It is really strange that, while there is a heated discussion on liberalization, neo-liberalism, privatization, etc., the most important dimension of globalization – financialization — is almost completely ignored. Why this is done is a mystery. The recent global crisis given rise by sub-prime mortgages in America has underlined that, without looking into the history of the rise and proliferation of financialization, it is difficult to understand the crisis and its implications.
Towards the end of the 19th century a new phenomenon leading to a qualitative change in the role of banks took place. Banks began actively taking part in decision-making process of newly emerged industrial monopolies and oligopolies. Reason was simple: they sought large sums of financial resources from banks, which, in turn, acquired a leverage and began actively interfering in decision-making process in the name of safeguarding their own and their depositors’ interests. Some of the giant corporations, resenting their growing dependence on banks and their constant interference, established their own banks to mobilize financial resources mostly for their own use. Thus there was a merger between industrial capital and bank capital, giving birth to finance capital. This new concept entered the economic lexicon only towards the end of the first decade of the 20th century with the publication of Rudolf Hilferding’s Das Finanzkapital. It could appear in its English translation — Finance Capital — from London only in 1981. Hilferding’s formulations became an important basis for Lenin’s formulations, contained in his Imperialism, the Highest Stage of Capitalism.
According to Hilferding: “Finance capital signifies the unification of capital. The previous separate spheres of industrial, commercial and bank capital are now brought under the common direction of high finance, in which the masters of industry and of the banks are united in a close personal association. The basis of this association is the elimination of free competition among individual capitalists by the large monopolistic combines.” Thus Hilferding thought, finance capital was indispensable for the emergence of monopoly capitalism.
It is true that “the integration of financial and industrial capital, in a general sense, is not specific to finance capital. Throughout capitalism the existence of specialized financial capitalists holding, exchanging, borrowing, and lending money is possible only because of their articulation with the productive sectors; it is only by lending money to industrial capitalists that they can appropriate surplus value through interest, and only by operating the payments and foreign exchange systems for the transactions of the whole economy that they can appropriate surplus value through profit. However, it is the specific manner in which the two types of capital are integrated that distinguishes finance capital, and the essence of it is that the relationship ceases to be at arm’s length.” (T. B. Bottomore, et al, eds. A Dictionary of Marxist Thought, 1983, p.173)
According to Hilferding, finance capital comes into existence as a result of the “processes of concentration which, on the one hand, ‘eliminate free competition’ through the formation of cartels and trusts, and on the other, bring bank industrial capital into an ever more intimate relationship. Through this relationship … capital assumes the form of finance capital, its supreme and abstract expression.” Underlining the ascendancy of finance capital, Maurice Odle says that banks and financial institutions not only advance loans to industrial companies and maintain their accounts but also direct their future activities. He shows that MNCs and MNBs (Multinational Banks) cannot be separated while discussing future activities. (Multinational Banks and Underdevelopment, New York, 1981)
In course of time, there emerged the phenomenon of financial oligarchy, which became so powerful that it could confront state power even in developed capitalist countries. Today, whatever may be the democratic faÃ§ade in America, real economic power rests with financial oligarchs.
Even though the phenomenon of finance capital is more than a century old, the concept of “financialization” is relatively recent. It entered in discourse in the 1970s though it has been in frequent use only since the 1990s when the present phase of globalization began. It came into circulation with its present connotation thanks to Kevin Phillips who used it in his book Boiling Point (1993) and devoted one full chapter, “Financialization of America”, of his Arrogant Capital (1994) to it, defining it as “a prolonged split between the divergent real and financial economies”. Thus, not only in America but also in the world at large financial sector came to have a supremacy over the real economy.
Credit goes to Paul Sweezy and Harry Magdoff for documenting and explaining the increasing role of finance in running of capitalism from the late 1960s onwards. Sweezy, in 1997, pointed out “the three most underlying trends in the recent history of capitalism, the period beginning with the recession of 1974-75 (1) the slowing down of the overall rate of growth, (2) the worldwide proliferation of monopolistic (or oligopolistic) multinational corporations, and (3) what may be called the financialization of capitalist accumulation process.” He showed that these three were “intricately interrelated”.
One should recall that, from the beginning of the 19th century, surplus capital became a troublesome problem for capitalists in the West. The scope for its profitable deployment in domestic economies fast declined and the problem could be solved, at least temporarily, by exporting it to colonies and the less developed areas under their influence. The need to acquire greater and greater scope for export of capital led to clashes among big capitalist powers and led to two world wars.
In the years following the Second World War, the scope for export of capital shrank as a number of countries declared themselves socialist, besides a number of erstwhile colonies and dependencies turning to the idea of economic development on the basis of own resources, labour power and market. Restrictions were imposed on the entry and operation of foreign capital. Official development assistance came to be preferred to foreign private investment. This model, however, withered away after the collapse of the Soviet Union and disintegration of the socialist camp. The Washington consensus-based globalization steered clear the way for the free flow of foreign direct investment that went in to build productive capacity and generate new employment opportunities and foreign institutional investments that went in existing shares, bonds, debentures and other commercial instruments. Steadily the extent of foreign institutional investments surpassed that of foreign direct investments. While the interests of foreign direct investments were tied with those of the host country and they could not be easily withdrawn, foreign institutional investments had no such ties with host countries. They were mainly hot money constantly in search of higher profits. With revolutionary changes in fields of information and communication, they could be moved from one stock market to another within a few minutes. Trading could be done with the help of the Internet while sitting anywhere in the world.
Increasing scope for export of capital in the present era of globalization has only eased problem without solving it permanent for the simple reason that scientific and technological progress has been constantly raising the level of productivity and the amount of surplus value appropriated by a handful of corporations. Problem arises as to its gainful deployment. One way out is to invest it in shares, bonds, debentures, treasury bills and other commercial papers. New ways like futures, options, derivatives, hedge funds, mutual funds, etc. have been brought into existence. For their creation and management, new financial institutions are created. Consequently, financial speculation not only increases but also becomes global.
Commenting on financialization, James Tobin referred to “the casino aspect of .. financial markets” and expressed grave concern. He was worried that more and more of resources were being thrown into financial activities remote from the real economy of production of goods and services. Obviously, as John Bellamy Foster of Monthly Review writes: “Tobin’s point was that capitalism was becoming inefficient by devoting its surplus capital increasingly to speculative, casino-like pursuits, rather than long-term investment in the real economy.”
Some people hold that both productive and financial investments are so tied together that there should be no worry. They assert that if savings are put in banks or deployed in buying commercial papers they ultimately go to entrepreneurs who use them for producing goods and services and, thus, strengthening real economy. Most economists reject this view as they do not see any inevitable and necessary relationship between the two.
Growing importance of financialization in America is indicated by the fact that the share of the financial sector in total corporate profit was 14 per cent in 1981 and it reached 39 per cent in just two decades. This has led to greater prosperity for financial middlemen and corporate elite. Their close connection has enabled them to influence country’s socio-economic life. To co-opt the new entrants to the service of a company, stock options are offered so that they have interest in pushing up the value of its shares.
Financialization has given birth to a number of companies that keep an eye on countries and companies and constantly evaluate their capacity to borrow and repay financial resources. They have a great impact on terms and conditions of loans. These rating agencies directly or indirectly influence policies of sovereign nations and companies. These agencies concern themselves more with the future prospects of the borrower rather than its past and present performance. It is needless to add that they may become tools in the hands of lenders to influence economic policies and future course of the economy of a sovereign nation.
Financialization has brought into existence credit cards and schemes of hire purchase to extend the market for consumer goods, especially durable ones. These are backed by banks and other financial institutions that get opportunities to make money. It needs to be noted that a number of financial companies are formally located in tax havens and they help launder black earnings.
It is high time that the process of financialization and the role of various actors involved in it are thoroughly studied to discern their growing influence on social, economic and cultural life, especially of the developing world.