Unlocking the puzzles of financialisation

Applied Institute for Research in Economics

Giuseppe Fontana is a Professor of Monetary Economics at the University of Leeds. He is an expert of the Endogenous Money theory and the New Consensus Macroeconomics theory, and of monetary and fiscal policies. Guy Dixon is a Senior Press Officer for the University of Leeds, promoting research expertise in the media.

Photograph of Giuseppe Fontana 400 x 200

Why social economics is key to unlocking the puzzles of financialisation

Over a decade from the global financial crisis, our knowledge of the causes and consequences of the 2007-2008 crash becomes ever clearer.

Mainstream economics takes us so far in understanding financialisation – or the growth of the financial sector over other parts of the economy and society. But when it comes to gaining insight into issues such deregulation, rising inequality, the growth of credit, the expansion of financial services into other sectors and crucially, what all this means for our society, a pluralist and multidisciplinary approach is needed.

On 15 September 2017, we held a social economics workshop at the University of Leeds, bringing together a rich variety of leading economists, geographers, sociologists, PhD students and other interested parties, to look at what a social economics perspective – which looks at how economic activity affects, and is affected by, society – can teach us. The workshop was generously sponsored by the Association for Social Economics, a founding member of the prestigious Allied Social Sciences Association (ASSA), and hosted by the Economics division.

presented research that I co-authored with colleagues from the universities of Cambridge and Bath, which compared the earnings of white, Hispanic and black men and women working in different occupations - management and financial services, professional (such as law and dentistry), sales, services, construction, fishing, farming and forestry – in the US between 1983 and 2009. We found that the earnings of white men working in managerial and financial services rose more rapidly than that of Hispanic and black men and women employed in all sectors of the US economy during the 26-year period. Furthermore, white males working in managerial and financial services earned more than white males working in any part of the economy. 

Gender and ethnic bias in financialisation

Our research suggests that financialisation has been neither race nor gender neutral. It has in fact intensified the gender and ethnic stratification of the US labour market, with white men being the greatest beneficiaries of it. This also leads to some interesting conclusions; since 2007, US financial institutions have tried to reform themselves to achieve financial stability. However, the homogeneity of the dominant identity group, namely white men, has not been challenged, which means that the same policy and practices are likely to be sustained beyond the crisis, and hence raises doubt on the effectiveness of reforms in the financial sector.

Research on the future of financial regulation by Professor Jan Kregel of the Tallinn University of Technology in Estonia and the Levy Economics Institute in USA, and which was produced as part of Leeds University Business School’s Financialisation, Economy, Society and Sustainable Development (FESSUD) project, was also discussed.  Professor Kregel warned that mobile payment systems and peer-to-peer lending pose a significant threat to financial stability, as traditional bank lending is challenged by unconventional practices.

We were delighted to welcome Professor Bob Jessop of the University of Lancaster, who delivered a thought-provoking speech, ‘Putting financialisation in its time and place’. He discussed the challenges that economists have in seeking to understand capitalism because of its sheer complexity. Capitalism, he argued, was not a homogenous concept, but rather an ever-changing system of relationships that could not really be understood contemporaneously. Professor Jessop’s speech concluded with a warning that financial organisations risked becoming more powerful than national economies.

The theory of financialisation evolution

Malcolm Sawyer, Emeritus Professor of Economics at Leeds, asked the question of whether the era of financialisation was over. In a compelling talk, Professor Sawyer emphasised again that financialisation was not an unchanging concept but rather an evolution. The first era of financialisation was broadly from the 1860s to the 1930s, and fuelled by the growth of western economies; the second was from the post-war period through to the 1980s and coincided with the tremendous growth of the banking sector and stock markets; and the third had been from the 1980s through to the 2008 financial crisis. In the third period, the expansion of the financial sector has also coincided with a growth in inequality.

Professor Sawyer argued that as time has passed, the belief that the financial markets were always efficient has faded away, as financial services have gone from being a driver of economic growth to a constraint on it. The financial sector has moved from its roots as a way of using peoples’ savings and investing them for economic growth, to a state where it is more often trading in existing financial assets, like in a casino economy.

Professor Sawyer suggested that financialisation had slowed, but was not yet in decline. He predicted that financialisation would evolve and seek new areas to exploit: public-private finance initiatives and healthcare were identified as two areas with potential.

Dr Aurelie Charles of the University of Bath presented her work with Dr Sunčica Vujić of the University of Antwerp in Belgium on wealth accumulation in the US and UK. While it was well-known that the richest in society have been able to preserve their wealth over time, it was not known how this was linked to their occupation. Dr Charles’ research showed that elite earnings - whereby one group earn disproportionately at the expense of other demographic groups - is not linked to their jobs. In fact, elitist earnings exist across occupations, with a dominant group (mainly white male and female) doing well at the expense of other racial, ethnic and gender groups. They then suggested that if the rule of legitimacy to financial flows over time is based on the interactions between social groups, then future trends of earnings are likely to reflect these rules of legitimacy.

Wage inequality in the UK

I presented provisional results of the project ‘Financialisation, wage inequality and secular stagnation’ with Professor Malcolm Sawyer and Dr Antonio Rodriguez Gil of Leeds University Business School. The project studies the effects of increasing inequality among the wages of workers in the financial sector and the rest of workers, using the UK as a case study. Our analytical model considers the different channels through which growing wage inequality, the rise of rentier income (dividend and interest) and rent extraction by the financial sector lead to a significantly lower level of investment and economic growth in a country.

Professor Gary Dymski of Leeds University Business School closed the morning session by discussing financial citizenship in the post-employment age. Financial exclusion – or a person’s lack of access to financial services - could be traced back decades, and Professor Dymski discussed research he carried out in California in the 1980s and 1990s, when the problem was often trivialised and ignored.

The growth of precarious work in many western societies meant that there was an urgent need to rethink what the financial system was for, Professor Dymski argued, as it had become disconnected from society. Professor Dymski suggested that we were not entering a post-capitalist era, but suggested that the system will evolve to new areas that were of limited use to society.

After lunch there was a stimulating PhD session, where students presented posters summarising their current work, and discussed future directions of their research with a very engaging audience.

Our perception of the economy

Professor Brett Christophers of Sweden’s Uppsala University gave the keynote address. Prof. Christophers said that what we know about an economy at any particular point in time depends on our perception.

Today, the economy is pictured in national accounts in such a way that financialisation can be seen. Finance is in the economy, rather than separate from it. Therefore, finance can grow its share, become a bigger part of the economy, and be assessed for its contribution to sustainable economic growth and well-being. However, Professor Christophers offered historical examples where it has not always been that way, and why this matters.

The final session of the workshop was a roundtable on the pros and cons of a pluralist and multidisciplinary approach to the analysis of financialisation. Some colleagues highlighted the challenges of a constructive dialogue between people with different expertise. It was argued, however, that a multidisciplinary and pluralist approach helps to better understand the complex effects of the growth of the financial sector over other parts of the economy and society. It is also a vehicle to highlight other social sciences perspectives and/or other less visible but sorely missed economics perspectives, such as ecological, institutionalist, feminist, Post Keynesian, and political economists.

In summary, the social economics workshop reinforced to all present the need to take a pluralist and multidisciplinary approach to understanding financialisation, and that a social economics perspective allows us to unlock our understanding of issues which we would not otherwise be able to see. 

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