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Financialization and Finance-Driven Capitalism
Abstract
This chapter discusses the discourses and consequences of finance-driven capitalism from a political economy approach by employing an analytical eclecticism. For this aim, we bring together diverse approaches to frame the understanding of financialization and how it influences the behavior of different actors. First, we critically assess the financialization theories from various historical perspectives. Then, we examine periodization issues of financialization by looking at historical patterns to uncover how different trajectories of the role of finance can offer insights in answering whether financialization constitutes a shift toward a new paradigm in capitalist accumulation, or a tenacious regularity of economic bubbling up. We claim that despite institutional and formal differences, financialization has been unfolding in the centuries-long history of finance. Its pace can be moderated or accelerated by particular policies, institutional changes, and the state of the economy, similar to those implemented during the Golden Age of capitalism or repeal of the Glass-Steagal act. Financialization is a global phenomenon and situated within unproductive activities by creating a rent-seeking society and reflects actual workings of modern capitalism rather than constituting a new epoch in capitalism.
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When do people care about relative gains in trade? Much of the international relations scholarship—and much of the political rhetoric on trade—would lead us to expect support for a trade policy that benefits ourselves more than it benefits others. Yet, a large interdisciplinary literature also points to the prevalence and importance of other-regarding preferences, rendering the conventional wisdom contestable. We investigate whether and how relative gains influence trade preferences through an original survey experiment in the midst of the China–US trade war. We find that in a win-win scenario, relative gains shape trade opinion: if both sides are gaining, people want to gain more than their foreign trade partner. However, these considerations are offset in a win-lose scenario where the other side is losing out. Relative-gains considerations causally affect opinion on trade, but not in a “beggar-thy-neighbor” or even a “beggar-thy-rival” situation. These findings contribute to our understanding of the role of relative gains in international relations and provide the first experimental evidence that relative-gains considerations can be offset by other-regarding preferences in international trade.
The US public holds more nuanced views about China than are typically captured in public opinion surveys. Empirical investigation of a nationwide online survey of US adults shows that the American public is sharply divided over the US–China trade war, despite reporting high support for international trade with China (76%). Using survey questions on US–China trade and the trade war, a typology was developed that indicates more than 40% of US adults support trade with China but oppose the trade war. A slightly smaller share has a more economically militant view of trade with China, supporting trade and the trade war. Political identity is strongly associated with attitudes toward the trade war, but only weakly associated with attitudes toward trade with China. Perceptions about China and its government, people, and culture are highly correlated with views on trade with China but are unrelated to views on the trade war.
In contrast to previous studies that mostly focused on the winners and losers of the US–China trade war, this study investigates the poverty and income distribution impact of the trade dispute in a developing country, using Indonesia as a case study. Employing a dynamic, computable general equilibrium model that is multi-region and multi-household, this study found that the trade war increases households’ real income and reduces poverty in Indonesia. The impact of the trade war, which is channeled into the Indonesian economy via trade diversion, improves the country’s terms of trade and eventually increases the returns of primary factors owned by households. However, Indonesia’s income inequality might increase as the rise in real income of upper-income households exceeds the rise in real income of lower-income households. The policy measures introduced by Indonesia to take advantage of the trade war might lower poverty incidence further and alter the impact of negative income distribution from the trade war.
Now that the election is over, Beijing has no choice but to deal with the Biden administration. Challenges will abound, more so because the government of Xi Jinping remains fully committed to the thrust of its existing policy framework, though the erstwhile underpinnings of the relationship are no longer working. Nor will it be easy to shake off the toxicity of the Trump years. This article does not intended as an action plan for either Beijing or Washington. Instead, by taking stock of the profound shifts in China itself and the Sino-US relations in the Trump years, it aims to shed some light on the behavioral logic for China’s foreign and security policies vis-à-vis the United States, and highlight the risks and opportunities ahead.
The remainder of this paper proceeds as follows. In the first section I will delve into domestic political terrain in China, where the confluence of mass anxiety fueled by social and economic changes and international backlash against it, ever more ferocious after the COVID-19 outbreak, has only exacerbated the acute sense of insecurity for both the party-state and its people. That siege mentality, in turn, has lent itself to the populist and nationalist fervor—in the broader society as well as the Chinese officialdom—that invariably found the United States a favorite target. The second section crystalizes the paradigmatic shift of the US-China relations under Trump before zeroing on the two thorniest issues, namely Taiwan and the tech war, that will by all means continue to hobble the relationship in the years to come. Besides offering a preview of how Beijing approaches the Biden administration, the third section also forewarns some of the pitfalls that the latter should steer clear of. The paper ends with a brief and preliminary forecast of what 2022 might look like for the relationship.
After almost two decades of dealing with asymmetric threats, America's strategic focus on technological superiority carefully honed during the Cold War, began to fracture, eroding its military and economic advantage. But China's recent emergence as a credible geopolitical rival has reinvigorated US efforts to sustain high-tech leadership as the basis of its military primacy. At the center of these efforts are the defense and defense-related agencies of the national security state (NSS) whose mission is to dominate the new technological frontiers of military power and achieve future competitive advantage. Alongside the quest for breakthroughs in foundational technologies, NSS agencies are seeking to correct long neglected deficiencies in advanced manufacturing, by rebuilding the industrial ecosystem's supply chains depleted after decades of offshoring. With this suite of initiatives, the US is following a course of action more consistent with the exercise of (economic) statecraft than industrial policy. However, unlike its authoritarian rival, the US faces the challenge of having to balance security imperatives with commercial interests and, not least, having to contend with a dysfunctional and maladapted presidency.
The Covid-19 pandemic has intensified the debate among optimists, pessimists, and centrists about whether the world economic order is undergoing a fundamental change. While optimists foresee the continuation of economic globalization after the pandemic, pessimists expect localization instead of globalization, given the pandemic’s structural negative consequence on the world economy. By contrast, the centrists anticipate a “U-shaped” recovery, where Covid-19 will not kill globalization but slow it down. The three existing perspectives on Covid-19’s impact on the economic globalization are not without merit, but they do not take sufficient temporal distance from the ongoing issue. This article suggests employing the historical perspective to expand the time frame by examining the rise and fall of economic globalization before and after the 2008 global financial crisis. The authors argue that economic globalization has been in transition since the 2008 financial crisis, and one important but not exclusive factor to explain this change is the evolving US–China economic relationship, from symbiotic towards increasingly competitive. The economic restructuring in US and China has begun after both countries weathered the 2008 crisis and gained momentum since the outbreak of trade war and Covid-19. The article investigates this trend by distinguishing different types of production activities, and the empirical results confirm that localization and regionalization have been filling the vacuum of economic globalization in retreat in the last decade.
This paper uses the SMART Model to analyze the direct economic effects of the US-China tariff war on both China and the US. Based on the three lists of Chinese products subject to additional tariffs imposed under the US Section 301 investigation throughout 2018 and the tariff lists issued by China as a countermeasure, we simulate the trade creation/reduction effects, welfare effects, and trade diversion effects at the detailed product level. According to the simulation results, US imports from China and Chinese imports from the US will be greatly reduced by an estimated 36.71 billion, respectively. US imports will be diverted from China to other markets, specifically, Mexico, Japan and Germany, in most sectors. Chinese imports from the US will be mainly diverted to Brazil, Germany, Japan, Argentina, the United Kingdom and Canada. However, trade between the US and China cannot be completely transferred to alternative suppliers in other countries without additional costs or a loss of utility, which results in a substantial reduction in the total imports and welfare in both the US and China. The sectors with the highest welfare loss in the US are machinery and electrical products. In China, soybeans and automobiles are the most affected sectors and exhibit much higher welfare loss than other sectors. The trade war harms both sides’ welfare and could have further adverse effects on global value chains and the multilateral trading system.
The China US trade war had been looming since January 2018, effectively started on 6 July 2018, calmed down since December 2018 until April 2019, has now entered a second stage after the US decided to increase previous tariffs of 10% levied in US $200 billion worth of Chinese goods to 25% on 10 May 2019. This study reviews the policy response from the Chinese authorities during January 2018–April 2019 by looking at the fiscal stimulus, monetary stimulus and other institutional reforms. Finally, this study concludes that the Chinese government has changed its policy focus from the traditional demand-side economics such as the 2008–09, 2012 and 2015–16 stimulus to supply-side economics such as the 2018–19 stimulus.
We evaluate the impact of the US–China trade war using a dynamic computable general equilibrium (CGE) model of global trade. We conduct ex ante simulation analysis exploring three scenarios to understand how the trade war affects import tariffs, investment, and productivity. The escalation of the trade war reduces gross domestic product (GDP) in China and the USA by −1.41% and −1.35%, respectively. The trade war reduces nearly all sectoral imports and outputs in both countries. To reflect the important role of global value chains (GVCs), we modify the dynamic CGE model with agent‐specific import demands, and we explore the difference between the results for the two models relating to the trade war impacts on GDP and bilateral trade. When GVCs are accounted for, the negative impacts on bilateral trade are more widespread across countries, and world GDP in the modified model is reduced by −$US450 billion. These results suggest that the GVCs play substantial role in determining trade responses at the disaggregated level.
The current China–US trade war that started in early 2018 has been the largest of this kind in the global market in the past half century, if not longer. Many speculations about the reasons for and progress and potential implications of the trade war emerge. Countries must understand the reasons for the war to avoid future trade wars. Predicting what will happen in the near future and the related economic consequences are even more important for people (including businessmen and government policymakers) to prepare for them and make corresponding decisions. However, endeavouring to predict is a tough job. This paper tries to provide an unbiased analysis through the lens of the trade literature. That is, we want to ask how much we can understand the current trade war on the basis of the accumulated knowledge we can obtain from our profession. Related theories include imperfect competition, increasing returns, terms of trade argument, distributional effects and political economy argument.
The end of the Bretton Woods agreement led not only to changes in the international economic
relations, but also in the very way in which capitalism functions. The liberalization of capital flows and
deregulation and integration of financial markets under US leadership gave rise to a new systemic
pattern of wealth, financialization, in which operations with financial assets received increased
importance in the management of wealth by households and enterprises, and not only by banks and the
other financial market institutions. Unlike most recent interpretations of this phenomenon, this one does
not indicate a tendency of the system towards stagnation, but rather an increase in the instability that
characterizes it, reinforcing the moments of expansion, contraction, as well as leading to crises. In fact,
with the generalization and the dominance of finance, borrowing and spending decisions by enterprises
and households are now increasingly responsible for current and expected fluctuations in the stock of
wealth, which in turn are responsive to current and expected fluctuations in the prices of financial assets.
This implies a transformation in the relationship between the state and the market, with central banks
and national treasures becoming hostage to the need to prevent private losses and the perverse effects
they may exercise over output, income and employment levels of the economy.
The paper argues that the process of financialization has profoundly changed how capitalist economies operate. The financial sector has grown relative to the real economy and become more fragile. Non-financial businesses have adopted shareholder value orientation, which had negative effects on investment. Working class households became squeezed because of rising inequality and have become more indebted, in particular in countries with real estate bubbles. Financial globalization has given rise to growing international imbalances, which have allowed two growth models to emerge: a debt-led consumption growth model and an export-led growth model. Both should be understood as reactions to the lack of effective demand due to the polarization of income distribution. The resulting finance-dominated accumulation regime is characterized by slow and fragile growth. The crisis is best understood as the outcome of the interaction of financialization and changes in income distribution.
Focusing on U.S. nonfinance industries, we examine the connection between financialization and rising income inequality. We argue that the increasing reliance on earnings realized through financial channels decoupled the generation of surplus from production, strengthening owners' and elite workers' negotiating power relative to other workers. The result was an incremental exclusion of the general workforce from revenue-generating and compensation-setting processes. Using timeseries cross-section data at the industry level, we find that increasing dependence on financial income, in the long run, is associated with reducing labor's share of income, increasing top executives' share of compensation, and increasing earnings dispersion among workers. Net of conventional explanations such as deunionization, globalization, technological change, and capital investment, the effects of financialization on all three dimensions of income inequality are substantial. Our counterfactual analysis suggests that financialization could account for more than half of the decline in labor's share of income, 9.6% of the growth in officers' share of compensation, and 10.2%of the growth in earnings dispersion between 1970 and 2008.
The paper seeks to distinguish between two broad perspectives on financialization. The first takes the view that financialization relates to the growth of the financial sector in its operations, power, etc. On that basis, financialization has been proceeding with ups and downs for possibly thousands of years. The specific forms financialization may have taken in the past few decades are outlined. The findings from mainstream economics literature on one aspect of financialization (growth of bank deposits, growth of stock markets) and economic growth are reviewed. The second perspective views financialization (financialized capitalism) as a stage or epoch of capitalism dating from circa 1980.
Deeping superpower rivalry between the United States and China has created acute strategic dilemmas for secondary powers in the Indo-Pacific such as Australia and Japan. This predicament is exacerbated by their divergent security and economic interests which cut across the superpower divide; a condition dubbed a ‘security/economic disconnect’. These two intimately related dynamics preclude clear-cut implementation of conventional balancing/bandwagoning alignment choices and have led to mixed hedging strategies to cope with this situation. To address these issues, the article presents a refinement of the hedging concept in International Relations (IR) that emphasizes its multi-dimensional nature, within a broader interpretation of alignment itself. It applies this to the case of the Australia and Japan with reference to their Strategic Partnership, which is both emblematic of hedging responses to systemic uncertainty, and an institutional mechanism through which to operationalize joint hedging policies. This provides insights into how middle power strategic partnerships are managing strategic risks across the security, economic, and other, domains.
This paper examines whether the recent trade war between the US and China would lead to a great power war. In so doing, we rely on two theoretical frameworks, mercantilism and power transition theory, that are likely to link trade war to a military confrontation. Evidence shows that the trade war per se is not a sufficient condition for an all-out war between the US and China. Unlike mercantilists argue, first, we identify the importance of domestic coalitions before trade war being escalated to a military conflict. Second, we find that trade war as economic statecraft is a viable means to suppress a challenger’s capability, which may stop or delay the power transition process. The findings provide implications for middle power countries where strategic choices are required between the two major powers.
Turkey is widely considered to be a middle power in the international system. The authors apply hierarchical, behavioural and ideational approaches to the foreign policy of Turkey: each of the three unveils specific features of Turkey as a middle power in the post-hegemonic world. It is argued that the behavioural approach to studying middle powers should be updated to distinguish ‘benign’ and ‘revisionist’ middle power strategies. The factors contributing to Turkey’s transition from being a benign middle power to being a revisionist one are holistically investigated.
East Asian countries signed the Regional Comprehensive Economic Partnership Agreement (RCEP) in November 2020. This paper demonstrates the importance of ASEAN centrality in East Asian economic integration and makes a preliminary assessment of the agreement in terms of the four expected roles: liberalization, rulemaking, reducing policy risks, and forming a pro-trade middle power coalition. The comparison with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) reveals the strengths and weaknesses of RCEP. The paper emphasizes the importance of dynamic aspects of mega-FTAs after being in effect and claims that RCEP must be further developed as an evolving agreement.
This paper explores how South Korea and India have taken positions between the United States and the People’s Republic of China over diverse foreign policy issues. By adopting dual engagement and strategic ambiguity as hedging strategies, both regional powers reduce their vulnerability to the influence and pressure of the two great powers. Thanks to their strategic importance and prominence in regional politics enhanced by such strategies, South Korea and India can independently pursue their foreign policy preferences to a great extent. The analysis of voting behavior of these regional powers in the United Nations General Assembly between 1991 and 2018 confirms our expectations.
The turmoil of 2007-2009 is a crisis of financialised capitalism. This collected volume analyses financialisation by drawing on Marxist and heterodox theory of finance. It examines domestic and international aspects of financialisation, placing the crisis in its appropriate social context.
The past decade has been characterised (among other things) by the emergence of a discourse about the ‘Rise of the Rest’. (Some) non-Western states have been described as ‘rising powers’ capable of agency in the international system and as potential partners for the West in global governance. This stands in contrast to a more traditional narrative that saw the non-West primarily as a source of international problems and a developmental project. Does this discursive shift signify a historic reversal in how the non-West understood by the West? The answer is complicated. In this article, I argue that the hype about ‘rising powers’ in Western policy circles following the Global Financial Crisis of 2007–2008 had little relation to an ‘objective’ analysis of actual structural shifts in favour of ‘the Rest’ and was more akin to a financial bubble, with speculation driving perceptions of ‘rising powers’. I also show that the ‘rising powers’ literature is better located within the broader (and long-standing) debate about the decline of the United States, and should be read more as a manifestation of American anxieties and hopes than as informing us about the choices or the motivations of the ‘rising powers’. Ironically, however, the Western hype nevertheless has helped along a structural shift that is under way, first by partly moulding reality in that direction (especially in the form of financial decisions), but more importantly by freeing non-Western powers (for better or worse) from their internalised cages of perceived inferiority and lack of agency in the modern international order.
Will the US-led Indo-Pacific strategy lead to an extensive alliance network against China? This article shifts focus to non-Quad Asian states—in particular, Indonesia, Vietnam, and South Korea—that face a strategic dilemma in the US-China competition and examines their positions regarding a rising China and the Indo-Pacific strategy. While reluctant to join the US strategy for the Indo-Pacific region, Asian middle powers now aim to tame, rather than contain, China despite their slight variations of response to the Indo-Pacific strategy. The US and its three partners—Japan, India, and Australia—have not been successful yet in recruiting new members to their coalition, mainly because of the declining hegemon’s (seemingly) weakened commitment to a liberal international order and the rising challenger’s (potential) opposition and punishment.
Many scholars and policymakers in the United States accept the narrative that China is a revisionist state challenging the U.S.-dominated international liberal order. The narrative assumes that there is a singular liberal order and that it is obvious what constitutes a challenge to it. The concepts of order and challenge are, however, poorly operationalized. There are at least four plausible operationalizations of order, three of which are explicitly or implicitly embodied in the dominant narrative. These tend to assume, ahistorically, that U.S. interests and the content of the liberal order are almost identical. The fourth operationalization views order as an emergent property of the interaction of multiple state, substate, nonstate, and international actors. As a result, there are at least eight “issue-specific orders” (e.g., military, trade, information, and political development). Some of these China accepts; some it rejects; and some it is willing to live with. Given these multiple orders and varying levels of challenge, the narrative of a U.S.-dominated liberal international order being challenged by a revisionist China makes little conceptual or empirical sense. The findings point to the need to develop more generalizable ways of observing orders and compliance.
The Trump administration’s confrontational approach has prompted a serious debate in China about the country’s economic and political course.
Three major concerns drove the U.S. into initiating the trade war, and they are (a) the concern that China’s chronically large trade surplus was depressing job creation in the U.S. (b) the concern that China was using illegal and unfair methods to acquire U.S. technology at an effectively discounted price; and (c) the concern that China seeks to weaken U.S. national security and its international standing. On the dispute over China’s exchange rate and trade imbalance, the first conclusion is that it was marked by analytical confusion over the meaning of the term ‘equilibrium exchange rate’. The second conclusion is that China’s trade imbalance reflects the economic conditions in both China and U.S., and that the efficient and fair solution of the problem requires policy changes in both countries. On the industrial policy dispute, the first conclusion is that the issue of forced technology transfer is largely a dispute about China using its market power to benefit itself at the expense of its trade partners. The second conclusion is that China’s use of market power can last only until the other large countries could unite and retaliate as a group. The inevitability of retaliation means that China should replace the joint-venture (JV) mechanism for technological diffusion with other ways to strengthen its technological capability. On the U.S. concern about whether China trade weakens its national security, the first conclusion is that the notion of national security that is commonly adopted in the U.S. trade policy debate is ignorant about the primary determinants of U.S. capability in innovation. By focusing instead mainly on how to hold down China technologically, the long-run outcome will be a technologically weaker U.S. and hence, a more vulnerable U.S. The second conclusion is that the U.S. must identify a clear, short list of critical technologies and critical infrastructure for the recently reformed Committee for Foreign Investment in the United States (CFIUS) to cover, and update this list constantly. Otherwise, the broad and changing nature of notions about national security would allow the bureaucratically driven phenomenon of mission-creep to steadily expand the coverage of the CFIUS process, thereby steadily rendering CFIUS to be operationally capricious. Our principal policy suggestion to China is that, because China’s economy in 2018 is very different from that in 1978 (e.g. many parts of China now look like Singapore and China is Africa’s biggest donor), there should be more reciprocity in China’s trade and investment relations with the advanced economies despite China’s status as a developing economy under WTO rules. Our principal policy suggestion to President Trump is to stop equating strategic competition with economic competition. Strategic competition is normally a zero-sum game. While fair economic competition is usually a zero-sum game in the short run, it generally creates a win-win outcome in the long run.
This paper estimates the effects of financialization on physical investment in the UK using panel data based on balance sheets of publicly listed non-financial companies supplied by Worldscope for the period 1985–2013. We find robust evidence of an adverse effect of not only financial payments (interests and dividends) but also financial incomes on the rate of accumulation. The negative impacts of financial incomes from interests and dividends are particularly strong for the pre-crisis period. Our findings support the ‘financialization thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long-term concerns for productivity.
This paper uses a multi-country global general equilibrium (GE) model to numerically simulate the effects of possible China-US trade wars. We introduce an endogenous trade imbalance structure with trade cost into the model which helps to explore both tariff and non-tariff trade war effects. Our simulation results show that China will be significantly hurt by the China-US trade war, but negative impacts are affordable. The US can gain under unilateral sanction measures to China, but will lose if China takes retaliation measures. Comparing the effects under mutual trade war, China will lose more than the US. Introducing non-tariff barrier trade wars will intensify the negative effects, and comparatively negative effects to China are larger than to the US. Mexico’s involvement in trade war with the US will strengthen the negative effects and comparatively hurt the US more. Under non-cooperative and cooperative Nash bargaining equilibrium, the US can gain more than China in trade war negotiation, which means the US has stronger bargaining power than China. Additionally, trade wars between China and the US will hurt most countries and the world especially in GDP and manufacturing employment, but benefit their welfare and trade.
These are not happy times for liberal internationalists. No one can be sure how deep the crisis of liberal internationalism runs. However, in what follows, I argue that despite its troubles, liberal internationalism still has a future. The nature of the crisis is surprising. The threats to liberal internationalism were expected to come from rising non-western states seeking to undermine or overturn the postwar order. In the face of hostile, revisionist states, the United States and Europe were expected to stand shoulder to shoulder to protect the gains from 70 years of cooperation. But, in fact, liberal internationalism is more deeply threatened by developments within the West itself. The centrist and progressive coalitions that lay behind the postwar liberal order have weakened. Liberal democracy itself appears fragile and polarized, vulnerable to far right populism and backlash politics. In recent decades, the working and middle classes in advanced industrial democracies—the original constituencies and beneficiaries of an open and cooperative international order—have faced rising economic inequality and stagnation. Within the West, liberal internationalism is increasingly seen, not as a source of stability and solidarity among like-minded states, but as a global playing field for the wealthy and influential. Liberal internationalism has lost its connection to the pursuit of social and economic advancement within western countries.
This is not a 'Minsky moment' of financial crisis: what we have seen, rather, is a slow transformation of the global financial system towards what Minsky called 'money manager capitalism', which he saw as inevitably leading to instability. The term 'money manager capitalism' highlights the links between developments of the last thirty years and pre-war finance capitalism: i.e. money is managed not by those with a stake in companies but by those with a stake in making money from financial transactions, in conditions of ever-decreasing regulation. This restoration of conditions similar to those that existed in the run-up to the Great Depression has had a similar outcome. To get out of the mess will require radical policy changes no less significant than those of the New Deal.
This paper develops the concept of the “financialization” of the nonfinancial corporation (NFC) by laying out the key stylized facts describing NFC financial behavior between 1950 and 2014 via a detailed decomposition of firm-level balance sheets. In the existing literature, the concept of the “financialization of the nonfinancial corporation” remains ambiguous; as such, clarification of the trends that have occurred in NFC financial behavior is an important prerequisite for analyses of why NFC behavior has changed and with what consequences. By systematically delineating the evidence for the “financialization” of NFCs, this paper contributes to the literature by establishing precisely how NFC financial behavior has changed in the post-1980 U.S. economy. The growing “financialization” of nonfinancial corporations is summarized by an increased share of financial assets in NFC portfolios, increasing indebtedness and equity repurchases among large firms, and deleveraging among smaller firms. The paper concludes by introducing the behavioral insights gained by approaching these stylized facts from a conceptual standpoint emphasizing the interdependence of portfolio and financing decisions and, thus, the links between the changes in financial behavior across NFC balance sheets.
The concept of alternative futures, banished from postmodernity's eternal present, flourishes on the financial summits of the global economy. Robin Blackburn argues against a neo-Luddite dismissal of the new financial engineering techniques by the Left, while coolly assessing the economic and social costs of their current configurations.
Some economic events are so major and unsettling that they "change everything." Such is the case with the financial crisis that started in the summer of 2007 and is still a drag on the world economy. Yet enough time has now elapsed for economists to consider questions that run deeper than the usual focus on the immediate causes and consequences of the crisis. How have these stunning events changed our thinking about the role of the financial system in the economy, about the costs and benefits of financial innovation, about the efficiency of financial markets, and about the role the government should play in regulating finance? In Rethinking the Financial Crisis, some of the nation's most renowned economists share their assessments of particular aspects of the crisis and reconsider the way we think about the financial system and its role in the economy. In its wide-ranging inquiry into the financial crash, Rethinking the Financial Crisis marshals an impressive collection of rigorous and yet empirically-relevant research that, in some respects, upsets the conventional wisdom about the crisis and also opens up new areas for exploration. Two separate chapters-by Burton G. Malkiel and by Hersh Shefrin and Meir Statman - debate whether the facts of the financial crisis upend the efficient market hypothesis and require a more behavioral account of financial market performance. To build a better bridge between the study of finance and the "real" economy of production and employment, Simon Gilchrist and Egan Zakrasjek take an innovative measure of financial stress and embed it in a model of the U.S. economy to assess how disruptions in financial markets affect economic activity-and how the Federal Reserve might do monetary policy better. The volume also examines the crucial role of financial innovation in the evolution of the pre-crash financial system. Thomas Philippon documents the huge increase in the size of the financial services industry relative to real GDP, and also the increasing cost per financial transaction. He suggests that the finance industry of 1900 was just as able to produce loans, bonds, and stocks as its modern counterpart-and it did so more cheaply. Robert Jarrow looks in detail at some of the major types of exotic securities developed by financial engineers, such as collateralized debt obligations and credit-default swaps, reaching judgments on which make the real economy more efficient and which do not. The volume's final section turns explicitly to regulatory matters. Robert Litan discusses the political economy of financial regulation before and after the crisis. He reviews the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which he considers an imperfect but useful response to a major breakdown in market and regulatory discipline. At a time when the financial sector continues to be a source of considerable controversy, Rethinking the Financial Crisis addresses important questions about the complex workings of American finance and shows how the study of economics needs to change to deepen our understanding of the indispensable but risky role that the financial system plays in modern economies. © 2012 by Russell Sage Foundation and the Century Foundation. All rights reserved.
'Eckhard Hein examines the causes and consequences of financialisation. His book is economics as it should always be: it combines reflections, data gathering, empirical analysis, theoretical formalization, and policy recommendations. Hein goes beyond the exuberant behaviour of the banking industry to analyse the global financial crisis and the eurozone crisis, showing, through various variants of a Kaleckian growth model, the macroeconomic consequences of the rising dominance of finance over modern capitalism during the last three decades.' - Marc Lavoie, University of Ottawa, Canada.
From the point of view of economic history, the ideal way to study any institution of commercial law would be to compare the information contained in legal codes and treatises with the material relating to its application in economic life as manifested by actual contracts, letters, and business records found in archives and other repositories. In the case of the early centuries of the Islamic period, available sources unfortunately preclude such a procedure. Theoretical legal texts exist in abundance, but any corresponding documentary material is for all practical purposes non-extant. In order to determine if the framework in which the trade and commerce of the early Islamic period was carried on--a trade known to have been active and important--we must of necessity rely on legal treatises for most of our information, which trying wherever possible to call upon whatever meager help other literary sources may provide. In the absence of documentary and similar sources, the possibility of investigating the quantitative aspects of trade is all but eliminated. However, in those areas of trade which have been described as qualitative, such as the variety of goods exchanged, the specialization of the merchant class, and the complexity of business methods, legal and other literary sources provide a great deal of valuable information. It is with the institutions of partnership and commenda in the early Islamic period, two of the qualitative components of trade, that Abraham L. Udovitch makes his primary focus in Partnership and Profit in Medieval Islam.
This paper addresses the question of how consumer credit has become a part of daily life of wage earners in the age of financialization by drawing on the experience of Turkey. Given the dearth of information in this area, it draws on fieldwork conducted among metal workers. In particular, the paper analyzes how consumer credit has become a part of daily life of workers, driven by socio-economic and institutional factors. The results show that consumer debt in Turkey has become a part of the daily life of workers as a consequence of, first, growing dependence on debt to support basic reproduction of labor power, and second, of the banks’ increasing orientation towards consumer lending. These findings also signal the deepening of the already unequal power relation between banks and wage earners.