By SCOTT SEHON & STEPHEN MAHER*

“Real” industrial capital was surpassed by the “fictitious” activities of finance. This increase is a symptom of a “late phase” of capitalism, a harbinger of the system’s dysfunction and decline.

Today, it is practically taken for granted by political figures from Hillary Clinton to Bernie Sanders that the rise of finance in recent decades has come at the expense of industry. These views are also widely held among critical political economists, perhaps the most prominent of whom are Robert Brenner and Cédric Durand. Its emergence, says Cédric Durand, is “rooted in the exhaustion of productive dynamics in advanced economies and the reorientation of capital away from domestic productive investment”. According to this view, “real” industrial capital has been surpassed by the “fictitious” activities of finance. The rise of the latter is a symptom of a “late phase” of capitalism, a harbinger of the system’s dysfunction and decline.

For Robert Brenner and Cédric Durand, the rise of this corrosive financial sector crucially depended on its ability to capture the state – leading to the formation of what Robert Brenner and Dylan Riley came to call a new form of capitalism, “political capitalism”. According to these theorists, this has been perhaps most evident in the Federal Reserve's decades-long quantitative easing (QE) policy: “nonstop monetary infusions from central banks,” which Cédric Durand sees as the result of “blackmail” by a corrosive financial sector.

In a widely read and cited recent essay, Cédric Durand speculated that we are now witnessing the “end of financial hegemony.” This is because the return of inflation has created an irresolvable contradiction: while continuing quantitative tightening (QT) to control inflation would end the state support that was essential to sustaining financial power, allowing inflation to continue would also undermine finance by eroding values. assets and reduce real interest payments.

Indeed, as we argue in our new book, The fall and rise of American capitalism: from JP Morgan to BlackRock, every part of this framing is wrong or misleading. The increase in finance by no means came at the expense of industry; on the contrary, it strengthened industrial capital. Financialization has facilitated the construction of highly flexible and global production and investment networks. This intensified competitive discipline on industrial corporations to maximize the extraction of surplus value and reduce costs. The structural role of finance in contemporary capitalism makes it difficult to see both inflation and monetary tightening as a fatal threat to its power.

And far from what Robert Brenner saw as the “increasing looting” of the state by financial parasites, QE was implemented by a significantly autonomous Federal Reserve acting to meet the systemic imperatives of capital accumulation. This state-led restructuring led to the historic unprecedented concentration of ownership in the three major asset management firms: BlackRock, State Street, and Vanguard. Far from being separated from industry, this culminated in a new fusion of financial and industrial capital that we call “the new financial capital”. Critically, the ownership power of these asset managers has actually been strengthened during the current period of QT and high inflation. Cédric Durand's insistence that financial hegemony is coming to an end is therefore unconvincing.

This is not just an academic exercise: our understanding of the relationship between finance and industry has important policy implications. Framing finance as separate or opposed to industry may suggest that workers must form an alliance with industrial capitalists – their bosses – to contain a corrosive financial sector. However, if finance and industry are deeply intertwined and mutually interdependent, then the target of the left's strategy should not just be “financialization” but capitalism itself.

Our goal, made more important than ever by the worsening ecological emergency, should not be to find ways to increase regulations on finance to restore the supposedly “good” industrial capitalism of the postwar period, but rather to imagine and build a new form of democratic economic planning: gaining control of investment by transforming the state and developing the capabilities within it to manage finance as a public service.

The 2008 crisis and the rise of asset managers

Cédric Durand is correct in asserting that state intervention following the 2008 crisis was enormously significant. But what were its real systemic functions and historical implications?

This intervention was not the result of the instrumentalization of the state and the looting of its coffers by financial institutions, as Cédric Durand suggests. Rather, they were the product of a relatively autonomous state seeking to resolve a systemic economic crisis and support accumulation as a whole – acting not at the behest of specific companies, but in the interests of the financial system. It was these interventions, and in particular the continued extension of QE for a decade and a half by the Federal Reserve, that led to the historic change in the structure of corporate capitalism that became the new finance capital.

QE involved the Fed purchasing large amounts of assets and generating enormous liquidity through the creation of central bank reserves. While this was aimed at providing money to financial institutions, it was primarily about supporting the market-based credit system that evolved during the neoliberal period.

At the heart of this system were repo markets, in which financial institutions accessed short-term cash in exchange for collateral assets. The most important collateral, and therefore the basis for credit generation, were Treasury bonds and mortgage-backed securities. For the system to work, financial institutions had to view these assets as safe. Once the value of mortgage-backed securities was called into doubt, lending in these markets stopped and financial institutions were unable to access liquidity.

By purchasing mortgage-backed securities, the Fed guaranteed their value, unburdening them and supporting repo markets. As the Fed absorbed what were seen as the safest assets, especially government bonds, it pressured financial institutions to buy other assets, especially stocks and corporate bonds.

The massive flood of money into the stock market has driven a steady and widespread rise in stock prices. With a rising tide lifting all boats, it has become more difficult for actively managed investment funds – which try to “beat the market” by trading strategically – to justify their high management fees. The result has been a large-scale shift away from investing towards passively managed funds, which trade only to reflect the changing weight of companies in a given index and can therefore offer very low fees.

Before 2008, three out of four U.S. equity funds were actively managed; by 2020, more than half was passive, with nearly $6 trillion in assets under management (AUM). This concentration was especially centered on the big three and, in particular, BlackRock. Between 2004 and 2009, BlackRock's AUM grew an incredible 879 percent.

These companies are also incredibly diverse. They are collectively the largest or second largest holders of companies that make up 90 percent of the total U.S. market capitalization, including 98 percent of the S&P 500. Furthermore, they hold on average more than 20 percent of each of these companies – reversing the old trade-off between ownership strength and diversification, in which the weight of holdings tends to decrease with increasing diversification (“diluting” holdings in a larger number of companies). Asset managers have become strong owners in virtually all publicly traded companies, including other large owners like big banks.

The extent of this concentration, centralization and diversification of property is unprecedented in the history of capitalism. However, this regime remains intensely competitive. Asset managers compete with each other, as well as with all other savings outlets. To attract capital, they must offer the highest returns and lowest risk by imposing strict limits on the interest rates they can charge. Therefore, asset managers must increase their profits by maximizing AUM, as their fees are usually calculated as a percentage of this. They do so by accumulating assets and increasing the value of the assets they already own.

But because the passive funds managed by these firms are highly illiquid, unable to trade except to track a specific index, they cannot simply dump shares of underperforming companies. Instead, asset management firms directly pressure managers of their portfolio companies to maximize competitiveness and asset values ​​– blurring the distinction between corporate ownership and control.

Asset management companies have effectively become permanent and active owners of all of the largest and most important corporations in the economy. These relationships are organized through asset managers’ “governance divisions,” which centralize oversight of industrial corporations. This includes coordinating share voting strategies, collaborating with portfolio companies on governance reforms, influencing board composition, approving executive compensation and overseeing strategy.

Their large ownership stakes ensure that asset management companies have the attention of management and can engage in routine “behind the scenes” coordination – supported by the ability to exercise voting rights on shares, which they have not hesitated to do when necessary. As Rakhi Kumar, head of corporate governance at State Street, put it: “Our size, experience and long-term perspective give us corporate access and allow us to establish and maintain an open and constructive dialogue with company management and boards. The option to exercise our substantial voting rights in opposition to management provides us with sufficient leverage and ensures that our opinions and client interests are appropriately considered.”

However, the metrics that Cédric Durand employs – the balance of profits between the financial and industrial sectors, liquidity in the financial system and asset values ​​– do not include the structure of corporate ownership. So he ends up losing one of the most important bases of financial power: the unprecedented concentration of industrial capital ownership by the three largest asset management companies.

As a result, Cédric Durand's assessment of the decline of financial hegemony misses the mark. Although QE was essential to the initial formation of financial capital, its existence and dominance do not necessarily depend on the continuation of QE. In the current context of market volatility and QT, the relatively safe, diversified and extremely low-cost passive funds managed by giant asset management firms are likely to remain competitive.

In fact, these funds have continued to grow strongly – poised to overtake actively managed funds around the world this year. Although profits at asset management firms have temporarily declined and inflows into passive equity funds have slowed, as would be expected in a bear market, the continued concentration and centralization of ownership suggests that the power of these firms lies in truth increasing, not deteriorating.

Financial capital, industrial capital and globalization

The formation of financial capital also reinforced the consensus among the capitalist class around globalization. Contrary to some desires, these “universal owners” cannot lead the decarbonization of the economy or serve as the basis for a new social democratic class compromise around the expansion of the welfare state.

Far from demonstrating a willingness to sacrifice the profitability of individual companies for the general interest of the system as a whole by forcing them to “internalize externalities,” asset management firms have an incentive to maximize the competitiveness of individual portfolio companies. To the extent that corporate competitiveness is linked to the free mobility of capital – allowing corporations to move investments around the world in search of the highest returns – the interests of asset management companies are also linked to this.

The intensification of globalization through the elimination of barriers to capital mobility, especially the liberalization of exchange rates and capital controls, both empowered finance and helped resolve the crisis of the 1970s, helping to restore the profitability of industrial corporations. Multinational corporations' construction of flexible and dynamic cross-border production and investment networks depended on the creation of an internationally integrated financial architecture dominated by large US financial institutions.

The globalization of capital has therefore meant that finance has become more central to the structure of accumulation and more politically powerful. However, because non-financial corporations also benefited from this, they eventually accepted financial domination. The interests of financial and industrial capital have become increasingly intertwined throughout the subsequent neoliberal era.

Financialization was further entrenched by the deeper restructuring of the non-financial corporation during this period. Through a series of adaptive responses to the challenges presented by diversification and globalization, top managers have increasingly become investors, circulating monetary capital among competing corporate divisions, operations, and facilities based on their ability to generate monetary returns.

While investment was centralized, operational control was decentralized to self-contained business units that competed for investment from top executives. Forming capital markets within the corporation in this way improved discipline regarding cost reduction, efficiency, and profit maximization. The difference between financial and non-financial corporations has therefore become blurred, as the fusion of financial and industrial capital – financial capital – has been consolidated within the non-financial corporation itself.

In this context, Cédric Durand's implication that domestic investment is “productive”, despite being momentarily hampered by pressure on profits, is in contrast to apparently non-productive or speculative investments in “globalized production chains” – which he admits have enabled the exploitation of “cheaper labor” and brought “higher returns” – is confusing.

In fact, Cédric Durand seems to identify the entire process of globalization as simply unproductive. While he is correct that this process has led corporations to rely on derivatives to manage the risks associated with globalized production, this only demonstrates how critical these financial instruments are to production and thus points to the problems with viewing them as simply “fictitious capital”.

In any case, the financialization of the non-financial corporation did not simply begin in the neoliberal period, but at the height of the “Golden Age” of capitalism. It was driven not by the industrial slump but by the accumulation of large reserves of retained profits by industrial corporations, the result in part of weak investor discipline in these highly profitable enterprises. Rather than leaving these cash reserves idle, industrial companies circulated them as interest-bearing capital, becoming until the 1960s the largest creditors in the commercial paper markets. Industrial companies were also the largest borrowers in these markets, which served as an important source of financing for industrial operations. In this way, financialization enabled the redistribution of retained profits accumulated by large corporations throughout the economy, supporting industrial profitability.

It is incorrect, then, to say that financial hegemony arose as a result of declining industrial profits, supposedly leading capitalists to divert investment into speculative financial services. Nor were subsequent decades of neoliberal financial hegemony characterized by declining corporate profits, investment, or research and development (R&D) spending. It was during the 1980s and 1990s that the cutting-edge high-tech companies that dominate the global market today, such as Apple and Microsoft, emerged. In fact, R&D spending has grown as a percentage of GDP in almost all major economies.

Meanwhile, corporate investment rose sharply relative to GDP, diverging significantly from the postwar norm. And this growing investment generated a tremendous boom in the mass of non-financial corporate profits. Although financial profits grew faster, this did not come at the expense of industrial investment, profitability or competitiveness.

Far from being rooted in the 'exhaustion of productive dynamics', financialization and globalization made it possible to restore industrial dynamism. Certainly, financial hegemony is reflected in the greater portion of the surplus captured by financial institutions through share buybacks and dividends. But this is by no means a sign of industrial decline. On the contrary, the fact that companies are making high profits, partly as a result of financial restructuring, means that they are able to reinvest in production and return unnecessary money to shareholders. These financial gains can then be reinvested elsewhere.

In the postwar years, industrial corporations themselves circulated surplus money as interest-bearing capital, earning financial returns; Today, they also distribute a portion of their high profits to financiers to invest throughout the economy. Neither represents a more dysfunctional capitalism – the difference simply reflects the changing structure of corporate organization and capitalist class power.

The rise of finance is not a symptom of industrial decline, but rather a condition for industrial competitiveness. As financialization facilitated the movement of capital in and out of sectors, facilities, and countries, the competitive disciplines for maximizing returns on all investments were intensified. The interpenetration of financial and industrial capital highlights how problematic it is to see finance as a “dead weight” in capitalism – and makes it difficult to imagine how financialization could be reversed.

The end of financial hegemony

Cédric Durand's “bifurcation against finance,” in which the implementation of a restrictive monetary policy by central banks or the continuation of inflation at moderate levels amounts to “a choice between apoplexy and agony in slow motion,” seems largely imaginary . On the one hand, Durand fails to demonstrate convincingly that inflation is entrenched and that the combination of declining asset values ​​relative to industrial profits is not merely cyclical. In fact, inflation appears to be slowing now.

However, Cédric Durand is correct in highlighting the possible trade-offs faced by central banks between controlling inflation, on the one hand, and maintaining financial stability and asset price appreciation, on the other. But there is no reason to believe that central banks cannot navigate such contradictions, avoiding a full-scale crisis while maintaining a general policy of monetary tightening to reduce inflation. In this respect, if Cédric Durand exaggerates the intractability of the dilemma between monetary and price stability, he underestimates the capabilities and autonomy of central banks, as well as the importance of controlling inflation for a financialized global capitalism.

The rise of finance is not a symptom of industrial decline, but rather a condition for industrial competitiveness. Furthermore, there is no clear contradiction between the current financial capital regime and QT. Indeed, BlackRock CEO Larry Fink called for monetary tightening and insisted that the Federal Reserve would have to change policy before Fed Chairman Jerome Powell did so (who insisted at the time that inflation was merely “transitory ” and that there was no need for a sharp increase in interest rates).

This is precisely the opposite of what one would expect from Cédric Durand's argument: central bankers pushing for easy money and powerful financial firms pushing for tightening. There are structural reasons why asset managers would like to control inflation, the first of which is that they depend on the competitiveness of the industrial companies they own.

BlackRock and other asset management firms not only manage equity funds, but are also central institutions within the shadow banking system. If these companies' profits from their equity funds have declined due to falling stock prices as a result of the squeeze, their cash management operations and other investments have simultaneously become more profitable even though they represent a smaller proportion of total revenue.

There is every reason to believe, therefore, that the Big Three will emerge from the current bear market in an even stronger position. While profits may have temporarily fallen, they are by no means at crisis levels and are supported by diversified holdings and operations; while these companies continue to accumulate assets and ownership power.

There is certainly a risk that a monetary tightening could lead to a liquidity crisis or a stock market collapse, creating a widespread financial panic. But finance could well emerge from a crisis in an equally strong or even stronger position as it did after 2008. For starters, this would presumably end the current bout of inflation. And while such a crisis would require extraordinary state intervention, there is no reason to conclude that this would exceed the capabilities of central banks.

The broader problem with suggesting that financial hegemony is collapsing on its own is that it prevents us from thinking seriously about how to deal with the real obstacles that finance poses to working-class and environmental struggles. Likewise, framing finance as merely “fictitious” or “dead weight” may imply—as William Lazonick, Elizabeth Warren, and other social democrats explicitly argue—that “productive” industrial capitalism can be restored simply by controlling a financial sector. corrosive.

But it is simply not possible to separate the industrial capitalists, who have supposedly been harmed by financialization, from the financial capitalists who claim to have benefited from it. The effect, in both cases, is to minimize the challenge and urgency of addressing the accumulated social and environmental damage inflicted by global capitalism – and the need to build an alternative.

*Scott Sehon is professor of philosophy at Bowdoin College. Book author Free Will and Action Explanation (Oxford University Press).

*Stephen Maher is professor of economics at Suny Cortland and co-editor of the Socialist Register. He is the author, among other books, of Corporate capitalism and the integral state: General Electric and a century of american power (palgrave).

Translation: Sofia Schurig for the magazine Jacobin Brazil.

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