Financialisation, Neoliberalism and Economic Crises in the Advanced Economies

By Dr Kalim Siddiqui

Financialised capitalism emerged in the advanced economies during the last four decades. It has opened wider avenues to wealth formation and speculation, as well as caused the recent financial crises and the rising levels of income inequality. In this article, the author discusses the impact of financialisation and neoliberalism on the current state of the global economy.

 

Financialisation means a relative shift of the economy from one of being production-based to financial-based. In other words, financialisation can be characterised as shift in the centre of gravity of the economy from production to finance. This is resulting in a huge change in economics, trade and society in the advanced economies. Despite the fact that in the past the financial services have played an important role in capital accumulation, something has fundamentally changed in capitalism in the last few decades. Financialisation of the economy stands out as one of the largest and most significant changes in the structure of the advanced economies. 

We characterise financialisation as the emergence of a regime of accumulation where the ascendency of the shareholders’ value orientation is important. This seems to act as a drag on the economy and influences government policy in a manner that disfavours workers. Increasing profit in the financial sector has an impact on the labour share of the national income and the distribution of income and profits across sectors; that is, it seems that financialisation of the economy has increased inequality. These changes have been reflected in various aspects of the economy, such as the rising share of the financial sector (FIRE, i.e., finance insurance and real estates) in the economy; increasing the proportion of financial profits in the total profit and increasing debt related to GDP.1 In 1960, manufacturing accounted for 27% of the U.S. GDP while finance accounted only 13%. Since then, the situation has changed dramatically. For example, since 1980, General Electric has made more money through financial services rather than the production of goods. Increased financialisation has led to a decrease in the share of working people’s wages, and globalisation is putting U.S. workers in the same position as the super-exploitative conditions imposed on workers in the developing countries. Capital can move globally, but workers cannot. Such policies are designed to make workers insecure and as a result accept low wages. Financialisation and off-shoring of capital has led to the concentration of wealth amongst the handful of elites and big corporations in recent decades.2

Financialisation has opened wider avenues to speculation and wealth formation with little concern about capital investment in new productive capacity in the manufacturing sector.

Financialisation has opened wider avenues to speculation and wealth formation with little concern about capital investment in new productive capacity in the manufacturing sector, as apparent during the long prosperity of 1950-1973, i.e., the post-war economic boom. This period saw the building of the trade union, public provision of education, health and the development of redistributive progressive tax systems and the creation of the welfare state in the advanced economies. However, the Keynesian demand management, full employment and collective bargaining interfered with the working of market. The banks were regulated, and, during that period, there was no financial crash.3

 

The Rise of the Financial Sector

Since the 1980s, there have been consorted efforts by the Western governments to increase the importance of financial sector, such as banks and investment companies. The growing influence of finance was noted as a matter of concern by James Tobin, who proposed a financial transaction tax to curb currency speculation. However, in 1999, U.S. President Clinton abolished the Glass Stegall Act, which negated the need for the separation of investment and commercial banking that had previously been in place for more than five decades. The removal of restrictions on banks seems to have contributed to the rise of a financial system where the lines between regulated banks and the so-called shadow banking system have become blurred. The existence of shadow banking, which is directly or indirectly guaranteed by banks, has made it practically impossible to confine the safety to the regulated banking system. This led to an orgy of speculation that, ultimately, resulted in the 2008 financial crisis, the biggest economic crisis since the Great Depression of the 1930s.4

 
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Dr Kalim Siddiqui is an economist, specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, U.K.. He has taught economics since 1989 at various universities in Norway and U.K..

References:
1. Siddiqui, K. 2019a. “Government Debts and Fiscal Deficits in the UK: A Critical Review”, 10(1) World Review of Political Economy, Pluto Journals, forthcoming.
2. Siddiqui, K. 2017a. “Financialization and Economic Policy: The Issues of Capital Control in the Developing Countries”, World Review of Political Economy 8 (4): 564-589, winter, Pluto Journals.
3. Siddiqui, K. and P. Armstrong. 2017b. “Capital Control Reconsidered: Financialization and Economic Policy”, International Review of Applied Economics, 32(6): 1-19, March.
4. Lapavitsas, C. and I. Mendieta-Muñoz. 2016. “The Profits of Financialization”, Monthly Review, July, New York.
5. Foster, J.B. 2007. “The Financialization of Capitalism”, Monthly Review, April, New York. https://monthlyreview.org/2007/04/01/the-financialization-of-capitalism/.
6. Toporowski, J. 2000. The End of Finance, London: Routledge.
7. Siddiqui, K. 2019b. “The Political Economy of Essence of Money and Recent Development”, International Critical Thought, 9(1): 1–24. 
8. Crotty, J. 2009. “Structural Causes of the Global Financial Crisis: a Critical Assessment of the ‘New Financial Architecture’”, Cambridge Journal of Economics, 33: 563-580.
9. Siddiqui, K. 2008a. “Recent Global Financial Crisis”, Klassekampen, (in Norwegian) 20 October, Oslo, Norway.
10. Siddiqui, K. 2008b. “Free-Market Illusion and Global Financial Crisis”, Mainstream, vol.49, 25 November, New Delhi.
11. Marx, K. 1981. Capital vol. 3, London Penguin. 
12. Keynes, J. M. 1973. “A Monetary Theory of Production”, in Keynes Collected Writing, vol. 1, London: Macmillan.
13. Siddiqui, K. 2019c. “Corruption and Economic Mismanagement in Developing Countries”, The World Financial Review, January-February.
14. Siddiqui, K. 2018 “Imperialism and Global Inequality: A Critical Analysis”, Journal of Economics and Political Economy, 5(2): 266-291.
15. Siddiqui, K. 2017c. “Globalisation, Trade Liberalisation and the Issues of Economic Diversification in the Developing Countries”, Journal of Business & Economic Policy, 4(4):30-43.
16. Siddiqui, K. 2016. “Will the Growth of the BRICs Cause a Shift in the Global Balance of Economic Power in the 21st Century?” International Journal of Political Economy, 45(4): 315-338, Routledge Taylor & Francis. 
17. Siddiqui, K. 2015a. “Foreign Capital Investment into Developing Countries: Some Economic Policy Issues”, Research in World Economy, 6(2):14-29.
18. Siddiqui, K. 2015b. “Political Economy of Japan’s Decades Long Economic Stagnation”, Equilibrium Quarterly Journal of Economics and Economic Policy, 10(4): 9-39. 
19. Van der Zwan. 2014. “The State of the Art: Making Sense of Financialization”, Socio-economic Review, 12: 99-129.