Opinions Column: Making Money from Money

By Annavajhula J.C. Bose; Department of Economics, SRCC (University of Delhi)

Financialization is a shift in the gravity of economic activity from production to finance. The financialisation of capital accumulation means investing money to accumulate more money without producing any equivalent value in the society. Simply speaking, it means making money from money and not by engineering products.

In the period beginning with the recession of 1974-75, we observe the following three predominant worldwide trends: (1) slowing of the overall rate of economic growth; (2) worldwide proliferation of monopolistic corporations; and (3) financialisation of capital accumulation process. All the above three trends are interrelated. The long-term stagnation in growth that started in the 1970s was the major factor leading to the financialisation of capital accumulation. The most important factor behind this stagnation was the alarming inequality of income and wealth created in the process of capital accumulation, which limited consumption demand at the lower income levels of the economy. Moreover, capital accumulation goes hand in hand with the concentration and centralization of capital, resulting in monopolization.

Monopolization tends to swell the profits of these large corporations, while reducing the demand for additional investments in a situation of increasingly controlled markets and weakening consumption growth. This is particularly because monopoly corporations avoid overproduction and price reductions. These situations create barriers that limit profitable investment opportunities. Other factors at work in this economic environment include the saturation of economies with no greater new investment opportunities. In these situations, with immense surpluses on the one hand and a dearth of profitable investment opportunities on the other, from the 1970s onwards, the owners of capital increasingly moved towards investing in financial products to maintain and expand their money capital. At the same time, financial institutions also stepped forward with a vast array of new financial instruments, including futures, options, derivatives, hedge funds, etc. The result has been a skyrocketing of financial speculation. This trend has never been reversed and emerged as an important feature of capitalism.

These situations have led to the emergence of a new phase of global monopoly-finance capital wherein the world economy is increasingly dominated by a small number of monopolistic multinational corporations headquartered in developed countries. We can see, for example, the world automobile industry is coalescing into six or eight companies–two U.S. car makers, two Japanese and a few European firms are among the likely survivors. The world’s top semiconductor makers number barely a dozen. Four companies essentially supply all of the world’s recorded music. Ten companies dominate the world’s pharmaceuticals industry. In the global soft drinks business, just three companies matter. Just two names run the world market for commercial aviation, Boeing Co. and Airbus Industries. This is also reflected in the fact that global mergers and acquisitions have increased at alarming rates and in 2007, reached an all-time high of $4.38 trillion, and foreign direct investment (FDI) stock grew from 7.0 percent of world GDP in 1980 to around 30 percent in 2009. The revenues of the top 500 global corporations are now in the range of 35-40 percent of world income.

The monopoly corporations’ control on the global economy is further increased by strategic alliances among them. For example, the world’s major airlines have coalesced into a handful of mega-alliances, such as the Star Alliance, led by United Airlines of U.S. and including important airlines of the United States, Canada, United Kingdom, Germany, Belgium, Switzerland, Austria, Spain, Portugal, Poland, Croatia, Slovenia, Scandinavia, Finland, Greece, Turkey, Egypt, Thailand, Singapore, Brazil, New Zealand, South Africa, Japan, Korea and China. The growth of this international monopoly-finance capital further aggravated the problems of stagnation and actually also emerged as one of the factors behind the spread of this stagnation across much of the globe. Once established, monopoly capital intensified the financialisation of capital accumulation across the globe to alarming levels, as the huge monopoly corporations, unable to find sufficient investment outlets for their enormous economic surpluses within their production networks, increasingly turned to speculation in global financial markets. And a globalisation of financial crises decade after decade emerged more frequently and in more severe forms. The boom-bust cycles driven by capital inflows and consequent abrupt outflows, combined with dangerous fluctuations in exchange rates and the interplay between domestic, IMF and G7 policies have been the most important causes behind economic instability in many countries. The debt crisis that affected almost all Latin American countries was the first global financial crisis of the neoliberal era, and it was closely linked with the boom-bust cycles of capital inflows-outflows. It originally occurred in Mexico in 1982, but by October 1983, 27 countries had been caught up in it. In 1994, the crisis reappeared in Mexico. In July 1997, the East Asian crisis broke out and affected Indonesia, Malaysia, South Korea and Thailand. In August 1998, it was Russia’s turn to devalue and default, and in 2001 Argentina entered the list. These episodes continued in this or that form and affected more and more countries with increasing severity. 

With monopolistic corporations gaining greater control over the global economy, nation states are increasingly subjected to the whims and fancies of these corporations and have restructured and revised regulatory systems to remove all barriers for capital accumulation. 

It is interesting to see the role of the states during the crises. In most countries, the states’ actions clearly reflected the attitude that the well-being of the people can be sacrificed, but the corporations were considered too big to fail. Their strategies in fighting these financial crises included hammering the general public, cutting back on social services, and increasing taxes on people, while providing lucrative bailout packages to corporations who were actually responsible for creating the crises. 

The financial superstructure of the capitalist economy can never expand entirely independently of its base in the productive economy, and therefore the bursting of speculative bubbles is a recurrent problem. 

Within capitalism, to some extent this crisis can be resolved and delayed and its severity can be reduced by greatly expanding state spending directly benefitting the population and creating a system facilitating distribution and redistribution of income and wealth (e.g. raising taxes on corporates and increasing the level of social security benefits), along with putting strict limits on financialisation and systematically controlling the dangerous movements of capital. However, these pro-people strategies almost disappeared from the agenda of the capitalist states. The strategy adopted by global capital to resolve this crisis is neoliberalism, i.e., enforcing free trade and free flow of capital across the globe, creating a new international division of labour, and providing immense opportunities for global finance capital to accumulate the surpluses generated across the globe, particularly in developing countries. This strategy is actually seeking to shift the crisis elsewhere rather than resolve it. Whatever means are chosen, this strategy can only delay and decrease the intensity of the crisis in developed countries by shifting it to developing countries.

Financial globalisation has had a distinctly negative impact on labour’s share of income in both developed and developing economies. Additionally, in the case of developing countries with weak domestic financial systems, capital account openness has led to an export of wealth towards rich countries, rather than the other way around. The decline of labour’s share in national income in almost every country in the world can be related to a crisis of stagnation in wages particularly due to no increase (or sometimes reduction) in real wages, rise in prices of essential commodities, increasing focus on use of labour saving technologies and intensifying the competition among labour for jobs, implementing anti-labour policies and forcefully reducing the collective bargaining power of labour in overall terms.

On the other hand, specific aspects of financialisation also have had serious negative impacts on labour. Capital account and trade openness have in general brought about a deterioration in labour’s share of income. One of the important factors behind this is international capital mobility that drastically increases the bargaining power of capital against labour. As a result, workers must always face higher degrees of volatility in terms of earnings and working hours whenever a labour demand or labour productivity shock occurs. It is also well documented that currency depreciations and economic recessions have had a clear and lasting negative effect on manufacturing wages in almost all countries.

Financial crises are in general negatively linked with labour’s share of income. In the aftermath of a crisis, labour’s share of income usually declines sharply and recovers only partially during subsequent years. These distributional changes at the expense of labour appear to be systematically used by the states in their strategies for the resolution of financial crises, i.e. the whole load of the crisis is actually thrown on the head of labour.

Financialisation not only affects the present circumstances of workers but also their future. For example, in many countries, governments are financializing the pension funds of workers. Pension funds are increasingly invested in financial markets and pension earnings of workers are thus linked with the boom and busts in these markets. There is another important impact of financialisation. Productive capital by its nature remains in very close proximity to the factors of production. Human labour and natural resources are used as raw materials in production, and therefore productive capital directly affects these factors and in turn is affected by them, and hence it is compelled, and there is more space to compel it, to develop some concern for protection of these factors of production. But finance capital, having no direct link with these factors, considers them as non-market, non-value aspects and therefore has never shown any interest in protecting them.

Sources:

Collins, Mike. 2015. Wall Street and the Financialization of the Economy. Forbes. February 4.

Pratap, Surendra and Bose, Annavajhula J.C. 2015. Finanacialisation, International Capital Mobility and Primitive Accumulation: Triple Monsters Eating Up Livelihoods. International Journal of Development Research. 5 (5). May.

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