Financialisation: roots and repercussions

During the past decade or so, the term ‘financialisation’ has been increasingly invoked in discussions and debates around the nature and dynamics of contemporary capitalism. Money and finance have, of course, long played a central role in the economy, and assumed heightened significance in the rise and development of industrial capitalism from the 18th century through into the early-20th century. By providing a common—and commonly accepted—measure and store of value, the historical function of finance has been to render any current or future product or service (tangible or intangible) into an exchangeable form, namely currency, and thus facilitate trade. Over the last half century or so, however, finance has moved steadily beyond this traditional role. Authors and observers began talking about the progressive realignment of capitalism towards financial markets and imperatives, the rise of ‘finance capitalism’, ‘money manager capitalism’ and the ascendancy of the ‘global finance system’. Since the late-1970s, and certainly the early-1980s, this process seems to have accelerated and expanded to a degree that some argue we have entered a new phase of unprecedented ‘financialisation’. According to Krippner (2005, 173) this new phase is a “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production”, while Dore (2002, 116) sees the process as the “increasing dominance of the finance industry in the sum total of economic activity”. Not only has money in all its multifarious forms become fully commoditised, traded in and of itself for profit, without reference to the real economy, it has permeated almost every sphere of social and cultural activity, reducing such activity to monetary calculation and, as a consequence, subjecting it to the imperatives of financial markets and institutions. As Phillips puts it, “financial services, broadly construed, [have] take[n] over the dominant economic, cultural and political role in a national economy” (Phillips, 2006, 268). While this dominance of money and finance in everyday life is but the latest phase in an on-going process that has been unfolding for decades—arguably since the early-20th century—it is a phase that is both quantitatively and qualitatively different from what preceded it. Finance has ceased simply to assist the running and operation of the real economy of goods and services, but rather has come to dominate, even displace, the latter. Financial rationales and practices have re-shaped performance metrics not just for enterprises across all sectors of the economy but also throughout the public sector and utilities, including health services and social services, thereby directly affecting the social well-being and welfare of households. The goal of this special issue is to throw some critical light on certain aspects of the financialisation phenomenon with the aim of stimulating further discussion of the processes involved and the consequences for the economy as a whole—for firms, and households and individuals. Although some commentators on financialisation have adopted a narrow view, defining it as the ascendancy of shareholder value as a mode of corporate governance, the authors in this special issue adopt a wider lens, and view financialisation as a process of cultural and economic transformation. Moreover, the papers demonstrate how this transformation has deeper roots than just the growing dominance of capital markets and financial institutions. They highlight how financialisation alters behaviour and values in the economy, in society and in governmental institutions and policy regimes. From this perspective, financialisation cannot be explained in terms of an inexorable inner logic of capitalist development. Instead, it has been aided and abetted by Western states driven to open up markets and globalise their economies. But, as the global banking and financial crisis of 2007–2008 has so emphatically demonstrated, by encouraging and assisting financialisation, those same states have become victims of the transformation they helped to bring about, and have been forced to bail out their debt-encumbered banks and financial systems. A further aim of the papers that make up this issue of the journal is to emphasise the spatialities of financialisation, to produce more complex, less ‘anaemic’ geographies of financialisation (Christophers, 2012). Like other phases and forms of capitalism before it, financialisation is not a geographically neutral process: it has emanated from, and has been controlled from, particular places, while subjecting other places and spaces to its strictures and implications (see Martin, 2011). No less than the other forms and phases of capitalism before it, financialisation is quintessentially a process of geographically uneven development. Financialisation can be understood as a continuum of processes (see Lee et al., 2009). At one end are changing financial motives and products tied to the rise of the investor class and the growing activism of shareholders, especially among powerful institutional investors (Froud et al., 2006). This perspective emphasises changing power relations in the economy but is compatible with economic narratives in which advanced economies move from producing goods to offering services. In this contemporary narrative, financial services are simply one type of service, albeit with a global market. An important line of research has explored the changing role of investors and how financial motives and incentives have altered behaviour in non-financial firms. Most prominently, Epstein (2005) examined the negative impact of financial growth on real investment. This has become an issue of considerable concern in the UK and the USA, where global manufacturing firms have retained capital rather than invest in the facilities, worker training or research and development capacity that would strengthen their process and product innovation capacity. The connection between anaemic capital investment in research and development and the loss of innovation capacity in advanced manufacturing has been recognised as undermining the potential for sustainable economic growth (Ezell and Atkinson, 2011). The policy solutions proposed, however, rarely address the underlying dynamic of financial incentives. Instead they advocate an increase in state subsidies to firms through tax incentives. In this instance, as in other dimensions of financialisation, the state role as ‘risk absorber’ is expanded for the private market sector rather than for the citizenry. Another important strand of research provides compelling evidence that the growing significance of finance in the USA and the UK has occurred over a period when economic growth has become dependent on debt-financed consumer demand (Gowan, 2009; Buchanan et al., 2009) and the repatriation of the proceeds of the overseas expansion of their financial economies (Christophers, 2012). In this issue, Lapavitsas and Powell (2013) reaffirm the distinctive trajectory of financialisation. They argue that the move to accumulation through financial strategies was not, as implied by the ‘service economy’ explanation, an indirect or derivative phenomenon in which capital moved to the financial services sphere in search of increased profits. They perceive financialisation as a process in which the financial system becomes an ‘autonomous sphere’ for capital accumulation, with its own independent logic. Within their framework, recent excesses driven by financial motives and institutions do not represent a temporary transfer of capital to the profits available from financial services but a long term restructuring of the global economy to advantage those engaged in financial transactions and markets. Lapavitsas and Powell note the significance of historico-geographical unevenness that shapes the emergence of financial mechanisms and tools and reinforces the rootedness of forms of financialisation in differently constructed market governance frameworks. Questioning explanations that attribute transformation to ‘globalisation’, Lapavitsas and Powell describe how the underlying changes in capitalist accumulation are deflected through the prism of particular institutional, political and historical developments. Rossi’s paper reaffirms the importance of understanding financialisation as emanating from policy projects rather than solely from economic imperatives. He explores how one instance of political, geo-historical development—the project of European monetary integration—has worked to enhance financialisation by easing the mobility of financial capital in the form of bank deposits (Rossi, 2013). He argues that the direct consequences of the increasing dominance of financial motives and institutions on the Euro-zone and on its constituent nations are growing inequality among population groups and regions. As the share of Gross Domestic Product (GDP) represented by labour income has fallen, both personal and household income inequality has increased. As Rossi notes, the trends toward inequality negatively affect domestic demand, impairing economic growth. As such, Rossi provides a systemic and political explanation of the Euro-zone crisis, connecting the crisis and its differential effects to the political influence of financial firms and the incentives driving them. Wissoker’s case study of the insurance industry explores some of the incentives driving one group of financial intermediaries (Wissoker, 2013). His research charts the industry’s move from one of providing risk protection products to that of providing investment products and demonstrates the contingent, iterative character of the process. He points to the interacting roles of market transformation outside the control of the industry executives and the adaptive way in which the industry responded to incentives to change the nature of its products. In his analysis, Wissoker notes the importance of understanding how industry firms perceived their alternatives. The insurance industry was once composed of cooperatively held firms, with very conservative agendas so as to reduce risk for their members. As publicly held firms, a return to the mutual benefit organisation was impossible, giving credence to the Froud et al. thesis pinpointing shareholder value as a preeminent driver of the transformation. The papers in this issue also consider some of the indirect consequences of financialisation as it reaches into people’s daily lives by altering legal and customary practices in arenas such as housing and education. The notion of an ‘owner’ society promotes the idea that one’s livelihood is rooted in finance rather than in productive work. The owner society agenda is about equality of opportunity (to save and invest) neglecting that this path is available only to those with the means to invest and the financial literacy to translate investment into income. The processes associated with financialised accumulation thus subtly alter the conception of citizenship and of the public sphere, changing the understanding of the relationship between individual and society. As interest in the processes associated with financialisation has developed, research has begun to examine ways in which these processes have been transformative. Some of the papers in this issue respond to these questions and to Pike and Pollard’s (2010) call for more attention to the role of financial instruments in people’s lives and in shaping their self-understanding. Empirically, this perspective points to the way in which financial risk, metrics and practices have become bound up with and normalised through everyday activities such as buying or improving a home; learning and obtaining skills; having children and providing for old age (see Clark, 2000; French and Kneale, 2009; French et al., 2011; Langley, 2008; Martin, 2002). An acceptance of the relationship of financial processes to changing subjectivities and understanding of the self and society contravenes conventional beliefs about the economy as a separate sphere and personhood as fixed over time in relation to changing economic roles, practices and expectations (see Pollard, 2013). Instead, it emphasises a broader anthropological conception of economic activity as encompassing a ‘way of life’ that is mutable and socially structured. Although the effects of financialisation became prominent and noticeable with the great recession, the constituent processes of this shift were set in place in the 1970s and 1980s. These included a decimation of trade unions and of the values underlying collective bargaining, a gradual undermining of the role of government through deregulation and a redefinition of the citizen as a consumer of a bundle of services rather than a member of society with collective obligations and rights. The strong ‘consumerist’, orientation prioritises the utility of the individual while neglecting the concerns of the commons, or of justice-based claims to meet basic human needs. Allen and Pryke’s paper on the financialisation of water infrastructure in the UK notes how, “the politics of water was now framed in such a way as to only recognise the figure of the ‘consumer’, the end user of the water industry, rather than the figure of the citizen with universal rights to accessible and affordable water” (Allen and Pryke, 2013, 435). This redefinition of water users as buyers of a market service rather than citizens with a right to a basic element of life—clean water—was paralleled on the firm side by a definition of customers as financial assets or ‘cash cows’. In monopolised industries, such as energy or water utilities, and also media distribution, firms were able to capture dependable low risk and consistent cash flow from a customer base that had—and still has—no alternatives. As Allen and Pryke note in their analysis of Thames water, these revenue streams are disconnected from the operation of the service and its infrastructural needs. The financialised utility thus shifts value from the citizen consumer to the investor. In a similar vein, Phil O’Neill (2013) considers the financialisation of infrastructure, noting how airports, motorways, telecommunications and electricity grids have become subject to financialisation processes. He examines how infrastructure is being reorganised through ownership changes and re-regulation that privileges its financial rather than material performance. Rather than being passages for a city’s flows of people and objects, infrastructure is transformed to de-prioritise non-commercial outcomes, to better match the design characteristics of financial products and to leverage claims on surplus values produced in other economic sectors. All of the papers in the issue open up—in different ways—questions concerning the spatial dimensions of financialisation. Marshall’s paper takes a historical sweep and illuminates how the UK processes of financialisation were organised and driven from the City of London (Marshall, 2013). From the perspective of the financial centres, London and New York, the processes of financialisation were arguably more abstracted and their regional consequences were not visible to or were ignored by the traders. When the consequences of the speculative management decisions inherent in the abstracted financial products began to manifest themselves in a financial market crash, major financial institutions and the financial centres were protected by national governments because of their global and national significance. It could be argued that these processes were more pervasive in the UK because of the relative dominance of London and its role as a global financial centre and because of the centralisation of UK government decision-making institutions. As Pratt (1998, 2225) argued, the financial ‘distancing’ of the relationship between industrial borrowers and lenders in the regions “made regional development in the UK less rather than more likely to occur” and Britain, in effect, accepted enhanced spatial disparities as the price of greater financial stability (see also Allen, 2010: Martin, 2010). Apart from the national and peripheral relationships in a national space, the global action sphere of City of London financial market actors insulated them from a concern for the role played by financial vehicles outside London. The hinterland or periphery became a ‘captured’ lower risk market that underwrote global speculative ventures. In the USA, cultural dispositions and institutions, including a deregulated banking sector, created pre-conditions for national financialisation, while the size and diversity of the national economy and decentralised governance mitigated against the kind of banking crises that devastated the North of England. Moreover, in the USA strong regional institutions mitigated the damage. However, the deepening of the financial dimension of industrial investment reduced capital available for longer term industrial investments. It also enhanced the importance of two regional financial hubs—Boston and San Francisco as short-term venture capital markets. Ultimately, in both the USA and the UK, financialisation acted as a ‘spatio-temporal fix’ with an accepted internal coherence that rationalised a particular form of financial-spatial development, one that favoured financial centres and deprived the periphery of development capital except in housing and commercial real estate markets. Beyond the very important geography of financial centres and peripheral regions, there were also distinctive and long-lasting local geographic consequences. Coppock’s paper considers the lived experiences of financialisation and its impacts on individuals and households within three rural districts in England (Coppock, 2013). She examines the uneven history and geography of bank and building society closures and the consequent formation of distinct ecologies of financial inclusion and exclusion. To varying degrees, individuals and households conform, diverge and subvert neoliberal versions of the responsible, financially self-disciplined individual. Sokol (2013) brings the issue to a close by reiterating the important opportunity afforded by the on-going economic crisis for economic geography to move to a centre stage of academic debates about the nature of contemporary capitalism. He advocates a ‘newer’ economic geography, one that starts by inserting financial issues more centrally into conceptualisations of economies and their uneven geographies, an argument that has pre-crisis antecedents in Corbridge et al. (1994) and Martin (1999). He argues for the need for a re-engagement with issues of value(s), value flows and spatialised circuits of value, highlighting the credit–debt relationship as one especially significant exemplar. The origins and reach of financialisation have remained murky and difficult to observe in part because they are a taken-for-granted aspect of contemporary life. This issue contributes to the small but expanding body of work examining how financial rationales and values have infused areas of life that were once held to be more or less private and beyond the direct reach of capitalist financial calculation.