For the sake of this argument let’s assume that while capitalism may not be the most egalitarian system of resource management and allocation, it’s the best one we have to date. It’s a bit like the definition of democracy – it isn’t perfect, but no one’s come up with anything better. So, with this in mind we can propose that capitalism is worth saving. But, saving from what? And here I climb back on the hobby horse – we need to save free market capitalism from Financialism.
What is Financialism? If you’ve just tuned in, I’ve been operating with the Armistead definition:
“Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments. Financial instruments…are in their original form firmly linked to economic reality. However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.” [Armistead]
When this “life of its own” comes in to play there are some serious problems for the underlying economy. Michael Konczal summarizes the issue as succinctly as anyone:
“If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector—the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities—relative to the rest of the economy.
The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.”
That second paragraph is a summation of what we’ve been looking at for the last 20 years. If we were discussing capitalism we’d be talking about economic growth predicated on development in manufacturing, housing, infrastructure, energy, agriculture, primary industries, transportation, etc. However, we’ve not been talking about capitalism, especially in the media. We’ve been lathered up and shaved by financialism.
We barely know what capitalism is anymore. What’s the first thing that comes to mind when someone says, “business news?” If you said, “stock market report” that would reflect what the evening news gives you. Usually the Dow Jones Industrial Average comes first, and then ‘what drives it’ comes in commentary purporting to be analysis. Consider the following reaction to inquiries about the strength of the economy in 2012:
“The stock market in the past has been a leading indicator, but that leading quality has weakened in recent years. Stock prices are driven by profits and profit growth. During the Great Recession, corporations have been able to maintain profitability by slashing employment to reduce costs. They have streamlined their operations and have squeezed more productivity out of their remaining workers. Thus, higher stock prices don’t necessarily mean a stronger economy, especially in terms of employment growth. That said, I do think the economy is on an upward path, with job growth of about 2 million expected for the national economy in 2012.” [SDUT]
And here we have an illustration of the third point Konczal was making: Corporations are judged not by the quality of their products, the character of their work forces, the direction of their research and development – but by the immediate income paid to shareholders.
Couple this with the Shareholder Theory of Value, which Jack Welch once referred to as the “dumbest idea in the world,” and the financialist incentive is to maximize productivity, prioritize immediate results, and ignore the stakeholders for the benefit of the shareholders. Now, view the Epi Pen issue from the perspective of the shareholders – the object was to increase immediate shareholder value, but:
“While individual consumers may not have had a voice or recourse, the market did. Mylan may have improved its margins and ultimately driven higher returns and shareholder value, but within a week the price increase cost the company $3 billion in market cap and a stock tank of over 12% in 5 days.” [Fortune]
Ethics do matter, especially to stakeholders. If there is a silver lining in this cloud it is that the stakeholders (individual consumers, school districts, emergency responders, local fire departments…) can place significant pressure on shareholders. Breach the bounds of acceptable human behavior and the amorphous market will take a bit out of the corporate hide; illustrating former CEO Welch’s point precisely.
Now, let’s enter the political phase. Republicans would love to dismantle the financial regulation structure which has curtailed some of the excesses of Financialism which precipitated the last Great Recession. Out with Sarbanes-Oxley, Out with Dodd Frank, out with “excessive regulation.” This is a recipe for disaster. Regulation restrains, and restraint is what is needed to prevent capitalism from degenerating into financialism.
Again, a summation from Konczal:
“…the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can’t just be strip-mined for a small sliver of capital holders; we’ll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.”
Income inequality on steroids? More Bubbles? More volatility? And, more economic problems associated with those issues. It will be up to Democrats to resist the financialization of the American system of capitalism because the Republicans are either trapped in its web or ignorant of its consequences.