After Financialization
On “Makers and Takers” by Rana Foroohar
By Nicolas Colin (Co-Founder & Director) | The Family
It has now become quite clear that the tax cut voted by the US Congress in December 2017 won’t have any real benefits for workers. The money given back to companies was largely sent on to shareholders in the form of dividends or share buybacks. Notwithstanding the 2008 crisis and the exasperation expressed ever since by American voters, the power balance between shareholders and employees isn’t even close to being reversed.
Rana Foroohar, a journalist for the Financial Times and CNN, has become one of the finest analysts of financialization. As she explains in her book Makers and Takers: The Rise of Finance and the Fall of American Business (Crown Business, 2016), today’s economy is divided in two. There are the “makers”, who produce useful goods and services. And there are the “takers”, those who (with the pretext of financing the makers) use the opportunity to continually grab more and more of the value being created in the economy.
Foroohar is meticulous in describing the mechanisms that have brought us to this state of affairs. She reminds us that for traditional financiers, the interests of the company coincided with those of the shareholders. Optimizing certain financial ratios thus becomes an imperative, which was not without its own set of problems. Profits per share, for example, could be improved by either increasing profits (which is difficult) or by reducing the total number of shares (which is much easier). By focusing on this particular financial indicator, management often chose the easy path, turning away from further investments. And since they then didn’t know what to do with the money they were making, they kept sending more and more of it back to their shareholders.
The entire economy ended up falling under the charms of financialization. For example, automobile manufacturers and large retailers, who earn relatively less from their core business, started diversifying into financial products such as car loans and credit cards. If a company such as GE risked being dragged under by the 2008 crisis, it was due to the fact that its financial activities (GE Capital) had become so large as to risk eating the rest of the company from the inside. GE ended up having to get rid of its financial arm in order to allow the company to get started once again.
And the real complication is that financialization doesn’t only benefit a privileged few. It also indirectly benefits lifelong savers, who are promised higher investment returns, as well as borrowers, who have access to cheaper credit. Since the 1990s, households have been able to maintain their lifestyles in no small part by increasing their debt loads. And political leaders were all too happy for financialization to boost the growth rates seen in the economy.
Still, in the wake of 2008, the financialization engine has ground to a halt. Financialization once allowed for the old Fordist economy of the 20th century to keep struggling along. But today, it is simply operating in a void, a void created by our own lack of imagination. Today’s makers are paralyzed by the many obstacles that are blocking innovation and the takers are continuing to hog all the wealth.
To leave financialization behind, we urgently need to speed up the digital transition. Finance needs to get back to doing something other than inflating dividends and betting on the housing market. We need to learn how to finance entrepreneurs, who are the new makers, while also giving them more leverage in their relationship with the takers. Last century, this was done by creating the new institutions for the nascent Fordist economy: stronger social protections, a new financial system, strong unions, properly adapted industry regulations. It’s time, now more than a decade after the 2008 crisis, to do the same for the digital economy.
(Originally published in Le Monde (in French), June 12, 2018.)
