By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website.
Financialization is not new, nor is discontent with it.
“Capitalism is essentially a financial system, and the peculiar behavioral attributes of a capitalist economy center around the impact of finance upon system behavior.” Minsky (1967)
Fifty years ago, Minsky zeroed in on instability as the central flaw of the financial system of his time, and located the source of that instability in excessive business borrowing and bank lending. But his was an economist’s discontent. Non-economists go farther, in at least three dimensions.
Polanyi (1944) famously zeroed in on the way that the logic of markets gets extended to “fictitious commodities” – land, labor, and money – and the way that society reacts defensively to that illegitimate extension. Today, arguably, it is the logic of finance that has been so extended, turning everything it touches into an asset with a speculative price.
Brandeis (1914) objected differently to the way that accumulations of financial wealth – “other people’s money” – tend to undermine democratic political forms (among other problems). Today, arguably, it is the institutionalized character of those accumulations (TBTF) that threatens political forms.
Bryan (1896) famously drew attention to the “cross of gold”, the deflationary effect of the international gold standard on domestic farm prices in the emerging market economy of the United States. Today, arguably, the analogous issue is the hegemony of the US dollar imposing discipline on emerging market economies, most importantly the BRICS–Brazil, Russia, India, China, South Africa.
All three of these non-economist discontents are concerned with the boundary between the market system and something else–non-market goods, the political system, national developmental priorities–boundaries on which they see the market system encroaching. To the extent that capitalism is essentially a financial system, they fear extension of its logic and wish to keep it safely confined. All three see markets and finance as something separate from society, at least in principle. The money view, by contrast, sees markets and finance as essential infrastructure for modern society.
Economists, for their part, focus on problems with how the logic of money and finance actually operates, even supposing that logic could be confined within a separate sphere of the “economic”. Probably no one thinks the present system is working well. But reaction to evident dysfunction has produced a vast array of proposed fixes, ranging from 100% money to bitcoin, from helicopter money to debt jubilee.
From a money view perspective, it is notable that almost all of the proposed fixes begin analytically from a conception of what money “really is” (or should be), and conceive of credit as a kind of superstructure built on top. Almost no one starts with credit as the elemental relationship, and hardly anyone recognizes the interlocking web of commitments that constitutes the fabric of the modern economy.
From a money view perspective, the origin of discontent seems to lie in the fact that each of us, in our interface with the essentially financial system that is modern capitalism, operates essentially as a bank, meaning a cash inflow, cash outflow entity. We like the elasticity of credit, that allows us to spend today and put off payment to the future. But we don’t like the discipline of money, which is to say ultimate payment.
And most of all, we don’t like the asymmetry of both credit and money. Creditors may or may not accept our debt, and even when they do they may or may not accept ultimate payment in the coin we prefer. The system is inherently hierarchical, hence our discontent, a discontent that is only made worse when creditors are people (or institutions) unlike “us”, and especially so when they insist on repayment in a currency not our own.
There is thus good reason for discontent, but there are also lots of bad reasons based on fundamental misunderstanding of the nature of the system. Focusing on what money really is – whether gold or state fiat – shifts attention away from what credit really is, which is to say away from the center of discontent. As debtors, we owe society; as creditors, society owes us. Whether we want to or not, we are each of us banks, managing our daily cash inflow and cash outflow relative to the larger system which is society.
Brandeis, Louis. 1914. Other People’s Money, and how the bankers use it.
Bryan, William Jennings. 1896. Cross of Gold Speech.
Minsky, Hyman. 1967. “Financial Intermediation in the Money and Capital Markets.”
Polanyi, Karl. 1944. The Great Transformation
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Not sure the bank thing is a good analogy. Seams when a financial system raises the cost of an asset like land through speculation to the point where a debtor has not enough income to cover outflow to provide basics of survival….. food, water, shelter, community etc……..then does the crrditor/speculator thus owe society because, it was through speculation and Mal-investment that society was damaged.
Thomas Jefferson….I think, said something along the lines…… if banks get a hold of credit creation then, by inflation and deflation the citizens of this country will be left homeless upon the land their fathers established.
We are all “banks”, but we don’t have the capacity to socialise costs and privatise benefits.
The problem is thereby, a problem of the power structure and accountability. Of institutional decay and corruption.
Very well said!
Capitalism has always favored the few at the expense of the many. Yet there have been places and moments, like in post-WWII U.S., where effort has gone into making the financial system at least appear somewhat transparent and predictable. Today we simply suffer the unrestrained looting of kleptocrats who laugh in our faces if we dare to complain. They violate “rules” that are already tilted in their favor with impunity. Meanwhile, if you are a poor person, unable to pay a traffic ticket in a timely fashion, you may well lose your liberty, or even your life.
I’m curious what makes capitalism unique for you in that regard? I agree that there are problems with market-based economics, but you seem to be suggesting that other forms of political economy don’t have problems of concentration of wealth and power?
Capitalism without democracy and individual rights absolutely favors the few at the expense of the many. That’s why our intellectual enablers have spent so much energy trying to separate economics from politics: to camouflage political choices as if they are natural economic outcomes.
I’m not sure what “other forms” you have in mind for comparison. But I would suggest it is a huge failure of imagination to suggest humans have exhausted all possible forms of economic organization and are stuck with contemporary global capitalism. Time for some innovation!
Or even time for some disruption.
Agreed. But I would suggest back that it is a huge failure of intellectual honesty for those in more comfortable positions to peddle softer versions of the status quo as if it’s some kind of notable innovation. There’s a lot of scapegoating capitalism going around not in service to honestly evaluating the problems, but rather, to deflecting attention away from political choices that run directly counter to market-based economics and civil liberties. It’s the age old scenario of the man shooting his parents and then begging the court for mercy because he’s an orphan.
I respect actual radical proposals; I think that’s where the genuine debates and exchanges of ideas about the future exist. Is democratic capitalism, liberal democracy, constitutional governance, life, liberty, and pursuit of happiness, whatever we want to call it, the best we have, or are there options to fundamentally reject private property and individual rights in favor of something better?
What makes me nervous is when the same soup warmed over is served as if it’s not only not the same soup, but even proclaimed to not be soup at all. Okay, this metaphor is getting soupy. Wash out.
Agreed.
And as Mehring points out: “Focusing on what money really is – whether gold or state fiat – shifts attention away from what credit really is, which is to say away from the center of discontent.” It’s the quality of that debt, what it is and why, that needs far more examination. At present, it is at the root of much discontent: why should I and mine be expected to salvage bank balance sheets that are essentially fraudulent in terms of crap mortgages?
The institutional decay is really some kind of measure of the quality of crappy debt, which is making many of us seriously discontent at being expected to cover crap bets.
The problem we have is that the system is rigged. Bad actors in the upper class can destroy their bank for fun and profit. Individuals father down the scale cannot discharge student loans under any circumstances. This is the largest source of discontent and a problem elites refuse to address.
And the elites won’t address it until they are jailed or guillotined. Why should they?
Why should they stand against a rigged system or why don’t they?
They should because it is the right thing to do. The don’t because they are immoral.
The article starts off well enough, but then loses track of the critical standpoints it initially sets out. For example, within the above idea, the author can’t talk about dimensions of life that are not monetizable because they are a capitalist prerogative. For instance, if someone is forced to work mandatory overtime because their employer doesn’t want to hire enough workers to cover demand without overtime, you either do the overtime or you exit. You can’t buy your time off. Etc.
I’m not sure what point this article is attempting to make. The distinction between money and debt becomes moot if money is a debt — which if I understand his arguments correctly is what Michael Hudson argues in “Killing the Host”. I do like the reading list at the bottom. I’m behind many of the rest of the commenters in not having read any of these oft cited books.
I agree with other comments the formula “we are each of us banks” is lame. I think it matches nicely with the oft repeated analogy between government finance and a family business.
The close: “fundamental misunderstanding of the nature of the system” leaves me hanging. Where is the explanation which clarifies things and repairs my misunderstanding? I missed it in the presentation above and the concluding absurdity — “… we are each of us banks, managing our daily cash inflow and cash outflow relative to the larger system which is society.” — hardly serves as clarification of anything. It just makes me annoyed that I bothered to read down that far.
Bad analogy: If each of us were our own bank, then we would be able to create money like banks and loan out with interest and make billions each quarter because sometimes we could speculate or gamble and make billions more while our fellow citizens become poorer because of our efforts.
You make wish I were my own bank. Reminds me of Bill Black’s formula for the best way to rob a bank.
If you have a line of credit or even a credit card, you are creating money every time you use it. The challenge is to use debt to lever income-producing assets or to enhance productive capacity – to invest, in other words. Using money you create thru debt for consumption is not a good practice.
Investing in your own education thru debt is a good practice tho as always in all things caveat emptor.
Unlike some commenters, I do happen to like the imagery of all of us being banks. That’s what we all do: our labor flows out, other people’s labor flows in. Imbalances can (and in fact, almost by definition have to) occur over arbitrarily short time frames, but over longer timeframes, these inflows and outflows do have to roughly balance. It also helps lay bare the fallacy of bailing out individual banks (TBTF) as some kind of means of saving the banking system rather than those specific banks bailed out. If the USFG gave Wash a trillion buck bailout, Wash Banking Inc would be very grateful and fix lots of things in Wash Town USA and make lots of jawbs and groaf and all dat. Does that make it good policy, either for the residents of Wash Town or the residents of Dry Town across the valley?
Where I don’t quite follow the author’s point is in distinguishing money/credit/financialization/etc. The easiest way to understand money at a macro level is that money is labor. Or a bit more complexly, money is the mental construct, the idea, by which we value human labor and transport that value across spacetime.
The issue of financialization isn’t market vs. non-market or money vs. non-money or something like that. Financialization is about the subset of money called currency, particularly currency units issued by a sovereign government, being used to allocate resources in areas where currency units are poor allocators of resources. Financialization is about middlemen and looters skimming off money as it flows through; whether this is good or bad in a particular case depends upon whether those middlemen add value or simply act as rentiers. The biggest areas of financialization in contemporary western culture, especially in the heart of the free world in DC, are not markets at all. They are government sponsored enterprises carrying out that age old quest of the Will to Power. Remove USFG policy choices to run a global empire abroad and create massive inequality at home, and our supposedly market-based financial system would shrink to a much smaller size overnight.
If money were true labour then bankers would be broke!
That’s the irony. People keep claiming banks can create their own money. But they can’t. They would all be broke if it weren’t for the government giving them money. Remove the government subsidy – just a fancy way of describing an arrangement where the general public performs work for the banksters – and indeed the banksters would be broke.
“Financialization is about middlemen and looters skimming off money as it flows through; whether this is good or bad in a particular case depends upon whether those middlemen add value or simply act as rentiers.”
You hit the nail on the head here. Profits from financial transactions differ from those derived in trading commodities and services. The former are occult whereas the latter originate in the value of labor power. The claim that financial profits track interest rates doesn’t work because they remain linked to credit and ultimately commodity exchange. If you listen to the Blankfeins and Dimons, they will say they are compensated for some special managerial skills that add values to the financial transaction. This is only nonsense to justify their mega-salaries, themselves only a fraction of the huge profits in finance. According to Hilferding’s Finance Capital, the source of profit in finance is “sui generis” and derives from what we now call transaction fees. Whether legitimate or not, we need to understand how those rates are determined relative to the other variables.
Thanks, I think this is where there is opportunity, for us to understand and make decisions about how these things are related to the other variables.
I’m constantly fascinated about the circular justifications of large compensation packages. That’s the weak point where it all breaks down. Under scrutiny, the defense of wage inequality turns out to be a defense not of the best interest of the system, but of the rather more provincial defense of personal privilege.
money is the mental construct, the idea, by which we value human labor and transport that value across spacetime.
But even this has to be qualified by tradition, power relations, etc. as there are many, many forms of human labor (often those forms traditionally performed by women) that we value but do not compensate with money. Also, who is “we?” And when did “we” decide that 2 and 20 was appropriate compensation for the “value” provided by hedge funders?
I wholeheartedly agree. This is my critique of MMT in a nutshell. It’s so focused on the subset of money that is financialized labor, labor in jawbs in the formal economy, the aggregate quantity of national currency units, that it is naturally blinded to the bigger picture of “tradition, power relations, etc.” Of what use is JG for poor people in prison, or the single mom left outside? They have jobs. Terrible jobs. Instead, we should give financialized money (national currency units) to people who need it before they end up in prison in the first place. Prevention rather than punishment. We pay lip service to women, yet we destroy families, use public policy to entrench wage inequality, don’t provide universal health insurance, and make them go through incredibly demeaning hurdles, hurdles that create intergenerational poverty and incarceration, to obtain what meager ‘welfare’ our society does offer.
Yep, that is my interest as well. I do not think we are encountering monetary problems, primarily. We are, mostly, encountering political problems, which is a whole different dilemma. “We” is the government; the citizenry; the body politic. It’s the government that entrenches wage inequality today. We don’t live in the 1920s era of inequality where lack of government was the major characteristic. Today, we live in a world where the government is an enormous actor, both in terms of the national currency units it spends and in terms of the power it wields to direct labor in the private sector without it showing up in the financial reports of spending of national currency units. What does the USFG “spend” in financialized money, USD, on, say, intellectual property? Not much, yet IP law has a huge impact on traditions and power relations in contemporary society.
The single biggest thing “we” could do to help women with housework would be to end the drug war specifically and the two-tiered justice system more broadly. That would free up billions of labor hours a year – mostly male labor hours. But of course, it would ‘reduce’ spending and aggregate demand in the subset of the economy that our intellectual class cares about, so we should probably continue pretending that prison construction jobs and prison doctor jobs and prison guard jobs are good. I mean, we need more aggregate demand, right? Cutting spending is Evil Austerity?
The fact that women doing household work aren’t paid in national currency units doesn’t mean their labor isn’t a form of money. Rather, it means that some portion of their labor (money) is being taken by others. That’s an arrangement that has been going on for a long time. The many work so that the few can live a life of luxury.
This “economist” alludes to, but fails to make the connection of the “asymmetrical” AND disproportionate power between creditors and debtors, that has been legislated, ratified and codified into the creditor castle (institution) of banking, currently run by banksters and moated with pols, judges, story-tellers masquerading as “journos”/”economists” etc….e.g.-assuming it were possible to make a sharp distinction between speculating and investing, by what reasonable definition of creditor can vultures be classified as creditors?
Also doesn’t seem to challenge the presupposition of “self-regulation” in the abstract “logic”(and language) of “markets”, which is innate in thinking of “money” as a commodity. This abstract “logic”(and language) has “supplied” the fodder for neoliberal zealots to rationalize de-regulation, which many have concluded has been a major driver of the “defining issue of our time” and the disdainful polarization between the “haves” and “have-nots”.
Also seems to fail to recognize the conflict when thinking about money as a commodity and the effects of compounding interest…
Thanks for this. I followed the link and have started reading Louis Brandeis’ Other People’s Money, which I’ve never read before. We’ve learned little in the ensuing 100 years…
Mehring’s concept of financialization appear to be his beginning attempt at a type of reconceptualization of the history of American capitalism.
His money view argues persuasively that the real origin of discontent should begin not with conceptions of “… what money really is (or should be)” but with the nature of credit/debt and its interlocking web of commitments.
His (and Minsky’s) insight that the nature of the capitalist game for all of us is the balance between cash commitments and cash flows captures nicely the two sides of uncertainty which each of us face in a system where the exact co-ordination of such payments is impossible.
His money view sees “..markets and finance as essential infrastructure of modern society where as debtors, we owe society or as creditors society owes us.”
Such a conceptualization seems to put him at odds with Hudson when Hudson argues that a financialized economy tends to become a mortuary where the host economy becomes lunch for finance. Mehring appears to be more hopeful that the death of the host can be avoided.
Part of the strategy for avoidance may be in the degree of democratization that has taken root. It seem imperative that both Hudson and Mehring begin to focus more intently on the relationship between wealth creation and the necessity of political de-centralization–rather than the more traditional left response arguing for the necessity of a more powerful State.
And if there is a connection between a potentially powerful democratic politics and a strong economy then maybe the strategy of the Sanders grouping (assuming they can formulate a new conception of the State) should be to attempt a takeover of the Republican party rather than wasting its time with the terminally and increasingly authoritarian Democrats.
Would you agree that money is debt?
The author has a narrow understanding but doesn’t realize it.
I’m grateful for insights I’ve gotten from others along the way, in particular the understanding that money gives us a way to energize our values and activities. This made me more aware in what values I’m supporting whenever I spend or invest money. (Am I supporting creativity? the abundance of the planet, or its exploitation? Fear? Beauty? Fairness?)
I’m particularly grateful to David Martin & the folks at M-CAM for understanding, speaking and demonstrating in their daily lives that financialization is part of the problem we face as a society. We have created structures that keep trying to reduce everything to numbers, using accounting systems and metrics that do not acknowledge or respect a multitude of values that are equal or greater in importance–the quality of our relationships and interactions; our skill and experience in many situations; the health of the planet; the vibrancy and connectedness of the lives we potentially lead. His Future Dreaming documentary is a good introduction. The link has a number of short clips.
Ways of thinking and interacting that have greater possibility will take us further.
“Economists, for their part, focus on problems with how the logic of money and finance actually operates,”
Err, no. Most economists don’t focus on such problems. And I doubt the good professor does either, unless he works without a economic textbook.
Most economists don’t understand what ‘money’ actually is, don’t understand how it is analoguous to blood and blood flow in the body, and especially have no idea how ‘finance’, aka Wall Street or TBTF Banks, works.
What they do focus on is the ‘law of supply and demand’, the supply of production and its costs & expenses, and just a nod to the demand for production.
How have urban political responses either ameliorated or exacerbated different cities’ housing crisis? How do the current responses differ from its predecessors?