Financialisation

Thursday 7th January 2010

So, the finance "industry" has been gambling with amounts of money many times in excess of the total value of production worldwide. In other words, there exists "wealth" in cash form that is many multiples of all the food, clothing, housing, transportation etc. that we see physically produced, sold and consumed all around us in our daily lives.

Where did all this cash come from? Why did it end up as the stakes in a massive (now defunct) global poker game?

The answer is that the cash came from the surplus left over after the cost of producing goods was subtracted from the sales of those goods — or profit. In previous times profit has been re-invested in further production (or destroyed in war), but since the end of the long boom of the 50s and 60s the returns to be made in the productive economy have increasingly stagnated (i.e. the rate of return on investment, or the rate of profit, has fallen).

One of the reasons for the falling rate of profit is the pressure on wages — for example in the US real wages have been static or falling for several decades — and the concomittant pressure on consumption that this entails. There are other reasons, including the increase in the ratio of fixed capital (manufacturing plant, equipment, transport networks and so on) to labour costs (as originally analysed by Marx in Capital). In any case, the result has been that instead of re-investing profit in productive economic activity money has been poured into ever-increasing rounds of speculative financial instruments, from CDOs to leveraged buy-outs, from the dot-com fiasco to the housing bubble.

Financialisation: are we really to believe that unregulated markets are the right way to run things?