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Setting the Scene of the Neoliberal Process
of Financialisation
Maria Dafnomili1
University of Crete, Greece
Abstract
The world is in a chaotic condition. The global financial crisis which began from the
U.S. and spread via the financial mechanisms throughout the world brought to the
fore all these known secrets about the operation of the global capitalist system and
the problematic theorizing of economic science. The capitalist system in the present
structure seems to have come to an end and its existence being is similar to that of a
zombies; ugly, persistent and dangerous. The general turmoil that prevails in the
countries around the world is unprecedented both in its magnitude and its sphere of
influence. All these, are highly related to the phenomenon of financialisation.
Keywords: financialisation, finance, neoliberalism, globalisation, financial crises.
1 Maria Dafnomili is a PhD Candidate in the Department of Economics at theUniversity of Crete.
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1. Introduction
When the historian Karl Polanyi published his masterpiece The Great Transformation
in 1944, he exerted severe criticism on the 19th century industrial, market-based
society. It is really commendable that almost 50 years ago Polanyi made an
astonishingly prophetic and modern statement arguing that "allowing the market
mechanism to be the sole director of the fate of human beings and their natural
environment...would result in the demolition of society" (Polanyi, 1944, p.73).
However, he was persuaded that such a demolition could no longer happen in the
post-war world because, as he said (p.251) "Within the nations we are witnessing a
development under which the economic system ceases to lay down the law to society
and the primacy of society over that system is secured". Unfortunately Polanyis
optimism didnt come true, as today the focal point of the whole neoliberal dogma is
that markets should dictate their orders to society, directing beliefs, actions and the
fate of human beings. A dogma that its advocates tried to put into practice with the
well-known results.
We are facing one of the most severe crises in the history of the global capitalist
economy, certainly the most severe since the Great Contraction of the 1930s
(Dumnil and Lvy, 2011a). The current crisis is unique both in its magnitude and in
its depth combining at the same time all the elements that we have seen in past crises:
a wave of bank bankruptcies comparable to those of the early 1930s; a bursting of the
real estate bubble in the U.S.A. comparable to what happened in Japan at the end of
the 1980s; a liquidity trap in the U.S.A. and, most recently, a disruption of
international capital flows and a wave of currency crises similar to those in East Asia
in the late 1990s (Allen and Gale, 2007). These events are highly related to the
process of what is calledfinancialisation.
Although the emergence of finance capital is not a new phenomenon, aging for more
than a century, the concept of financialisation is relatively new (Morera and Rojas,
2009). It emerged in the 1970s, assumed relative prominence in the 1980s and
exploded in use and frequency since the 1990s when the present phase of
globalisation began. Financialisation as a phenomenon is inextricably linked with
liberalisation, financial globalisation, privatisation, commercialisation and
marketisation (Fine, 2008). Even though it represents one of the most important
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dimensions of these phenomena about which there has been heated discussion in
recent years, very little has been written about financialisation until recently
(Lysandrou, 2008).
Financialisation as a real world phenomenon, started when the Bretton Woods system
of fixed exchange rates ended in the 1970s. From the moment the convertibility of
dollar into gold ended in August 1971, the United States has had the ability to sustain
a growing external deficit by increasing the amount of dollars in circulation,
encouraging in this way a gradual expansion of credit (Onaran, 2009). This process is
well described by P. Gowan (2009) who in his article Crisis in the Heartlandargues
that after the end of the Bretton Woods system, a long-term trend was set off towards
a new international and monetary financial system. This was based, on the one hand
on limited controls of international movements of private finance initially in the G7
countries (in the US in 1974, the UK in 1979, the Germany in 1982 etc.) and
afterwards in the rest of the world (in the European Community by 1990 as well as in
Japan and East Asia in 1995), and, on the other hand, on floating exchange rates.
In the course of time, financialisation became a basic feature of the capitalist system,
and its dominance would have been impossible had it not been for the following
circumstances which prevail during the last four decades. It accelerated dramatically
with the emergence of neoliberalism and deregulation. Its implementation was
promoted through the creation of new financial products, institutions and practices
such as securitisation, commercial paper, conduits, Credit Default Swaps (CDSs),
Collateralized Debt Obligations (CDOs), derivative markets, leveraged buyouts,
currency exchanges, and the like (Dumnil and Lvy, 2011a, p. 8). In addition, the
role of the upper managerial class and the change at the working conditions, the
freedom of capital movement seeking out more profitable outlets and, last, but not
least, the policies adopted by governments both in developed and developing nations,
were some of the elements of the new economic global order.
What is more, the banking system played a fundamental role in sustaining and
expanding the profitability of financial institutions, through the mushrooming of
financial products and of financial transactions, resulting in the vulnerability of the
real economy to debt finance (see Stever, Goetz and Upper, 2007; Lapavitsas and dos
Santos, 2008; dos Santos, 2009; Dymski, 2010). As the volume of capital has shifted
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from the productive sector of the economy to the financial sector, manufacturing and
other industrial sectors have come under pressure to increase their profits, through
policies such as mergers, acquisitions, outsourcing, downsizing or even looking for
other more profitable markets (Rattner, 2011; Blecker, 1999). The private sector is
now giving emphasis on international competitiveness, considering this to be the most
significant source of increased profits, and by taking this into account; governments
adopt the appropriate public policies to attain this goal (Adler, Forbes and Willmott,
2008).
Consequently, the global economy has become significantly financially integrated
over the last four decades. International finance grew more rapidly than trade and
income, with Eurocurrency markets playing initially a leading role (McGrew, 1011).
Financial capital movements became global, surpassing both the borders of national
economies and the controls that were initially imposed, and were accompanied by the
growing perception that financial liberalisation was a desirable objective, associated
with advantages at both the national and international level (Camacho and Nieto,
2009). Thus, demand for international finance increased and economic activity
became inextricably linked with global financial flows. This can be confirmed by the
following figure which shows the dramatic increase in foreign assets and liabilities asa share of GDP in both industrial and emerging markets from 1970 to 2004 (Lane and
Ferretti, 2005). Especially, it can be observed that around the 1990s, when the present
phase of globalisation began, we have an increasing explosion of foreign assets and
liabilities as a share of GDP.
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To continue with, this increasingly international dimension of financial capital is
highly related to the emergence of financial and banking crises globally (see Sweezy,
1997; Stiglitz, 2000; Rodrik, 2004; Isard, 2005; DArista, 2005; Morand, 2006).
Financial requirements exceeded the typical requirements of trade of goods and
services. For instance, the crises in Argentina, Mexico, Japan, South East Asia,
Turkey, Brazil and Russia were a direct result of the financialisation process (see
Brenner, 2002; Haldane, 2004; Foster, 2008; Felton and Reinhart, 2009).
Consequently, in order for someone to understand how financialisation emerged and
increased both in magnitude and influence, a deeper analysis is called for. The present
paper aims to illustrate that financialisation in combination with the neoliberal
policies that had played a critical role in the current crisis led in the inefficient
regulation of financial markets, the increasing inequality in the distribution of income
Figure 1: Foreign Assets and Liabilities as a share of GDP
Industrial Group and Emerging Market DevelopingCountries Group, 1970- 2004
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and in the rising imbalances in the global economy. Section 1 refers to some
introductory comments of the phenomenon, while Section 2 presents on the one hand
an excursion into the history of economic thought where the intellectual roots of the
concept of financialisation can be traced and, on the other hand, its unique relation to
the American economy. Section 3 shows the main features of financialisation and
Section 4 the existing relation to the emergence of global financial crises.
Furthermore, Section 5 continues with the presentation of the neoliberal framework
where financialisation arose and increased its sphere of influence as well. Section 6
offers some concluding remarks.
2. Financialisation: Setting the Scene
As it was stated in the introduction, a diversion into the history of economic thought is
a necessary condition for understanding the concept of financialisation. Knowledge of
questions that have plagued modern economic science is important for setting the
framework within which this phenomenon should be analysed.
The beginning of modern economics is associated with the works of Adam Smith who
analysed economic factors in broader contexts. The publication of The Wealth of
Nations in 1776 has been described as "the effective birth of economics as a separate
discipline (Wahl, 2008, p. 150). This book can be characterised as a reaction to the
crisis of Mercantilism brought about by the first Industrial Revolution, and was in
tune with the beliefs and interests of the emerging bourgeoisie. New ideas were
introduced with the self-regulation of markets being among the most important ones.
That view had a substantial effect in the history not only of economic thought, but
also of the emerging capitalism (Fine, 2000). With the passage of time, as production
and economy became more and more complex, new interpretations emerged,
accompanied by the import of concepts and methods from other sciences, especially
from mathematics and physics. Economic models were then developed in order to
fulfill the wish to move towards an approach in accord with the physical sciences
(Fine and Milonakis, 2009).
This resulted in another revolution that took place in economics with the 1870s being
an important threshold in this direction. The new ideas took shape, among others, in
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the writings of the so-called Marginalist School2. Writing simultaneously and
independently of one another, the Frenchman Leon Walras, the Austrian Carl Menger
and the Englishman Stanley Jevons developed the following theory: the price of
goods or services instead of reflecting the labour content reflects the marginal
usefulness (utility) of the last purchase. This meant that, in equilibrium, people's
preferences determined prices including indirectly the price of labour (Weintraub and
Mirowski, 1994).
In the 1930s the world was plunged into the vagaries of the Great Depression. After
the 1930s, the faith in the self-regulation of the market and in the invisible hand came
into question and the terrain was set for the Keynesian Revolution. Keyness General
Theory gave a new insight in economic policy emphasising the role of the state in the
broader economic and social context, aiming primarily to restore full employment
(Spence, 2011). In the 1950s, Keynesian theory became the mainstream
macroeconomic theory but two main drawbacks made it susceptible to criticism. The
first one concerned the hypertrophy of public expenditure, while the second one
referred to the increase in the rate of inflation due to the strengthening of labour
unions (Taylor, 1998).
In their 1963 bookA Monetary History of the United States, 1867-1960 Milton
Friedman and Anna Schwartz challenged Keyness foundation regarding the role of
the state. They supported monetary policy rather than fiscal, and introduced the notion
of the natural rate of unemployment. Then, the real business cycle theory
introduced by Kidland and Prescott, became the role-model of New Classical
Macroeconomics which maintained that the way to get out of the crises could be
found in a mix of deregulation and privatisation (Arrighi and Silver, 1999). In 1971
the Bretton Woods monetary regime was brought to an end. President Nixon
2By marginalism we denote the use of marginal concepts within economics. According to Zablotsky
marginal concepts are associated with a specific change in the quantity used of a good or of a
service, as opposed to some notion of the over-all significance of that class of good or service, or of
some total quantity thereof (Zablotsky, 1995, p.12). The central concept of marginalism proper is that
of marginal utility, but marginalists, following the lead of Alfred Marshall, also developed the
concept of marginal physical productivity in their explanation of cost; and the neoclassical tradition
that emerged from British marginalism generally abandoned the concept of utility and gave marginal
rates of substitution a more fundamental role in analysis (Ghiselin, 1987, p.21).
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announced the end of the dollar standard regime and the systematic liberalisation of
the markets started in the mid- 1970s. In 1973 and 1979 the two oil crises resulted in
the aggravation of the economic situation. It was at that time that neoliberalism and
phenomena such as privatisation and marketisation emerged (Kotz, 2008; 2002;
1978).
Last but not least, a significant facet of this new scene in the US was the Washington
Consensus. Briefly, in November 1989, the Institute for International Economics
convened a conference to investigate the progress of economic reforms in Latin
America. At that time, there was a general misconception, based on Williamsons
assessment, that Latin America countries were unwilling to undertake significant
reforms to overcome the debt crisis. In this conference, Williamson coined the term
Washington Consensus. The Washington Consensus was initially what most
people in Washington believed Latin America (not all countries) ought to be
undertaking as of 1989 (not all times) (Williamson, 2002, p.1), and, was
originally used to describe a list of ten reforms that I [Williamson] argued were
practically universally agreed in Washington to be desirable in most Latin American
countries (Williamson, 2004, p.195).It is clear that the Washington Consensus set of
policies are a mirror image of the policies adopted by US neoliberalism. Nevertheless,in the international economy, neoliberalism in the form of the Washington Consensus
has been imposed around the world; by powerful financial institutions and interest
groups particularly based in US Washington Consensus is a kind of US exported
neoliberalism (Hailu, 2009).
In general, the lax monetary policy adopted firstly in the US and then in other
countries around the world after the 1970s, had the effect of doping the economy.
Speculation, moral hazard and risk-taking became endogenous characteristics of the
global economic system. The growing financial instability was inextricably related to
the emergence of crises including the current global crisis, the most severe economic
crisis since the Great Contraction of the 1930s, which led to the unexpected
catastrophic results that took by surprise the bulk of the economists, politicians,
commentators and the public (Lapavitsas, 2010; Reinhart and Rogoff, 2008).
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2.1 The Roots of Financialisation
That we live in a world of finance is an undeniable fact. Financial news rules in the
business press. The management of American corporations is in accordance with the
rhythm of Wall Street. Consumers are confronted daily with new financial products.
Significant increases in financial transactions, financial assets and in the profits of
financial and non-financial firms as well as increases in the shares of national income
accruing to the holders of financial assets set the framework of financialisation. At the
same time, the 1970s represent an intellectual break point with the emergence of new
ideas which were meant to affect the global economic, social and political system.
Dramatic shifts of a massive scale have taken place in countries of both the developed
and the developing world (Panceira, 2010; 2009).
Financialisation as a phenomenon arose in the United States and through various
financial mechanisms has spread in many countries all over the world. In order to
illustrate this we have first of all to establish whether and how the US economy
became financialised. As Merton once remarked, it might at first seem needless to
say that before social facts can be explained, it is advisable to ensure that they actually
are facts (Merton, 1959, p. ix).
During the last four decades, the US has entered the neoliberal phase3 of capitalism
with the following main features. First and foremost, the deregulation of financial
businesses both at the domestic and the international level; secondly, the privatisation
of many state services in combination with a deep reduction in social spending, and,
last, but not least, the decrease in the power of trade unions and a general shift of
power from labour to capital, with the increase of part-time workers, labour contracts
with unfavourable working conditions and stagnant or even decreasing wages. This
3 In the course of time, capitalism has undergone many changes and passed through different stages,
each one characterised by a specific set of institutions and structures. After the Second World War ahighly regulated form of capitalism arose in the industrialised world. The main features of this phase ofcapitalism are the emergence of a welfare state; the increase in the power of trade unions; theimposition of capital controls and, in some countries, the public ownership of a significant portion ofthe enterprise sector (Kiely, 1994; Arrighi, 2008). During the 1970s which turned to be a turning pointin the evolution of the global capitalist system, a transformation took place. A new structure of theeconomy emerged consisting of a complex nexus of relations between finance and different sectors ofthe economy. The characteristic feature of this period was the increasing importance and power of thefinancial sector which started to become more and more independent and sat on top of the productionsystem (Kiely, 1998). Since 1980 we have entered the neoliberal phase of the capitalist system. This
involves privatisation of state enterprises, a reduced welfare state, limited state regulation and weaktrade unions (Arestis and Sawyer, 2003).
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was the direct consequence of financial deregulation in conjunction with the severe
competition from low-wage countries. Output per hour has risen faster than real
earnings. In other words, productivity surpassed compensation growth during the
period 1979-2000 (Hein and Achim 2010; Wallerstein 2008;2004).
Figure 2 displays the remarkable increase of financial profits in comparison with
manufacturing profits, specifically in the US. Over the period 1981-2004, when the
financial sector was beginning to recover from the previous period of recession, the
relative shares of financial equities were more than triple, while, as it can be observed,
there was a steady implosion of the manufacturing sector.
Similar conclusions can be drawn from Figure 3. In 1965, manufacturing accounted
for 31 percent of total overall private industry output in the USA. By 1997, this sharehad dropped to 20 percent, with the financial and services sector replacing
manufacturing as the leading contributors to private industry output. Between 1965
and 1997, services grew by 2.115 percent and finance, insurance and real estate grew
by 1.473 percent. By comparison, manufacturing grew by 619 percent during the
same period (American International Trade Administration,
http://trade.gov/manufactureamerica/facts/tg_mana_003019.asp#P13_602 ).
Figure
Source: Bureau of Economic Analysis
http://trade.gov/manufactureamerica/facts/tg_mana_003019.asp#P13_602http://trade.gov/manufactureamerica/facts/tg_mana_003019.asp#P13_6027/27/2019 Dafnomili NL Financialization
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Source: Bureau of Economic Analysis, U.S. Department of Commerce
Figure 3: Private Industry Output from 1965 to
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In addition, the role of the dollar in the arrangement of international transactions was
of particular importance in this process. This is confirmed by the fact that nowadays
the dollar enters in about 76 percent of foreign international transactions whereas the
euro enters only in 24 percent. What is more, 66 percent of the total foreign exchange
reserves are held in dollars, while only the 25 percent of them are held in Euros
(Taylor, 2011, p. 95). In accordance with this, a series of events has led to the
establishment of the dollar as world money. The proliferation of financial
instruments resulted in a remarkable increase in financial assets. Specifically, the
latter (the sum of equity, bonds and bank assets) reached 425 percent of the US GDP,
and this increase helped preserve the role of the dollar internationally (Dumnil and
Lvy, 2004a, p. 660).
Apart from this, debt crises became the means by which a further impetus was given
to financialisation through the terms and conditions (adoption of austerity measures,
cutting public spending, increase in taxes, layoffs in the public sector) imposed by the
IMF structural adjustment and stabilisation packages (Kindleberger and Aliber,
2005, p. 68). Since the beginning of the 1970s the debt of developing countries
doubled from 8 percent of GDP in 1972 to about 22% in 1982 with Mexico, Brazil,
Venezuela and Argentina together accounting for nearly 75 percent of the totaldeveloping world-debt during this period (Marshal, 2011, p. 20). In the 1980s, the
Plaza and the Louvre Accord secured the commitment of foreign banks to defend the
dollar and around the 1990s the emerging countries witnessed a huge influx of private
capital leading to the well-known Asian Crisis in the 1998 and then a reverse flow
from the developing countries to the US (Dodd, 2004). This set of features resulted in
three significant outcomes: first, the increase in income inequality; second, the
growing trend in speculative and risky activities and, last, the emergence of severe
global asset bubbles (Hahn, 2005). Figure 4 highlights the transformation of the
American economy during the rising debt era. From the 1950s until the 1980s
financial profits as a share of GDP floated over the level of 1 percent. This changed
during the 1980s, as the financial sector grew its profit-margins in a period in which
the bulk of the American population was borrowing and going into debt in order to
finance a lifestyle that was initially set up for the upper classes (Johal and Leaver,
2007).
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Figure 4: Debt leverage and banking profits go hand in hand
Source: Peak Watch
Another significant aspect of financialisation is the changing character of the
american banking system and consequently of the international banking system
(Stever, von Peter and Upper, 2007). A well developed financial system can emerge
only when the infrastructure of the banking system is well established. The stability of
the Gold standard period provided the basis for massive financial flows from the
surplus to deficit-countries in the pre-1914 period. Central banks during that period,
rather than imposing new international policies, brought about changes in national
policies by adjusting interest rate-premia and exchange rates (Taylor, 2011). In
accordance with the growth of financial institutions and international banks, globalfinance also developed and imposed changes in the regulations of the national
authorities (Michl, 2011). Central banks around the world cooperated with national
authorities and developed a global system of international transactions. The
innovation of new financial instruments made the regulations difficult to implement.
Consequently, the process of financial deregulation led banks and large corporations
to boost the openness to financial markets preparing the ground for the general
deregulation. This trend had as a result the increasing involvement of workers and
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others in the mechanisms of finance. The increase of consumerism led them to take
loans from financial institutions in order to meet elementary needs, such as housing,
education, health, and provision for old age. In other words, their income has been
financialised. Only then could banks extract significant profits directly from wages
and salaries (Lapavitsas, 2009).
The international character of the banking system became more pronounced after the
1980s and was further boosted during the 1990s and especially in the 2000s. What is
more, during the process of financialisation both commercial and investment banks
have been transformed. As finance expanded, relations between industrial enterprises,
financial institutions (such as banks) and the state also changed. These changes
determined the content of financialisation in a decisive way.
Table 1
Source: UNCTAD, World Development Report 1994, p. 128
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Growth of six big banks
Source: Company Annual Reports, 2009
Additionally, investment banks focused on the subprime mortgages considering this
to be a sector of high profitability. For this reason, Morgan Stanley purchased
Advantage Home Loans, Merrill Lynch bought Mortgages Plc and Lehman Brothers
acquired South Pacific Mortgages. Being helped by the use of the techniques of
financialisation the banks repackaged debts obtaining remarkable high returns.
Corporations playing in this way were transformed into giant casinos, taking more
and more leveraging- sometimes they were betting for instance thirty or more
borrowed dollars for every dollar of their own that was used (Foster and Magdoff,
2008). Lastly, as Galbraith (2008, p.48) has claimed that the first rule of central
banking is that when the ship starts to sink, central bankers must bail like hell.
Another figure which confirms even more why the American economy can be
characterised as financialised and why financialisation as a phenomenon began in
the US is the following. During the course of financialisation the US workforce has
shifted from manufacturing to finance. In Figure 5 two contrasting trends can be
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observed. In 1947, the manufacturing sector was 25.6 percent of the entire US GDP
base whereas the FIRE sector only 10.5 percent. In contrast, in 2009 FIRE reached
21.5 percent while manufacturing was down to 11.2 percent (Gowan, 2009, p. 361).
Source: Bureau of Economic Analysis
3. Main features of financialisation
Financialisation is a multifaceted phenomenon, both in terms of its meaning and its
sphere of influence, by affecting a wide range of social, political and economic
aspects of human life, imposing the latter upon a risky environment of financial
fragility and economic instability (Kotz, 2008a; Martin, 2002). Finance rests on
promises which by definition can be broken, and all the participants know that. This
makes the financial system vulnerable to expectations about the fulfillment of these
promises.
Figure
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First and foremost, financialisation can be understood as the increasing expansion of
financial assets and financial activity relative to the other sectors of the real economy
(Fine, 2007). In a nutshell, there has been a significant financial deepening since
1980, which has accelerated after 1990 (McKinsey, 2008, p. 10). Some indicative
data that depict the immense growth of the financial sector relative to the other sectors
of the real economy are the following. The FIRE (Finance, Insurance and Real Estate)
sector in the US increased from 2.5 percent in 1947 to 4 percent in the end of the
1970s and reached 8 percent in 2007 (Philippon, 2008, p. 6). The same results also are
concluded for the case of UK where finance increased from 5 percent of gross value
added in 1970 to 8 percent in 2007 (Haldane, 2010, p. 4). Rates are more or less
similar for the Anglo-Saxon economies and Australia too (Weale, 2009, p.6).
Regarding corporate profits, a significant increase is also being documented, reaching
the level of 27 percent in 2006 from 15 percent that it was in 1980 (Lazonick and
OSullivan, 2000, pp. 30). This increase was even more pronounced in the UK where
financial intermediation increased from 1.5 percent in 1978 to 15 percent in 2008
(Haldane, 2010, p.4). In addition, there was a close connection between US and UK,
on the one hand and China and Japan on the other. The former considered to be the
main exporting economies of the latter, leading to a growth in financial flows and to
the establishment of a financial system that would play a leading role in the global
economy (Ward, 2011).
Secondly, apart from the expansion of financial assets, this period has witnessed the
proliferation of different types of assets through the expansion of securitisation.
Swaps, CDOs, options and derivatives are some of the commodities created for the
implementation of the new financial policies. These instruments had as their initial
purpose hedging and risk management (Morin, 2000). In the course of
financialisation, derivative markets have allowed participants to make bets aimed at
managing risk, or simply speculating. The rise of Black and Scholes model has given
to an air of objective reality to derivative prices (Froyd and Williams, 2007).
Thirdly, in the course of financialisation the relationship between finance and industry
has changed. As Rossman and Greenfield (2006, p. 2) put it:
Of course, companies have always sought to maximise profits. What is new
is the drive for profit through the elimination of productive capacity and the
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reduction of employment. Transnational food processors, for example, now
invest a significantly lower proportion of their profits in expanding
productive capacity. Financial markets today directly reward companies for
reducing payroll through closures, restructuring and outsourcing. This
reflects the way in which financialisation has driven the management of non-
financial companies to act more like financial market players.
Under the dominance of finance, enterprises must, as is well understood, not only
generate profits, but primarily guarantee that profits would be higher than those
defined by international parameters of the financial markets. For instance, companies
transfer their plans to countries with low production costs or even close production
units that have insufficient profitability. What is more, the existence of high
profitability criteria enables industrial groups through the process of market
centralisation to dominate a bigger portion in the world market. The objective is to
increase gains in productivity at all costs. Enterprises take advantage of the decline of
the resistance of the work force due to the existing threat of unemployment, being in
this way able to put their practices in force and stimulating strong speculative
activities. This new mode of enterprises function is known as the financialisation of
the enterprise (Weale, 2009).
Additionally, it has been observed that financialisation has a bilateral effect on
corporations. On the one hand, it imposes constraints on their investment strategies
and, on the other hand, obliges them to find new customers and increase profits.
Concerning the former, it is well-known that corporate credit-worthiness is
determined by banks and ratings agencies. Corporations may be able to make the
investments that they wish but in the end they are always accountable to the pressures
exerted by financialisation. The investment plans they draw up should now meet the
expectations imposed by the financial sector. No matter what the size of the
corporation is, the submissions to the examinations and inspections of the rating
agencies- Standard and Poors, Moodys and Fitch Ratings- are an unavoidable fact if
they want to reassure investors and have cheap access to capital (Blackburn, 2006).
Making a profit is not enough anymore; a triple A rating is also needed. By the same
token, most of the biggest corporations nowadays try to reduce their workforce by
out-sourcing and sub-contracting. Another catalyst of financialisation is that
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companies that were facing difficulties in selling their goods and services opened up
their activities by selling finance too (take as example HSBC and Citigroup).
Fourthly, undoubtedly, financialisation is inextricably related to consumer booms and
busts with the recent housing boom in the US being an aspect of financialisation
provoking the consequent speculative bust. Given the fact that real wages were
stagnant, in order to fulfill the lifestyle that were dreaming for, homeowners started
borrowing from financial and non-financial institutions. Low interest rates fuelled
even more the housing speculation (Woodford, 2010, p. 207).
Fifthly, financialisation has penetrated into a variety of aspects of social life such as
pensions, education, health and provision of economic and social infrastructure. For
instance, the extension of healthcare insurance represents one of the unwelcome
effects of financialisation. Even the weather can be financialised. The World Food
Programme (W.F.P.) proposed to issue catastrophe bonds which are linked to low
rainfall. This organisation would pay principal and interest when rainfall was
sufficient; if there was no rainfall, the W.F.P. would cease making payment on the
bonds and would instead fund relied efforts (Wray, 2009).
Sixth, financialisation, in combination with deregulation, privatisation andcommercialisation has set a particular set of cultures and policies with the efficacy of
markets taken as the foundation of the core of neoliberal theories. Cultural norms,
ways of behaviour and thinking, lifestyles have considerably changed from the 1980s
onwards.
Seventh, in the course of financialisation the process of work has been transformed,
partly due to technological and regulatory changes. In Marxist terms, the labour has
been intensified and unpaid labour stretched. Also, the bargaining position of both
working-class and middle-class has been seriously weakened, and there has been a
major shift in the distribution of income in favour of the top 20 percent (Hein, 2011;
Lapavitsas, 2009).
Eighth, financialisation has made income inequality more pronounced. For instance,
inequality in the US increased dramatically over the past 30 years (Lindert and
Williamson, 2003).
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Figure 6: The purchasing power of two income fractiles of U.S. households
(thousands of dollars of 2006)
Source: Bureau of Economic Analysis as cited in Dumnil and Lvy, 2011, p. 47.
The figure above illustrates the purchasing power of the bottom 99 and the top 1
percent of the US households income. The spectacular difference in the trends of the
purchasing power observed in the two fractiles between the first post-war and
neoliberal decades is clearly illustrated (based on income statements to the Internal
Revenue Service). The first line () measured on the left axis represents the average
purchasing power (in 2006 dollars) of the bottom 99 percent of U.S. households while
the second one (--) measured on the right axis, describes again the average purchasingpower of the top 1 percent of U.S. households in terms of income. From the figure it
can be concluded that at the beginning as well as in the end of the period the average
purchasing power of the top 1 percent is 20 times larger than that of the bottom 99
percent (the scale on the right axis is 20 times larger than the scale on the left axis).
Another observation is that the purchasing power of the bottom increased enough
until the 1970s and then stagnated. To the contrary, the purchasing power of the top 1
percent hardly grew between the pre-war and the 1970s, and then it dramatically
increased. This shift of income patterns to the benefit of upper income brackets
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described for the United States is actually a global phenomenon (Piketty and Saez
2003, p. 24-27.)
Ninth, financialisation is related not only with a slowing rate of growth but also with
an impressive drop in the level of private savings. The collapse of personal savings in
combination with the decline in corporate savings led to a huge decline in the overall
level of private saving. From the following figure we can draw the following
conclusions. Between the Second World War and the beginning of the 1980s, both the
rates of savings and investments remained stable, around an average of 4.5 percent
with highs of 7 percent for some years (1952-1979). In the 1980s, it suddenly fell to
about 1 percent or even almost to zero during recessions. The Reagan administration
played a significant role in this decrease. This fact highlighted the gradual
metamorphosis of the functioning of the US economy in the course of the
neoliberalism. What is more, the figure also illustrates the diminishing rate of
investment. As it can be seen, again during the neoliberal decades the rate of
investment also decreased from an average of 4.1 percent from 1952 to 1979, to an
average of 3.5 percent (Dumnil and Lvy, 2004a, p. 23).
Figure 7: Ratio of net savings and investment to the Net Domestic Product (%):
US: total economy
Source: NIPA (BEA); Flow of Funds (Federal Reserve) as cited in (Dumnil andLvy 2004a, p.23)
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4. Financialisation and Crises
The increasing power of financialisation is inextricably linked with the imposition of
financial openness in both developed and developing countries. In turn, the main
accusation against the dangers posed by financial openness is related to the increased
potential for financial risks. It is observed that when countries liberalise their financial
systems, removing any capital controls previously being implemented, there is a
strong possibility of a financial crisis (Bordo and Eichengreen, 1999). This approach
is in contrast to the verdict of the neoclassical orthodox theory, which argues that
financial instruments and economic integration should lead to smooth consumption
rather than to financial crises- the outcome in most of the countries of the developing
world during the last decades (Chinn, 2011). It is true, that speculative attacks occur
when market fundamentals deteriorate and, in the case of the emerging economies
which have removed their capital controls too quickly, capital liberalisation had a
tremendous impact on their national economies (Rodrik and Subramanian, 2008).
What is more, the problem is that developing countries by definition exist in a second-
best world, meaning that they suffer from distortions and corruptions. In a world still
struggling with problems of underdevelopment, it is difficult for developing countries
to strengthen financial regulations and governance (Schmuckler, 2004). The reasonwhy these countries are poor is because there are many things that go wrong with
them. They do not have well established property rights and legal system; they have
high levels of corruption and poor financial information. As a consequence,
significant economic and financial crises have taken place in developing countries
since the 1990s: Mexico (1994); Indonesia, Korea and Thailand (1997); Brazil and
Russia (1998); Argentina and Turkey (2000); Brazil (2002). According to Henry
(2007, p. 890) these crises have usually followed capital account liberalisation and
are powerful testimony to the extent to which the costs of financial globalisation have
fallen disproportionately upon the bigger so-called emerging market countries. This
is consistent with a study by Eichengreen and Bordo, conducted in 2001, according to
which the probability of a financial crisis occurrence has doubled after the 1970s.
Another interesting survey, conducted by Bordo, Eichengreen, and Peria in 2001,
presents the frequency of financial crises and their duration during the last 120 years.
They distinguish between four different time-periods. The first one runs from 1880
until 1913 (the gold standard era); the second from 1919 to 1939 (inter-war years); the
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third from 1949 to 1971 (Bretton Woods era) and the last one from 1973 until 1997
(neoliberal era of capitalism). It can be observed that, during the last time-period the
world has experienced most financial crises: ninety-five financial crises took place in
the periphery and forty-four in countries of the advanced world.
Table 2. Financial Crises in the Core and Periphery
PeriodFinancial Crises in
Advanced countries
Financial Crises in
Emerging Markets
18801913 7 25
191939 36 13
194971 21 17
197397 44 95
Source: Michael Bordo and Barry Eichengreen, Crisis Now
and Then: What Lessons from the Last Era of Financial
Globalization, NBER Working Paper 8716, 2002.
Furthermore, in 2001, Kaminsky and Schmukler conducted a research about the
emergence of boom and bust episodes in stock markets. They observed that, three
years after the liberalisation process which both developed and developing countries
followed, most of them experienced the burst of financial crises with significant
impacts. What is more, the emergence of most of these crises can be found in good
times before the collapse. Indeed, it is observed that, at an early stage in the
financialisation process, most of the emerging economies experienced high levels of
economic performance. More specifically, inflation was low and economic growth
was high. However, as the authors argue the good times often have a dark side
(Kaminsky and Schmukler 2001, p. 67).
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Source: Kaminsky and Schmukler (2001)
Figure 8 depicts the average boom and burst cycle in the financial markets.
Industrialised countries are: Italy, France, Canada, Germany, United States, UnitedKingdom, Japan, Ireland, Finland, Denmark, Spain, Portugal, Sweden and Norway
Figure
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and developing countries are: Brazil, Argentina, Chile, Mexico, Columbia, Peru,
Hong-Kong, Korea, Venezuela, Indonesia, Malaysia, Taiwan, Philippines and
Thailand. Date 0 is the date of the peak when normalization reaches 100.
In a nutshell, undoubtedly there are direct and indirect channels between financial
globalisation and financial crises. When a countrys financial system is liberalised, it
becomes subject to foreign discipline and because financial markets are imperfect by
nature, countries become more prone to financial crises independently of their
fundamentals. Imperfections can generate speculative attacks, bubbles, irrational
behaviour and crashes.
5. Financialisation and Neoliberalism
The concept of neoliberalism has, during the past thirty years or so, become quite
widespread in many political and academic debates. Several authors have even
suggested that neoliberalism is the dominant ideology that shapes our world today,
and that we live in an age of neoliberalism. The overshadowing importance
accorded by some to the phenomenon of neoliberalism does not signify, however, that
it is a clearly defined concept. I suggest in this paper the definition of Dumnil and
Lvy which relate neoliberalism to the increase of the financial impact towards the
real economy, arguing that neoliberalism is a new stage of capitalism that emerged in
the wake of the structural crisis of the 1970s. It expresses the strategy of the capitalist
classes in alliance with upper management, specifically financial managers, intending
to strengthen their hegemony and to expand it globally (Dumnil and Lvy, 2011,
p.1). In this way, it is clearly understandable that financialisation was an integral part
of the neoliberal process and that it wouldnt have this strength and power had it not
been for the neoliberal policies that were implemented in a global scale.
In the 1940s and 1950s the current neoliberal policies and ideas would have been
inconceivable, causing the laugh of most of the people, facing difficulty in finding
believers and followers (Dumnil and Lvy, 2011b; 2005). At that time, everyone was
a Keynesian, a social-democrat, a social-Christian democrat or some kind of
Marxist. Ideas such as the establishment of an international free trade environment
with the removal of any restrictions and the limitations of any capital and financial
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controls would have undoubtedly been out of the spirit of the time. The world at that
time was functioning in a very different way. The synchronized impacts of the New
Deal, the Marshall Plan, and the Welfare State established a new order of social-
democratic power (Dumnil and Lvy, 2004a).
Neoliberalism as an ideology was shaped at the University of Chicago in the 1970s.
With the figures of Friedrich von Hayek and Milton Friedman at the centre, the
neoliberals created a gigantic international network of institutes, foundations,
publications, writers, scholars and public relations necessary in order to promote their
ideas and establish them as a doctrine (Felix, 2003). The built up of this ideological
cadre can be considered to be a case of what the Italian Marxist thinker Antonio
Gramsci called cultural hegemony. As Gramsci puts it if you can occupy peoples'
heads, their hearts and their hands will follow
(http://thinkexist.com/quotes/antonio_gramsci/ ).
After World War II the political conditions at a global level were uncertain. It was
without doubt a transitional period, not only for the US, but also for several European
countries which were balancing between a kind of social-democracy (socialism) and
a free-market capitalist system. What is more, economic recovery was associated with
the creation of large deficits and the increase in flows of capital from Europe and the
rest of the world to the US.
The failure of Keynesian policies to confront efficiently the structural crisis of the
dollar in the early 1970s led not only to the suspension of the convertibility of the
dollar into gold (August 1971), forcing European countries to let their currencies to
float, but generally to a new international deregulated financial framework with
financial institutions and multinational corporations increasing their power and their
sphere of influence. This clear break with the Bretton Woods system enhanced the
existing freedom of trade and of capital movements. The IMF Articles of Agreement
were modified saying now that the essential purpose of the international monetary
system is to provide a framework that facilitates the exchange of goods, services, and
capital among countries. What is more, the crisis of the 1970s created the conditions
of a new bout of class struggle during which the income of the capitalist class was
restored. A new discipline was imposed on workers, placing them in the global
competitive framework (Thomson, 2010).
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In 1974 the US removed the controls it had established during the 1960s. Britain,
Germany and France followed suit. Britain remained consistently focused on making
London a financial centre, where neoliberalism would promote the interest of the
upper class (managers and capitalists) to the rest of the world. Germany has always
had as a major objective the implementation of orthodox, monetary measures that
would bring price stability. France, traditionally a nation characterised by a significant
amount of state protectionism, after the election of Mitterand in 1981 moved toward a
free-market economy within the general social, economic and political framework of
a unified Europe (Rogoff, 2006). A classical and indicative example of a politician
that promoted the neoliberal ideology and policy was Margaret Thatcher, who came
to power in Britain in 1979 under the slogan There Is No Alternative.
Since the 1980s, neoliberalism both as an ideology and policy has ruled the countries
of developed and developing world, becoming the main form of expression of the
capitalist system. Financialisation, as it was stated before, has been an integral part of
this procedure. The quantitative changes brought about by financialisation were
matched by even deeper qualitative changes. Financial activity penetrated into a
widening range of economic and social activities (Fine, 2009). Thus, the primary
role of individuals in society has been transformed from workers-consumers toworkers-consumers- investors (Casey, 2009, p. 260), put differently, the distance
between high finance and everyday life, between global banking and household
finance, has been drastically reduced (Finlayson, 2009, p. 420).
The main form of the neoliberal policies decade was the lessening of capital controls.
Liberalisation has been extensive in countries that were in a highly restricted financial
situation in 1975 leading to their full openness by the 2000s. In Figure 9 we can
observe the gradual removal of capital controls. From the bottom panel in Figure 9, it
can be observed that countries in all income groups on average- have relaxed their
capital controls though the level of capital controls had a reverse relationship with
their income per-capita (Joshi, 2003).
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Figure 9: Capital Controls by Financial Openness and Income Group, 1975-
2005
Source: Annual Report of Exchange Arrangements and Exchange Restrictions
(AREAER), IMF; and staff calculations.
Another study conducted again by Kaminsky and Schmukler in 2001, documents the
gradual lift-up of restrictions in the course of the neoliberalism. Figure 10 depicts
exactly the evolution of financial restrictions on financial movements of capital.
Figure
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During the last thirty years, both industrialised and emerging countries have followed
the same procedure of financial integration, by lifting their controls and restrictions.
What is more, developed countries have always been more liberalised than developing
ones. A significant element worth mentioning is that, over time, some periods of
reversals can be observed, especially in the aftermath of financial crises, such as the
crises in Mexico and in East Asia.
Source: Kaminsky and Schmukler, 2001, p. 35
Analysing the above figure, restrictions vary from level 1 (no restrictions) to level 3
(High restrictions). Developed countries are Italy, France, Canada, Germany, United
States, United Kingdom, Japan, Ireland, Finland, Denmark, Spain, Portugal, Sweden
and Norway while developing countries are Brazil, Argentina, Chile, Mexico,
Figure
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Columbia, Peru, Hong-Kong, Korea, Venezuela, Indonesia, Malaysia, Taiwan,
Philippines and Thailand (Kaminsky and Schmukler, 2001, p. 35).
Summarising, during the transitional period between the 1970s and the 1980s
capitalism entered into a new phase which has been called the neoliberal stage. One of
the so-called key characteristics of this phase, the disengagement of the state from
economic affairs through the perception that the state did not have any role in the new
economic status quo, is misleading. Indeed, the state was the agent of implementation
of the new neoliberal policies worldwide. At the international level, financial
institutions such as the World Bank and the Internationally Monetary Fund played a
quasi-state role in the imposition of the neoliberal new order in the planet. Another
characteristic of this new order has been the adoption of a general neoliberal ideology
which is related not only to the adoption of free trade and the imposition of a free
international circulation of capital, but also to the freedom being given to the
enterprises to hire and fire according to their needs and the rules being imposed by the
global entrepreneurial competition (Wolfgang, 2011). Thus, neoliberalism emerged as
a result of both the ideas and policies that were implemented during the last thirty
years. It is not only a belief, an ideology, or even a doctrine, but also a mode of
economic governance and a policy package (Steger and Roy, 2010).
The application of these ideas implemented by the Thatcher and Reagan regimes
varied, but the founding principle was the shift from governments control to the
private sector of the economy, and the adoption of policies that will remove the
barriers to capital flows and financial investments. In this line of thinking,
financialisation emerged as a post hoc addition becoming gradually the theoretical
central tenet of the neoliberal growth model (Froyd et all., 2000). For many
economists, the existing relationship between neoliberalism and financialisation
involves both the explanation and the solution of the current financial crisis.
Simplifying, we could say that the crisis began in the financial sector because of the
broader phenomenon called financialisation which is the heart of neoliberalism.
No one can deny any longer that the current financial crisis was not merely a crisis of
the financial sector of the economy, but also a crisis of the neoliberal capitalist system
which dominated over the last three decades. According to Fine (2009, p.1) The
current crisis, and the response to it, seem to have delivered a death blow to
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neoliberalism. Economists were responsible for the creation of elegant mathematical
models of (im-)perfectly self-regulating markets that were disconnected from the
reality of actual functioning markets. One of the focal point of modern economics is
the efficient markets hypothesis which, according to Quiggin (2010, p.44) implies
that there can be no such thing as a bubble in the prices of assets such as stocks or
houses. Further, the bulk of the evidence illustrates that they continued with highly
risky strategies even though they knew that they were on a bubble. Citigroups CEO
Charles Prince told the Financial Times in July 2007 as long as the music is playing,
youve got to get up and dance. Consequently, financial firms that took excessive
risk, found themselves overleveraged and instead of markets punishing this behaviour
they promote policies that will help to continue operating in the same way
(Geanakoplos, 2010, 2010b).
6. Conclusions
Nowadays, the role of the capitalist state has been transformed aiming to meet the
new requirements of financialisation. The states role is fully incorporated in a system
which supports finance with all possible means. Capitalists, politicians and
intellectual networks attempt to transform capitalism into a system with minimal
constraints for big business. They have the perception that in order for capital to gain
the upper hand, the economic environment has to be unstable and highly insecure for
the bulk of the population and the state. What is more, although financial
liberalisation is inextricably linked with bubbles and crashes, especially after the stock
market crash of 1987, it is an astonishing fact that the policies being implemented
have little effect in slowing down the financialisation trend. Half of the losses in stock
market valuation from Wall Street blowout between March and October 2002 was
regained within a couple of years. What is even more astonishing is that the average
daily volume of foreign exchange transactions rose from $570 billion in 1989 to $ 27
trillion dollars in 2006. Since 2001, the global derivatives market has grown at a rate
of over 100 percent per year (Dymski, 2009, p. 43). Martin Wolf of the Financial
Times claims that another ideological God has failed. Yes, no doubt, but the idolatry
seems to go on and on and within it financialisation?
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