Guest post by Daniel Ben-Ami
From influential mainstream economists to self-proclaimed Marxists it has become widely accepted that financiers run the economy and dominate politics in the Anglo-Saxon world. In America it is often argued that Wall Street is the most powerful force in society whereas in Britain the focus is on the influence of the City (with a capital “c” to denote London’s financial centre).
Although the critics of finance represent different shades of opinion, their arguments are remarkably similar. It is said that financial institutions, particularly investment banks, have managed to sweep aside regulatory measures designed to curb their immense power. Often these financial interests are identified with a free market, “neo-liberal” ideology which, at least on a rhetorical level, favours a minimal state. So for Simon Johnson, a former chief economist at the International Monetary Fund (IMF), finance has successfully engineered a quiet coup in which the American people have come to share its mistaken beliefs. Meanwhile, David Harvey , a well-known radical academic, talks of a “state-finance nexus” which essentially allows the financial sector to dominate society.
Although the financial sector is undoubtedly an important area to investigate such critiques are analytically flawed. They reflect a one-sided understanding of finance and typically lead to conservative political conclusions.
At the most basic level the critics tend to overestimate the importance of the financial sector, let alone just banks, in the economy. Although financial institutions have undoubtedly increased in importance since the 1970s they still account for a minority of economic activity. According to a recent British study financial services in the UK account for 10% of economic output with another 3.9% in the related areas of accounting services, legal services, management consultancy and maritime services. The same study showed American financial services at 8.4% of output although alternative figures previously quoted on this blog put the entire finance, insurance, retail, rental and leasing sector at about 21%. Even if the latter is correct, and it is a broad definition, it would still mean that almost 80% of the economy is non-financial.
But the problem with the notion of all-powerful finance goes beyond the numbers. It also underestimates the extent to which financial institutions and non-financial companies have become inter-twined. On the one hand, financial institutions have increasingly become involved in non-financial businesses. For example, numerous different types of investment funds have taken over much of the ownership of corporate America and corporate Britain. The size of the global fund management industry was estimated at about $105 trillion in assets at the end of 2009. On the other hand, non-financial companies, particularly larger ones, have become heavily involved in financial activity. This manifests itself in numerous different ways including extensive risk management operations and the extension of credit to consumers.
What seems to be happening is not so much an increase in the power of financial institutions but a financialisation of the economy as a whole. An urgent task of any new economics should be to examine the character of the underlying forces driving this transformation.
The overemphasis on financial institutions also tends to lead to a blindness to structural economic problems. Criticism of banks is typically followed by a call for more extensive regulation rather than an investigation into the barriers to economic growth.
Such a flawed analysis can only lead to political dead ends.