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Financialization, Global Crisis, and Economic Stagnation

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Anthony
Hosted By: Association for Social Economics
  • Chair: Giuseppe Fontana, University of Leeds and University of Sannio

The 'Great Financial Crisis' and the 'Great Recession': Origins and Economic Policy Implications

Philip Arestis
University of Cambridge and University of the Basque Country


We locate the main causes of the recent financial crisis on three factors. Two of them were the financial liberalisation and the distributional effects (redistribution from wage earners to the financial sector) in the US, and elsewhere. Both these factors gave great strides in the development and extension of new forms of securitisation and use of derivatives. This was a financial engineering practice, the third main factor, which led to the growth of the instruments labeled as collateralised debt obligations, especially so in the form of collateralised mortgages. There were also three contributory factors, which were accentuating the process of the main causes: the international imbalances, mainly as a result of the growth of China; the monetary policy pursued by countries over the period leading to the crisis; and the role played by the credit rating agencies. We discuss the economic policy implications of the financial crisis before we summarise and conclude.

Managing the Discontent of the Losers

Mark Setterfield
New School


In the early-mid 1990s, Social Structure of Accumulation (SSA) theorists began to identify the solidification of a neoliberal SSA. Among the complex of institutions that make up the archetypal SSA is a “capital-citizen accord”: a set of norms and conventions that ameliorate potential conflict between capital and the citizenry, who expect to be involved in self-governance through mechanisms of participatory democracy. The capital-citizen accord of the neoliberal SSA involved “managing the discontent of the losers” – reconciling the low wage growth, re-assertion of capitalist control of the workplace, and heightened employment insecurity that would be visited on the majority of the working population by virtue of the breakdown of the post-war (Golden Age) capital-labour accord with social stability, either by coercion or non-economic conciliation. This paper argues, however, that the neoliberal capital-citizen accord actually involved a fundamentally material basis: the ability of households to accumulate debt in order to limit the growth of consumption inequality in the face of burgeoning income inequality. This debt accumulation offset broke down in the financial crisis of 2007-09. One result of this was the exhaustion of the neoliberal growth regime. A second was its destabilization of the capital citizen accord. Although neoliberalism appears to be institutionally entrenched, this institutional entrenchment is incomplete. The result is that an SSA that has resisted top-down reform despite its demonstrable exhaustion is now threatened by bottom-up “reform” in the shape of rising populism, of which Trumpism and Brexit are reflections. The outcomes of this process are highly uncertain – a key characteristic of the periods of inter regnum that separates successful SSAs.

Financialisation, Wage Inequality and Secular Stagnation

Giuseppe Fontana
University of Leeds and University of Sannio


The past three decades have been characterised as an era of “financialisation”, namely a period where the role and power of the financial sector in the economy has increased. The relationship between the financial and non-financial sectors has been modified, including a rise in the share of finance in both GDP and employment. It is also increasingly evident that financialisation has also led to a deterioration of the power relations between workers of the financial sector and the rest of the labour force, which sometimes is characterised as the rise of “financial elites”. Similarly, the bargain powering of CEO over workers and other stakeholders has also increased (see, e.g. “World Wealth and Income Database” project). Most of the financialisation literature has aimed to examine the rising role and power of the financial sector in terms of the effects of different regimes of accumulation. These effects are modelled with a class of rentiers that extract rents from other economic sectors, mainly industrial capitalists. However, this representation is incomplete as it does not reflect the effects of financialisation on the labour force, and within it on different categories of workers. This paper acknowledges that financialisation is a broad phenomenon. It offers a formal model of aggregate spending that explicitly accounts for the distribution of income between non-financial corporations, CEOs and finance workers, the average worker and rent earners. It is also recognised that different social groups, receiving different types of income, have different saving/consumption behaviours.

Understanding the Rise of Populism: Financialisation, Household Balance Sheet Structures, and Inequality in the United States Since 1980s

Hanna Szymborska
University of Leeds


This paper examines how the rising polarisation of income and wealth in USA since the 1980s has contributed to the crisis of democracy exposed by the 2016 presidential elections. It argues that Trumpism resonated with American voters due to their dissatisfaction with financialised capitalism, which led to the concentration of economic resources among the top 10%. This is because the changing nature of financial sector operations, financial deregulation, securitisation, and labour market liberalisation policies generated differences in wealth accumulation possibilities and the associated rates of return and leverage across households. Based on the US Survey of Consumer Finances between 1989 and 2013, we decompose wealth and income inequality in this period using the Oaxaca-Blinder decomposition to understand which balance sheet items have contributed the most to inequality. Overall, we find that differences in asset ownership, particularly non-financial assets, influenced inequality more than debt. The paper concludes with a review of policy options to promote more equitable growth in USA.

The Political Economy of Income Distribution: Industry Level Evidence From 14 OECD Countries

Alexander Guschanski
University of Greenwich


There has been a significant decline in the share of wages in GDP in both developed and developing countries since the 1980s. This paper analyses the determinants of the falling wage share, captured as labour compensation as a ratio to value added, using sectoral data. We compile a comprehensive sector-level dataset of 14 OECD countries (Australia, Austria, Belgium, France, Finland, Germany, Ireland, Italy, Japan, the Netherlands, Spain, Sweden, the UK, the US), for the period from 1970 to 2014, which allows us to trace the developments in the wage share of high and low skilled workers and within manufacturing and service industries. The use of different databases including input-output tables allows us to obtain detailed estimations of the effect of globalisation and union density on the wage share. Furthermore, by taking endogeneity serious we are able to obtain new insights with regard to the effect of technological change. Our findings lend strong support to the Political Economy approach to functional income distribution. We confirm a significant negative effect of globalisation, and we discover offshoring to emerging markets and Eastern Europe to be a robust driver of this process. Technological change had an impact which differs by skill group, but we also find a strong effect of institutional factors such as union density and minimum wages on the wage share.
JEL Classifications
  • B5 - Current Heterodox Approaches