The Era of Financialization, An Interview with Costas Lapavitsas: Parts 1 and 2
Part 1
Dollars & Sense: Over the past few years we’ve heard more and more about the phenomenon of “financialization” in capitalist economies. This concept appears prominently in your writings. How would you define “financialization”?
Costas Lapavitsas: Well, it’s very easy to see the extraordinary growth of the financial sector, the growth of finance generally, and its penetration into so many areas of economic, social, and even political life. But that, to me, is not sufficient. That is not really an adequate definition. In my view—and this is basically what I argue in my recent book and other work that I’ve done previously—financialization has to be understood more deeply, as a systemic transformation of capitalism, as a historical period, basically. I understand it as a term that captures the transformation of capitalism in the last four decades. To me, this seems like a better term to capture what has actually happened to capitalism during the last four decades than, say, “globalization.”
Financialization indicates a systemic transformation that has basically three fundamental tendencies, which we can locate at the deepest level of the capitalist economy. First, we find that commercial and industrial enterprises have become financialized. In other words, they rely—the big ones, at least—less on banks. They have a lot of money capital, which is available for investment, but they don’t actually invest it directly, they use it for financial profit making. So in that way, they’ve acquired some financial capabilities themselves—they’ve become finance-like. They are financialized. The second tendency is that banks have been transformed; they do less straightforward money collecting and lending and more transacting in open markets, and more business with households. And the third tendency has to do with households themselves. Households have been sucked into the formal financial system. They rely more on it for borrowing, and they rely more on it for assets like pensions, insurance, and so on. They have become financialized, too. The reasons for this development are complex: Wages have been stagnant, real incomes have not been rising systematically, and at the same time, public provision in health, education, housing, and so many other fields has either not expanded or retreated. In that context, private provisioning has taken its place, and private provision has been mediated by private finance. Consequently, households have become financialized. These three tendencies taken together define, in a deep way, the financialization of contemporary capitalism and indicate a historic transformation—a major shift in the development of capitalism.
D&S: Some economists may talk about financialization as an outcome of particular government policies like the deregulation of the financial sector. But it sounds like you have a view of it that it’s a more profound trend in capitalist economies. Do you think that the features of financialization that you describe would likely have happened—at a greater or lesser pace—regardless of the particular policies adopted with respect to the financial sector?
CL: I understand fully that some economists, particularly in the United States, economists who are of a heterodox and critical persuasion, see financialization as the outcome of policy measures, particularly financial liberalization or deregulation which has allowed finance to expand. Incidentally, if one takes this position, it is easy to say that what we need to do to control financialization is to impose regulation again. To me, the transformation represented by financialization is far deeper, because one can observe financialization in the most unlikely places were policy has actually been quite different to the United States. It is possible to observe financializing behavior, particularly among large industrial and commercial enterprises, even in places that do not have the financial practices and outlook of the United States. To me, financialization is a deeper process than simply a government policy outcome. Precisely for this reason I’ve tried to put my finger on these three tendencies at the molecular level of capitalist accumulation, the level at which one should always start when one is trying to capture a historical period.
There are two more things I have to say, which add context and depth to my argument. The first is that policy alone, to my mind, can never explain the tendencies and characteristics of a long-lasting era. That’s just not possible. Policy can explain the particular turns and twists of economic performance. Policy by itself, however, cannot explain a profound transformation of the capitalist system because then the question becomes “where has this policy come from?”
Now, I understand that financial deregulation has been characteristic of the last few decades, and I agree that it has played a big role in sustaining financialization. But if it is claimed that deregulation has come about purely as a result of a change in policy—if we simply say “it’s happened because neoliberalism has triumphed”—then that would be a very shallow explanation, as far as I’m concerned. It is important also to ask about the underlying conditions that have made possible the triumph of neoliberalism, and there one will find, I believe, deeper tendencies, including those that I have identified. Capitalism has been changing spontaneously. In that context, financial deregulation became more feasible and began to be demanded by the agents of the capitalist economy. Once deregulation became a regime and it was implemented on a large scale, then that obviously accelerated financialization further. It’s a two-way process, but the starting point is the transformation at the grassroots, the fundamental transformation of capitalist accumulation, which is what really concerns me. That’s the first thing I want to say.
The second point I want to make, which might add further context, is that we observe financialization also in developing countries, or in countries which are at a different level of development than say, the mature countries, the United States, Japan, Germany, and so on. We observe financialization emerging in places like Brazil, Turkey, Korea, even in places like India and so on. It is happening even though we do not have policy changes similar to those of the United States, and we have very different social and economic conditions. It is then apparent that financialization is actually a deeper process that arises across the world and even differs among mature and developing capitalist countries. It’s a profound transformation that cannot simply be explained by policy alone. It is necessary to look at what is happening at the level of production, at the level of trade, at the level of the household, and so on—even in developing countries—in order to get a deeper understanding of this period.
Part 2
D&S: You’ve anticipated our question about whether financialization is exclusive to high-income capitalist countries or is also happening in developing countries. How is it different in developing countries?
CL: Financialization in developing countries is a recent phenomenon, which has begun to emerge in the last 15 years in full earnest. We see a number of middle-income countries that are financializing, and we have to look at it carefully to understand it. One thing that is immediately obvious is that, in mature countries, financialization has been accompanied by weak or indifferent performance of the real economy. Rates of growth have been weak, crises have been frequent, unemployment has been above historical trends. We see a problematic state of real accumulation in mature countries. But when we look at developing countries, it is possible to see countries with phenomenal financialization, where growth has been reasonably strong. Brazil has been financializing during the last ten years, and yet its growth rate has been significant. Turkey has been financializing and yet its growth rate has been significant, and so on. So financialization in developing countries is not the same as in mature countries, because typically in the last ten years, it’s been accompanied by significant rates of growth.
Where does the extraordinary growth of finance in developing countries come from? To my mind, it comes from the way in which these countries have been integrated into the world economy. Integration into the world economy in the last 15 years has relied on the ability to use the dollar to pay, since the dollar is the main means of payment in the world market. Huge reserves of dollars in the last 10 to 15 years have emerged in middle-income countries. It is well known that these reserves are very costly for developing countries, but I am just as interested in the side effect that they’ve had, namely to catalyze financialization in the countries accumulating reserves. In countries that hoard dollar reserves private banks acquire very liquid financial assets because the central banks sterilize the reserves. As domestic banks acquire liquid assets, they begin to play financial games and can do financial operations that they were not able to do before. Consequently, financial markets emerge with significant depth, and suddenly, after ten tears, say, the developing country has a large domestic financial sector where it didn’t have one before.
Foreign banks also enter, and they begin to deploy methods and practices which they’ve brought over from their own mature countries. Fairly rapidly, the domestic banking system also adopts these techniques and begins to operate in similar ways to foreign banks. What then emerges in places like Turkey, like South Africa, like Brazil and Korea, is a tremendous expansion of the financial system, the growth of banks, and banks engaging in transacting practices rather than borrowing and lending as well as banks moving towards households. Household indebtedness in those countries has increased very substantially in the last 10-15 years from nothing, from a very low base. So they’re financializing in this complex way. To me, this is subordinate financialization, deriving from mature country financialization mostly on account of the role of the dollar as world reserve money. It’s an indication of the global aspect of financialization, but also a sign of how different the process is in developing countries.
D&S: In periodizing contemporary capitalism, we commonly hear this referred to as the “neoliberal era,” maybe also the “era of globalization,” and you’ve proposed instead to think of it as the “era of financialization.” Do you see neoliberal policy and globalization as outgrowths of financialization? Do you see these as policy outcomes that are due to the particular political role of the financial sector, as distinctive from the rest of the capitalist class?
CL: We need again to think carefully here, because periodizing capitalism is a very difficult task. The “era of neoliberalism” to me doesn’t really say very much, because neoliberalism is an ideology. It’s a very important set of ideological practices and beliefs. When it becomes policy, it affects things considerably, but it still is an ideology. Therefore, it doesn’t define an era. It’s a bit like saying the “Keynesian era of capitalism.” Such a thing doesn’t exist. An era must be defined in terms of real, profound, material changes in capitalist accumulation, and neoliberalism is not that. To me, neoliberalism is the appropriate ideology of the financialization era, if you want me to push it further. It’s the ideology that sits best with the era of financialization.
Second point is, does globalization define an era? No, I don’t think it does, because what is globalization? When you actually look at it as an idea, you have considerable difficulties because it’s never been defined properly. To say that globalization is the global expansion of capital is not saying very much. Capital has always been global. It has always attempted to go global. Globalization does, of course, indicate the expansion of capitalism in recent decades, which is very important. But it doesn’t really define the era in any sense that I would recognize as meaningful. It’s a term that I also use in discussion, of course, but I wouldn’t use it to define a period in strict terms.
So we’re left with how to define the period still, the last four decades. What is it? To me, financialization serves this purpose admirably. That is, as long as financialization is understood along the lines that I’ve suggested, not simply as the growth of finance but as a transformation at the deepest level of capitalist accumulation. Industrial and commercial enterprises themselves have been changing, banks have been changing, the condition of individual workers has been changing, and these tendencies taken together have brought about the transformation of the historical period. That is, to me, how the classics of Marxism have always attempted to define periods in the history of capitalism. I’m following, basically, Hilferding, Lenin, and the classics of Marxism in this regard, in defining the current period.
Has the change come about because of the particular role of the financial system? No, I would argue. It has come because of the three tendencies I’ve identified at the roots of capitalist accumulation. Now, you might naturally ask, why have these tendencies come about? What I would say there is that we need to look even more deeply and think in terms of the forces and relations of production. We’ve got to think in terms of the deepest material development of capitalism, things like the technological revolution that has taken place in the last four decades, the transformation of work, and similarly basic factors of the economy. When we look at the technology, for instance, it is obvious that there has been a revolution in terms of information technology and telecommunications. But this revolution of technology has not led to successful and sustained growth of real accumulation. What it has done is to boost finance, and to transform the way in which finance and real accumulation interact. It’s also transformed labor, the way we work. The deepest roots of financialization, then, must be sought in the transformed interplay of the forces and relations of production.