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

CONCLUSION

By the late twentieth century, finance was perceived as being much more productive than before. Finance, too, became increasingly valuable to policymakers, in order to maintain economic growth and manage inequality of wealth and income. The cost was mounting household debt and increasing government dependence on tax revenues from the financial sector.

To ignore the question of value in relation to finance is, then, highly irresponsible. But in the end, the real challenge is not to label finance as value-creating or value-extracting, but to fundamentally transform it so that it is genuinely value-creating. This requires paying attention to characteristics such as timeframe. Impatient finance – the quest for short-term returns – can hurt the productive capacity of the economy and its potential for innovation.

Indeed, the crash of 2008 vindicated the warnings of Keynes, Minsky and others about the dangers of excessive financialization. Yet while the crash and the ensuing crisis weakened banks, it still left them in a dominant position in the economy, sparing the embarrassment of those who had extolled the value of financial services in the years before they imploded into bankruptcy and fraud.

In the intervening years, there has, unsurprisingly, been a regulatory reversal – or at least a partial one. Under political pressure, and recognizing that they may have gone too far in allowing commercial and investment banks to share the same roof, regulators in the US and Europe have since 2008 sought to distance one from the other. Reforms such as the US Dodd–Frank Act of 2010 attempt to prevent investment banks from using the deposits of their commercial-bank parents (which are ultimately backed by government under deposit insurance schemes) to finance their riskier income-generating activities. New rules have tried, at least partly, to steer investment banks back to their original function of using borrowed money raised in wholesale markets to finance risky transactions – which even mainstream economists sometimes liken to a casino.

Yet today financialization appears to be thriving again despite its questionable productivity. Financialization remains a powerful force and its capacity for value extraction is scarcely diminished. Attempts to end excessively dangerous and socially useless financial processes, or at least shine a light on them, have merely displaced them into darker corners. Tighter regulation of the activities that caused the last crash has encouraged banks to seek ways around the new curbs, while still lobbying to relax them (except where they conveniently keep out new competitors). It has led less regulated ‘non-bank financial institutions’ or ‘shadow banks’ to expand where banks were forced to contract. What we must now look at is the wider web of different financial intermediaries that have cropped up, with their desire to make a quick, high return and their effect on company organization and the evolution of industry.

5

The Rise of Casino Capitalism

Rather than the financial conservatism that pension funds, mutual funds and insurance companies were supposed to bring, money manager capitalism has ushered in a new era of pervasive casino capitalism.

Hyman Minsky, 1992 1

When we talk about finance, we should bear in mind its many different forms. While traditional activities like bank lending remain important, they have been eclipsed by others. One is ‘shadow banking’, a term coined in 2007 to describe diverse financial intermediaries that carry out bank-like activities but are not regulated as banks. 2These include pawnbrokers, payday lenders, peer-to-peer lenders, mortgage lenders, investment banks, mobile payment systems and bond-trading platforms established by tech firms and money market funds. Between 2004 and 2014, the value of assets serviced by the ‘informal lending sector’ globally rose from $26 trillion to $80 trillion and may account for as much as a quarter of the global financial system. Shadow-banking activities – borrowing, lending and asset-trading by firms that are not banks and escape their more onerous regulation – all have one thing in common: they funnel finance to finance, making money from moving existing money around. Another significant boost to finance has been the rise of the asset management industry and its different components, from widely marketed retail investment funds to hedge funds and private equity. While average incomes have grown, enabling a build-up of savings especially by the better-off, rising longevity and governments’ reduced appetite for social insurance and pension provision have put pressure on households around the world to make their savings work harder. Those who ‘manage’ investments on their behalf can often claim a fee – often a percentage of the funds under management – whether or not their stock-picks and strategies have demonstrably added value. Taken together with traditional banking, and released from the regulations that previously kept financial firms’ size and risk appetite in check, these forces caused the sector to grow disproportionately large.

There are two key aspects to the long-term growth of the financial sector and its effect on the real economy. These two aspects of financialization are covered in this and the next chapter. I will focus on the UK and the US, where both forms of financialization have been developing most. The first, covered in this chapter, is its expansion in absolute terms and as a share of total economic activity. Today, the sector has sprawled way beyond the limits of traditional finance, mainly banking, to cover an immense array of financial instruments and has created a new force in modern capitalism: asset management. The financial sector now accounts for a significant and growing share of the economy’s value added and profits. But only 15 per cent of the funds generated go to businesses in non-financial industries. 3The rest is traded between financial institutions, making money simply from money changing hands, a phenomenon that has developed hugely, giving rise to what Hyman Minsky called ‘money manager capitalism’. 4Or, put another way: when finance makes money by serving not the ‘real’ economy, but itself.

The second aspect, covered in the next chapter, is the effect of financial motives on non-financial sectors, e.g. industries such as energy, pharmaceuticals and IT. Such financialization can include the provision of financial instruments for customers – for example, car manufacturers offering finance to their customers – and, more importantly, the use of profits to boost share prices rather than reinvest in actual production.

Both these aspects of financialization show how, in the growth of the financial sector, value creation has been confused with value extraction, with serious economic and social consequences. Finance has both benefited from and partly caused widening inequality of income and wealth, initially in the main ‘Anglo-Saxon’ countries, but spreading since the 1990s to previously less financialized European and Asian economies. Rising inequality might be ‘justified’ by economic gains if it promotes faster growth that raises basic or average incomes, for example by giving richer entrepreneurs the means and incentive to invest more. But recent increases in inequality have been associated with slower growth, 5linked to its social impact as well as the deflationary effect of reducing already-low incomes. The key issue is: what role does finance, in all its complexity, play in the economy? Does it justify its size and pervasiveness? Are the sometimes huge rewards that can be earned from financial activities such as hedge funds (an investment fund that speculates using borrowed capital or credit) or private equity proportional to the actual risks taken?

PROMETHEUS (WITH A PILOT’S LICENCE) UNBOUND