Most economists who pronounce on the current economic crisis are repeating what economists stated in the economic crises of the 1930s and 1970s, because they see a single macroeconomic paradigm with each school of economics viewing this through their own specific kaleidoscope. These kaleidoscopes seldom elucidate the situation but serve to confuse by passing for no more than a sophisticated diplomatic discourse embraced by politicians to support partisan interests and ending up harming the electorate and economic units in the process.
There are two fundamental problems:
What is financialization?
- macroeconomic theory has become increasingly financialized and seldom takes into account the critical determinants of production of goods and services
- as a result of this macroeconomic policy evolution microeconomic practice has become increasingly financialized
Financialization is the process whereby all economic considerations are reduced to a nominal financial quantification usually measured in the local currency or expressed in a common currency by applying exchange rates.
The crucial problem with financialization is that what appear to be distinct policies or even schools of thought, such as Keynesianism or Monetarism, and supply side economics are in fact questions of emphasis on which aspect of financialization is more significant as a policy target. These are aggregate demand (expressed as a quantified monetary aggregate) or money supply (expressed as a quantified monetary aggregate). Increasingly economic activities involve so-called financial engineering where the manipulation of numbers substitutes for real production or services where income is received in return for little effort beyond the holding of some asset which generates an income from those who make use of the asset. This has created a major financial services activity that is made up of über-rentiers.
Although many see this evolution as recent, it had already been detected before the Great Depression and, indeed, was to a large extent the cause of the Great Depression, and the crises in 1970s and now. The American economist, Thorstein Veblen2 wrote in 1921 the following:
Thorstein Bunde Veblen
"Half a century ago it was still possible to construe the average business manager in industry as an agent occupied with the superintendence of the mechanical processes involved in the production of goods and services. But in the later development the connection between the business manager and the mechanical processes, has on average, grown more remote; so much so, that his superintendence of the plant or of the processes is frequently visible only to the scientific imagination... His superintendence is a superintendence of the pecuniary affairs of the concern, rather than of the industrial plant; especially is this true in the higher development of the modern captain of industry."
Veblen considered this evolution to be associated with a change in motivation that brought to the fore financial manipulators, who sabotage and retard, rather than advance technological development. He considered success in the business world to wait on guile:
"The successful man under this state of things succeeds because he is by native gift or by training suited to this situation of petty intrigue and nugatory subtleties. To survive in the business sense of the word, he must prove himself a serviceable member of this guild of municipal diplomats who patiently wait on the chance of getting something for nothing; he can enter this guild of waiters on the still-born pecuniary gain, only though such apprentership as will prove his fitness. To be acceptable, he must be reliable, concilliary, conservative, secretive, patient, and prehensile."
So well before the first major financial crisis, Veblen has described the specific changes that would give rise to such crises. Because nothing in macroeconomic theory has sought to tackle these issues, the schools of economic thought have fashioned elaborate kaleidoscopes that do not dare tackle such basic flaws for fear of upsetting those who dominate the "pecuniary" affairs of the economy and who continue to promote increased financialization. It is understandable why Thorstein Veblen's seminal work is not widely taught in our schools of economics.
Thorstein Veblen pointed out the drift from an emphasis on physical processes to one of financial processes. The important factor, however, is that unknown to Veblen the subsequent evolution of economics saw macroeconomic schools embedding the very same negative evolution by giving increasing emphasis to nominal financial aggregates and paying far less attention to innovation, technology, technique, learning and production performance. Indeed chairs in economics have been endowed at many universities by the organizations that Veblen criticised creating a tendency for an enhanced emphasis on financialization. This problem of bypassing technology and innovation, that is a fundamental technological ignorance on the part of macroeconomic theorists, was pointed out in 19763
(See pdf: "On the Problem of Technological Ignorance amongst KM Economists
', Charter House Essays in Political Economy, 1981)
Clearly proposals for growth and escaping from the excessive debt generated by over-financialization are not going to come from Keynesians, Monetarists or supply side economists whose theories possess none of the necessary perspectives on technology and therefore lack the appropriate tools in their policy tool kits.
The constitutional dimensions of this counter-evolution are significant. This can be appreciated by asking some simple constitutional questions. Who voted for the current financial crisis? Who voted for the solution imposed upon constituents by politicians? Who voted to become a member of the winners, losers of neutral policy impact groups generated by conventional economic policies? The answer to all three questions is no one! And yet, we consider ourselves to be constituents in a so-called democracy. The question is therefore why does the electorate tolerate this cavalier treatment by so-called representatives. The answer is that the large corporations, and financial intermediaries such as banks have effective lobbies that work so as to prevent the electorate from having any say in the very issues that determine their standard of living. This is done through politicians whose parties benefit from supporting the specific wishes of interest groups by by-passing processes where the constituencies would have some say in policy design. Financialization has led to a serious decadence in the quality of macroeconomic policy which now is geared to the interests of a small minority and political parties, themselves small private organizations with a membership of less than 1% of the electorate doing the bidding of the minority who survive on the back of financialization.
One dimension of the über-rentier characterization of banks is that they receive fee incomes and margins on interest in exchange for renting out funds which have been generated from fractional reserve banking, that is, these are not assets built up as a result of investment and hard work but rather are a multiple of deposits made by members of the public. The fact that banks rent many times these deposits back to the same public make them über-rentiers.
Economic policy needs to be shaped in response to the preferences of the social and economic constituencies in an equitable fashion. But politicians and influential interest groups prefer to leave economic decisions as a preserve of "professionals" or "experts". Since on the side of economists a flawed macroeconomic paradigm is applied and politicians appear to know no better, we have to endure a situation where no "alternative" policies are proposed that do not include the continuation of financialization.
This articles is a modified version of one originally entitled, "Why no "alternative" policies are proposed" of January, 2012.
Hector McNeill is the director of SEEL-Systems Engineering Economics Lab.2
Thorstein Bunde Veblen, (1857-1929) was an American economist and leader of the institutional economics movement. His institutional economics was integrated with a Darwinian evolutionary approach. He made a basic distinction between the productiveness of "industry," run by engineers, manufacturing goods, and the parasitism of "business," which exists only to make profits for a leisure class. The chief activity of the leisure class was "conspicuous consumption" and their economic contribution being "waste," that is, an activity that contributes nothing to productivity. The implication was that the American economy was therefore made inefficient and corrupt by the businessmen. He considered technological advances were the driving force behind cultural change.3
McNeill, H.W.,"Price Performance Fiscal Policy - A Real Incomes Approach"
, Rio de Janeiro, 1976.
Posted February 2012
Updated: 9th March, 2012 - removed redundant word and added qualification to the last sentence.
Updated: 14th March, 2012 - added qualifying word to section on financialization.
Modified: 17th June, 2015 and altered title and addition of some text - sense not altered.