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