Economic & Political Weekly
By: D N Ghosh
July 14, 2012
Over the years, financial activities have come to consume an enormous amount of time and resources. The gross value added by financial corporate business in the United States (US) has been moving upward consistently: from 2.3% of the gross domestic product (GDP) in 1948 to 9.1% in 2010 (p12). Clearly, we have been witnessing what Kari Polanyi Levitt (2008) termed "The Great Financialisation", signifying a long-term shift in the centre of gravity of the capitalist system from production to finance. Also labelled "financial capitalism", this finds its reflection in every aspect of the economy: share of financial profits as well as of total profits, rising levels of debt relative to GDP, a pyramidal financial superstructure built on the foundation of innovative opaque instruments, and so on.
The recent financial crisis has laid bare several unpleasant facts about the functioning of financial capitalism. Robert Shiller had dissected the nature of the crisis in two earlier books, Irrational Exuberance and The Sub-Prime Solution. Admittedly, the credibility of the system itself is at stake and the persons in command, the drivers of the system, have been the targets of public hostility. There is a general perception, as Shiller recognises, that "the wealthy in our society - among them the financiers - have a real and genuine incentive to use devious means to attack and subjugate, economically, the majority of the population" (p220). Such an attitude towards finance, if allowed to continue unchecked, would pose a threat to the advance of the world's prosperity in the coming years (p 220). Finance owes it to itself to undergo some kind of penance. The book is the outcome of an attempt by Shiller to "develop a working theory of financial capitalism to help guide the greater discussion of finance and the good society" (p 14). In his judgment, it is only on the strength of such a reform package that finance should strive to redeem itself.
What Is Good Society?
But what is "good society"? The term can lend itself to a wide variety of interpretations, depending on whether one is looking at it from the perspective of a philosopher, sociologist, psychologist, historian or economist. Shiller has defined good society, in general terms, as "an egalitarian society, one in which all people respect and appreciate each other" (p 1). A good society, in his judgment, has to be an ownership society, "one in which citizenship and responsibility are encouraged by the widespread ownership and control over individual properties". A real sense of participation in society and the economy may be promoted by policies that encourage more business-oriented ownership, most notably ownership of broad portfolios representing the real productive assets of the country (p 214). This would be the way to prevent concentration of economic power, an essential foundation of good society, but in a manner that does not ignore the essential role of sophisticated finance as one of the key factors in economic growth and prosperity (p 228). To achieve that, financial capitalism has to reform itself and address the issue of what he has, in his earlier book The Sub-Prime Solution, termed "Financial Democracy: Democratising and Humanising and Expanding the Scope of Financial Services" (emphasis in original).
The members of any society, be they households, small businesses, corporations, civic institutions, or governments, have different kinds of goals, and if they are to function cohesively, they have to be assured of access to the full range of services in every sphere of finance, be it banking, insurance or securities. But how will this come about? The first part of Shiller's book, consisting of 18 chapters, is an elaborate exposition of his thinking as to how the range of participation of the disadvantaged groups in the financial market may be widened. For example, for low- and middle-income groups, the complexities of the market can be scary, which, in effect, would keep them away. If we expect these groups to navigate their way through the intricacies of the market, they have to have recourse to legal and financial services, the cost of which may be prohibitive. Thus, Shiller makes the interesting suggestion that to widen market access for those who cannot afford to pay for legal and financial services, such services be made a public good, financed by the government. If the legislators are to be won over, organised and sustained pressure on them through lobbying is a must, and if so, "we need lobbyists as representatives for all groups, including for the other 99% with which the Occupy Wall Street protesters identify". So Shiller advocates lobbying on behalf of these groups as a public interest activity.
In two interesting chapters on philanthropy, he argues that if the windows of opportunities are to be opened for the voiceless people of today to enable them to access the financial markets, support has to come in a big way from the philanthropists. The core of Shiller's thesis is that if finance has to contribute to social good, the financial elite of the society along with the other organs of financial capitalism - their working partners in running the present system - have to change their behavioural pattern and must accept the responsibility for "enlightened stewardship" for managing financial assets in a way that can bring stability to the capitalist system and insulate it from recurrent disruptions.
Can we share Shiller's touching faith in financial elites as crusaders for ushering in a "good society"? Ignoring all that has been happening in recent decades, he believes that financial engineers can help us solve our problems in the future "just as mechanical engineers have designed the artificial heart or electrical engineers have designed the mobile phone" (p 74). What makes one think that finance capital will suddenly, of its own, change its colours? What kind of economy have the financial elites - the driving force for financialisation ever since the 1970s - produced? More and more money went into speculation on asset values because this is where profits were to be had. Why invest in low-profit production when you can source money at cheap rates and move it around the world through innovatively-created financial instruments? Unemployment has been on the rise, and inequality has increased sharply, leading to the progressive undermining of what could be deemed to constitute a good society. As David Harvey (2010: 30) puts it pithily,
"It was as if the banking community had retired into the penthouse of capitalism where they manufactured oodles of money by trading and leveraging among themselves without any mind whatsoever for what the working people in the basement were doing."
This passion for maximising opportunities for profit, which gives the elites the command over resources to influence the polity and economy, has been overriding every other consideration, irrespective of the consequences it may have on the economy and society. It is utopian to think they would willingly participate in any reform programme aimed at creating or reinforcing social values and institutional practices that place limits and curbs on the self-perpetuating needs of profit maximisation. We cannot expect them to be their own gravediggers.
Market vs Society
What we are witnessing today are the consequences of a disjunct between the values that drive the market and the ethos and aspirations of society. The motives and aspirations that drive the financial community have to be those that are relevant to the society concerned. What society is looking for is the availability of goods and services that are needed for good living, namely, health, food, education and the like. The powerless people are craving for their entitlement to basic goods that make life worthwhile. The pattern of investment has to be in harmony with this compulsion. It has to be socially vetted; it cannot be left to the wisdom of profit-making financial capitalists.
Financial stability is a public good, an essential component of good society. Society has to be assured of it. We cannot delude ourselves in believing that time is on our side and that we can still afford to sit and wait for finance to evolve in ways that Shiller believes it can. For far too long we have nursed the expectation that somehow market operators will learn to behave themselves. The $2 billion loss of J P Morgan in mid-May 2012 is a stunning reminder that little has changed over the decades. The same thing had happened in 1995 with Barings; in 1998 with Long-term Capital Management; in 2000 with Enron and World Com; and in 2008 with several Wall Street businesses. Financial stability will continue to remain a distant dream unless financial entities are made to behave, as the Financial Times urges in an editorial (16 May 2012, "more like public utilities - predictable businesses, with low stable returns").
We need social intervention, imaginatively conceived and purposefully directed, to realise the objectives of what Shiller visualises as "good society". This responsibility for steering us to that goal has to be accepted by the polity. There are more tools available today than before, but the polity must have the will and the character to insulate itself from the influences of the dominant power network that financial elites have created to serve their own interests. If finance has to serve society, in the inclusive sense of the term, there must be good people in polity to make that happen.