According to The Washington Post, over the past 30 years, much of the US economic growth has favored the top 1 percent of earners. Meanwhile, middle-class incomes have declined, alongside diminished economic mobility for young people, all as a direct result of economic financialization*. In short, shareholders benefiting from capital income have never been so affluent, in contrast to employees benefiting from labor income. If finance is indeed a vital ingredient for economic growth, too much of it can be likely to cause inequalities…
Before delving into the financialization of the economy and its effects, it's crucial to provide a historical and economic perspective on this gradual financialization.
In terms of the economic framework of a society, Keynes posits that money serves as the link to belonging in collective market exchanges. It establishes a social relationship of economic exchanges by attributing an object/service to a payment. However, money also grants power over others: "we desire to appropriate it because others desire it [...] its appropriation gives us power over others" (Michel Aglietta).
Since its origins in the 15th century*, capitalism has evolved and transformed across countries, entrepreneurial endeavors, growth models, social structures, and political frameworks, while never losing sight of the famous adage: "make money with money."
Following the Second World War, a new regime of capitalist growth emerged, characterized by strong state intervention (public enterprises, investment programs, exponential development of public administration) in the economy, creation of social protection, and significant consideration for the power of employees (unions, collective bargaining on wages, social benefits, etc.).
However, from the 1980s onward, a "neo-liberal"* growth regime took hold as the global economy adapted to the energy price and inflationary shocks of the 1970s. The quest for financial profitability imposed itself on all economic players, leading to the financialization of commodities, currencies, equities, and real estate. Despite crises such as the one in 2008, the rent-seeking* neo-liberal economy has proven resilient, with finance becoming the driving force behind modern capitalism.
What are the concrete impacts of finance and the "rent economy" on businesses?
In 2019, professional shareholders - institutional shareholders - held 43% of global market capitalization (or 24 trillion USD), compared to 11% held by corporations and 10% by the public sector (OECD).
Being a shareholder grants ownership rights over a company based on the number of shares held. Majority shareholders can appoint management or influence strategic decisions, often prioritizing maximizing shareholder returns. One corporate management principle made particularly visible by this quest for maximum shareholder return is the elevation of companies’ stock market value as the management principle of these companies.
Who hasn’t noticed that the shareholder value of large corporations has become the main management principle?
By seeking to cut costs, buy back shares, or maximize short-term returns, the production system predominantly serves the interests of capital owners, at the expense of other stakeholders: employees, suppliers, subcontractors, and public authorities (Michel Aglietta). Gradually this impacts in transfering the income from the real sector to the financial sector
This prompts the question of whether the increased power of shareholders and global finance generates inequality.
In a 2017 study for the OECD Economic Review, Boris Cournède and Olivier Denk highlighted an absolute contrast between growth in average income: an accumulation of credit (public and private) that weighs on growth, and the expansion of stock market financing that continues to benefit growth. Inevitably, public reforms aimed at containing inequalities through redistribution or public investment are hampered by the debt burden to finance them.
According to theorists and philosophers such as John Rawls and Michel Aglietta, such a private appropriation of the fruits of growth is opposed to the development and maintenance of public goods.
It is precisely these public goods, such as housing, education, health, security, social protection and employment, whose mission is to prevent exclusion, reduce inequality and promote a stable society.
Finally, while in theory in a democracy, the state is responsible for producing and maintaining these services and infrastructures, in practice a balance is needed between the different social forces or classes to obtain services or infrastructures that are truly for all - in the sense that their equal or unequal allocation is subject to power relations: social struggles (political and trade union) on the one hand, and influence on the other (lobbying, the revolving door between public and private sectors*, donors...).
What changes can be made to reduce inequalities and tame the concentration of economic power enjoyed by the financial world?
First of all, back to the corporate sector, we need to recall the 3 forms of capital that enable a company to function: economic capital, social capital (workforce) and cultural capital (knowledge, IPs, production methods) (Pierre Bourdieu), and point out the extent to which they are interrelated and need to be more radically taken into account in their entirety in companies.
Secondly, as we have already seen, we need to stress the importance of social struggles in the context of a better basis for sharing wealth or search for ecological transition and, finally, in the possible transition from an authoritarian system of corporate governance (shareholder governance) to a democratic and collective type of corporate governance: stakeholder governance. Involving employees, customers, suppliers, shareholders, managers, etc., to set social and environmental criteria and distribute profit among all those who have contributed to it.
In conclusion, we are faced with the challenge of transforming companies in response to societal and environmental challenges. About this latter, in the context of shareholder domination and the hegemonic role of financial markets, it seems challenging to escape the so-called “market neutrality” (the laissez-faire logic of shareholder value management) that is obviously incompatible with the goal of carbon neutrality by 2050 in the EU (Isabel Schnabel, ECB).
A reflection proposed by Mael Cougard
KNOWLEDGE:
Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels (The Levy Economic Institute - Bard College).
15th Century as begining date of modern capitalism as traced to the emergence of agrarian capitalism and mercantilism - Italian Renaissance & first mercantalist policies in Great Britain (The Birth of Capitalism - a 21st Century Perspective).
Neo-liberal Economy is characterized in terms of its belief in sustained economic growth as the means to achieve human progress, its confidence in free markets as the most-efficient allocation of resources, its emphasis on minimal state intervention in economic and social affairs, and its commitment to the freedom of trade and capital (Encyclopaedia Britannica).
The Rent-seeking economy aims to increase individual (in the sense of privatised) wealth without creating any benefits or wealth to the society by obtaining financial gains and benefits through the manipulation of the distribution of economic resources. Economists view such activities as detrimental to the economy and society. The practice reduces economic efficiency through the inefficient allocation of resources. Also, it commonly leads to other damaging consequences, including a rise in income inequality, lost government revenues, and a decrease in competition (CFI).
Revolving door practices occur hen people move between positions as regulator or legislators and private companies within the same sector this can lead to conflicts of interest, regulatory capture, and economic distortions (U4 Anti Corruption Resource Center).