Abstract
This chapter reconstructs how the process of financialisation changed the behaviour of the financial system. The author examines first this issue from a long-period point of view, providing a synthetic reconstruction of the main long-run factual trends and provides a suggested interpretation of its theoretical implications. The author focuses, in particular, on one of the most far-reaching new features acquired recently by the financial system: the progressive intermingling between the process of production of goods and the process of “production” of financial instruments. The focus shifts then on a few important side effects of the recent evolution of the financial system and its policy implications. The concluding remarks sketch the direction that we should pursue to render the financial system consistent with the normative principles of comprehensive sustainability, as defined in Chap. 1.
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Notes
- 1.
See Vercelli (2017) and the literature there cited.
- 2.
- 3.
Jevons (1866) called this condition “double coincidence of wants”.
- 4.
See, for example Lapavitsas (2013, 4).
- 5.
See Meek (1962).
- 6.
- 7.
Analogously, in organic chemistry, by separating the atoms of a molecule or modifying the structure of their links, we alter the properties and behaviour of the molecule (the smallest particle of a substance that retains all its properties). In organic chemistry the carbon atom C plays the crucial role in determining the properties of a molecule. In financialised capitalism, the financial element F plays more and more a similar crucial role.
- 8.
In the standard representation of the structure of an organic molecule, the straight lines represent the chemical valence of elements. Carl Schorlemmer (1874, 329) explains that: “such formulae are intended to give an idea of the manner in which the attractive forces of the atoms, forming the molecule, are distributed”. Carl Schorlemmer (1834–1892) was one of the founders of organic chemistry and was a close friend of Marx and Engels who asked his advice on scientific questions. We can see an influence of organic chemistry in Marx’s representations of the economic circuit that was later borrowed by Keynes within a different theoretical framework. In the light of the link emphasised in this paper between finance and structural flexibility, it is suggestive to observe that the carbon atom is endowed of an amazing structural flexibility as it forms a vast number of compounds, more than ten million, by far exceeding any other element.
- 9.
Hilferding (1910) emphasised this point.
- 10.
See, for example Lapavitsas (2013, 69).
- 11.
See, for example Gorton (2012).
- 12.
See, for example Lapavitsas (2013, 8).
- 13.
See Sect. 5.8 for a few examples.
- 14.
The seminal contribution came from Jensen and Meckling (1976).
- 15.
In the real world, this is not necessarily true. Shareholders may keep into account in their choices also different values such as the social and environmental responsibility of the company. The agency theory completely ignores the normative complexity and heterogeneity of shareholders.
- 16.
As Lazonick (2017) argues, since late 1980s, the major US corporations embraced the principle of maximisation of shareholders value that “prevailed, virtually unchallenged, in corporate boardrooms and business schools favouring the legalized looting of the U.S. business corporation”. The process of transition was rapid: “In 2000, the mean total remuneration of the 500 highest-paid U.S. executives was $32.3 million, of which about 80 percent was realized gains from exercising stock options and another five percent was from the estimated value of stock awards” (ibidem).
- 17.
According to Lazonick and O’Sullivan (2002, 17) “The ‘boom’ years of the mid-1980s saw hundreds of major plant closings. Between 1983 and 1987, 4.6 million workers lost their jobs, of which 40 percent were from the manufacturing sector.”
- 18.
The sustained and rapid rate of increase in stock prices was the result of a massive flow of funds into the stock market through equity-based mutual funds. From 1982 to 1994, pension and mutual funds alone accounted for about 67% of the net growth of the total financial assets of households (Edwards 1996, 16–27).
- 19.
See Sect. 5.9.
- 20.
We can start to detect the preliminary steps of a process of convergence also in the case of households’ incomes.
- 21.
A classical statement of this view is contained in Wicksell (1898).
- 22.
See Chap. 7.
- 23.
Keynes maintained that this is a crucial explanation of structural unemployment: “there is no remedy but to persuade the public that green cheese is practically the same thing [of money] and to have a green cheese factory (i.e. a central bank) under public control” (Keynes 1936, 235).
- 24.
The expression “full faith and credit” indicates a situation in which a government agrees to repay a debt no matter what. For example, if a bond is backed by the full faith and credit of the US, the government must find some way to repay the bond.
- 25.
Wolf rightly emphasises that after the post-Lehman shock “[w]e were forcibly reminded of the dependence of the financial system on the unique capacity of the state to create the money that people want when they trust nothing else” (Wolf, 2014).
- 26.
- 27.
See Grossman and Stiglitz (1980).
- 28.
See, for example , Evans and Honkapohja (2001).
- 29.
- 30.
See Stout (2011, 9).
- 31.
See Milgrom and Stokey (1982).
- 32.
Therefore, the assumptions of the model exclude the presence of noise traders.
- 33.
- 34.
This metaphor is surprisingly appropriate to the case in point. In ancient Rome, Janus Bifrons was the god of change and transition, usually depicted as having two faces—a face that looks to the past and the other one to the future. As I argued in the preceding sections, the ultimate role of finance in a market economy is that of facilitating structural change, and this is often done by connecting present and future in new innovative ways. It is not surprising that, already in ancient Rome, Janus was believed to be the god of financial enterprises. In addition, according to a popular myth, Janus was the first to mint a coin (Macrobius 2011).
- 35.
See Alessandri and Haldane (2009).
- 36.
The bank was so renamed in 1867. A detailed account of the genesis of central banking may be found in Ugolini (2017).
- 37.
For example, the Sveriges Riksbank did not have a monopoly over issuing bank notes until 1904.
- 38.
In the US, for example, under the initiative of the Secretary of the Treasury Alexander Hamilton, the Congress chartered in 1791 the First Central Bank of the United States that lasted only twenty years. The Federal government chartered in 1816 the Second Central Bank of the United States but also in this case after twenty years its charter was not renewed. After these two false starts, diverse regimes of decentralised banking followed: first a period of free banking (1836–1862), and then a period of National Banks (1863–1913). The Federal Reserve was established only in 1913 after the financial panic of 1907. Its role was limited to money creation of last resort to prevent the disruptive debt deflation triggered by monetary panics. After WWI, its powers were enlarged, extending them also to money creation, but their questionable use contributed to the late-1920s stock market bubble and the ensuing Wall Street breakdown (Friedman and Schwartz 1963).
- 39.
According to the famous Bagehot’s rule, the central bank should lend “at a very high rate of interest … The rate should be raised early in the panic, so that the fine may be paid early… Secondly, that at this rate these advances should be made on all good banking securities, and as largely as the public ask for them…the majority to be protected, are the ‘sound’ people, the people who have good security to offer” (Bagehot 1873, 57–58).
- 40.
See Sowerbutts et al. (2016).
- 41.
I use here a slightly anachronistic language borrowed from the theory of public goods that was going to be developed a few decades later following the path-breaking contribution of Pigou (1920).
- 42.
See Bordo et al. (2016, 3).
- 43.
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Vercelli, A. (2019). The Second Financialisation. In: Finance and Democracy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-27912-7_2
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