On the Futility of Regulating Finance

Posted: November 18, 2011 in Uncategorized

By Counterpublic

If anything bridges the gap between many in the Occupy movements, the mainstream press, and many in the financial elite, it is their diagnosis of the causes behind the current crisis. Finance got out of hand; bankers got too greedy; governments didn’t regulate properly.

Having a similar diagnosis of the problems, it’s no surprise that their solutions retain the same similarity. “Regulate finance!” it is declared. Cut banker bonuses; introduce a financial transactions tax; break apart too big to fail institutions; ring-fence the banks, and so on. It is hoped that with these reforms, we can return to the good capitalism of years before: low unemployment, high wages, and a well-functioning system of public services.

The problem with all these analyses is that they fail to ask the key question: why did our economic system turn to financialisation in the first place?

It is here that the full contours of our current situation become clear. Financialisation did not arise as an aberration of capitalism; it was instead a necessary outgrowth.

Despite the contingencies and accidents of history, a clear systemic pressure can be discerned behind the rise of finance. By the 1970s, investment in productive sectors of the economy was becoming increasingly difficult to generate a profit from. On the one hand, technology was reducing the number of workers available to exploit. On the other hand, the low-hanging fruit of early industrialisation had been used up, leaving only increasingly difficult profit opportunities. These are the long-term causes of the current crisis that most mainstream economics misses.

So in order to maintain some semblance of profitability, the surplus capital in the world had to seek out new investment sectors. It was here that the financial sector was constructed as a new space for investment. The derivatives markets, for instance, rose from a negligible level in the 1970s to having a nominal value of over $600 trillion by the time of the 2008 crisis.

Simultaneously, the economies of the developed world shifted away from investment in the productive sectors. For instance, UK government figures show that in the last 20 years alone there has been a 50% decrease in manufacturing as a share of UK GDP.

The upshot of the necessary turn to financialisation is that it is simply not possible to turn back the clocks and revert to a form of capitalism premised upon manufacturing and a chastened financial sector. Finance arose precisely to resolve the problems of declining manufacturing profits and declining profitable investments. These original problems have not been solved, but only displaced into the financial sector. Financial speculation was a stop-gap measure. In other words, greed was built into the system. Individuals are not at fault; this is a systemic problem, and only systemic solutions can resolve it.

What is necessary now is a rethinking of what economies can be. Drawing upon the successes and failures of the 20th century’s experiments in economies, the aim of the occupy movements and those on the left needs to be to establish the parameters for a 21st century economy.


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