We used to make things and employee people who were paid wages that they spent back into the economy. Finance properly allocated capital for productive ends rather than speculation and fraud. We had a productive economy that benefitted Main Street rather than Wall Street.
Under the ideological cover of neoliberalism, economic policies decoupled wages from rising productivity, with debt substituted. Wall Street’s interests diverged from promoting policies of economic growth and rising living standards to promoting policies that benefitted themselves exclusively.
The result is an increasingly extractive economy, says economist Michael Hudson, who describes how the FIRE sector (finance, insurance and real estate) is taking more and more money from the productive economy.
“Wall Street is interjecting itself into the economy, so that instead of the circular flow between producers and consumers, you have more and more of the flow diverted to pay interest, insurance and rent. In other words, to pay the FIRE sector. It all ends up with the financial sector, most of which is owned by the 1%. So, their way of formulating it is to distract attention from today’s debt quandary by saying it’s just a cycle, or it’s “secular stagnation.” That removes the element of agency – active politicking by the financial interests and Wall Street lobbyists to obtain all the growth of income and wealth for themselves.”
Financialization was made possible by neoliberal economists who turned classical political-economy on its head. Classical political-economists attempted to construct an economy that eliminated rents, freeing an economy from overhead. They made the distinction between earned income from productive endeavors and unearned income, or rents from extractive endeavors. The common denominator among all these classical political-economists was the distinction between earned income and unearned income. Unearned income was monopoly rent and interest. Earned incomes were wages and profits.
American neoliberal economists, chiefly, Milton Friedman, conflated income, claiming that all income was the same. Income from wages was to be treated the same as capital-gains. This pernicious economic decision contributed to the financialization of the US economy by misallocating capital for speculative activities rather than productive ones, and contributing to the massive inequality that’s the story of the election.
According to Hudson, “The financialization of companies is the reverse of everything Adam Smith, John Stuart Mill, and everyone you think of as a classical economist was saying. Banks wrap themselves in a cloak of classical economics by dropping history of economic thought from the curriculum, which is pretty much what’s happened…Following the banks and the Austrian School of the banks’ philosophy, that’s the road to serfdom. That’s the road to debt serfdom.”
What can we do to change from an extractive economy to a productive one?
Hudson says that rather than following the advice of the neoliberal economists prescriptions for privatization, we need to fund public infrastructure to keep the cost of doing business low for small businesses. Hudson quotes one of America’s great pre-neoliberal economist–Simon Patten.
“Patten said that public infrastructure is a fourth factor of production. But its role isn’t to make a profit. It’s to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions. Obviously these financialized charges are factored into the price system and raise the cost of living and doing business.”
Does the general elite opposition to infrastructure spending make a little more sense now? The financial sector makes more when the economy is tied up in debt and blocked by tollbooths demanding rent.
Going forward, elite opposition to progressive reforms is the brutal reality facing movements or candidates. Right now, Bernie Sanders appears to be the only candidate who is advocating the types of public infrastructure spending and progressive reforms that will clash with the financial plutocracy that dominates the US government. The financialization of the US economy has brought unimaginable wealth and power to this small cohort of bankers and hedge funders. They will resists these reforms with all their considerable might. Count on it.
Justice Brandeis had it exactly right when he stated that, “We can have democracy in this country, or we can have great wealth concentrated in the hands of the few, but we can’t have both.”