Financialisation, neoliberal capitalism and the new regime of accumulation
This section will make visible the dynamics that connect the commodification of debt, the reconstitution of the state according to the model of the enterprise and its accounting practice to better serve the interests of capital, and financialisation as the nexus linking the different components of the new economy. It develops a longer historical approach to argue that, with the new system of value grounded in the commodification in principle of everything from land to debt, knowledge and life, a new modality of capitalism is emerging. This new composition of capital is authorised by neoliberal discourse functioning as a diffused political philosophy and political economy that provides it with a vocabulary of justification and the values and rationality that can be strategically and pragmatically deployed in its support. I shall be arguing that this phase in the evolution of capitalism as a zero-sum game has intensified and institutionalised the turbulent pressures driving the various crises identified in the Introduction. It will become clear too that the genealogy of accumulation and growth is in correlation with a genealogy of exploitation and resource use secured by harnessing technological advances in the service of capital.
To chart the changes, let us start with the now familiar analysis of Marazzi who in The Violence of Financial Capitalism underlines the fact that the incentive for the changes was coming from the search for profit maximisation, arguing that the latter, through ‘financial engineering’ (2010: 44), had resulted in the ‘reduction in the cost of labor, attacks on syndicates, autonomization and robotization of entire labour processes, delocalization in countries with low wages, precarization of work, and diversification of consumption models. And precisely financialization’ (2010: 31).
It is a view which finds support in Roubini and Mihm’s account in the wake of the 2008 crash when they explained how,
decades of ‘market fundamentalism’ laid the foundation for the meltdown, as so-called reformers swept aside banking regulations established in the Great Depression, and as Wall Street firms found ways to evade the rules that remained ... (B)anks increasingly adopted compensation schemes like bonuses that encouraged high-risk, short-term leveraged betting ... They effectively shifted negative consequences away from traders and bankers ... (they were) part of a larger epidemic of moral hazard. (Roubini and Mihm, 2010: 268)
They pick out the key role of ‘shadow banking’ in the making of the crisis: ‘These “banks” were also nonbank mortgage lenders, conduits, structured investment vehicles, monoline insurers, money market funds, hedge funds, investment banks and other entities’ (2010: 34), often operating outside regulatory protocols. They make the point that speculative borrowing and lending inside the shadow banking system leading up to the crash was boosted by the Commodity Futures Modernisation Act in the USA in 2000 that ‘declared huge swathes of the derivatives market off-limits to regulation’ (2010: 75). For example, one of the instruments being deregulated and placed off-balance sheet was credit default swaps (CDSs) that, once ‘liberated’, reached ‘a notional value of $60 trillion by 2008’ (ibid.).
From an historical point of view, it is instructive to recall Karl Polanyi’s observation that financial innovations have been a central component in every crisis which has beset Europe for centuries (Polanyi, 2001 ). This is underlined in Roubini and Mihm’s analysis when they point to the many other examples and the similarities between them, for example, the fact that most ‘begin with a bubble ... (which) often goes hand in hand with the excessive accumulation of debt, as investors borrow money to buy into the boom ... asset bubbles are often associated with excessive growth in the supply of credit’ (Roubini and Mihm, 2010: 17ff.). They note in that respect the ‘tulip mania’ of 1630, the John Law Mississippi Company in 1719, the South Sea Company bubble of 1720, and global crashes such as in 1825, which led to the new Poor Law Acts of 1834 and the workhouse in England (Ashurst, 2010), the ‘global meltdown’ of 1873 and the Great Crash of 1929. It could incidentally be argued that the austerity programmes adopted by many countries to address the current crisis may well lead to new outsourced forms of workhouse. Although major technological innovations such as that of the railroads or the creation of the Internet are sometimes important factors too, as they point out, the ‘most destructive booms-turn-bust have gone hand in hand with financial innovations’ (2010: 8).
As we know, the institutions and measures put into place after the great depression – notably the Bretton Woods institutions (World Bank and IMF), central banks acting as lender of last resort, the Basel Capital Accord stipulating the ratio of capital to assets for banks, etc. – were supposed to help regulate markets to prevent such crashes and mitigate the effects of minor contractions in the world market. But, as Roubini and Mihm stress, ‘market fundamentalism’ dictated a phase of deregulation, whilst ‘new structures of incentives and compensation ... channelled greed in new and dangerous directions’ (Roubini and Mihm, 2010: 32). The crucial element to add to the brew is debt-financed consumption which not only ‘fuelled economic growth’ (2010: 18) but also fed into the vicious cycle of borrowing and
spending by the population at large, creating ‘irrational euphoria’ oblivious of the risks (2010: 14). The exemplar of this irresponsibility is the case of loans given to NINJAs (borrowers with no income, no jobs, no assets) that were sanitised and leveraged by financial institutions, and contributed to the mountain of unsecured loans leading up to the crash.
Amongst other familiar features of the new apparatus of financial capitalism one finds the following: financial instruments such as derivatives and the futures market, much of it now automated through algorithmic and high frequency trading of securities (HFT, algo trading), facilitated by new electronic and cybernetic technologies (with a helping hand from the USA which legislated to protect traders in derivatives from oversight, as I just noted), hedge funds and private equity acquisitions that harvest or asset-strip the profitable parts of companies and load debts on them. One should signal also the activities of ‘vulture’ funds, i.e., a more rapacious or parasitic species of hedge funds that buys up debts, including sovereign debts in poor countries, to extract crippling repayments. Generally, these financial instruments involve the leveraging of assets, often insecure, often in the form of ‘real estate’, and credit or debt facilitated by the new techniques of informationalisation and the mathematics of chaos and probabilities that became part of the securitisation game (Roubini and Mihm, 2010: 33). As I argue later on, derivatives operate as the mechanism whereby the modes of general equivalence instituted in terms of money, information and the market are exemplarily co-articulated. One should foreground also the technological dimension of these economic transactions, since the technical supports of financial systems tend to be neglected although they should play an important part in the analysis of these systems and crises, for example, with regard to cybernetic technology today or relating to the role of the ticker tape and telegraphic communication in the 1929 crash. All these systems and apparatuses or dispositifs are the gears of the accumulative machine, operating through forms of rent-seeking devices for the creation and harvesting of ‘surplus’.
The history of their recent emergence goes back to 1970 in response to ‘the crisis of capital accumulation’, as Harvey (2005: 14ff.; 2010) has shown by reference to diminishing returns on capital. The new techniques and practices introduced as part of financial capitalism can thus be viewed as a response to this situation. Indeed, as Michael Lewis reveals in The Big Short (2010), the invention of instruments like the derivatives that drive transactions in the financial market was planned and organised from the 1990s precisely with profit maximisation as the overriding concern. The vehicles for this were the complicated schemes for packaging financial products or ‘synthetics’ based on debt. Similarly, Gillian Tett in Fool’s Gold (2009) and The Silo Effect (2015) points out that the arcane technical character of synthetics were well beyond the grasp of leading bankers who inhabited the ‘silo’ created by the new financial paradigm dominating markets; they were of course happy to collect on the fortunes that were generated without heed of the consequences.
A revealing example of the kind of complexity at the heart of financialisation is the extent to which the mathematics of complexity, chaos and probability is being used by quantity analysts or ‘quants’ to produce new financial models and trading algorithms that are able to explain patterns, instabilities and performance relating to markets more accurately than according to the still dominant equilibrium theory and Chicago School economics. For example, Mark Buchanan (2014) draws a parallel between financial models and the meteorological models developed to address extreme weather, as well as those used in physics relating to processes endowed with feed-back, to claim that the current assumptions underlying mainstream economic theory are founded on delusions. Equally, Weatherall (2013) has argued that the application of the mathematics of complexity is effective in dealing with probability calculations on the financial market because they follow power–law distributions similar to those applying to systems like the weather. He too points out that this approach is completely different from the equilibrium model which financial institutions like the European Central Bank still rely upon and that upholds austerity programmes (see also the demolition of this model by Blyth, 2013; Stiglitz, 2013; Klein, 2014; Krugman, 2015, and many others). And in An Engine, Not a Camera: How Financial Models Shape Markets,
Donald MacKenzie (2006) makes the important point that the new mathematical models do not simply describe or reflect an independently existing economic state of affairs but instead make possible the proliferation of practices like derivatives.
A fascinating illustration of these new mechanisms and their inherent risks concerns the use of the Black-Scholes equation in finance ‘to value European options, that is, the right to buy or sell an asset at a specified time in the future. Remarkably, it is identical to the equation in physics that determines how pollen grains diffuse through water’ (Forshaw, 2013: 22). The equation, refined by Scholes and Merton (who received the Nobel Prize for their work in 1997), prompted them to set up a hedge fund in 1994 to trade in derivatives; it made billions but crashed in 1998 with $4.6 billion debt which required a bailout to protect the financial system from the fall-out (Luyendijk, 2015). Yet, the use of these new instruments became ubiquitous; and we know the disastrous consequences (see, for example, Mackenzie and Vurdubakis’ 2011 analysis of problems with coding in financial operations). The point is that Black-Scholes and similar models for options pricing used in risk management are subject, like all dynamic systems characterised by complexity, to initial conditions or initial state of the system, and to metastability – what economists call volatility. In the case of economic activity, these conditions include human inputs, which are variable and capricious, and framed by politics, for example, assessments of geo-economico-political situations affecting markets (Knorr-Cetina and Bruegger, 2002), and fiscal and monetary policies such as austerity, etc. The problem is that whilst the link between the models and economic activity is subject to feed-back loops and unpredictability, a disconnect exists between the
reality of the systems experiencing points of crisis and the simplistic models, the dogmatism, or the cynical opportunism determining policy framed by bankrupt economic theories and political agendas.
An important aspect of the new financial system is that the invention and trading of derivatives – collateralised debt obligations (CDOs), credit default swaps (CDSs), collateralised loan obligations (CLOs) and the like – on the world financial markets not only generates value well in excess of the value of the original assets, but also its predominance in the circulation of capital deepens uncertainties in the system and distorts the whole question of value. Today, in their autonomised form, notably through ‘algo trading’, these ‘products’ of what Marazzi calls ‘financial engineering’ not only operate as virtual stocks that in turn autonomise the creation of value, they also introduce new systemic risks. The latter are unavoidable anyway since the probabilistic functions embedded in the algorithms include both ‘benign’ as well as ‘savage’ or ‘wild’ chance or risk, as Benoit Mandelbrot has explained in Fractales,hasard et finance (1997: 58–65); these embedded risks result in the likelihood of a ‘flash crash’, for instance, the major crash of 6 May 2010 and the lesser one of 8 July 2015. Nowadays algorithmic technology increasingly by-passes human traders by selecting the best combination of stock to invest in by holders of capital, doing so via software that searches through the market index to pick the best combination at any given time (Adee, 2017: 22). One analyst has put the value derived over the last three years from these ‘passive funds’ at about $1.3 trillion whilst managed funds lost $250 billion (ibid.).
The distortion of value is all the more disturbing in light of the fact that the value of derivatives-related trading is several times the value of world GDP, as Lee and LiPuma (2002), Arnoldi (2004), Venn (2006a and 2006b), and others have underlined. Many recent estimates put the ratio at about 10 to 1; for instance, the Bank of International Settlements reckons the value of derivatives to have been $691 trillion at the end of 2014, whilst GDP for 2014 was $78 trillion (World Bank, 2014). This ratio by comparison makes the sphere of production far less significant in generating profits for holders of capital – yet this asymmetry forces sectors of production to reduce costs and increase ‘productivity’ to compete with or feed into the financial sector because of their sensitivity to their share value on the stock markets. It has been argued that the reliance of value-creation on informational technologies announces the emergence of cybernetic capitalism (Robins and Webster, 1988), but my concern is about the processes whereby such knowledges are recruited or produced in the service of capital. For sure, power/knowledge dynamics are involved, but also a whole history of property regimes, as well as a history of what Foucault called ‘technologies of the social’, thus relating to subject formation, and a history of subjugation to add to the mix alongside the forms of resistance that constantly intervene to alter the dynamics and nourish the hope of an emancipation.
One needs to add the following for a fuller picture of financialisation as the new process creating value for capital: the privatisation of social services and
their downgrading to minimise costs; the externalisation of the cost of administration onto the (online) purchaser or client; the harvesting of ‘free labour’ by means such as using ever more powerful techniques for extracting information from ‘big data’ collected from consumers’ internet purchasing activity and from crowdsourcing and the monetisation of social media. Another important component to foreground is the invention of managerial compensation schemes dreamt up to incentivise managers by inflating rewards for top executives and thereby bind them to the principle of ‘shareholder value maximisation’. Elements of this strategy were developed specifically to align the interests of executives with the drive for growth to feed the imperative of profit maximisation, as Chang has explained (2010: 17). The flip side of this stratagem is the reduction in the cost of labour, including through setting targets and expectations that can only be met by capturing the unpaid labour time extracted from employees, particularly in the so-called ‘knowledge economy’ via informational technologies that electronically impound employees’ ‘free time’. And of course, financial capitalism operates in an environment of sophisticated transnational systems and schemes that institute strategies of pricing, ownership and investments to enable corporations and holders of capital to avoid, or at least minimise, tax payments and social responsibility (Roubini and Mihm, 2010; Shaxson, 2012; Stiglitz, 2013, and many others). It is important also to keep in view the colonial establishment of many of these mechanisms and rules of the game; this includes the support of compliant power elites (the kleptocracies) helping corporations and sovereign funds in their search for safe havens for routing transactions in order to by-pass regulatory and taxation regimes. Equally, financial capitalism has encouraged the interpenetration of licit and illicit economic transactions to the benefit of mafia capitalism. As I go on to show, these are all part of the network of instruments that together establish the parameters of the debt society.
It has become clear that these new practices driving capitalism, including the principle of ‘shareholder value maximisation’ fixated on short-term cycles dominated by profit maximisation, have transformed the relation between capital and labour (Glyn, 2007), worsened working and living conditions for most people, and amplified the imbalances and the destructive tendencies inherent in the global economy, as Chang (2010: 17–19) and Roubini and Mihm (2010) show. The view that the acceleration of dispossession directly relates to the predominance of financial capitalism is further supported by studies of inequality such as in Wilkinson and Pickett’s (2010) The Spirit Level where they detail the negative impact of neoliberal strategy for income distribution and argue that: ‘the truth is that the major changes in income distribution in any country are ... (due to) changes in institutions, norms, and political power ... Differences in pre-tax earnings rise, tax rates are made less progressive, benefits are cut, the law is changed to weaken trade union powers and so on’ (2010: 243). The evidence they have gathered shows that ‘almost all the problems which are common at the bottom of the social ladder are more common in more unequal societies’, making such unequal societies ‘social failures’ (2010: 18).
Whilst the innovations in financial capitalism as well as the consequences of current fiscal and monetary policy are now common knowledge, what is still disputed are the motivations for the changes and the knowing disregard by decision-makers of the destructive effects for large sections of the world’s population. What I want to examine at this point are not so much the details of the changes, but two broader features: on the one hand, the relations of force that worked to institutionalise the conditions for financial capitalism to grow into a self-serving economy, and, on the other hand, the structural changes in the economy and in the role of the state introduced to try and immunise capital against the new risks associated with financialisation. A feature to emphasise is the fact that the apparatuses or dispositifs set up to try and protect capital from these risks require the active support of the state as enabling agency, particularly by providing the collateral against these risks, for example, through Quantitative Easing and the transfer of public assets into private holdings.
Harvey’s (2005) account of the emergence of neoliberalism provides a clue regarding motivations when he highlights the structural and political forces that from the 1970s were responding to shifts in the redistribution of wealth in the post-war period, produced by the welfare state system – itself a feature of post-war socio-political settlement – that had resulted in a narrowing of the gap between the richer and poorer sections of populations. The question of capital accumulation and the politics of wealth redistribution can thus be seen to have been at the heart of the strategic shifts relating to contemporary politico-economi...