of unemployment, and linked this to the demands of financial markets. The need to develop international institutions to deal with the refinancing of public debts has become clearer. The differences in lending rates are provocative, and the financial system will be blamed for the miseries ahead. The mobilisation of NGOs at the international level has been rising in the field of finance, where the lobbying of banks and their associates has so far prevailed. The recent creation of Financial Watch at the European level is a sign of this evolution (see www.finance-watch.org). Opinion polls on the very rich are telling of a rising distrust and anger. The broadly held perception that the majority of the very rich openly escape taxes is adding to this resentment. Opinion polls in the USA for instance show that the very rich are widely considered as smart but dishonest. What seems to be building up is a situation in which the broad majority will come to consider that finance-led capitalism has to be scrapped. It may not be in favour of radical alternatives to capitalism, but of a strictly reformed capitalism in which finance may remain a sophisticated tool, but in the hands of public, collective authorities for its supervision. The forms it may take could follow from the imperative to face a major challenge that has not so far been considered, such as the environmental sustainability of our modes of development.
The need to finance the transition to more environmentally sustainable paths is bound to be seen by large majorities of citizens as a necessity in the decade to come. Only public international agencies can make significant contributions to addressing such a global issue. 4 But the route out of the vagaries of finance-led capitalism is not straightforward, and many events can change the international situation. The development of a more multipolar world of finance is one of them. The risks of an unprecedented authoritarian turn in Western democracies to reduce the contestation of modern finance remains a possibility. But the conscious need to face environmental challenges may turn into a political opportunity to take control of finance, and give it a useful role once more.