Thursday, April 16, 2009

Finance Capitalism and Public Policies

In the early 20th century, the Austrian economist Rudolf Hilferding proposed that a new form of capitalism was taking hold. In his book of 1910, Finance Capitalism (Das Finanzkapital), he ventured that the increasing concentration of economic activity and banking into larger and larger combines was effectively producing a new form of capitalism, the finance capitalism of the book’s title. Because this new form of capitalism controlled the flow of investment, he suggested that it was displacing competitive industrial capitalism while creating a demand for a centralizing and “privilege-dispensing state.” According to Hilferding, finance capitalism was always on the lookout for state intervention to prop up its wealth and privilege. Sound familiar?

Here is a photograph of a scary looking Rudolf Hilferding.

Fast -forward almost 100 years and we can see the full unfolding of Hilferding’s prediction. It is evident in the massive amounts of money being made. Lloyd Blankfein, the CEO at Goldman Sachs, received compensation of around $43 million for fiscal year 2008. Lots of people make lots of money in this sector, and as we now know it is neither connected to their skill in assessing risk or foresight in managing change and economic uncertainty. The compensation reflects itself: people get paid a lot, not necessarily because they are any good, but because they are in this sector. And the sector binds government to its needs and requirement through the slick passages of individuals who move effortlessly and often from finance to government and back. These moves transcend party affiliation: Paulson moved from Goldman Sachs to Treasury Secretary under Bush: Rubin moved from Treasury under Clinton to Citibank after deregulating the banking system; and more recently Rubin’s colleague at Treasury, Larry Summers, moved from a lucrative hedge fund gig to advising Obama. In the May issue of The Atlantic, the former chief economist at the IMF writes of a quiet coup in which the US government was hijacked by the finance industry (

Public policies are not only shaped to suit finance capital--and these include the promotion of free movement of capital across borders, the repealing of regulatory frameworks and the overturning of oversight regimes--but also are taken for granted as “the right and only things to do” in the name of general welfare. While change is currently afoot for reregulation, be on the lookout for how the resultant systems will be shaped by financial interests.

In the fall of 2008, the US Congress could not move fast enough to prop up the banking system. The $750 billion TARP (Troubled Asset Relief Program) bailout was exactly the “privilege-dispensing” Hilferding was writing about in 1910. And compare the political response to the banking crisis with the meager, parsimonious reaction to the problems of the automotive industry or even of the housing crisis. Cars and housing are important, but not nearly as important, in this new form of capitalism, as finance and banking. Paulson and Bernake managed to frighten politicians into accepting the package by painting a scenario that the world was going to collapse if nothing was done. This may or may not be true. My argument is that this conclusion comes less from a fully formed economic analysis than from the contemporary ideology that fixates on banking and finance. The power of finance capitalism is such that this ideology is now viewed by the US government as the only the way to see and understand the world. Current policies and beliefs clearly reflect the interests of bankers and not the general welfare or common good.