krippner book forum: part 1 – the order of battle

This semester’s book forum is dedicated to Capitalizing on Crisis: The Political Origins of the Rise of Finance by Greta R. Krippner. The book addresses an important development in the American economy, the heavy reliance on finance for profits. The book makes a political argument. Financialization is not the outcome of an unfettered market process, nor is it some development hoisted upon this country by Wall Street. Rather, it is the unintended consequence of policy decisions made by Federal officials in the 1960s, 70s, and 80s in response to a number of political and economic problems.

The book forum will begin this week with a discussion of the book’s main empirical claim, which is that America now has a financialized economy. Next week, I’ll discuss the three policy making episodes that Krippner focuses on and the last week will be a number of critiques, comments, and alternative interpretations.

So let’s start with financialization. On page 27, Greta provides a simple definition – an increasing reliance on finance for profits. I like this definition. Aside from it’s simplicity, it implies a null hypothesis – that profits are still made through manufacturing or non-financial services.This null hypothesis is then attacked in chapter 2, which presents, and defends, a few key trends showing that non-financial firms have gotten more and more of their profits and/or income from financial instruments. Greta provides a now classic example. Auto companies used to make most of their profits by selling cars. Now, most of the profit comes from financing car loans.

I’m not a political economy specialist, or a macroeconomist, but this argument appears consistent with a lot of what we’ve discovered in recent years about the wide spread securitization of all kinds of loans and the amazing growth of the finance sector. It’s also consistent with a recent economic literature on income distributions showing that the the very top (>99%) of the income distribution is now defined by banking and finance rather than manufacturing. In the past, the super rich were captains of manufacturing and services, or they simply owned tons of land and were rentiers. Now, they are much more likely to be hedge fund managers. These analyses are based on recent IRS data files. If you are interested in a nice summary, listen to this interview with Daron Acemoglu and go to 15:57 where he discusses the data used in that research.

Let me conclude with a comment on where Greta is “coming from.” This book is squarely in the radical political economy camp. The book is strongly rooted in various arguments in critical social theory (e.g., Habermas’ theory of legitimation crisis is invoked) and world systems theory. Thus, the market economy is viewed as an inherently dysfunctional system where crisis is endemic. Financialization is the outcome of a response to earlier rounds crisis in the American capitalist system.

However, the book doesn’t quite go in the direction of old style elite theories, which Brayden discussed at length a few weeks a go. The book gives elites great power but saddles them with nasty feedback loops and unintended consequences, nor does it accord them an unwarranted unity of purpose. So this account will look way different than what might be offered by a political scientist or a macroeconomist. or even an unreformed Mills follower. But I think that is a good thing. These other accounts either natualizes what are essentially political decisions, or assumes too much agency in a complex multi-level system. The radical point of view is correct in that state building exercises are essentially about social control and coalition building, which entails market formation, a view, appearing in various guises from Polanyi to Fligstein.