Dear Prof. Wolff and team: Thanks for your great work. You spend a great deal of time discussing WSDE as alternatives for industrial capital. But Marx also talks about finance capital, and if we are to "do better than capitalism" we must clearly also propose alternatives to the current financial system. I wonder if you might be able to suggest some reforms on that front either here on this webpage or on Economic update. I recently read this article by Prof. J. W. Mason on the topic which I found extremely interesting (https://www.jacobinmag.com/2016/11/finance-banks-capitalism-markets-socialism-planning/). I would certainly be very interested to hear your views on these proposed reforms and I would like to hear Prof. Mason as a guest on Economic Update if that be possible. Thanking you again for your excellent work which has taught me so much. Ali
Thank you for your kind words. Might we begin the conversation with a recent short piece I wrote on finance? Here it is:
The Contradictions of Finance
Saturday, 17 September 2016
By Richard D. Wolff, ROAR Magazine | News Analysis
After the financial crisis, the long-term fate of Wall Street now hinges on the context of global capitalism and the emerging popular struggles against it. (Photo: David Ohmer / Flickr)
This article originally appeared in ROAR's third print issue, "The Rules of Finance." ROAR is a volunteer-run publication sustained by its subscribers. To read more,pre-order the print issue or subscribe online.
Like much else in economies, finance both enhances the economy's growth and development and undermines it. The balance between these contradictory effects depends on all the other aspects of an economy and society and how they all influence financial contradictions. From its first entrance into the economy -- that part of society concerned with the production and distribution of goods and services -- money has been contradictory. On the one hand it enabled trade and exchange far beyond the limits of barter and other pre-money systems. On the other hand, money introduced all sorts of new instabilities.
The role of finance and its contradictions changed especially after the 1970s. The old centers of capitalism (western Europe, north America and Japan) lost major parts of their global primacy. A combination of computer-related automation, political shifts and relocation of production to low-wage areas -- particularly in Asia and Latin America -- brought economic decline to most of the old centers' people. In effect, employers in the old center obtained access to a vast new, lower-waged labor force and the profit gains associated with it. The employers could relocate to where the new cheaper labor became available or else bring that labor into the old centers as immigrants. Most old center countries did both. The result nearly everywhere in capitalism's old centers was stagnation or decline of real wages coupled with sharply worsened inequalities of income and wealth.
Ironically, the post-war period had enabled the resurgence of a capitalism that had been hobbled by the Great Depression and the war. Coupled with the social-democratic gains achieved during the 1930s and 1940s, the years from 1945 to 1975 witnessed a decades-long celebration of rising standards of mass consumption paid for by rising real wages.
Indeed, depicted as the emergence of a comfortable "middle class," rising consumption was celebrated by capitalism's ideological champions as the system's great achievement and justification. Product advertising exploded alongside rising consumption, intruding into every corner of modern life. One key result was to make rising levels of consumption more than ever the measure -- the very definition -- of each individual's success in life. In the US, parents promised one another and their children an American dream of ever-rising consumption financed by ever-rising real wages.
The arrival and continuance of stagnant or declining real wages after the 1970s made the realization of that dream impossible. Yet it was so deeply internalized and desired by Americans, so ingrained in their expectations, that they were determined to achieve it even without the rising wages to pay for it. They would sustain rising consumption otherwise, partly by borrowing. The latter provided a new profit opportunity for financial capitalists: lending to consumers to enable their rising consumption.
Families determined to consume more usually turned first to sending more household members out to do more hours of work as real hourly wages stagnated. When those extra hours proved insufficient, borrowing remained as the only way to pay for rising consumption. In profit-driven response, the financial sector invented new forms of consumer credit extension (especially credit cards and later student loans) and greatly expanded old forms (mortgages and car loans). Banks bundled all these forms of consumer debt into asset-backed securities, enabling them profitably to tap globally dispersed sources of loanable funds.
Credit crucially supported the booms of the 1980s and 1990s into the new century, yet it also spread globally the risks that the huge new supplies of consumer debt instruments might not pay off. The spurt of financialization after the 1970s also included major new loans to corporations and governments. When the credit default crisis broke in 2008, it included all three types of loans: consumer, corporate and public. Financialization had yielded large new profits and the expansion of the financial sector relative to all the other sectors of capitalist economies around the world. It had also yielded their global collapse.
The financial expansion phase is often followed by its contradictory other, the contraction phase. The crash of 2008 proved to be the turning point this time between the phases. Bailouts, bail-ins and a wide variety of other monetary (and some fiscal) policies have been tried to "manage" the crash and its consequences with, at best, mixed results to date. Where some "recovery" has occurred it largely bypassed huge portions of the population. Recovery's impacts on the top 1 percent and 10 percent of enterprises and individuals also proved uneven.
Financialization facilitated the historic relocation of capitalism from its old to its new centers. Because this relocation was driven by the profit gains of capitalists moving from high to low-wage production, the result was a supply-demand imbalance. Lowered global wages rendered effective demand deficient. In this situation, debt could temporarily remedy the imbalance. Global finance thus profited in multiple ways from the globalization it promoted. Yet it also over-reached, took excessive risks, and eventually imploded. Its survival became dependent on state intervention and support.
As a result, financial industries are now stronger but also weaker, thereby perpetuating finance's intrinsic contradictory nature. Their longer-term fate now hinges most on what happens to the larger capitalist context. As capitalism declines in its old centers and leaves massive social, economic, ecological and political divisions and destructions in its wake, how far will the resistance there go? Will movements demanding state-financial enterprises to compete with private counterparts gain strength? Will initiatives to go beyond capitalism arise, grow and challenge the established financial institutions? Has that already begun?
In capitalism's new centers, will history repeat there the bitter divisions and working-class struggles that characterized the early development of capitalism's old centers? Might struggles in old and new centers find some common ground and bond to build an effective alliance in opposition to capitalism? Answers to these questions will have more to do with shaping the future of financial industries than the details of their practices.
This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.
Richard D. Wolff is professor of economics emeritus at the University of Massachusetts, Amherst, where he taught economics from 1973 to 2008. He is currently a visiting professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a visiting professor of economics at the University of Paris (France), I (Sorbonne). His work is available at rdwolff.com and atdemocracyatwork.info.