Financialization Hypothesis: A Theoretical and Empirical Critique

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One response to “Financialization Hypothesis: A Theoretical and Empirical Critique”

1. 

   David G Legge

   February 16, 2024

   Thanks to Alexis for posting this paper. It has pre-occupied me for several days.

   My response to Subasat and Mavroudeas is driven by my belief in the importance of political economic theory in the Struggle for Health, and in the wider struggle for an equitable, sustainable, convivial human society.

   In various Declarations and Statements, the People’s Health Movement has affirmed that many of the barriers to achieving Health for All are embedded in the forces and dynamics of capitalism and imperialism. However, tracing out how particular health issues (deepening economic inequality, food insecurity, privatisation of health care, the debt crisis, etc) are shaped by such forces and dynamics and devising strategies which challenge those dynamics requires a clear analysis of how those health issues are reproduced by this wider capitalist system. So political economic theory really matters in the struggle for health.

   PHM envisages building a people’s health movement which confronts the forces and dynamics of capitalism as they impinge directly on health. The vision also includes the coming together of a wider range of social and political movements which can together drive the transformation of national and the global polities, economies, societies. Building such a convergence of social and political movements depends on two conditions: first, building solidarity between movements, and second, recognising how the different denials and hurts which drive those different movements reflect in different ways the same fundamental dynamics of contemporary capitalism. The narratives of political economy play a critical role in building a shared view of those fundamentals.

   Political economy is a sprawling network of linked stories which help to make sense of what is happening (in particular, the hurts and denials central to our activism) and which help to inform our choices about strategy and practice.

   The concept of ‘financialisation’ as elaborated through the Monthly Review school of political economy (‘monopoly finance capitalism’) is a useful substory in this wider collection of stories. Early articulations of financialisation in relation to the contemporary capitalist economy were presented in Sweezy and Magdoff (1983) and Magdoff and Sweezy (2023[1993]) and elaborated by more recently by Foster (see, for example, Foster 2010). These provide a very clear account of changing economic currents which are conveniently labelled as ‘financialisation’.

   Sweezy and Magdoff use Veblen’s (1978 [1904]) notion of surplus productive capacity in explaining that, with advances in technology, new management strategies, and globalisation, productive capacity tends to exceed aggregate demand, leading to stagnation with respect to investment in productive assets. At the same time, with increasing monopolisation of the productive sector (and the associated pricing power), profits continue to accrue. However, if the opportunities for investing in new productive capacity are limited, an increasing proportion of these profits flows into the financial sector (via the purchase of financial and other assets) rather than into the creation of new productive capacity.

   Sweezy quoted by Foster 2007
   “Monopolization tends to swell profits for the major corporations while also reducing “the demand for additional investment in increasingly controlled markets.” The logic is one of “more and more profits, fewer and fewer profitable investment opportunities, a recipe for slowing down capital accumulation and therefore economic growth which is powered by capital accumulation.”
   “The resulting “double process of faltering real investment and burgeoning financialization” as capital sought to find a way to utilize its economic surplus, first appeared with the waning of the “‘golden age’ of the post-Second World War decades and has persisted,” Sweezy observed, “with increasing intensity to the present.”

   Because of the importance of political economy for the PHM project and (what I perceive as) the usefulness of the Monthly Review analysis, I was particularly challenged by the Subasat and Mavroudeas paper.

   Subasat and Mavroudeas take a broad brush approach to ‘financialisation’, and conclude that it “fails to present a credible analysis of contemporary capitalism and it is marred by both analytical and empirical weaknesses”.
   In large parts of their paper, they treat financialisation as a singular narrative despite the different variants that they identify. Their paper claims to disprove erroneous claims about the relationship between the productive and financial sectors but does not set out any preferred narrative. Simply that the ‘financialisation hypothesis’ is an erroneous distraction from an understanding of contemporary capitalism.

   It appears that for Subasat and Mavroudeas the increasing flow of profit into the financial sector in the face of limited investment opportunities, is not the main issue in contention; rather it is whether financialisation is cyclical or a new phenomenon and whether it reflects a new stage of capitalism.
   “If financialization purports to have any significant meaning, we argue, it must be identified as a structural break; that is, as a new capitalist stage. If it is simply a transient phase of the economic cycle or related to a policy choice, then it does not deserve the attention drawn to it.”

   The analytic section of the paper appears to confuse the superficial and the deep. The dynamics of the capitalist system are discussed in terms of crude causal links between ‘sectors’ defined by the statisticians, without any accommodation for the limitations of official statistics in representing the underlying theoretical models being considered.

   Much of their critique is structured around the alleged hypothesis that “financialization is responsible for deindustrialization”. This construction of unidirectional causation is a cartoonish representation of structural dynamics taking place within a single system. Certainly, it bears no relationship to the structural changes taking place in the advanced capitalist economy as hypothesised by the monopoly finance capitalism model of the Monthly Review school.

   The following three quotes from the paper illustrate the crude conceptualisation of different sectors ‘causing’ changes in other sectors.
   • “Under three scenarios the financial sector will not be responsible for the decline in manufacturing.”
   • “Service sectors other than financial services may have contributed more to the decline in the share of the manufacturing sector.”
   • “Real estate, science, information, construction, wholesale and other services contributed a lot more than the financial sector to deindustrialization.”

   The financialisation hypothesis, according to the monopoly finance capitalism model, proposes that the diversion of profit from monopoly manufacturing into the financial sector contributes to increased activity in the real estate and construction sectors, driven in part by lending for housing construction. Then as the housing bubble builds, consumer spending is held up by the ‘wealth effect’ (associated with the appreciation of house prices). In effect the increased lending associated with financialisation contributes to maintaining the market for goods and services (while the bubble lasts).

   It would be quite problematic, to seek to trace and estimate these underlying pressures and flows from changes in the relative size of particular sectors, as a proportion of GDP. The statisticians define sectors as mutually exclusive categories whereas the underlying phenomenon of financialisation will be manifest in several different sectors: finance, construction, wholesale and retail in the case of the above example.

   In the empirical part of the paper Subasat and Mavroudeas set up four propositions which are allegedly common to all or most of the different conceptions of financialisation and then seek to disprove these propositions with reference to international comparisons of the growth or shrinkage of different sectors in different countries.

   “The empirical section scrutinizes and disputes several specific empirical arguments maintained by several authors of FH. It shows that (a) the big majority of the largest multinational companies are not financial firms, (b) there is not an abnormal increase in the ratio of financial assets to economic activity during the recent decades, (c) financialization is not the main cause of deindustrialization, and (d) financialization does not originate from financial liberalization. It is important to emphasize that the empirical part does not refute all the empirical claims cited in the financialization literature. It aims to dispute only the aforementioned four fundamental arguments which are clearly stated by several influential authors.

   The authors assemble national economic data from countries occupying very different locations in the imperialist regime and through the use of percentages give equal weight to small peripheral countries as compared with the imperial hegemon. (See Fig 6 where the significance of the US is obscured by the use of percentages without reference to absolute values.)

   The time interval, 1995 -2018, does not include the transition from the long boom of the post-war years to the stagflation of the 1970s and the rise of neoliberalism in the 1980s. Regardless of the methodology employed, if financialisation qua trend took place across the period from the post-war boom to the present, it would not be discerned with this relatively short time interval.

   The exclusion of China from the empirical analysis on the grounds that it is not financialised is very problematic. (“China, which is not associated with financialization”). By some accounts the real estate bubble in China, which the authorities are still trying to manage, is a paradigmatic example of financialisation.

   In fact, Subasat and Mavroudeas agree with the core insight captured by the term financialisation:

   “However, despite the abovementioned problems, Arrighi’s view that when over-accumulation occurs, a great part of this over-accumulated capital goes into the financial system and hunts for extra profits at the expense of cash-strapped productive-capital is correct and has been pointed out by Marx and several Marxist economists (e.g., H. Grossmann—see Mavroudeas and Papadatos 2018). This can expand the share that money-capital gets out from the total surplus-value extracted.”

   Their main concern is more about whether it is a cyclical phenomenon or not, and whether its impact justifies declaring a new phase of capitalism or not.

   In the context of the Struggle for Health, and seeking to make sense of the hurts and denials associated with deepening inequality, food insecurity, privatisation of health care and the debt crisis, the core insight as recognised in the above quote remains extremely useful. The sweeping declaration that the financialisation hypothesis is erroneous, and does not deserve attention, seems unfortunate.

   References
   Foster, J. B. (2010). “The Financialization of Accumulation.” Monthly Review 62(5).
   Magdoff, H. and P. M. Sweezy (2023[1993]). “The Puzzle of Financialization.” Monthly Review 45(5).
   Sweezy, P. M. and H. Magdoff (1983). “Production and Finance.” Monthly Review 35(1): 1-13.
   Veblen, T. (1978 [1904]). The theory of the business enterprise. New Brunswick, N.J., Transaction Books.

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