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The Puzzle of Financialization

Harry Magdoff was coeditor of Monthly Review from 1969 until 2006. Paul M. Sweezy was a founding editor of Monthly Review (along with Leo Huberman) and coedited the magazine from 1949 until 2004.

Writing in 2013 on the financialization of the capitalist economy in his book Profiting Without Production, economist Costas Lapavitsas of the University of London observed that, “Close association of financialization with Marxism goes back at least to the insights advanced by the current of Monthly Review,” as exemplified by the work of MR editors Harry Magdoff and Paul M. Sweezy. Decades before the question of the explosive growth of finance in the capitalist economy was taken seriously by the economic establishment, Magdoff and Sweezy argued that the secular stagnation of production under monopoly capital and the financial explosion were connected in a symbiotic relationship from which there was no visible escape within the system. This was succinctly expressed in their 1983 MR article, “Production and Finance.”

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In the present article, originally published as the October 1993 “Notes from the Editors” in MR, Magdoff and Sweezy argued that while both the long-term slowdown of the capitalist economy and the growth of finance relative to production were sometimes recognized in the economic and business literature, the connection between the two processes was largely ignored. Four years later, in “More (or Less) on Globalization” in the September 1997 issue of MR, Sweezy referred to “the financialization of the capital accumulation process.” Today, the stagnation-financialization problem remains the main economic contradiction in the capitalist core—a specter that continues to haunt Wall Street.

The Editors

Making sense of the daily news becomes increasingly difficult in this late summer of 1993. On the one hand, capitalism, considered as an economic system, a mode of production of the things society needs to keep going and reproduce itself, is faltering everywhere; on the other hand, capital in its most generalized and abstract form of high finance is flourishing as never before. Here in the United States, the stock market has been posting new all-time highs almost on a daily basis; just the other day the New York Times ran a major story reporting that Europe’s stock markets too have been rising throughout the summer months. While some 25 million would-be workers are unemployed in the industrialized (OECD) countries, the jet-sets there, and in the third world and former Communist countries as well, are flying higher than ever.

In search of an explanation of these seemingly contradictory happenings, you might first turn to one of the available textbooks from which our youth learn their economics. But you would be disappointed, for there you would be instructed that the function of finance is to serve production—facilitate payments, raise capital to found new enterprises or expand existing ones, etc. Production is primary, finance secondary. The two are as closely intertwined as Siamese twins: they prosper together in good times and suffer in bad. The very idea of an explosion of finance along with sagging production is nowhere hinted at, let alone explained.

Textbooks, you may reason, are bound to lag behind reality. They are not the place to look for the explanation of the most recent developments. For that it would be better to consult the work of the experts—economists at the top universities, star reporters, and analysts covering the economy for the business press—who labor on the frontiers of knowledge in this vitally important area of economic understanding. But, alas, here too the search for an explanation of the coincidence of flourishing finance and stagnating production would be in vain. These two sets of phenomena are of course well known, and there is no shortage of literature on either of them. But what is in short supply is any analysis of their coexistence, still less of their possible functional interdependence.

Some years ago, when Casey Stengel was manager of a new [base]ball club and the players were floundering around doing everything wrong, he is reported to have complained, “Isn’t there any one around here who knows how to play this game?” In a similar vein, an observer of the present economic scene might cry out, “Isn’t there any one around here who understands how this capitalist system works?” And the honest answer would have to be that there isn’t, at least not if you confine your attention to the accredited keepers and purveyors of economic wisdom.

Is the search for an explanation therefore hopeless? Well, not quite. More than ten years ago (May 1983) we ran a “Review of the Month” in MR entitled “Production and Finance.” It showed, using a variety of statistical measures, that throughout the long post-Second World War upswing, the financial sector of the economy had grown dramatically both absolutely and relative to the productive sector. Four years later (1987) this essay was included in a collection of Reviews of the Month (Stagnation and Financial Explosion, MR Press, 1987) which on the one hand embedded the argument in a theoretical analysis of the way the advanced capitalist economy works (stagnation in production and hyperactivity in finance) and on the other hand continued to track empirically the divergent trends in the two sectors that had been the subject matter of the 1983 essay. In the years since 1987 we have continued along the same lines with special emphasis domestically on the dynamics of the recession of the late 1980s and early 1990s, and internationally on the global spread of divergent trends in production and finance. (We are now considering whether the time is ripe to collect and consolidate the essays of the last six years into a new volume bringing the story of late capitalist development up to date.)

Does this mean that we think we have solved the puzzle of the contradictory two-sector capitalist economy? Well, yes, in a way. But we don’t want to be dogmatic about it. Important aspects of the problem remain untheorized, and there may be other fruitful approaches to a solution. The trouble is that no one else seems to be interested. It is almost as though a conspiracy of silence exists on what pretty clearly constitutes the central contradiction of the contemporary global economy: how can capital be doing so well and capitalism so badly? We would like nothing better than a good debate on the subject.

2023, Volume 74, Number 10 (March 2023)
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