ASA session with Fred Block: Democratizing finance
In a series of posts about real utopias (see the earlier posts by Gar Alperovitz and Jerry Davis), we’ve invited Fred Block, professor of sociology at UC-Davis, to write about his session that will take place Sunday at 10:30 at the ASA conference.
My Real Utopia proposal for this ASA meeting is on “Democratizing Finance.” It is posted at the Real Utopias website. Writing this was much more difficult than I ever imagined, and this draft still needs a lot of work. It was hard because at the current moment, getting unemployment in the U.S. down to 7% seems unimaginably difficult and unrealistic goal. It follows that major structural changes such as democratizing finance appear to be wildly utopian with no element of realism whatsoever. The other problem is that almost all the work we have in the sociology of finance is focused on what happens in one or another specific market. We have very little work that generates an overview of the financial system as a whole, but serious reform has to look at the entire structure.
My argument proceeds through the following steps:
First, I try to explain the major defects in our current financial system. It reinforces inequalities of wealth and power, it generates dangerous speculation, and it fails to channel capital towards economically vital investments. Second, I argue that any financial system requires gatekeepers who will decide what activities are worthy of financing. However, I suggest criteria for evaluating creditworthiness that are far more egalitarian than the ones that are used in our existing system. Third, I propose a series of institutional mechanisms that could allocate capital consistent with these more egalitarian criteria.
This is where the “real” comes in. For one thing, Germany has a diversified and decentralized banking system that does provide financing for some of the activities that are under financed in the U.S. For another, the U.S. already has a healthy number of alternative financial institutions–mostly credit unions–and some of the needed infrastructure to make them effective.
The challenge is to implement policies that would–over a decade–shift the share of consumer deposits held by credit unions from 10% to 80%. Such a shift would dramatically shrink the “Too Big to Fail” financial institutions that caused the crisis and that seem impervious to effective regulation. But this would also mean transforming credit unions from sleepy little institutions to powerhouses that could become the catalyst for locally-driven economic development. Getting there requires both new government policies and a social movement to invigorate locally-based financial institutions.
I am wary that any “democratic” i.e., political control over economic choices must create failure modes without attendant benefits. In the classic model, workers and shopkeepers save their wages and profits. Ordinary people can and have personally owned huge volumes of equites. In the previous century, my wife was a big fan of “DRIPS” dividend reinvestment programs. Of course, insurance annuities were perhaps the most common form of indirect investment. Mutual funds also were (and are) available.
But, I suggest, the very non-market “democraticing” of finance led to the current meltdown, recession and (arguably) depression we now experience. In other words, the Bush-Obama Bailouts did not come from an occupying army of foreigners or Martians: we the people chose them the people who made the “democratic” choices to invest inflationary credit into various socially important firms. That inflation and the uncertainty of government intervention discourages savings, discourages personal investment.
Personal savings is the bedrock of the economy and we the people told the government to mine it out and build pyramids with it. It will be the economic equivalent of geological time before financial “accretion” and investment “pressure” reform that foundation — assuming that we stop undermining the foundation of our economy.
Michael E. Marotta
August 15, 2012 at 6:35 pm
I think Simon Johnson was right three years ago when he testified before Congress that the first order of business must be to break up the power of the current financial “oligarchy”. I think the great scandal of our time is that the richest people in our society are, in general, also the people who control, not the means of production, but the issuance of credit. That is, the best way to get rich today is to get yourself as close as possible to the press that prints the money. That’s just outrageous. Until that is changed (by something resembling a revolution, I fear is the only way) finance will continue to serve the interests of those at the top of the economy, not the general health of the economy.
In 2008 there was an opportunity to bankrupt all the oligarchs. Then there was at least an opportunity to break their oligarchy by breaking up the big banks. I like the idea of shifting financial power to the credit unions, but until there are some dramatic changes at the top of the system, I think the proposal is more utopian than real.
Thomas
August 16, 2012 at 7:07 am
The people closest to the press that prints the money are, indeed, craven and corrupt. They are Congress.
Randy
August 16, 2012 at 2:33 pm
Generally, people are free to vote with their feet and not work for someone whom they do not like. Certainly, the higher you go in terms of wages and responsibilites, corporations must seek and bid for workers. (Even the president is an employee, hired by the board.) As noted in the original post, the shares of stock voted by that board might represent some largish or smallist fraction: 1% or 5%, which can be a sizable block when the firm is General Motors. It is said that perhaps the primary factor in Ford Motor Company’s surviving and thriving is that individual Ford family members still hold fractions about that size: they are involved and they vote because, ultimately, it is their own tables to which the bread would not come.
Paul Blumberg’s idea of “industrial democracy” only reflects the fact that we have democractic culture. You do meet bosses with a “my way or the highway” attitude, but no one likes or respects them. We all want our own ideas to have recognition even when (or especially when) they are not implemented. When that does not obtain, we are resentful, not obedient. “Take this job and shove it.”
As Mises, Friedman, et al., point out, workers choose to remain unemployed, perhaps not absolutely, but clearly conditionally. If that were not true, all those illegal Mexicans would have been pushed out of their janitorial jobs back in 2008, by desperate engineers, sales managers, bankers and accountants underbidding former factory workers. A sense of self-worth and pride underlays the democratic culture.
And a more basic question must be asked about democracy? What is special about “one person = one vote?” The corporation sells voting shares and non-voting shares. Why not organize the government on the same basis, with each $1000 T-Bill being one vote? It might rankle your sensibilities (rightfully so, I grant), but on a purely scientific level, it is no less moral way to arrange an organization. It might run against our deepest traditions, but those traditions at one time also included racism and sexism, not as sins, but as virtues. Tradition is only habit. Nothing sanctifies it. Perhaps our democratic tradition needs to be questioned. (Just sayin’…)
Michael E. Marotta
August 16, 2012 at 4:09 pm
Everyone off to ASAs and the inmates left running the asylum? Poor Fred.
Kim
August 16, 2012 at 11:09 pm