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The most obvious indicator of financialisation is the dramatic increase in the size of the finance sector itself. Between 1970 and 2007, the UK’s finance sector grew 1.5% faster than the economy as a whole each year.9 The profits of financial corporations show an even starker trend: between 1948 and 1989, financial intermediation accounted for around 1.5% of total economy profits. This figure had risen to 15% by 2007.10 The share of finance in economic output was, however, dwarfed by the growth in the assets held by the UK banking system: banks’ assets grew fivefold between 1990 and 2007, reaching almost 500% of GDP by 2007.11 The UK also boasted one of the biggest shadow banking systems relative to its GDP before the crisis — a trend that has continued to this day.12 Meanwhile, cottage industries of financial lawyers, consultants, and assorted advisors grew up in the glistening towers in the City of London and Canary Wharf. Between 1997 and 2010, the increase in the share of financial and insurance services in UK value-added was greater than the increase in the share of any other broad sector bar the government sector — itself supported by the tax revenues provided by finance.13 Overall, by 2007, the UK had one of the largest finance sectors in the world relative to the real economy.
Historically, its advocates have argued that capitalism makes everyone better off by creating wealth for everyone. Businesses make profits, and they invest these profits in future production. This creates jobs, which raise living standards for the majority of the population. Such a system might lead to rising inequality in the short term but, as entrepreneurs reinvest their profits, eventually this wealth will trickle down to everyone else. Whilst this has always been an optimistic reading of the way capitalism works, during the post-war period it often appeared to reflect reality (at least in the global North). But finance-led growth upsets the channels through which wealth is supposed to trickle down from rich to poor, and it does so in obvious ways. Investment slows, wages fall, and profits — especially financial profits — boom.
Financialised capitalism may be a uniquely extractive way of organising the economy, but this is not to say that it represents the perversion of an otherwise sound model. Rather, it is a process that has been driven by the logic of capitalism itself. As their economic model has developed, the owners of capital have sought out ever more ingenious ways to maximise returns, with financial extractivism the latest fix. In many ways finance-led growth represents capitalism’s most perfect incarnation — a system in which profits seem to appear out of thin air, even as these gains really represent value extracted from workers, now and in the future.
Finance-led growth represents the apogee of the logic of capitalism. The owners of capital are able to derive profits without actually producing anything of value. They lend their capital out to other economic actors, who then hand over a portion of their future earnings to financiers, limiting economic growth. The costs of this model are left to future generations in the form of mountains of private debt and unsustainable rates of resource consumption. If the logic of capitalism is based on extraction from people and planet today, then finance-led growth is based on extraction from people and planet today and tomorrow, until the future itself has been stolen.
The growth of the multinational corporation meant that billions of pounds worth of capital was flowing around the world within corporations. Toyota, General Electric, and Volkswagen couldn’t afford to keep their subsidiaries across the globe insulated from one another — money had to be moved, even if that meant undermining the monetary architecture of the international economy. Technological change also facilitated direct transfers of capital between different parts of the world. All this meant that, despite the continued existence of capital controls, capital mobility had increased substantially by the 1970s. The combination of the emergence of the Eurodollar markets and the rise of the multinational corporation were beginning to place serious strain on Bretton Woods.
But it was the US government — not the banks — that dealt the final blow to the system that it had helped to create. With the dollar as the reserve currency, the US had gained the “exorbitant privilege” of being able to produce dollars to finance its spending15. Because everyone needed dollars, the US could spend as much as it liked without the threat of hyper-inflation. The gold peg was supposed to rein in this behaviour: if investors started to think that there were more dollars in circulation than gold to back it up, they might turn up at Fort Knox demanding the weight of their dollars in gold. But this didn’t stop the Americans from printing billions of dollars to fund a wasteful and destructive war in Vietnam. Combined with dollars leaking out of the US via its growing current account deficit, the global economy was facing a dollar glut by the 1970s. Realising that there were far too many dollars in circulation to keep up the pretence, in 1971 Nixon announced that dollars would no longer be convertible to gold. Bretton Woods was finally over.
With the demise of Bretton Woods, capital was finally released from its cage. Many countries continued to maintain capital controls and strict financial regulation. But the glut of dollars that had emerged at the international level needed somewhere to go. Meanwhile, the capital that had been stored up within states like the UK under Bretton Woods was desperate to be released into the global economy. It pushed and strained against the continued existence of capital controls, finding ever more ingenious ways of getting around the system. Finance capital had returned with a vengeance, and it sought to remove all obstacles to its continued growth. But it would take a national crisis for the remnants of the post-war order finally to fall.
From the start, this project was cloaked in the language of “efficiency”, “modernisation”, and — most pernicious of all — “economic freedom”.14 Thatcher’s groupies argued that the unions were vested interests getting in the way of the operation of the free market. The neoclassical theory of wage determination posits that workers are paid a wage equal to the “marginal product” of their labour.15 Essentially, firms pay workers a wage equal to the value of the output they produce. If a firm paid a worker over this amount, another firm could afford to undercut them whilst still making a profit, and if they paid workers less, then another firm could poach the worker with a higher salary and still make a profit. In the perfect world of equilibrium inhabited by the professional economist, the economy runs like a well-oiled machine, everyone fulfils their function, and society’s resources are used in the most optimal way. By extension, workers who demand wages above their marginal productivity reduce the profitability of the companies they work for, therefore reducing the efficiency of the economy as a whole. The unions were committing a cardinal sin — disrupting the operation of the free market — and the state had no choice other than to intervene.
But over the course of the post-war period, the marginal productivity theory of distribution largely held. When the UK had a powerful labour movement able to argue for pay rises on behalf of their workers, on aggregate wages and productivity rose in unison — workers were paid a wage equal to what firms could afford, no more and no less. In fact, there is now a great deal of evidence to suggest that strong union movements actually raise productivity and improve firm performance.16 But after Thatcher’s battle with the unions, wages stopped rising in line with productivity. Without the unions to demand that firms paid workers a salary equal to their marginal output, bosses had no incentive to do so. Instead, they set about internally redistributing resources from workers to shareholders, making billions in the process.17
At the same time, the state was retreating from providing the kind of social security that had been a hallmark of the post-war era. Risks that had formerly been socialised were privatised, encouraging middle-earners to “think like capitalists” in planning and insuring for risks. Private health insurance coverage has increased as wealthier consumers seek out better care than that which is available on the NHS. Rising tuition fees have also shifted the burden for paying for education onto individuals, who find themselves saddled with debt well into their careers. Many working families were taken in by the “delusion of thrift”, believing that their pensions and properties were increasing in value because of smart investments rather than a generalised environment of asset price inflation. This was, of course, a delusion — one that was quickly shattered in 2007 and the legacy of which many families are still dealing with. Many peoples’ pensions were effectively wiped out in 2008 (only to be revived through QE), some homes were foreclosed upon, and personal bankruptcies soared. Unsurprisingly, this assumption of what were previously socialised risks by ordinary households has led to a pervasive rise in feelings of anxiety and insecurity.
The steady privatisation of public spending around the world was recently identified by the UN as the source of pervasive human rights abuses.29 The UN’s expert panel claimed that “[g]overnments trade short-term deficits for windfall profits and push financial liabilities on future generations”. Neoliberal governments have relied on privatised public spending in order to alleviate some of the inequality created by the finance-led growth regime, and to mute the ups and downs of the business cycle. They have, however, shied away from returning to the old Keynesian model of promoting full employment, given the implications this would have for power relations between workers and owners. Instead, they have sought to create a model of privatised Keynesianism, which allows executives and shareholders to profit from public spending through monopolistic corporations that pay executives huge sums whilst hiring workers on poorly-paid, precarious and insecure contracts. In other words, privatisation attempts to deal with some of the many contradictions of finance-led growth, whilst maintaining the power relations upon which it rests.
Meanwhile, the state’s retreat from the provision of public services and the mass sell-off of social housing have increased the cost of living for households, without increasing productive investment. Rising utilities bills, transport costs, and care costs have all eaten away at households’ already stretched incomes. The increase in house prices seen since the crash has driven up rents far more than it has increased the supply of affordable housing. The decline in the social housing stock has pushed many people into temporary accommodation. Some, like Jerome Rogers, have been driven into crippling debt in an attempt to meet their basic needs — allowing lenders to benefit from the deterioration of our collective wealth. Those who are wealthy enough to do so have opted to save more, knowing that they will be forced to fund their own retirements and care needs. The individualisation of risk has only increased disparities of wealth, leaving some facing crippling debt and others sitting on huge piles of unproductive cash, much of which is channelled into real estate or financial markets, making the problem even worse.