Since 2007, British capitalism has been in a period of extended crisis, characterised by stagnant wages, rising income and wealth inequality, the declining labour share of national income, low levels of investment, and stagnant productivity.
Mainstream economists failed to diagnose the root cause of the current post-crash stagnation for the same reason they failed to see the financial crisis coming: their models are not built to account for broad structural shifts in political and economic institutions.
The 2008 crash and its aftermath are the outcomes of a long-standing transformation in political economy, going back to 1979, when the financialisation of the British economy began.
From 1970-2007 we witnessed seismic growth in the size and profits of, and assets held by, Britain’s financial sector. But financialisation isn’t just about bigger banks: it means more and bigger financial institutions wielding greater power over other economic actors – from households, to businesses, to the state.
We saw corporations become financialised as the interests of creditors and shareholders took precedence over those of workers, consumers, and wider society. International investors came to control huge pools of capital, created out of ordinary people’s savings, corporate profits, and the wealth of the very rich. The same investors used their power as shareholders to push businesses towards ‘maximising shareholder value’ – increasingly, companies’ wealth went to shareholders via dividends and share buybacks, or was lent to other corporations, rather than to workers or into the investment needed to drive up productivity.
Similarly, the financialisation of the household has been associated with rising household debt and rising wealth inequality. Total household debt increased from 80 percent households’ disposable incomes in 1970 to 145 percent in 2007. This drove unsustainable rises in house prices. New homeowners benefitted from huge capital gains, whilst those who failed to jump on the bandwagon were left with huge debts and no assets.
And so it has become increasingly difficult to say where a household ends and a bank begins.
The state too has transformed developing a symbiotic relationship with the finance sector, resulting in a complete failure to regulate it properly. As banks, house prices and stock markets boomed through the 1980s and 1990s, the state came to rely on the revenues derived from financialisation. Governments even began encouraging private investors to undertake public spending on its behalf through private finance initiatives.
The legacy of financialisation has been devastating for the so-called ‘everyday economy’ – the sectors like health, education, care and utilities, upon which most communities rely. There has been a rise in outsourcing, artificially high utilities bills, service delivery that has pursued short-term profit at the expense of social value, and a proliferation of underpaid, precarious work.
Financialised capitalism may be a uniquely extractive way of organising the economy, but it is a process driven by the logic of capitalism itself. As the economy develops, profits naturally increase faster than wages, inequality rises and huge pools of capital accumulate in the hands of a small number of people.
But if financialisation is an inherent part of the development of capitalism, then we cannot simply fix the problems it creates by regulating the banks, taxing the wealthy or boosting our manufacturers. The solution must be to build a system in which resources are owned in common, rather than by a tiny elite.
Labour has already announced a number of welcome measures that will move this agenda forward – from the nationalisation of key utilities, to an end to private financing, and inclusive ownership funds.
However, the problems the British economy faces today require more radical solutions. These will require confronting the power of financial elites.
A socialist government should begin to de-financialise the economy by properly regulating the finance sector – particularly credit creation – which will limit the power of financial elites, whilst helping to reduce private debt levels and constrain asset prices. A public banking system should be built that lends and invests on the basis of democratically determined goals. A socialist government should also create a ‘people’s asset manager’, to invest in assets like equities, infrastructure and housing, directing capital towards socially beneficial ends and steadily socialising ownership across the economy.
The next Labour government will face tough challenges and confront staunch opposition. It must be prepared to take on vested interests – starting with finance capital.