The Contradictions of Finance

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This article originally appeared at Truthout.org and Roar Magazine.

Like much else in economies, finance both enhances the economy's growth and development and undermines it. The balance between these contradictory effects depends on all the other aspects of an economy and society and how they all influence financial contradictions. From its first entrance into the economy -- that part of society concerned with the production and distribution of goods and services -- money has been contradictory. On the one hand it enabled trade and exchange far beyond the limits of barter and other pre-money systems. On the other hand, money introduced all sorts of new instabilities.

The role of finance and its contradictions changed especially after the 1970s. The old centers of capitalism (western Europe, north America and Japan) lost major parts of their global primacy. A combination of computer-related automation, political shifts and relocation of production to low-wage areas -- particularly in Asia and Latin America -- brought economic decline to most of the old centers' people. In effect, employers in the old center obtained access to a vast new, lower-waged labor force and the profit gains associated with it. The employers could relocate to where the new cheaper labor became available or else bring that labor into the old centers as immigrants. Most old center countries did both. The result nearly everywhere in capitalism's old centers was stagnation or decline of real wages coupled with sharply worsened inequalities of income and wealth.

Ironically, the post-war period had enabled the resurgence of a capitalism that had been hobbled by the Great Depression and the war. Coupled with the social-democratic gains achieved during the 1930s and 1940s, the years from 1945 to 1975 witnessed a decades-long celebration of rising standards of mass consumption paid for by rising real wages.

Indeed, depicted as the emergence of a comfortable "middle class," rising consumption was celebrated by capitalism's ideological champions as the system's great achievement and justification. Product advertising exploded alongside rising consumption, intruding into every corner of modern life. One key result was to make rising levels of consumption more than ever the measure -- the very definition -- of each individual's success in life. In the US, parents promised one another and their children an American dream of ever-rising consumption financed by ever-rising real wages.

The arrival and continuance of stagnant or declining real wages after the 1970s made the realization of that dream impossible. Yet it was so deeply internalized and desired by Americans, so ingrained in their expectations, that they were determined to achieve it even without the rising wages to pay for it. They would sustain rising consumption otherwise, partly by borrowing. The latter provided a new profit opportunity for financial capitalists: lending to consumers to enable their rising consumption.

Families determined to consume more usually turned first to sending more household members out to do more hours of work as real hourly wages stagnated. When those extra hours proved insufficient, borrowing remained as the only way to pay for rising consumption. In profit-driven response, the financial sector invented new forms of consumer credit extension (especially credit cards and later student loans) and greatly expanded old forms (mortgages and car loans). Banks bundled all these forms of consumer debt into asset-backed securities, enabling them profitably to tap globally dispersed sources of loanable funds.

Credit crucially supported the booms of the 1980s and 1990s into the new century, yet it also spread globally the risks that the huge new supplies of consumer debt instruments might not pay off. The spurt of financialization after the 1970s also included major new loans to corporations and governments. When the credit default crisis broke in 2008, it included all three types of loans: consumer, corporate and public. Financialization had yielded large new profits and the expansion of the financial sector relative to all the other sectors of capitalist economies around the world. It had also yielded their global collapse.

The financial expansion phase is often followed by its contradictory other, the contraction phase. The crash of 2008 proved to be the turning point this time between the phases. Bailouts, bail-ins and a wide variety of other monetary (and some fiscal) policies have been tried to "manage" the crash and its consequences with, at best, mixed results to date. Where some "recovery" has occurred it largely bypassed huge portions of the population. Recovery's impacts on the top 1 percent and 10 percent of enterprises and individuals also proved uneven.

Financialization facilitated the historic relocation of capitalism from its old to its new centers. Because this relocation was driven by the profit gains of capitalists moving from high to low-wage production, the result was a supply-demand imbalance. Lowered global wages rendered effective demand deficient. In this situation, debt could temporarily remedy the imbalance. Global finance thus profited in multiple ways from the globalization it promoted. Yet it also over-reached, took excessive risks, and eventually imploded. Its survival became dependent on state intervention and support.

As a result, financial industries are now stronger but also weaker, thereby perpetuating finance's intrinsic contradictory nature. Their longer-term fate now hinges most on what happens to the larger capitalist context. As capitalism declines in its old centers and leaves massive social, economic, ecological and political divisions and destructions in its wake, how far will the resistance there go? Will movements demanding state-financial enterprises to compete with private counterparts gain strength? Will initiatives to go beyond capitalism arise, grow and challenge the established financial institutions? Has that already begun?

In capitalism's new centers, will history repeat there the bitter divisions and working-class struggles that characterized the early development of capitalism's old centers? Might struggles in old and new centers find some common ground and bond to build an effective alliance in opposition to capitalism? Answers to these questions will have more to do with shaping the future of financial industries than the details of their practices.


Showing 22 comments

  • commented 2016-10-05 19:48:34 -0400
    Think out of the box…..into the cosmos!!! The mother of all economies is the gift economy. Some probably afraid human being in the past started to ask anything in return of witch he/she was capable of making extra!?! Why? Why ask anything in return? Share and let money or valuemeasuring dissolve!! Out of the box enough?! (The one)
  • commented 2016-10-05 11:59:25 -0400
    At http://www.moneyasdebt.net you will find a detailed description of a non-disruptive “beyond money” solution that returns finance to real world production; is inherently self-balancing and socially inclusive; and is incapable of producing the instability that plagues the current system. The proposed solution, which is simply a cutting edge version of “alternative money” that has existed since numbers and writing were invented also solves the inherent mathematical problem of the current system, making it stable as well.

    Many commentators seem to agree that there is no escaping our current situation unless we think outside the box. Outside the box is where I come from.

    My animated movie, Money as Debt (2006) predicted a Crash and an ongoing debt crisis. My two sequels (2009) and 2011) provide both a unique and very radical analysis of the cause (our monopoly concept of money) and a thoroughly thought out solution (parallel forms of money).

    Wishing and hoping for something better, with only vague ideas of how to get there?
    Try evaluating a fully developed proposal and roadmap.

    http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution12.htm
  • commented 2016-10-05 08:24:34 -0400
    perhaps double on Sharing as a basic modus to build a (world)economy on, but the gift economy, as we can call this, is the economy of the Sun, the Earth itself. Neither off these `species’ ask money in return for their efforts (and we all actually are living on them/litterally) but sharing gives us the opportunity to build justice and even peace and start to build a whole new civilasation for this is the first big step: `Share togeteher and save the world’. (The one in cooperation with Maitreya) {Please consider sharing as basic modus broadly and with an open mind; thank you sincerely.}
  • commented 2016-10-05 05:14:50 -0400
    Finally, some word about Money in the first para. Money has its good and evil parts, that doesn’t mean we stick to it. Moving to a moneyless world doesn’t mean we go to the pre-money era. We need to transcend money and the post-money era will have its own good & evil things about it.
    We have to decentralize the power that money has now. Maybe a “Serves” – a decentralized unit, will replace “Money”, what say Prof ? Read here about Serves: https://www.facebook.com/notes/unselfish-movement/what-might-replace-the-price-tag-life-in-a-moneyless-economic-system/572564356263297
  • commented 2016-09-28 11:31:47 -0400
    I wonder…Hillary Clinton’s comments in the first debate about profit-sharing: was that the first time that was mentioned by a mainstream presidential candidate? Also, why do Trump supporters think that a dictator in business would somehow work out as a Democratic leader of our country?
  • commented 2016-09-23 04:25:18 -0400
    We don’t love money, we love the goods and service we can buy with money! And that’s exacly what money, especially interest and speculation efforts, is destructing on our own Earth!! Strange uh??!!
    Share together and save the world (Maitreya the world teacher) Our only option to last with all of us!!
  • commented 2016-09-22 13:52:32 -0400
    What strikes me about Professor Wolff’s account is the growth of financialization in our economy. Because most of its function is parasitic, enormous resources are wasted on inconsequential activity. Add to that parasitism another parasite, our penchant for domestic and foreign militarization, and we can explain our distressed economy failing most of its citizens.
  • commented 2016-09-22 12:51:02 -0400
    I encourage people to examine money and banking itself as the root of our problems. Consider the following.

    People who need money borrow it into existence as a debt-of-itself-on-a-schedule to a bank and people who don’t need money keep it forever or re-lend it as existing money. That makes “stability” (successful repayment in the aggregate) dependent on the rate of creation of new debt-to-banks never decreasing. When it inevitably does decrease, mathematical defaults are the only possible result, the magnitude of the default being the shortage of new bank credit on time multiplied by the number of principal debts dependent on recycling the same principal.

    Ups are always followed by downs and by 2007 the ratio of M2 (total principal debt to banks) to M1 (available money) had reached an unprecedented 5.26 :1. Velocity could not sustain a ratio that is normally functional between 2 and 4 and the Crash happened.

    Much more at http://www.moneyasdebt.net
  • commented 2016-09-21 23:48:46 -0400
    The number of police persons in San Jose, CA is dropping but the city is doing nothing about it. Is this true in other cities? This should be increasing not decreasing.
  • commented 2016-09-21 19:12:53 -0400
    Admittedly, I’m new to this, but what a brief and pointed historical survey of US economics and what a high quality of provocative and insightful comments. This dialogue is something we all must contribute too and develop and nurture…and act upon. Dr. Wolff’s piece leaves us with some open-ended questions about our future. It does seem the citizens of this nation and of the world are at a crossroads.

    Shareholder profitability – that almost singular goal of shortsighted corporate leaders emerging from the counter-revolution of the mid-1970s with its rise of Friedman economics personified by Reagan and Thatcher – seemed to naturally devolve into the baseness of personal greed by the time the financial industry was poised to collapse on itself in 2008. Ask yourself whether a consumption-based society really does lend itself to some sort of high-minded Protestant ethics, you know that “do unto others…” thing?, or has this been another distortion fed to us about a system and by a system where runaway consumption, the real driver of capitalism, is really more fertile ground for something like self-absorbed hedonism. Take an honest look around you and ask yourself which is the ideal consumer of our goods and services.

    So this system steeped in the “natural state” of master-slave relationships that has been around since before mankind first pulled a log through a field to sow the first seeds of civilization, well maybe it’s really starting to run its course too. Sure, get rid of the controls, the regulations and corporate executives start acting in self-interest – people in business don’t do what you say and they don’t do what you do either…they do what you pay them to do. Take away the accountability with gold or platinum parachutes, a lack of laws or even stomach to prosecute the weak laws you keep in place, and well there you have it.

    You hear it over and over – technology and globalization…, but then you get this nonsense of making this all work within the context of global capitalism. Just call it “freedom” since our apparently immortal corporations are now to be treated as people (think Citizens United v. FEC) and not something to control and check for the protection of consumers/working people or for the common good.

    No, not only are we trained from birth to only consider an economic reality that rewards the meritorious bullies who push aside the weak, but can not seem to grasp the unbelievably devastating impact of technology on this same economic system. Within this maelstrom with its wave after wave of truly Revolutionary change – well we can hardly see anything around us anymore. Technology makes work more efficient and revolutionary technology, well here you go…. The jobs you create are nothing when stacked up to the reverberations our capitalistic economy experiences through massive job loss and underemployment. It is not as simple as displacement, it is hyper-efficiency that simply eliminates massive amounts of work. That is what technology does and has done since the invention of the wheel. We are still on the front end of these waves too – stay tuned, there is more to come!

    So for your predictions – the manufacturing crunch has happened – sure outsourcing, lower wages from an economy of “employers” who simply do not want employees – call them what Naomi Klein calls them and what they call themselves – “global brands”. Are we gearing up for the next technology revolution that will hit the relatively fewer numbers of higher-paid service-based workers next (think blockchain technologies, AI and more and more efficient and sophisticated software – just off the top of my ill-informed and unimaginative head)?

    To eliminate work and jobs, that should most definitely be the goal of pure Marxism. Conservation is in direct opposition of Consumption and only one of these is by its very definition sustainable in a world of finite resources and exponential population growth. Competition is naturally inefficient while cooperation provides the opportunity to make a livable future for all. Which of the two brings out the best of human nature…? Well stepping back a few steps from the image of the mushroom cloud over Hiroshima should give us pause to reflect on this important question.

    I’m not that smart, but I consider myself an armchair student of history. My bet’s on the expansion of the current system of corporate fascism (called Corporatism) through more direct and overt measures. They fantasy can’t be maintained like it was anymore and there’s this darn thing called votes. There’s an outside chance of bringing us back towards a more Keynesian economy, but that would only delay the inevitable. It is a new world order, so how this plays out in the USA should provide us insight into how the world will respond – after all there are numerous vehicles our corporate fascism can and has effectively utilized around the globe. To name a few: the IMF, WTO, World Bank, the military, and the Dept. of Homeland Security.

    Democracy? That relies an informed body politic. It started with this thing called “national security” and here we are running around with bombs strapped on our chests. Does anyone really believe we have a system that is transparent, honest and introspective at its core anymore? I say, welcome to the political realm of security and surveillance – the next stage in the Tyranny of Lies – brute force, walls and private security armies. They paid for it on our backs, but do we really have the Will to take it back?
  • commented 2016-09-21 17:51:16 -0400
    I pressed the wrong button. Our “profit” is the benefit and knowledge we gain from achieving what we set out to do. It is also the way we will learn to improve things, but it should not be the end purpose, as it has become when dealing with finacial issues. That is the distinction when it comes to so many of these “finacial products” being marketed today – they achieve nothing of constructive value and only really have the one purpose in making a profit. Proper capital investment aims to achieve something constructive that will benefit the society, and that’s where it comes back to the philosophical approach of a Government in how they allow the finacial markets to operate.
  • commented 2016-09-21 17:41:34 -0400
    In response to Deborah’s post, I would suggest it is more a philosophical issue than a moral one. As for making a “profit” that is something everyone of needs to do in every effort we undertake.
  • commented 2016-09-21 11:19:55 -0400
    With great respect for Richard Wolff, I would suggest that the central issue is a moral issue coupled with a practical question: “Is it ‘right’ to profit at the expense of another, the community or the environment?” The practical question: What is it about existing governing structures and methods of decision making that we would be wise to examine and even change?

    While it might be challenging to obtain full agreement regarding the moral question, I offer the following as but one response to the practical question: Sociocracy – decisions made sociocratically are (1) made by consent, (2) consent is obtained through equivalency of voice and exists only after any paramount objects have been understood and satisfactorily overcome (not by force, but by changes in any proposal), (3) All decisions, after being consented to, have an agreed upon date specific for evaluation, and, (4) an agreed upon method of evaluation; (5) at any point after implementation, a concern may be raised and must be considered.

    I would also suggest that tying economic decisions to the notion of constant growth appears to me to fly in the face of the fact that resources are not infinite. It seems that we, in particular those in the so-called ‘developed nations’ would be well-advised to examine our values, our aspirations, our goals, our public policy and our foreign policy.
  • commented 2016-09-21 03:21:56 -0400
    Richard gives us some issues to consider, however some matters are omitted in Richard’s analysis, descriptions and explanations. I found Richard Koo very helpful in understanding what is going on in economies throughout the world. He uses the concept of a Balance Sheet Recession to explain the massive debt problems and economic crises in Japan and the rest of the world. An economy in a balance sheet recession is a kind of new disease, not explained by current economic theory or found in economics textbooks. The working hypothesis Koo argues is in this context not about profit maximisation but debt minimasation. When Asset bubbles caused by excessive borrowing and lending in the financial sector burst, households and firms balance sheets go underwater – asset prices crash downwards, liabilities exceed assets and equities, net worth, crash. People now focus on repaying their debts.This was experienced in Japan in the period 1995 to 2005, in the USA in the 1930’s and a balance sheet recession can also explain the 2008 financial crisis in the USA and in the rest of the world. Monetary policy / QE / low or 0 interest rates do not work, because people are repairing their balance sheets, paying back their debts, not borrowing and not spending – even though interest rates are zero! However fiscal policy, government spending and deficit spending, helicopter type of money drops, do work (see also the work of Steve Keen, Adair Turner (UK), Minsky, Thomas Pally, Stephany Kelton, Robert Parenteau (USA)). It worked in the USA to sort out the the 1930’s Great Depression – the new deal by the President / the government! In a balance sheet type of recession, disease, government is the only borrower in town and when governments spend more than they collect in taxes this is both necessary and good. Governments do not have to balance their budgets , G = T or run surpluses, whether they do or not depends on the circumstances of the economy and correctly diagnosing the problem – the disease! This is misunderstood by policy makers throughout the world. Richard Koo is easy to access on the www.
  • commented 2016-09-20 22:30:55 -0400
    neither government nor banking nor finance will work for the majority of the people until the people create democracy in deed and not the sham we have..as long as minorities, growing smaller and smaller in number as their private wealth grows larger and larger, are allowed to dominate there is no difference between modern capitalism and ancient egypt..we now tolerate billionaires whose material wealth and power would stagger some phony god/pharaoh and our innumeracy in failing to understand that – how the hell does anyone have a billion dollars while more than a billion humans survive (?) on not much more than a couple of bucks a day? – while we are fed a steady diet of consumerist crap by these rulers can only change when enough of us grow angry enough at what is happening to the planet we live on and most of its people by having it and us treated as products in a goddam free market where nothing is free, all to benefit/profit them while we carry the ever more staggering loss..for openers, do not vote for the lesser evil and then join any and every group opting for change that is systemic and not simply individual..capitalism must end or humanity will.
  • commented 2016-09-20 21:14:20 -0400
    Richard acknowledges that the wealthy have little impact on the economy through their spending in comparison to the 99% who must spend most of their earnings. So why the focus on a symptom, wealth inequality, rather than the source of the problem?
  • commented 2016-09-20 21:04:40 -0400
    “On the one hand it enabled trade and exchange far beyond the limits of barter and other pre-money systems”
    David Graeber points out in Debt: the first 5000years; that ‘barter’ has never existed, it is a fabrication of Adam Smith, most pre-money systems were credit based, including the shops that smith used in his period!
  • commented 2016-09-20 20:59:47 -0400
    As far as I can see from this article, far too much emphasis is placed on the wages component of production. Indeed, the 1945 to 1975 period did see a huge rise in mass consumption but the fact of rising wages was an indirect cause. What the rising wages did was to allow a massive increase in borrowing power for the consumer and an ever increasing dependence on debt to sustain the productive capacity.
    Your comment about “a wide variety of other monetary (and some fiscal) policies have been tried to “manage” the crash and its consequences…” is a distortion of the truth because, the Government never tried to “manage” the banking industry at all; all it did was to ensure the existing system stayed in place.
    Your article has completely ignored the fundamental basis of any nation’s financial system, and that is that the nation’s money supply is solely and wholly the responsibility of the Government. It is not the prerogative of the private banking sector to determine how much money a nation needs, but Governments around the world have caved in on that responsibility and let the private banks dictate how and where the capital is directed.
    The single most important criteria in determining the nation’s money supply is the essential need to balance a nation’s productive capacity with it’s consumption capacity. There is absolutely no point in producing anything if it is not going to be consumed. So far in the financial history of the world, there has been a woefully inadequate way of distributing purchasing power to the general public to ensure there can be a balance between production and consumption. The wages/salary component in the chain of producing virtually anything is in the order of 25% to 35% of the total cost. All the other costs in raw material, overheads, infrastructure, borrowing, taxes and profit margins are relatively fixed, hence the attraction in lower wage costs to increase the profit margin.
    In the longer term that becomes a self defeating exercise as it reduces a nation’s purchasing power to a level that cannot absorb the production, even when the prices are lowered. The end result has to be a recession, or even worse, a depression that will ultimately force the Government to step in and try to correct the imbalance.
    Until Governments around the world face up to the fact that they have monetary sovereignty over their nation’s money supply, and are prepared to take the responsibility to ensure the total supply is properly managed in the interests of the nation and the people, the private banking fraternity will continue on their merry way of boom and bust cycles to gradually take over the nation’s entire wealth.
  • commented 2016-09-20 20:42:37 -0400
    There is a need for a path to follow out of this financial/political morass to a more democratic reality that addresses the problems of the people of the country instead of merely ensuring the rich get as much as they want or most of everything including all the political power. We need a coming together in the spirit of the constitutional convention that deliberated at the beginning of this country to create a plan for the country to follow into a new beginning.
  • commented 2016-09-20 19:21:16 -0400
    In the past century, the tendency of industrial capitalism toward ever more increasing productivity of labor, was the dominant theme of economics. The impact on culture, was the rise of sci-fi epics about a not so distant future (2000, 2010 or so) wherein all necessary work is carried out by machines and people enjoy the free time otherwise they would have to spend to do those works.
    The end of competitive capitalism begetting the rise of monopolies, followed by financialization and globalization, put an end to those dreams. Today, instead of flying trains and robotic butlers, we got iPhones and smart phones. All of those big dreams are summarized in a small device which, by means of intrusive advertisement and promotion, is sold to consumers in prices of at least 10 times more than its real value. Some poor people in third world countries would sell their body parts (e.g. a kidney) to buy an iPhone.
    Still, there are people around who have not woken up from old dreams and see a bright future for their glorious capitalist economic system.
  • commented 2016-09-20 17:58:40 -0400
    It seems that the financial sector is completely divorced from the real economy. It is essentially a self-contained economy that feeds upon itself with no tangible products. To leave decisions regarding the public sector to the private sector makes no sense. A democratic government should decide the priorities needed for a functioning and thriving society and, in conjunction with the private sector, allocate the resources, human and natural, required to achieve those goals. The private sector may serve as a valuable tool but it should not the brain nor the hand guiding that tool.
  • commented 2016-09-20 17:44:13 -0400
    Corporate wealth has infiltrated politics to such a drastic degree that the decisions of the elite CEOs and board members of giant corporations hold far more weight than any decisions of our so-called representatives in congress. In fact, most “representatives” in the two major parties dance to the corporate tunes without care for the unrepresented masses needs and wishes. Other economic views of minority parties/groups/grass routes movements are continuously locked out of the conversation and political process. We cannot wait for economic calamity to be the motivation behind fixing our social/economic/political ills.

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