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Financial
techniques and instruments have allowed investment and trading
activities to expand in time and space. Without them, neither
economic growth nor economic globalization would ever have
taken place. Over the centuries, finance and financial institutions
have become increasingly specialised, culminating in the emergence
of a veritable financial system. In modern-day
economies, this system fulfils three main functions:
* It ensures
the flow of payments on which economic activity depends to run
smoothly. In doing so, the financial system facilitates the use
of money as a means of payment.
* It ensures that the available monetary resources are used effectively
across the economy by placing excess liquidity of some agents
at the disposal-on a temporary basis and for reward-of other
actors who have trading or investment plans but who lack the
necessary liquidity. By doing this the financial system enables
money to operate as a veritable store of wealth.
* It creates financial assets (ie, transferable contracts embodying
rights and obligations), estimates the inherent risks, determines
their prices, and facilitates their exchange.
By pricing
assets, the financial system extends the function of money as a standard of
value to a specific category of transactions.
This description of the financial system emphasises its secondary,
derivative nature. On the one hand, in each of the above ways
it acts as a functional extension of money, whose efficiency
and radius of action are increased as a result. As an extension
of money, finance is dependent on it and remains subordinate
to money which has ultimately a public aspect. On the other hand,
it is the vocation of the financial system to serve other economic
(ie, commercial
and industrial)
activities, which it helps, as it were, to keep well-lubricated
and flowing smoothly. The traditional lack of autonomy of the
financial sector explains the relative lack of interest that
economists have shown in it. This is why, to this day, financial
assets and transactions involving them are absent from national
accounts.
Five centuries after financial activities started to expand in
Northern Italy, a new «window of opportunity» to these
activities was opened up some thirty years ago, in the form of
technological breakthroughs in the processing and transmission
of data.
The financial sector has taken full advantage of these new opportunities,
as its unprecedented vigorous expansion over the past fifteen
years shows. During this period, finance has developed three to
seven times faster than other economic activities.
Growth various
economic and financial items,
between 1980 and 1995, in nominal terms
Item Growth
Turnover of «Fortune 500» enterprises 140%
Total assets of «Fortune 500» enterprises 230%
Nominal GDP of OECD 300%
Value of world merchandise trade 440%
Capitalisation of world stock markets 970%
Turnover of world stock exchanges 1170%
Value of foreign exchange transactions (Forex) 2100%
Observatoire de la Finance, various sources
Today,
finance is the spearhead of the so-called «globalization» process
and, as such, enjoys unprecedented visibility and prestige. The
scale of the changes now taking place inevitably raises questions
about the true nature of finance. Is it a purely quantitative
phenomenon, or are we dealing with a totally new technological
and political situation in which the relationship between financial
activities and other areas of economic, political and social life
has been fundamentally altered? Has finance ceased to be dependent
on politics and economics and become an autonomous, or even a
dominant, force?
The recent explosive growth in the influence and importance of
the financial sector implies a profound change in the relationship
between finance and the pursuit of the common good. The notion
of «common good» embraces two separate concerns:
on the one hand the social concern, where the question is what
the financial sector brings to the community; and on the other
the personal concern, where the question is how finance contributes
to the growth and self-realisation of each and every member of
society. Accordingly, the relationship between the financial
system in its present state and the common good poses new questions,
opens new horizons and calls for new inquiries. At least three
avenues of research can provide a basic structure for looking
at how finance contributes to the common good.
DIRECTION
ONE: THE RELATIONSHIP BETWEEN POLITICS AND FINANCE
On
August 15th 1971, President Nixon took the US dollar off the
gold standard, thereby exposing public policy -through the dollar-
to market forces. This decision (which, it need hardly be added, was
merely a stage in a much longer process) marked a profound change in
the relationship between finance and politics.
Finance rushed in to fill the hole that Nixon's decision had
made in the Bretton Woods system. It was aided by a number of
factors, including technological progress in data transmission
and processing and increasing international harmonisation of
laws and regulations. Taking the dollar off the gold standard
was the springboard for the large-scale development of national,
and above all international, financial activities. Like it or
not, the discord or weakness of the governments of the day set
in motion the collapse of central-bank control over the creation
of money and the value of national currencies. Today this process
is culminating in what may be termed the «privatisation
of money».
The changing relationship between finance and money is about to
result in the amalgamation of two fields which were once legally
and institutionally subordinate to one another. While this amalgamation
of money and finance implies a certain degree of «privatisation»
of money, finance in turn now has
more immediate implications for the common good -a dimension that
traditionally applied only to money. This new state of affairs
requires redefining the powers and means of action that are available
to national, international and supranational public bodies, particularly
as regards the supervision and regulation of financial
activities.
Exposing national currencies to market forces means submitting
public policy to external assessment. There is nothing wrong
with such assessment in itself; indeed, it may help to prevent
governments from pursuing aberrant policies. It does raise two
questions, however. Should policy makers accept the subordinate
position to which they have been relegated by the markets? And
are financial markets the most appropriate authority to assess
public policy? In this connection, one cannot help noting the
asymmetry between those who use a national currency on a daily
basis as their unique means of payment and those who use it as
an asset among others only to maintain or increase their wealth.
There is a growing ambiguity about the roles of finance, which
is globalised and in private hands, and money, a local means
of payment and a symbol of sovereignty, which -in theory at least-
is there to serve the overall national interest.
DIRECTION
TWO: THE ECONOMIST PARADIGM
Until recently, any attempt to investigate financial issues was
tantamount to trespassing on private property. First there were
the financial professionals, who were keen to maintain something
of a smokescreen around their field of activity. Next came a small
circle of academics, who allowed the emergence of a paradigm which
has since come to prevail among university economists. Known in
short as the Modigliani-Miller-Arrow-Debreu paradigm, it continues
to dominate supposedly scientific journals and to determine appointments
to teaching positions. The list of «guardians of the temple»
is a long and impressive one, from the prestigious cohort of Nobel
prizewinners to researchers who are all too often constricted
by their own methodology. Despite undeniable theoretical breakthroughs,
this concentration of effort by sophisticated academics
and professionals
has imperceptibly resulted in finance becoming divorced from its
economic context, both as a subject for study and as an activity.
This leaves economic science poorly equipped to weigh and analyse
the many complex links between the financial sector and the rest
of the economy. Consequently, it is not in a position to answer
one of the key questions facing today's world. In order to stand
up to this challenge, economic science will need to develop a
new paradigm for research and analysis. Even though there seems
little chance that such a new paradigm will emerge from within
the discipline, nevertheless problems cannot be solved by looking
the other way.
This is a time of change, and yesterday's cast-iron certainties
are giving way under the pressure of indisputable fact. Finance
can no longer be treated as a separate activity cut off from
other dimensions of social and economic life. Although the financial
sector still finds it hard to accept fundamental challenges to
its traditional way of thinking, cracks are now starting to appear
in the ivory tower. The very growth of the financial sector is
forcing those outside it to look more closely at the nature of
that growth and the issues that it raises -whether or not the
guardians of the temple of mainstream economic thinking like
it.
DIRECTION
THREE: THE FINANCING OF OTHER ECONOMIC ACTIVITIES
Like
other components of the financial system, stock exchanges have
been expanding almost continuously for the last 20 years. Yet
most of this growth (including
that of so-called «emerging» markets), in terms
of either capitalisation and volume of transactions, cannot be
satisfactorily accounted for by «fundamental» economic
data. In fact, the number of listed companies, their contribution
to GNP and their industrial profitability have essentially remained
unchanged.
The influx of liquidity into stock exchanges -including emerging
stock markets- can be explained firstly by the spread of modern
savings instruments such as investment funds, and secondly by
the banks' abandonment of their traditional role as lenders.
This has profoundly affected the way in which the financial system
performs its function of converting savings into investment.
Many banks today would sooner sell their clients' shares of investment
funds than make them a firm commitment on a savings account and
then lend the money -at their own risk- to some little-known
small or medium-sized enterprise. While perfectly comprehensible
from the banks' point of view, this change in the way in which
savings are converted into investment may have an adverse impact
on the economy as a whole, and thus on society.
It is reliably estimated that over 90% of the transactions on
leading stock markets merely involve changes in the ownership
of securities which are already in circulation -in other words,
they are largely second-hand markets. This means that transactions
involving new securities seldom account for more than 10% of
the total. While a certain degree of liquidity is undoubtedly
essential if markets are to operate smoothly, only transactions
involving new securities can give companies the finance they
need and so truly convert savings into investment.
Stock-market listing enables companies to significantly reduce
their financing costs (both
debts and equity capital). As a result, listed companies
can obtain financing much more cheaply than unlisted ones, which
are usually small and medium-sized enterprises. Not surprisingly,
listed companies find it easier to substitute capital for labour
than do unlisted ones. Behind this financially impeccable logic
lies the risk of a drift towards a two-tier economy-and a two-tier
society.
On the one hand, there are the major companies, which are highly
intensive in financial capital and mainly employ highly skilled
staff. On the other hand, there are the smaller companies, which
have higher financing costs and are relatively labour-intensive.
These employ local labour, which is less mobile and often less
skilled.
This is a little-explored feature of the operation of the financial
system. Yet, as the spectre of a two-tier society and economy
looms larger, it is an increasingly urgent issue.
University
of Fribourg & Observatoire de la Finance - Switzerland.
Manitese - Italy
*Published
in Social
Watch
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