By STEPHEN MAHER & SCOTT AQUANNO*
Finance capital in its current form represents a much more concentrated form of financialization and a much closer link between finance and industrial capital
Introduction
The 2008 financial crisis marked a fundamental shift in American capitalism. As crisis management efforts by the Federal Reserve and Treasury drove state power deeper into the heart of the financial system, successive rounds of quantitative easing facilitated the unprecedented concentration and centralization of corporate ownership in a small group of giant asset management companies.
In the wake of the crisis, these companies – BlackRock, Vanguard and State Street – replaced banks as the most powerful institutions in contemporary finance, accumulating proprietary power on a scale and scope never before seen in the history of capitalism. These asset management companies became the central nodes in a vast network that incorporated almost every major company from every economic sector.
This advent represented a historic transformation of corporate power. Since New Deal, the separation of ownership and control had been a central feature of the corporation's organizational form: those who owned the company (shareholders) were formally different from those who controlled the company (managers). In the decades before the 2008 crisis, markets mediated the relationship between shareholders and managers: shareholders “fled” underperforming companies by selling their shares.
But with the rise of the Big Three after the financial crisis, the distinction between ownership and control has broken down. As “passive investors,” asset management companies can trade changes in the position of companies they own in a stock index, such as the S&P 500 or Nasdaq. However, because they are unable to simply dump shares as they fluctuate, they look for more direct ways to control industrial corporations.
Such financial influence over industrial corporations has not been seen since the first Gilded Age (1870-1900), when titans like JP Morgan dominated American capitalism. For more than a century, the concentration of property power was limited by a trade-offs Basic: Investors could own a relatively small share of many companies or a large share of a small number of companies.
With greater diversification, in other words, shareholdings were diluted across many companies, limiting the control that investors could exercise over any particular corporation. Investors could thus accumulate enough stakes to exercise substantial power over only a relatively small number of companies. The rise of giant asset management firms since 2008 has reversed this dynamic: the Big Three have become the largest shareholders of almost all of the largest and most important companies.
Today, the Big Three are collectively the largest shareholders of companies that comprise nearly 90% of the total market capitalization of the U.S. economy. This includes 98% of companies in the S&P 500 index, which tracks the largest American companies – the Big Three own an average of more than 20% of each company.
Equally notable is the speed with which this concentration occurred during and after the 2008 crisis. From 2004 to 2009, State Street's assets under management increased by 41%, while Vanguard's increased by an even higher 78%. BlackRock's unique significance within this power structure, however, is reflected in the explosion of its assets under management by almost 879% during these years, becoming by far the largest global asset manager in 2009.
The pace and scale of this change heralded a new phase of American capitalism, defined by the unprecedented concentration of ownership, as well as the centralization of corporate control, around a small number of financial companies. Giant asset management firms now play a highly active, direct, and powerful role in corporate management – and do so in relation to almost every publicly traded company in the American economy. They became “universal owners,” managing the entire share capital of the United States.
Fall and rise of finance in the USA
The close link between financial institutions and non-financial corporations established after 2008 constituted a new form of fusion of financial and industrial capital that the Marxist political economist Rudolf Hilferding dubbed “finance capital” in 1910.[I] Although the term has been widely misused, financial capital does not simply refer to finance capital, much less banking capital.
Instead, finance capital emerged through the conjunction of finance capital and industrial capital. It is a new form of existence for capital that is established through its union – a synthesis that suppresses the original industrial and financial forms. Through this process, financial institutions began to play an active and direct role in the management of industrial corporations. By shaping the strategic direction and organizational structure of the corporations they controlled, financiers aimed to maximize returns on their money capital both through stock prices and through obtaining dividends and bonuses (forms of interest payments). .
Finance capital is a specific form of financialized capitalism. In general, financialization refers to the process by which money capital – or the circuit through which money is advanced and then returned with interest – achieves greater dominance over social life and the economy. The expansion of money capital was, as has often been noted, an important feature of the neoliberal period. This was reflected in the “dedicated shareholder value” doctrine, which holds that companies should give greater weight to rewarding investors through dividends and share buybacks.[ii]
Finance capital in its current form represents a much more concentrated form of financialization and a much closer link between finance and industrial capital. A central argument of this book is that neither the broader trend of financialization nor the emergence of finance capital indicates the decline of capitalism, or even the weakening of industry, as has often been claimed. Instead, financialization has occurred to increase competitiveness, maximize profit, and increase labor productivity and exploitation.
Furthermore, unlike the many studies that portray financialization as an abrupt break with a non-financialized capitalism that preceded neoliberalism, we argue that the roots of financialization are already found in the post-war period – as it emerged as a consequence of the efforts of the State. to impose a “tight” separation between finance and industry.
Tracing the rise of financial power in the last two-thirds of the 20th century through the first two decades of the 21st century, from the collapse of JP Morgan's empire to the rise of BlackRock, we present an alternative history of American finance that challenges the most widespread accounts. In the outline we have outlined, the history of financialization has four distinct phases: classical financial capital, managerialism, neoliberalism and new financial capital.
These phases form a cycle consisting of the decline and then the gradual, uneven and contradictory reconstruction of financial power. Each phase is characterized by specific organized forms of state, corporate and class power, with transitions marked not by sharp “ruptures” but rather by transitions that involve continuities and changes.
Hilferding's theory of finance capital was derived from his investigation into capitalist development in Germany in the late 19th century; however, his main thesis also applied broadly to the United States.[iii] During this classic period of finance capital (1880-1929), investment banks formed large corporations by merging smaller companies. The power of these banks depended on their ownership of corporate shares and their ability to provide credit.
As investment banks lent large sums of money to industrial companies, their interests became closely intertwined: while industrial companies depended on access to credit, investment banks sought to ensure that loans were repaid and thus monitored corporate operations to safeguard their investments. The banks' position as the largest shareholders ensured their power over corporations, allowing them to acquire seats on boards of directors and establish “linked boards” of the companies they controlled.
These networks of financial capital became looser with the increasing fragmentation of share ownership in the first part of the 20th century. A new stratum of professional managers began to exercise increasingly autonomous control over industrial corporations, to such an extent that banks were reduced to a support function.[iv] The managerial period (1930-1979) was brought about by regulations enacted in the wake of the 1929 stock market crash, which formally separated banks from the governance of industrial companies and left “internal” corporate managers as the preeminent force in the economy.
The absence of large blocks of shareholdings during this period allowed these managers to control industrial companies without facing constant interference from investors. However, at the same time, the separation between banks and industrial corporations led the latter to internalize a series of “financial” functions. They thus developed broad capabilities to raise and lend capital independently. The financialization of the non-financial corporation therefore originated at the heart of the new post-war “golden age”.
The hegemony of industrial corporations in this period was supported by the actions of the State of New Deal, which had three main attributes. The first of these was the focus on legitimation. The reforms of the New Deal, like trade union rights and social security, aimed to demobilize the intense class struggles of the 1930s. These measures increased the legitimacy of capitalism and integrated workers into the structure of managerial hegemony.
Second, these reforms led to a huge expansion of the state's fiscal expenditures, which were substantially financed through taxation. The State of New Deal it was, therefore, a tax and redistributive state; its compensation programs have reduced levels of income inequality.[v] During the period, the demands of largely apolitical unions in collective bargaining were also successful. Finally, industrial hegemony was supported by a military-industrial complex, which integrated the most dynamic corporations with state power. This generated enormous growth and diversification of so-called multinational corporations, stimulating the development of the form of corporate organization that became known as “multidivisional conglomerate”.
As the postwar boom slowed in the late 1960s, union activism for higher wages increasingly squeezed corporate profits, leading to a growing contradiction between legitimation and accumulation: union rights and labor programs New Deal have now become barriers to accumulation. This was resolved through the formation of the neoliberal authoritarian state, which disciplined labor through an unprecedented rise in interest rates and a new round of globalization.[vi]
Elections and political parties became even less significant as state power was concentrated in agencies isolated from democratic pressures, especially the US central bank, known as the Federal Reserve. This authoritarian structure was reinforced by the fact that the neoliberal state was a state in debt. As taxes were cut to restore corporate profits, state programs were increasingly financed through debt, which required increased financial discipline over state budgets. This has also contributed to increased inequality. Instead of paying taxes for redistributive programs, the rich now borrowed state funds to be repaid with interest.[vii]
In the neoliberal period (1980-2008), the hegemony of industry was countered by a new form of financial power. In part, this resulted from the integration of global financial markets, which provided the essential infrastructure for companies to circulate value through internationalized production networks.[viii] Financial hegemony was also supported by the proliferation of worker pension funds from the 1960s and 1970s onwards, run by professional money managers.
A wave of concentration and centralization of corporate actions occurred in these new “institutional investors”, who began to exercise significant power over industrial companies.[ix] However, this form of financial power was quite different from that of classical finance capital. Instead of individual banks exercising direct control over networks of firms, constellations of competing financial institutions exercised broad structural discipline.[X]
However, far from being imposed by external pressure from investors, financial hegemony initially emerged within the industrial company itself, as an adaptive response to diversification and internationalization throughout the post-war decades. In fact, this was an intrinsic aspect of the multidivisional conglomerate's form of corporate organization. Instead of being organized around one business, with greater diversification, large corporations began to include many different operations, which often had little or no direct relationship with each other.
Furthermore, these operations were increasingly international in scope. The challenges this brought led conglomerates to decentralize the operational management of business units, even when power over investment was centralized in the hands of managers at the top.[xi] These “generalist managers” did not manage a concrete production process, but rather the money capital itself; In the neoliberal period, they became financial capitalists, as their function was to establish the link between finance and industry.
With the development of capital markets within industrial corporations, their financial units and functions have become increasingly dominant. This was clearly manifested in the transformation of the corporate treasurer into a financial director responsible both for responding to “investor expectations” and for carrying out the internal restructuring necessary to meet them, as the conglomerate president’s right-hand man.
The financial capabilities of industrial companies also expanded as they sought to manage the risks of globalization by engaging in derivatives trading.[xii] All of this culminated in the emergence of the multi-tiered subsidiary form of corporate organization, whereby multinationals organized production by integrating their internal divisions with a secondary layer of external subcontractors to form highly flexible and competitive global networks.[xiii] American Apple's dependence on Chinese Foxconn is just one prominent example of this form of contemporary corporate structuring.
The new financial capital was formed after the 2008 crisis, when the diffuse financial power of shareholder capitalism, something characteristic of the previous period, was centralized through the creation of gigantic asset management companies. Amid the financial meltdown, regulators sought to increase systemic stability by orchestrating banking consolidation. When the dust settled, just four megabanks – JPMorgan Chase, Bank of America, Wells Fargo and Citigroup – dominated the banking sector in the United States.
Ironically, state intervention contributed to a bank retreat in the face of a group of giant asset management companies – namely BlackRock, State Street and Vanguard. As the State's cautious action in the face of risk drastically reduced the risk of shares, asset management companies paved the way for a flood of money to occur in this type of asset. The conversion of savings into shares further reduced risk and led to continued increases in share prices – as well as the equally continued concentration and centralization of ownership by asset managers.
An important basis of the concentrated ownership of asset management firms is pension funds and other institutional investors, who increasingly delegate the management of their portfolios to these firms. By pooling the already enormous masses of capital accumulated in these funds, asset management companies further concentrate financial power. They thus gained a degree of economic dominance never seen since the days when JP Morgan dominated. This has been underpinned by a historic shift towards so-called “passive management”.
Unlike active management, where highly paid money managers seek to maximize returns by “beating the market,” passive funds hold stocks indefinitely, trading solely for the purpose of tracking and approximating the movement of a given index. This allows them to offer dramatically lower management fees and, especially in the context of rising share prices, high returns. But these passive investors, contrary to appearances, are very active owners. Since they cannot discipline industrial corporations simply by trading shares, they seek more direct methods of influence, which are characteristic of finance capital as such.
If the rise of asset management firms was part of a historic shift in the organization of American capitalism, it shows in particular through the pre-eminence of BlackRock. In 2022, BlackRock's assets under management reached $10 trillion. If we include the assets it manages indirectly through its Aladdin software platform, that number approaches $25 trillion. BlackRock is now among the major owners of nearly every large publicly traded American company.
Never before in capitalism has the concentration of capital reached such an impressive extent. Their power is reflected not only in the size of their assets under management, but also in their special connection to the state. While George W. Bush chose Goldman Sachs' Hank Paulson to be Treasury Secretary during his administration, Hillary Clinton and Joe Biden considered BlackRock CEO Larry Fink for that role. Biden's top economic adviser, Brian Deese, is also an executive at BlackRock. All of this points to the growing power of this new type of financial capitalist.
*Stephen Maher is a professor in the Department of Political Science at the Technical University of Ontario, Canada.
*Scott Aquanno is a professor in the Department of Political Science at the Technical University of Ontario, Canada.
Book excerpt The fall and rise of american finance – From JPMorgan to BlackRock. London and New York: Verso, 2024.
Translation: Eleutério FS Prado.
Notes
[I] Hilferding, Rudolf – Finance Capital: A Study in the Latest Phase of Capitalist Development, London: Routledge, 1981 [1910].
[ii] Maher, Stephen – Corporate Capitalism and the Integral State: General Electric and a Century of American Power, London: Palgrave, 2022.
[iii] Of course, the structure of banking power in the United States and Germany differed, but despite the particularities and nuances, Hilferding's analysis broadly applies in both cases. The following three writings help to understand the problem: 1) DeLong, J. Bradford – “Did JP Morgan's Men Add Value? An Economist's Perspective on Financial Capitalism, in Peter Temin, ed., Inside the Business Enterprise: Historical Perspectives on the Use of Information, Chicago: University of Chicago Press, 1991, 205-50; 2) O'Sullivan, Mary A. – Dividends of Development: Securities Markets in the History of US Capitalism, 1866-1922, Oxford, UK: Oxford University Press, 2016; 3) Gourevitch, Peter A.; Shinn, James – Political Power and Corporate Control: The New Global Politics of Corporate Governance, Princeton, NJ: Princeton University Press, 2005.
[iv] Chandler Jr., Alfred – The Visible Hand: The Managerial Revolution in American Business, Cambridge, MA: Harvard University Press, 1977; Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property, New Jersey: Transaction Publishers, 1932; John Scott, Corporate Business and Capitalist Classes, Oxford, UK: Oxford University Press, 1997; Miguel Cantillo Simon, The Rise and Fall of Bank Control in the United States: 1890-1939, American Economic Review 88:5, 1998.
[v] Wolfgang Streeck, Buying Time: The Delayed Crisis of Democratic Capitalism, London: Verso, 2014.
[vi] Stephen Maher and Scott M. Aquanno – From Economic to Political Crisis: Trump and the Neoliberal State, in Rob Hunter, Rafael Khachaturian and Eva Nanopoulos, eds., Capitalist States and Marxist State Theory: Enduring Debates, New Perspectives, London: Palgrave Macmillan (in press).
[vii] Streeck, Buying Time...
[viii] Leo Panitch and Sam Gindin – The Making of Global Capitalism: The Political Economy of American Empire, London: Verso, 2012.
[ix] Michael Useem – investor Capitalism: How Money Managers Are Changing the Pace of Corporate America, New York: Basic Books, 1999; Stephen Maher – Stakeholder Capitalism, Corporate Organization, and Class Power, in Simon Archer, Chris Roberts, Kevin Skerrett and Joanna Weststar, eds., The Contradictions of Pension Fund Capitalism, Ithaca, NY: Cornell University Press, 2017.
[X] Scott - Corporate Business and Capitalist Classes.
[xi] Neil Fligstein – The Transformation of Corporate Control, Cambridge, MA: Harvard University Press, 1990; David Harvey – The Limits to Capital, London: Verso, 2007; Claude Serfati – The New Configuration of the Capitalist Class, in Leo Panitch and Greg Albo, eds., Socialist Register 2014: Registering Class, London: Merlin Press, 2013; Maher, Stephen – Corporate Capitalism and the Integral State.
[xii] Dirk M. Zorn – Here a Chief, There a Chief: The Rise of the CFO in the American Firm, American Sociological Review 69:3, 2004, 345-64.
[xiii] Harland Prechel – Corporate Transformation to the Multi-Layered Subsidiary Form, Sociological Forum 12:3, 1997, 405-39.
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