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Financialization, Definancialization and Regulation: Conditions for the Viability of Capitalism

Paper Session

Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: Association for Evolutionary Economics
  • Chair: Timothy A. Wunder, University of Texas-Arlington

Decommodification of Financial Regulation and Public Action

Faruk Ülgen
,
University of Grenoble Alpes

Abstract

This article seeks to analyze the institutional roots of the last decades’ financial crises and in particular those of the 2007-2008 systemic failure. These instabilities seem to be mainly due to the liberalization of financial markets since the system-wide liberalization triggered the process of financialization of many sectors of the economy and gave the priority to the financial efficiency criteria within the decision process of market players. Mainly relying on speculative arbitrage, the economic engine is wheeled thanks to the attractiveness of financial innovations that have nurtured rent-seeking operations without supporting the financing of productive activities. I maintain that such an evolution is the great transformation of the New Millennium Capitalism that mainly rests on the institutional transformation of the regulatory structure that is the commodification of financial regulation. The latter has replaced public regulatory mechanisms by private self-regulation systems that rely on market price-directed contractual schemas. Such an institutional transformation has fueled the system-wide process of financialization and led market-based capitalist economies to a highly speculative and macro-economically perverse regime of accumulation. Despite recurrent downturns, speculative return-related wealth keeps increasing and widening the income inequality gap. For instance, even in the aftermath of the 2007-2008 financial turmoil and subsequent market failures, U.S. billionaire wealth almost doubled between 2010 and 2020, increasing 80.6 percent in 2020 dollars, while the median wealth of U.S. households only increased 15.1 percent between 2010 and 2016. To redress this situation and make the economic engine move into a socially (and environmentally) sustainable growth path, financial stability must be thought of as a common good issue. Financial regulation must then be decommodified through alternative public regulation that seeks societal economic viability.

Innovative Enterprise and the Financialization of Innovation: Understanding Research and Development in the Modern Economy

Avraham Baranes
,
Elmhurst College

Abstract

This paper examines the way in which technological innovation and research and development (R&D) occurs in a financialized economy. Under the shareholder primacy theory of corporate governance, investments in R&D among large, non-financial corporations has taken a back seat to financial manipulations such as stock repurchases. Even high tech industries such as pharmaceuticals, have seen spending on dividends and stock repurchases outpace their spending on R&D (Tulum&Lazonick 2018). In line with arguments made by Serfati (2008), Lazonick (2008; 2019), Haldane (2016), Baranes (2017), and Lazonick&Shin (2020), I argue that financialization has been detrimental to innovation in two key ways. First, it has reduced the time horizon within which returns on R&D must be generated for management to be willing to incur the cost. As such, less investment in innovative activities occurs. Second, it has led to the development of an innovation pipeline in which gains from innovation are concentrated primarily at the top. Dominant firms come to behave more as financiers, obtaining cross-licensing and intangible assets in exchange for funding. Gains from these rent-generating assets are then distributed to shareholders rather than reinvested in innovative activities. The first section gives an overview of financialization with an emphasis on how the institutional requirements of a financialized economy incentivize and promote predatory value extraction (Lazonick&Shin 2020) rather than value creation. Specifically, the role of the maximizing shareholder value theory of corporate governance is investigated in the contexts of increasing the importance of short-term results for managers. The second section considers the way in which innovation in the modern economy operates. The focus here is on the importance of public financing of innovative activities and the innovation pipeline. It is argued that, with the financialization of the economy, downstream enterprises have taken on the role of financiers, rather than innovators, accumulating rent-generating assets.

What is Full Employment? An Historical-Institutional Analysis of a Changing Concept and Its Policy Relevance for the Twenty-First Century Post-COVID-19 Economies

Mario Seccareccia
,
University of Ottawa

Abstract

The concept of unemployment and the associated concept of full employment have acquired different meanings since the appearance of unemployment as an analytical concept among economists and other social scientists going back at least to the early nineteenth century. When analyzing unemployment, these early economists had in mind a specific institutional structure, which evolved to such an extent that, by the twentieth century, its meaning had changed radically, especially as early post-WWII Keynesian economists understood the term. The purpose of this paper is to provide an overview of the logic of these changes and to shed some light on what full employment as a policy objective, especially among Post-Keynesian Institutionalists, could mean in modern twenty-first century economies. This is especially important in light of the policy issues resulting from the Covid-19 crisis. With the exception of those who could transfer their work at home as in a modern “putting-out” system, governments were mandating and remunerating workers in most industrial countries to withdraw their labor services.

Fiscal Stimulus, Fiscal Policies and Financial Instability

Alicia Giron
,
National Autonomous University of Mexico
Eugenia Correa
,
National Autonomous University of Mexico

Abstract

In the very short term, the economic and social perspectives of capitalism changed on a global scale. Even though, these were not far from the forecasts expressed by the criticism of the persistence of neoliberal policies and austerity as the way out of the post-crisis problems. The deterioration of institutions and the persistent concentration of wealth slow down the capacities of countercyclical policies and fiscal stimuli. Especially in countries like those in Latin America that do not have a solid social policy structure, nor the experience of support institutions that support the generalization of unemployment. This paper seeks to analyze fiscal stimulus programs and their imitations in the Latin American context where informal employment and the limited capacity of public health prevail. But especially the (external) debt and the lack of capital control impose strong limitations and lessen the possibility and capacity of fiscal policies to be used as effective stimuli. Drawing from these constraints, this article exposes, through an in-depth analysis, the so-called budget ceilings and the conditions for expanding spending in some of the economies, and the social and institutional advantages in the case of carrying out fiscal policy without restrictions.

When (and Why) Does Public Debt Become a Problem?

Wesley Marshall
,
Autonomous Metropolitan University-Iztapalapa
Gregorio Vidal
,
Autonomous Metropolitan University-Iztapalapa

Abstract

Shortly after the 2007-2008 US banking crisis, Carmen Reinhart and Kenneth Rogoff wrote This Time is Different: Eight Centuries of Financial Folly. Their research, which indicated a public debt level of 90% of GDP as a threshold for financial crises, was used as an academic justification to the post-crisis austerity programs established throughout the world in 2010. Such economic determinism is highly problematic, from the research methods used to its real world applicability, as many countries have managed much higher levels of debt without provoking a financial crisis. On the other end of the ideological spectrum, modern monetary theory (MMT) has insisted for decades that public debt levels are not an economic problem for a country that enjoys monetary sovereignty. While this position is much more in line with reality, we argue that the two opposing positions are framed on the plane of economics, when they would be better placed on a socio-political one. In this paper, we argue that debt is fundamentally “a tool in the economic struggle of man vs. man" (Ingham, 2002), similar to money and capital. Assuming the academic framework of the social ontology of debt, this article will employ several historical examples to argue that debt levels are basically irrelevant in the understanding of when and why public debt creates a crisis. Furthermore, we will examine the notion of monetary sovereignty on both the economic and political plane to better understand the dynamics of public debt in the global periphery.

Money Circulation Mechanisms: Micro-Meso-Macro

Svetlana Kirdina-Chandler
,
Russian Academy of Sciences

Abstract

The objectives of the paper are as follows: firstly, to identify divergence from reality in the study of money circulation in modern orthodox micro- and macroeconomics; secondly, to consider the approach of heterodox mesoeconomics to analysis of money circulation.
An analysis of the real mechanisms of money circulation is one of the pitfalls for mainstream economics. ”The difficulties which the mainstream analysis has in dealing with money and credit are well-known ... The mainstream approach has generally seen ‘money as a veil’ ” (Sawyer, 2010: 296-297). This is due to unrealistic methodological assumptions and basic models of neoclassical economics, primarily with “the wrong microfoundations” (Stiglitz, 2017). Therefore, “in general equilibrium theory there is thus no endogenously developed theory of money” (Hanappi, 2009: 11).
A more realistic approach to analysis of money circulation was proposed by Keynes, who introduced ‘the transmission mechanism of monetary policy’. However, the current understanding of the transmission mechanisms in mainstream economics is “masked” in an econometric model where money circulation mechanisms are not studied, but only the closeness of the correlations between changes in money supply and gross output (or total expenditure). Monetary economics regards the economy as a “black box” within which unknown processes take place. Also, dependence of money circulation on the specifics of social structures within which economic life occurs is not considered. The popular Modern Monetary Theory, developed by post-Keynesian economists, makes a definite step forward in understanding how the economy works. However, MMT is primarily a macro-level theory and does not look deep enough into the ""black box"" of the economy, where money, capital and commodity flows interact.
JEL Classifications
  • B5 - Current Heterodox Approaches
  • G0 - General