Costas Lapavitsas Discusses the Financialization of Capitalism

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The neoliberal capture of the state has laid the ground for the financialization of capitalism, a stage of capitalism that cannot be reversed without developing new methods of public provision in housing, education, health, pensions and the other sources financialization has used to create profit. This is the crux of the argument advanced in Costas Lapavitsas's latest work, Profiting without Producing: How Finance Exploits Us All.

With this book, Lapavitsas sheds much light into one of the most misunderstood processes in the evolution of capitalism, correcting in the process the tendency on the part of many "progressive" economists to regard regulation as the ultimate solution to the exploitative nature of finance capital. For Lapavitsas, the struggle against finance capital is simultaneously a struggle against capitalism and for democratic socialism.

Below are some extracts from a Truthout interview with Costas on his theory of financialization of capitalism - you can read the interview in full here.

C.J. Polychroniou: The landscape of contemporary capitalism has been shaped by neoliberalism, globalization and financialization. Your new book deals with the financialization of capitalism. First, what does financialization mean for you, and in what ways does it represent a new feature of capitalism?

Costas Lapavitsas: For me, financialization represents a new historical period in the development of capitalism. Marxist political economy typically recognizes three great periods: laissez-faire capitalism around the middle of the 19th century, monopoly capitalism toward the end of the 19th century and imperialism that lasted perhaps until the Second World War. The 70 years since the war have been very difficult to categorize, not least because of the extraordinary Long Boom that lasted until the early 1970s, with unprecedented growth rates, rising incomes and greater equality. The Long Boom has been followed by four decades of indifferent growth, often stagnant incomes and rising inequality. In my view, financialization is a term that adequately characterizes this period. Its dominant feature has been the extraordinary rise of finance, which has come to penetrate areas of economic and social activity previously relatively distant to it.

More specifically, I understand financialization as a historical period characterized by three closely related tendencies at the molecular level of capitalist accumulation. First, big industrial and commercial capital has become "financialized," i.e. it has ample retained profits to finance investment but often uses the funds to engage in financial transactions with a view to extracting financial profit. Second, big banks engage less in lending to big capital, while seeking profits by transacting in financial markets as well as by dealing with individuals and households. Third, households have been drawn into the orbit of formal finance, both to borrow and to hold financial assets. A key reason is the retreat of public provision in housing, education, health, pensions, and so on, typically replaced by private provision. Private finance has emerged as the mediator of access to these very important goods and services for households and individual workers. 

How does finacialization relate to the other two forces in contemporary capitalism - neoliberalism and globalization?

I see neoliberalism as an ideological framework that has critically shaped economic theory and policy during the last four decades. It has determined the institutional setting of financialization through, above all, the deregulation of financial and labor markets. I find Mirowski's argument that neoliberalism is not the enemy of the state and nor does it genuinely ascribe to the simple opposition "state versus market," very persuasive. Neoliberalism is, rather, about capturing and using the state to achieve pro-market changes across society. The neoliberal capture of the state has laid the ground for the financialization of capitalism. To be more accurate, financialization would have been impossible without the state. Globalization, on the other hand, is much more difficult to pin down either as force or as concept. There has certainly been growth of global commodity markets and considerable foreign direct investment during the last four decades, facilitating the internationalization of production. The most striking aspect of globalization, however, has been the explosion of financial markets and lending. Even foreign direct investment to a large extent refers to establishment of banking facilities abroad. Globalization, then, appears to me as a notable feature of the historical period of financialization. 

The rise of financialization coincides with the deindustrialization process in the United States in the early 1970s. Do you see a link between the rise of financialization and the decline of industry? 

In historical terms, there is little doubt that financialization has been accompanied by lower rates of both accumulation and productivity growth. During this period, real accumulation has been plagued by difficulties, while financial accumulation has had explosive growth. Yet, I do not think that the difficulties of real accumulation are fundamentally due to the explosion of finance. They have deeper roots related to the "forces of production," including new technologies in information and telecommunications, changing labor skills and new forms of corporate organization. In the course of financialization, the new "forces of production" have not contributed to dynamic and sustained expansion of real accumulation, but they have encouraged the explosive growth of finance.

I do not subscribe to the view that "good" industry is opposed to "bad" finance. Relations between the two are far more complex and nuanced, reflecting mutual dependence as well as opposition. I sympathize with Hilferding's and Lenin's classical Marxist approach to imperialism claiming that industrial and financial capital have developed a symbiotic relationship in advanced capitalism. At the same time, I do not find that during the period of financialization, industry and finance have melded together to form "finance capital," i.e., the special form of capital that was thought to characterize the period of imperialism. Rather, contemporary industrial capital is increasingly independent of banking capital - certainly among large enterprises - and is able to finance investment out of retained profits. Yet, big business has become "financialized," that is it engages in financial transactions on its own account with a view to extracting financial profit. The "financialization" of big business has affected its internal organization and its long-term investment strategies in negative ways.

While financial transactions have increased substantially in the past 30 or so years, the contribution of the finance industry to GDP is in single digits. Yet finance capital, as the subtitle of your book blatantly states, exploits the rest of society. What makes financial markets so inefficient and finance capital so exploitative?

Finance is an intermediary and does not, strictly speaking, contribute to the fresh flows of value. More than that, it currently makes a limited contribution to employment and thus to the standard measurement of GDP. In my view, this is related to the extraordinary role of new technologies that have transformed the operations of finance without commensurately expanding employment. Furthermore, the internal organization of the private banking firm and the mobilization of the labor of bank workers leaves a lot to be desired in terms of efficiency. The image of private finance being at the frontier of progress because it deploys new technology is deeply misleading - it operates inefficiently on the whole. Last, but far from least, what exactly is the commensurate benefit to society from placing highly skilled labor and expensive technology at the disposal of financial markets? What is the great benefit from being able to arbitrage and set derivatives prices in split seconds across the world?

The remarkable thing about finance, however, is that it is not simply inefficient but also exploitative in ways that industrial capital cannot be. It is a primordial capitalist activity that long predates the establishment of industrial capitalism and has retained its ancient predatory outlook. Finance can extract profits from any money income and stock of money - its profits are not limited to the fresh flows of value produced annually. During the past four decades, it has become expert at making zero-sum profits that involve transfers from one economic agent to another. Financial profits have become an incredible proportion of total profits - particularly in the USA for which we have relevant data. The exploitative outlook of finance in relation to households and individual workers is also evident. This is a characteristic feature of financialization and marks it out as a historical period in the development of capitalism. 

Profiting Without Producing: How Finance Exploits Us All is available to buy.
You can read the full Truthout interview here.

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