Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

For the physiocrats, finance didn’t belong in the agricultural sector and was therefore seen as unproductive. Adam Smith took a similar view, though he also rarely mentioned bankers explicitly. According to Smith, bankers cannot create more than they get; for him, the idea of making money from money does not work in the aggregate – although it certainly helps the bankers fill their own pockets.

Karl Marx introduced another idea. He located the financial sector in the circulation phase of the circuit of capital, where value created in production is realized through distribution and ultimately used up in consumption. For Marx, finance is a catalyst, transforming money capital into production capital (the means of production such as factories, machinery and living labour – the labour power of workers). Hence any income is paid out of the value generated by others. Rather than adding to value, finance simply takes part of the surplus value generated through the production process – and there is no hard-and-fast rule as to how much it should take. Taking (not uncommonly) reassurance about capitalism from its arch-opponent, twentieth-century economists assumed that financial profits would always be limited by (and total less than) the sum of productive firms’ profits, and might even move up and down to even out the flow of profits in the ‘real’ economy.

But this story came under attack after the crisis. Trade in financial instruments had vastly outgrown trade in real products and was stimulating the very price fluctuations from which profits are made – by creating opportunities to buy low and sell high. In fact, systemic fluctuations have led to a crash historically every fifteen to twenty years. 21Crashes reveal the investment banks’ ‘risk-taking’ service – which justified their inclusion in GDP accounting – to be a hollow boast. It is the taxpayer who is called on to take the real risk, bailing out the banks. But even the most influential critics of finance in the twentieth century – Keynes and Minsky – did not succeed in fundamentally challenging the privileged place of financial institutions in economic policy and in the national accounts. Keynes’s attention was deflected (and Minsky’s early warnings obscured) by the fact that financial services’ share of national output was below 4 per cent and falling from 1933 to 1945, and did not move back above its 1930s level until the 1970s.

Writing in the 1930s, one of the most influential critics of finance, John Maynard Keynes, was upfront about what financial speculation entailed. In his lifetime he observed how financial markets and public attitudes to financial trading were changing, becoming ends in themselves rather than facilitators of growth in the real economy. When speculation spread from a rich leisure class to the wider population, it drove the stock market bubble that ushered in the Wall Street Crash and 1930s depression; but as public spending helped to restore people’s jobs and incomes, those with money again began to gamble it on stocks and shares. Wall Street was, he said, ‘regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield’. By this yardstick, Keynes commented, Wall Street could not ‘be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object’. 22

That ‘different object’, in Keynes’s view, was not a form of production, but ‘betting’ – and the profits of the bookmaker were ‘a mere transfer’, 23a transfer which should be limited lest individuals ruin themselves and harm others in the process. Moreover, Keynes argued, since gambling is luck, there should be no pretence that financial speculation involved skill. Any reference to skill – or productiveness on the part of speculators – was a sign that somebody was trying to trick somebody else. Keynes also thought that the proceeds from such betting and speculating should go to the state to remove the incentive – a better word might be temptation – to reap private gains from it. 24He went on to stress the difference between this kind of speculation (value extraction) and finance for actual productive investment (value creation), which he saw as crucial for growth and which was only possible without the speculative apparatus around it. If ‘the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done’. 25

The US economist Hyman Minsky, who was much influenced by Keynes, wrote extensively about the self-destabilizing dynamics of finance. In his work on financial instability 26he nested Keynes’s critique within an alternative theory of money. This theory, which began far from the mainstream but forced its way in when a bubble-bursting ‘Minsky moment’ broke the long boom in 2008, holds that the quantity of money in an economy is created by the interplay of economic forces rather than by an outside agency such as a country’s central bank. Although portrayed as all-powerful (and so responsible for all financial instability) by Milton Friedman and the ‘monetarists’ propelled to prominence by 1970s stagnation, central banks such as the US Federal Reserve can only indirectly and weakly control the private-sector banks and their money creation, by setting the base interest rate. Minsky charted the way in which the banking system would eventually end up moving to ‘speculative finance’, pursuing returns that depended on the appreciation of asset values rather than the generation of income from productive activity.

Banks and investment funds may believe they are deriving income from new production, and their individual ‘risk models’ will show that they will survive most conceivable financial shocks because of the diversification of their portfolios. But their incomes are ultimately transfers from other financial firms, and can suddenly dry up when one firm’s inability to meet a transfer obligation (defaulting on a loan, or withholding a dividend) forces others to do so in turn. That is what happened when Lehman Brothers, the American investment bank, collapsed in 2008, thereby precipitating the financial crisis.

As long as financial assets can be bought and sold in a reasonable amount of time without incurring losses, and debt can be rolled over to pay previous loans, markets are liquid and the economy runs smoothly. But once investors realize that borrowers are not earning enough to pay interest and principal (on which the interest is based), creditors stop financing them and try to sell their assets as soon as possible. Financial bubbles can be seen as the result of value being extracted ; during financial crises value is actually destroyed . The fallout can be measured not only in output and job losses but also by the amount of money that governments had to pour into private banks because they were ‘too big to fail’: the quantitative easing (QE) schemes that followed the crisis might have been used to help sustain the economy, but ended up further propping up the banks. The figures involved were enormous. In the US, the Federal Reserve embarked on three different QE schemes, totalling $4.2 trillion over the period 2008–14. In the UK, the Bank of England undertook £375 billion of QE between 2009 and 2012, and in Europe, the ECB committed € 60 billion per month from January 2015 to March 2017. 27

Back in the mid-1980s, to try to prevent the banking system from moving to speculative finance, Hyman Minsky formulated an economic recipe that can be summarized as ‘big government, big bank’. In his vision, government creates jobs by being the ‘employer of last resort’ and underwrites distressed financial operators’ balance sheets by being the ‘lender of last resort’. 28When the financial sector is so interconnected, it is very possible for one bank’s failure to become contagious, leading to the bankruptcy of banks all over the world. In order to avoid this ‘butterfly effect’, Minsky favoured strong regulation of financial intermediaries. In this he followed his mentor Keynes, who, as the post-war international order was being devised at Bretton Woods in 1944, advocated ‘the restoration of international loans and credit for legitimate purposes’, while stressing the necessity of ‘controlling short-term speculative movements or flights of currency whether out of debtor countries or from one creditor country to another’. 29