In all such cases, whatever may be the form of existence of this additional money-capital, it represents, so far as it is capital in spe, nothing but additional and reserved legal titles of capitalists to future annual additional social production.
Karl Marx, Capital II: 326
Pecunia non olet
Vespasian
1. The absurdity of modern economics
Any rational economics would be about how economic activity plays a part in the wider social system. Modern economics is doubly divorced from that. Firstly, it treats economics as an abstraction from social life, as though it could be judged solely on its own terms. And within that, economic activity is presented as revolving around money, rather than money being kept in its proper place as a means to our real social (or even economic) ends. Even if we accept the former abstraction, within economics itself one would expect the making, distribution, exchange and consumption of goods and services to predominate – that is after all how people actually live – but we have succeeded in making all that secondary to the circulation and augmentation of money itself.
This peculiar displacement and inversion that places money first and last – the perspective of the miser, that most wretched of human beings, who is, as someone-or-other once said, as much in need of what he has as of what he has not – is not the fault of economists, of course. Or at least they are no more than ghost-writers to the real culprit. This is after all a perfectly valid description of an advanced capitalist society, in which finance capital (and its unacknowledged bastard-and-then-master, fictional capital) has deposed real goods and services from the pinnacle of profitability to such as extent that the classic model of capitalist economic activity in which money is augmented through the creation and sale of goods and services – summarised by that nice Dr Marx as M-C-M’ – has started to run an increasingly poor second to the more direct creation of money through speculation, the creation of fictional capital and all the rest – M-M’.
It’s a distasteful state of affairs and creates the impression that economics has fallen into a sort of fantastic black hole, from which the introversion into which it has fallen ensures that it cannot escape. But even from the most radical point of view we can't just switch economics off. The economy is after all where we create all the means to our various ends, our economy is a capitalist economy, and so we must at least try to understand capitalism's view of itself. On the other hand, surely we are capable of constructing an economics that starts and ends with people, and so with the goods and services that are needed for human life.
(Even this ignores the deeper significance of economic activity, of course – the way the very process of participating in economic activity shapes the way we experience existence, and the way we define what is real and what is not, what is normal and natural, what is right, wrong and indifferent, what we are interested, uninterested and disinterested in. But at least it would wrench us away from this hypnotic fantasy that money must rule.)
An example of what I mean. In economic theory money is rightly assigned many functions. It is a store of value: people can use it to hold their savings. It is a medium of exchange, enabling us to buy and sell without having to wait for someone possessing exactly what we want and wanting exactly what we have. As an instrument for expressing the value (or at least the price) of goods and services, it’s a unit of account. Finally (as the list usually goes), money provides a standard of deferred payment (which is one important reason why we are always so concerned about inflation).
So far so ordinary. But since the creation of money by means of speculation, manipulation and downright fraud has come more to the fore (and nothing in recent economic policy has reversed this), this has made another, perhaps previously too obvious function of money more visible. For money is also a claim on goods and services. In a market that responds only to money, anyone with money has a right (or at least an access that will only be challenged in exceptional circumstances) to the goods and services created by society as a whole. As a result, those who specialise in creating money can corner a correspondingly volume goods and services (i.e., get rich) even though they create none themselves.
Hence the present essay.
2. What is money for?
Money, that indispensable lubricant, is an element of any post-barter economic system. So what is money, and what is money for?
The US Federal Reserve defines money as ‘anything widely accepted as final payment for goods and services’;[1] and for something to work as money, they suggest that it needs to be ‘divisible, portable, acceptable, scarce, durable, and stable’. As for the functions of money, the Federal Reserve suggest just three:
Medium of exchange.
Store of value.
Unit of account.
Economists are less unanimous about this list. Other functions have been suggested, such as:
A measure of value (i.e., in addition to a store of value).
The basis of credit.
A standard of deferred payment.
Although this is no place for detailed analysis, by and large the Federal Reserve’s list appears to define money as a component of a somewhat abstract economy, whereas these additional functions focus more on money’s practical functionality. And it’s in the light of this distinction that I suggest a further function of money, namely:
Money guarantees economic access to society’s goods and services.
Of course, this isn’t a new function of money: even though (as far as I am aware) it does not appear on lists of money’s functions, it has always existed, and there are vast industries (e.g., the foreign exchange business) designed to make it work. However, in an era of radical financialisation, this function achieves a radically new significance.
But is this function really different from, say, money as a medium of exchange? Although money operating as a medium of exchange is a common precondition for its ability to guarantee economic access to society’s goods and services, it is neither necessary nor sufficient. For example:
Welfare states and other government policies ensure that money isn’t necessary to access certain key goods and services. Qualifying for access and the process of access itself both occur without reference to money.
In most industrialised countries there are generally special rules governing access to goods and services that are available by money transactions. For example, there may be age-related restrictions on sales of alcohol and tobacco. So money is not sufficient to appropriate all forms of society’s wealth.
3. Why has this function not attracted attention previously?
If serving as a guarantor of economic access to all society’s good and services has always been a function of money, how has it evaded economists’ attention for so long?
Essentially it is because, prior to the present period, before financialisaton’s creation of an enormous new sector of the economy (and its associated class), access to money was based on participation (in one form or another) in the production of ordinary commodities (i.e., goods and services). In such economies, most money circulated as part of this cycle. Even tax revenues and social payments were essentially indirect flows driven and structured by the production, distribution, exchange and consumption of commodities.
As a result, access to society’s goods and services was directly tied to a more or less proportionate contribution to society’s stock of goods and services. So although money was already performing this distinct function, the function itself was of little distinct significance: economic access to society’s goods and services was based on transactions related to participation in the standard capitalist mode of producing those same goods and services. Like the higher dimensions in the more abstruse physical theories, in most circumstances this specific function, although it was always present, did not make its presence felt.
4. What does financialisation do?
So why would this simple, more or less direct connection between the production of goods and services and economic access to goods and services be broken? Ina word, it occurs because financialisation has become a major component in the economic system.
The definition of financialisation is by no means clear cut, not least because it entered the public’s vocabulary in a somewhat casual and haphazard manner right in the middle of the greatest financial crisis in eight decades. For present purposes, however, Epstein provides a useful preliminary description:
Financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international markets.[2]
This situation is especially focused at the very top of capitalist corporations, where it is increasingly the norm to remunerate[3] executives with stock options. With that,
Raising the price of its stock becomes the objective of corporate operations. Productive corporations compete by generating rapid increases in the price of the corporation’s stock, immediately through gimmicks and trickery, but more basically through firing workers, moving production, and raiding pension funds.[4]
So what does this promotion of all things financial mean? In essence, financialisation creates money without creating goods or services (i.e., commodities) that add any direct material value to society or to the world. This shift is expressed very clearly by Marx’s famous pair of transformations:
M → C → M′
and
M → M′
According to the first formula, in a capitalist economy the creation of use values (goods and services) consists of capitalists investing an amount of exchange value (money), M, in buying and processing commodities, which are then sued to create a finished commodity, C, which is then sold for a price, M′, that hopefully exceeds the original M by enough to warrant further reinvestment. In a financialised economy, it becomes increasingly the norm to seek out ways of using control over money itself to generate more money, and so skip over the mediating C — which is to say, move towards Marx’s second transformation, M→M′.
M→M′ is the capitalist utopia: to expand capital by the most direct route possible, without having to bother with the messy business of making things or being socially useful.
Hence, at least in part, the increasing predominance of financial services such as banking, residential mortgages, household credit, securities, assets management, hedge funds, specialised financial instruments (such as the recent economic collapse’s notorious ‘collateralised debt obligations’ and ‘credit default swaps’) — all areas that generate fees for transactions and services that create little or no additional social value.
Nor is this simply a matter of expanding the traditional financial sector. In fact there has been a marked trend towards ‘the financialization of everything’ and the universalisation of financialised goals, strategies and methods across the entire economy. There has also been a tremendous financialisation of other sectors through ‘shadow banking’. Here un- or under-regulated non-bank institutions provided core financial functions (e.g., consumer credit) at heightened risk to both the consumer and, collectively, the economy as a whole. As a measure of just how large shadow banking has become, it is now common for the financial arms of manufacturers to be more profitable than manufacturing itself.
But why are financial services not services in the same sense as the ‘goods and services’ referred to above? It’s certainly tempting to think of them as adding real value, if only in somewhat indirect ways. Thus in 2009 Lord Griffiths, then a Goldman Sachs vice-chair, defended bankers’ gigantic bonuses and other emoluments by urging us to ‘tolerate the inequality as a way to achieve greater prosperity for all’.
But this is misleading. Apart from certain markets where its impact has been of debatable benefit to society as a whole (e.g., real estate), the services provided by Goldman and their fellow financiers focus on the management of money itself. No service is provided in the sense of an activity or function that is valuable to society, unless you accept the financial sector’s own claims that they raise the efficiency and flexibility of the economy as a whole. But even if such claims are superficially persuasive, the sheer scale of the risks and rewards for this marginal ‘service’, not to mention the actual harm already imposed to society by dozens of large-scale finance-driven crashes across the world, surely demolish such claims.
Nor does the financial sector always shy away from self-criticism. In 2010 Adair Turner (then Chair of the UK Financial Services Authority) wrote that ‘There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability, and it is possible for financial activity to extract rents from the real economy rather than to deliver economic value.’
Indeed, a ‘flourishing’ financial sector can’t even be relied upon to provide efficient services to its financial customers: the period of pre-crash growth was accompanied by a ‘surprising’ growth in the cost of financial intermediation.
5. What has changed?
Yet I would suggest that money’s function as a guarantor of economic access to society’s goods and services is peculiarly well suited to the era of financialisation. In an economy where one economic sector can generate enormous quantities of new money without adding any value to society, this vast new river of money ensures that members of that sector can still corral society’s wealth without meaningfully contributing to it. So although this function of money is not new, its sudden growth in importance reflects a profound shift from a capitalist economy that provides society with goods and services in at least moderate efficiency and effectiveness to one where a singular class silently preys upon the wealth the rest of society is creating, all the time concealed by the blandness and homogeneity of money itself. Money, as Vespasian had it, has no smell.
In some respects this expression of financialisation is similar to another, yet more recent phenomenon — the advent of digital currencies such as Bitcoin. Why is a Bitcoin thought to be worth anything? Because, it seems, it is the fruit of a ‘mining’ activity. That is, a certain amount of effort has to be used to generate a Bitcoin, analogous to the labour that goes into more conventional goods and services. So the (socially average) extent of this (computer-based) ‘labour’ per Bitcoin justifies the underlying value of Bitcoins as a whole (even if it does not explain their wildly fluctuating market price).
But unlike more conventional goods and services, the effort required to mine a Bitcoin creates no use value. It creates only the exchange value of the Bitcoin itself, plus a residue of unusable heat dissipated from the computing machinery through which it was created. Likewise for financialisation as a whole — much the greater part of the services it produces are internal to the financial sector, which is to say the very sector that increasingly produces not social value but only money.
In other words, Bitcoin is the epitome of the wilder reaches of financialisation generally — money for nothing. Or at least, nothing valuable.
6. What is the social impact of financialisation?
Beyond the point at which it is usefully managing certain core functions within a given society’s economy (investment, business credit, insurance, and so on), the impact of this process rapidly becomes severely negative. As the IPPR thinktank put it:
A large finance sector increases inequality by inflating the price of assets, creates skills imbalance by skewing pay and rewards towards a relatively small number of jobs and increases exposure to global crises. By increasing the demand for sterling, financial sector growth has also led to the appreciation of the currency, negatively impacting exports.[5]
The UK’s enormous financial sector doesn’t even seem to be performing its most fundamental economic function — funding investments — properly:
The UK’s average productivity lags behind most comparable economies, including within the service industries which employ the majority of the UK workforce. Worse still, the UK’s aggregate productivity figures mask substantial imbalances across regions, with every region outside the South-East lying below the UK average…[6]
In fact –
[L]oans to the non-financial economy make up a conspicuously small proportion of banking interests… of the total lending to non-finance firms, roughly two thirds go towards mortgages. Of the rest, which is business lending, the majority goes to acquiring real estate assets — neither of which can always be described as productive investment.[7]
Yet financialisation is a self-supporting process because it attracts society’s most valuable resources. For example, right up to the crisis of 2008, graduates of Harvard, Yale and especially Princeton universities were extraordinarily likely to find employment in the financial sector. Thereafter the numbers tend to tail off, but the raw numbers remain high.[8]
Nor it hard to see why this career choice was so popular:
In 1980, the typical financial services employee earned about the same wages as his counterpart in other industries; by 2006, employees in financial services earned an average of 70% more… Attracted by high wages, graduates of elite universities flocked into the industry: in 2008, 28% of graduates of Harvard College went into financial services, compared to only 6% between 1969 and 1973… And graduates from the Stanford MBA program who entered financial services during the 1990s earned more than three times the wages of their classmates who entered other industries.[9]
And this is precisely the trend that this function of money exacerbates. Not only does it ensure that there are no constraints on the power of finance capital to exploit the economy as a whole, but it also disguises this distortion as no more than the ordinary expression of the ‘normal’ labour market.
Of course, this ought to be a self-limiting process. There is normally a limit to how much of an economy can be devoted to a single sector. That isn’t to say that the limit isn’t already very unhealthy for the economy and society as a whole, but it’s there.
Or rather, it isn’t. Because places like the City and Wall Street do not serve their national economy only. In fact it would be difficult to claim that either was principally concerned with their national economy (not least because the rise of financial capital was paralleled by the fall of manufacturing capital, so eliminating an obvious place for non-financial investments to be made). Likewise Tokyo, Frankfurt, Amsterdam and all the other financial centres. They all serve international (indeed transnational) markets. As a result, they can each continue to swell long after they have passed any size that is healthy for their respective national economies.
Which is precisely the situation we face now. The City, Wall Street and the rest continue to grow, and their respective national economies have the life sucked out of them. But of course, it’s hard to see quite how it happens. Hence the significance of identifying how the flow of money conceals how each class appropriates society’s overall product — even the goods and services to which it contributes so little.
7. What are the political consequences?
To be the guarantor of access to society’s goods and services is a fundamentally political as well as economic function of money. For it allows a class of finance capitalists to use its uniquely powerful and autonomous means of generating money that are purely internal to their class (i.e., M→M′), retain almost all of this exchange value for themselves, and then procure goods and services from the productive part of the economy (where M→C→M′ remains the norm) without making a meaningful contribution to the creation of wealth (as opposed to the creation of money).
So where an economy is highly financialised, identifying this function and showing its prominence and workings in contemporary economies also highlights the growing importance of changing class relationships and the process whereby capitalism moves from driving the growth of wealth and general development through the proliferation and elaboration of goods and services to permitting the class of finance capitalists to batten upon society despite making little material contribution to either its wealth or its development. Matt Taibbi famously described Goldman Sachs as ‘a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money’; now that financialisation has reached such a pitch., he might as well have been speaking of finance capital as a whole.
The political consequences are simple but great. Compared to either the relative size of the populations involved or the somewhat isolated parts of society it benefits, and despite its detrimental effects on the rest of the population and the social systems on which they rely, financialisation ensures that finance capital dominates tax revenues and key economic metrics such as GDP. So financialisation holds out the promise of both a quick fix and a prime vanity metric for politicians of all parties. Conversely, the influence of finance capitalism in both capitalism as a whole and political and government thinking cannot help but grow and exacerbate this situation still farther.
It is therefore no surprise that this singular class is able to exploit the productive part of the economy without needing to engage the rest of society socially or politically. That is not to say that finance capital eschews more direct control:
Control over investment capital and financial technical expertise gives finance capital and its banking representatives tremendous power — over policy making, over economies, over employment and income, over advertising and image-production…over everything. Production, consumption, economy, culture, and the use of environments are subject to a more removed, more abstract calculus of power, in which the ability to contribute to short-term financial profit becomes the main concern.[10]
– not to mention price gouging, control over the media via advertising and direct ownership, and that natural concomitant of consumerism, debt peonage.
Still, unlike feudalism, which used political and military methods to establish its own economic dominance, and did so overtly, finance capital can also apply purely economic methods for the same purpose, and does so by concealing itself and its tool entirely.
In a post-Thatcher, post-Reagan neoliberal world in which the state has long since abandoned either the pretence or the desire to manage society in the interests of the whole (though more willing than ever to intervene on behalf of finance capital), the political question becomes doubly difficult.
8. What is to be done?
Finance capital and financial activity have their value – not only managing the supply and circulation of money and directing investment (though still conceived of in narrowly financial rather than social terms) but also rationalising and smoothing various aspects of markets themselves. But once financialisation gets out of hand and the generation of money through bubbles, absurd risk and outright crime starts to predominate over real economic activity – the creation of goods and services – then the financial sector starts to achieve stupid levels of wealth (i.e., a huge proportion of the money in circulation) even though it is adding very little of social value. On the other hand, once finance capital starts to predominate, bubbles, speculation, crashes and monopolisation are inevitable – yet 'investment' banks, hedge funds and the rest are left in greater control over the real economy than ever.
Hence the significance of money's function as a claim to goods and service. It allows an otherwise parasitical class of financial specialists to distort and undermine the socially valuable part of the economy, not only making them richer and richer even though they produce very little of value themselves, but by this very process strengthening their position in the economy – and so society and politics – as a whole.
If this situation is allowed to continue, it will become increasingly difficult for any political party to exercise effective political control or to manage the economy in the interests of the many rather than the few. How this situation can be recovered is by no means obvious: especially in the UK we do not have the luxury of managing our economy in isolation.
But neither is the present situation standing still: the longer we wait to challenge the power of finance capital to capture a growing fraction of society’s present wealth and its prospects for future development, the slimmer our chances of success as a society become.
So a conscious choice must be made, between a world in which abstractions such as GDP are allowed to define a good society, and one in which real people producing and sharing real benefits — and avoiding real harms — to one another are the basis and goal of a consciously organised world.
Notes
[1] ‘Functions and Characteristics of Money’ https://www.philadelphiafed.org/-/media/education/teachers/resources/fed-today/Functions_and_Characteristics_of_Money_Lesson.pdf
[2] Epstein, G. (2005). Financialization and the World Economy. Cheltenham: Edward Elgar (p.3).
[3] In this respect at least people working in the financial sector are plainly better than the rest of us — they are always remunerated, not merely ‘paid’.
[4] Peet, R (2011). ‘Contradictions of finance capitalism’. Monthly Review, Dec.1, 2011.
[5] https://www.ippr.org/blog/is-the-uk-s-outsized-financial-sector-worth-it.
[6] https://www.ippr.org/blog/is-the-uk-s-outsized-financial-sector-worth-it.
[7] https://www.ippr.org/blog/is-the-uk-s-outsized-financial-sector-worth-it.
[8] Data summarised in Catherine Rampell, ‘Out of Harvard, and Into Finance’, New York Times, 21 December 2011. https://economix.blogs.nytimes.com/2011/12/21/out-of-harvard-and-into-finance/
[9] Greenwood, R., and Scharfstein, D. (2012), ‘The Growth of Modern Finance’. http://www.people.hbs.edu/dscharfstein/growth_of_modern_finance.pdf. Supporting references in the original text.
[10] Peet, R (2011). ‘Contradictions of finance capitalism’. Monthly Review, December 1, 2011.
References
For bibliographical references click here.