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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.

Written by fabiorojas

May 16, 2011 at 2:27 am

7 Responses

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  1. I thought she did a good job showing that financialization has indeed taken place but I was left unsatified with her treatment of radical political economy theories. With O’Connor/Habermas’s ideas of the social, fiscal, and legitimatation crises of the state at the center of her analysis, this is still a little too functionalist for me. I can’t see the argument for putting together the “this was largely inadvertent” argument with “this was destined to happen” grand theoretical narrative. It’s as if they were led by an invisible hand to play out the Marxist accumulation/fiscal crisis. At the same time, she gives herself an escape clause by asserting that she can’t say for sure whether finanicalization is part of this process but that it sure does fit the theory well.

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    joshmccabe

    May 16, 2011 at 12:54 pm

  2. Does Krippner address trends in the share of national income going to capital vs. labor vs. taxes. I’m not expert enough to lecture on the relationships between the components of national income and financialization but its definitely worth thinking about. I don’t know how, or even that it should, influence Krippner’s story. Anyway, I’ll just note that there hasn’t been a whole lot of change in capital’s share of income over the last 50 years, if anything it has declined in the U.S. https://www.clevelandfed.org/research/policydis/No7Nov04.pdf

    My next thought was to ask how these trends, and trends in financialization, differ across countries and what does that mean for how we explain the changes… http://www.econ.utah.edu/genmac/WP/06-4.pdf

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    Michael Bishop

    May 19, 2011 at 5:54 pm

  3. @Michael: The analysis, as far as I can tell, aggregated firm level data. It’s not an accounting of the entire economy. If you accept that the book is about financialization of *corporate profits* then this isn’t such a big deal.

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    fabiorojas

    May 19, 2011 at 6:05 pm

  4. One of the issues with measuring capital’s share of income compared to labor’s share is deciding what comprises capital income. In the National Income Product Accounts and BLS data Michael presents, capital income is a combination of interest, dividends, and proprietor’s income. I think that a key element of the financialization story is that this “Fordist” way of looking at income may be outdated: it focuses on how firms divide revenue from selling widgets among employees, bondholders, and stockholders.

    As I understand it, financialization entails a change in this traditional arrangement. Financial gain is realized more and more in financial transactions rather than commodity trade and production. Stock market booms and housing bubbles play a growing role in the overall generation of profits. As a result, financial income increasingly takes the form of capital gains- financial gain from the appreciation and subsequent sale of a capital asset (often deriving its value from speculated future cash flows). That these capital gains are increasingly abstracted from our widget factory model and instead on speculation in financial markets is what financialization is all about. After all, does anyone know why the global economy needs $220 trillion in derivatives now when it only had $20 trillion in 1996?

    Click to access dq110.pdf

    We can see evidence of this new way of generating capital income when we look at the distribution of income in the household sector. Capital gains income has surpassed interest income as well as dividends income in the last two decades, many years being greater than both combined:

    Click to access 16-05intax.pdf

    I suspect that if we add capital gains income to our measurement of capital income as dividends, we would find that capital’s share has grown.

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    Michael Nau

    May 25, 2011 at 1:34 am

  5. […] Fabio earlier described, Greta Krippner’s book seeks to explain how our economy came to increasingly rely on finance […]

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  6. […] Part 1, Part 2, Bradyen discusses consumer advocacy and credit markets. […]

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