In comments on a recent post on financialization, a number of criticisms were raised that are worth exploring further. Readers have reasonably objected that a graph showing increased financialization of the US economy demonstrated less than first appears. These objections break down into at least four claims:
1. Finance has been a part of modern economies for ages, and a major part at least since the late 19th century, what’s so different now?
2. To the degree there is something new, isn’t it a product of increasing complexity and thus a further refinement of the division of labor?
3. The financial class is really the only group that understands the ins and outs, and thus the stakes, in various regulatory and private decisions regarding this area of economic activity. There are experts, and only experts have the competence to make informed decisions. It’s either the experts or the Tea Party, you decide.
4. If there are other interests at stake, what exactly are those interests, and how are they articulated in the particular case of, say, financial regulations? All that has been said on this blog so far is some vaguely democratic stuff about general interests.
We agree that these are important issues, but cannot respond to all of these objections at once. Question 1 is for separate posts. Suffice to say we think something distinctive has happened since the 1970s in national and global finance (one thing being the more global character of finance). These trends are importantly different from, say, the period from 1870-1914 that gave rise to concepts like ‘finance capital’ and ‘monopoly capital.’
Questions 2 and 3 go together. It is misleading, in our mind, to view the current financial architecture as a kind of natural development of the division of labor and economic complexity. Current markets are the product of a host of conscious political decisions, especially regulatory and de-regulatory choices. One could choose any number of examples, but few recent ones include the Gramm-Leach Bliley Act (1999), which eroded the boundaries between investment banking, commercial banking, and insurance provision; and the 2004 SEC decision to raise debt-to-capital ratios. These decisions significantly altered the structure of financial markets, allowing for certain kinds of financial ‘innovation,’ which it must be said many people even in finance don’t seem to have understood. So the structure of financial (and all economic) markets is the product of the laws the institute them, and the incentives these create.
A further reason we have doubts about the expertise argument is that everything suggests that they have not been using this expert knowledge in the public interest, but rather to their private interest. As we have noted on this blog before, dramatic rises in incomes at the top over this period have gone hand-in-hand with stagnating real wages and rising consumer debt. It would seem one of the most significant elements of financialization has been its distributional implications, not the improved risk management or allocation of resources. Put another way, there is no reason after this crisis to particularly trust the experts!
Which brings us to our response to question 3: people might not understand everything, but they can understand enough. That is to say, not only is it misleading to view the growth of finance as a natural development of economic complexity (question 2), but it is also wrong simply to say these market are too complex for most people to understand (question 3). True, most people can’t be expected to know about or even understand the ins and outs of Tier 1 capital ratio requirements, or the kinds of collateral required for overnight repo agreements. But that does not mean a) they cannot be given better information, and get better educated than many are now (see, for instance, well-known misperceptions about inequality) and b) that they cannot know their own interests and c) that they cannot be organized on the basis of these interests to put pressure on their government to better serve them. Echoing one of the commentators on this blog, we would say the greater problem is not the people’s incompetence, but rather their relative apathy. The popular response to this crisis - Tea Party aside - has been decidedly tepid. But when representatives and regulators fear they will lose their jobs, or worse, they tend to do at least a better job of keeping the worst at bay. Or put another way, as plenty of post-crisis evidence has suggests, the problem was not the lack of knowledge amongst regulators, but a willingness to look. That is not a problem of incompetence v. expertise, but a political problem. One suspects they look harder when there is more popular pressure on the government. But now we are talking about things like social movements and popular protests, which are too quickly written off as the noise of incompetent mobs.
One final point. Question 4 was about what kinds of regulations and economic structures would be more in the public interest. Not just who are we talking about, but concretely what are their interests? If financialization has been generally bad, what is the proper response? That is a harder question, though it is easy enough to start by saying most people do not have an interest in more tax cuts for the wealthy and more spending cuts in social services. That, however, is only one part of the question and does not directly address how to respond to financialization itself. This is a question we do not ourselves have clear and complete answers to, but we are confident enough to say that we have no confidence in our existing rulers, or current experts, to solve those problems.