We live in an age of finance capitalism, when trading money, risk and associated products is more profitable than trading goods and services. That, in short, is what people often refer to as the ‘financialisation’ of the economy. This has huge implications for where capital is invested and the everyday exposure of people to capital markets, as more and more aspects of everyday life – from home ownership to pensions and schooling – are mediated through finance.
Financialisation is now penetrating all commodity markets and expanding from areas such as social reproduction (pensions, health, education, housing) into natural resources management. Just as the privatisation of public assets and services served as a building block for the financialisation of the economy, so the commodification of the natural commons is the basis for the financialisation of nature.
Financialisation, however, should be regarded as more than just a further stage in the commodification or privatisation of the commons. It represents a systemic transformation in the very structure of capitalism.
The crisis of 2007-09 resulted from a financial bubble marked by weak production, expanding bank assets and growing household indebtedness. For these reasons it casts light on the financialisation of capitalist economies.
The literature on financialisation generally links weak production with booming finance. According to some, causation runs from weak production to booming finance, while for others it runs in the opposite direction. This dichotomy is becoming more and more misleading. Rather, as pointed out by Costas Lapavitsas and others, financialisation represents a systemic transformation of both capitalist production and finance, which ultimately accounts for the crisis of 2007-09.
This transformation represents a response to the ongoing crisis of accumulation that began during the 1960s. By that time the overproduction of the US economy in relation to existing markets, coupled with diminishing returns on new investments, triggered the globalisation process. This involved the creation of much larger global markets through extensive liberalisation and privatisation as well as deflationary policies against labour to reduce costs of production – in short, neoliberalism.
This generated new problems at the end of the 1980s (such as the 1987 financial crisis), when aggregated demand was still low, following the reduction of labour income, and financial elites turned instead towards the new global capital market in pursuit of the biggest profits. This was in fact the first global market to be built after the break-up of the Bretton Woods monetary system and the related removal of controls on movements of capital in the 1970s. Still today the global capital market is much deeper and larger than any other global market of goods and services.
When the same crisis of accumulation manifested itself again, given the still-dominant neoliberal ideology banning direct state intervention in the economy to support global demand, a new solution was developed. This involved an unprecedented ‘private Keynesian’ response aimed at boosting aggregate demand through the indebtedness of corporations, banks and households, all made dependent on the functioning of capital markets for their financing. This triggered financialisation in the form we know it today, affecting all major actors in the spheres of production and finance.
Since the beginning of the past decade, after the ‘dotcom bubble’, financial capital has been seeking new asset classes in which to invest huge and growing private wealth. New key areas have thus emerged in which financialisation has started unfolding. These include natural resources (soft commodities such as coffee, corn, soya and fruit, and new commodities such as ‘carbon’) and public finance.
Concerning the latter, the financialisation approach is leading to a third wave of privatisation, with the first being the privatisation of public assets at a discounted value and the second the creation of public-private partnership (PPP) vehicles to help privatised companies finance new investments in infrastructure development. After the blatant failure of the PPP approach in many sectors, the third wave of privatisation is being conceived as the creation of a new financial system suited to capital markets.
Since the financialisation of the global oil market in the 1980s and 1990s through the establishment of oil future markets, financial speculation on other hard and soft commodities has significantly increased. This has been mainly driven by deregulation of derivative markets, the increasing involvement of investment banks, hedge funds and other institutional investors in commodity speculation, and the emergence of new instruments such as index funds and exchange-traded funds and products. While new financial actors such as hedge funds have attracted wealthy individuals and institutional investors, new financial products, such as exchange-traded funds, have opened the commodities world to retail investors as well.
Financial deregulation in particular has transformed soft commodities into financial assets. Holding (for example) a tonne of corn had never, until as recently as the beginning of the past decade, been able to produce a revenue stream or rent. This is now possible through financial engineering. This is not just paper money or speculation on virtual markets. Financial markets are penetrating deeper and deeper into the real economy as a response to the financial crisis, so that speculative capital is being structurally intertwined with productive capital, in this case commodities and natural resources.
The 2007-09 crash of the financial markets and global economy, coupled with the need to diversify investments beyond traditional financial markets – including equity, bonds and real estate – has made it necessary to further develop and even create new financial market risk. This is to enable the absorption of the massive liquidity that exists globally and is in search of high returns, including to cover heavy losses some institutional investors experienced during the crisis.
While turbulent markets have usually driven investors towards government bonds, the 2010 sovereign debt crisis, during which the bonds of southern European governments first took a dive, pushed investors towards alternative assets. The current figures on exchange-traded funds and hedge funds highlight the huge amount of money flooding into commodities trading, which has exacerbated food and fuel prices across the globe and created conditions for the kind of social unrest the world experienced two years ago.
New financial assets are today being created from existing commodities, and where markets do not yet exist natural resources will have to be traded so that new commodities and markets can emerge. Such is the case with carbon markets, where the new commodity ‘carbon’ is a derivative in itself – a prediction of emissions being avoided in a certain period against a baseline.
This is also why financial engineers are devoting much more attention to ecosystem services, including natural habitat, biodiversity and species trading. As recently discussed at the Rio+20 summit on sustainable development, new initiatives have been launched to give a monetary value to services provided by the earth’s different ecosystems. In this way, payments for these services will be possible all over the world. Experts say that we are talking of a £20 trillion market every year.
Private actors, and not just state agencies, will also be charged with managing some protected areas. As a next step, financial assets built on ecosystem services could be traded in global markets to be constructed through mechanisms for biodiversity conservation, permit trading and offsetting, such as those established in carbon markets.
Financialisation is just one of several possible answers to the crisis of accumulation affecting the current capitalist cycle. It still has a long way to go with the natural commons, as well as many difficulties to overcome. Fabricating new commodities, financialised from scratch, building global markets for these and inducing scarcity so that financial engineering can perform an extra extraction of value is not easy, as the experience of carbon markets over the past ten years demonstrates. Many of these attempts will lead to new financial bubbles and crashes, even though in the meantime key financial actors will make huge profits at the expense of affected communities and the environment.
The commodification of nature is nothing new, and the resistance of the commoners against this privatisation, or accumulation by dispossession, as David Harvey would put it, has been a leitmotif of human history. The financialisation of nature will, however, bring an acceleration in the expropriation of land for offset projects and new extractive schemes.
New financial assets require more natural resources to be extracted and traded, so that the financialisation of nature will inevitably lead to a renewed emphasis on mining and other extractive industries, as well as the implementation of massive and unnecessary infrastructure projects. This could be part of the proposed way out from the economic crisis, particularly in Europe, with severe implications for local populations and their territories and environment.
So the financialisation of nature risks locking us into an extractivist and privatising pattern despite the limits imposed on us by the ecological and social crises. And as in the case of carbon markets, financialisation is instrumental in pushing us towards the continued extraction of fossil fuels instead of keeping them in the ground to tackle the climate change challenge.
The role of government in the financialisation of natural commons will be key. This includes fabricating new commodities by law through schemes for monetising and trading natural resources, creating the financial infrastructure of their global markets and exchanges, and inducing scarcity in these markets to make them work.
Contrary to what is sometimes suggested, neoliberalism and financialisation do not aim to destroy the state. Actually they require a strong state to create markets, including financial markets, and new asset classes. This is something that the private sector can’t do alone. At a time of crisis a strong state is also needed to control dissent. So challenging and reversing the financialisation of nature inevitably means questioning the role of both markets and states and putting forward a comprehensive alternative political project centred on reclaiming the commons.