Lawrence: Definancialisation – A democratic reformation of finance

From the Summary:

An effective financial sector is vital to the UK’s future prosperity. Yet too often finance is divorced from the real economy, prone to generating macroeconomic instability and remote from the concerns of society. Moreover, the design of the financial sector has not only led to the misallocation of capital. ‘Finance capitalism run amok’, in the words of Thomas Piketty, also distributes power in a way that entrenches unjustifiable inequalities of influence and reward. These inequalities threaten the strength of our economy and the vitality of our democracy.

The process driving these shifts – financialisation – is arguably the most important structural change in British capitalism in the last 30 years. Financialisation is defined for our purposes as the ‘increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies’ (Epstein 2005). The rise in the scale, scope and profitability of financial activity relative to the size of the UK’s economy in this period is well known. For example, the balance sheet of the UK banking sector grew from 40 per cent of GDP in 1960 to 450 per cent in 2010 (Davies et al 2010), with predictions it will reach as high as 900 per cent by 2050 (Wolf 2013a); the proportion of pre-tax profits of financial corporations as a percentage of total UK pre-tax profit rose from 7 per cent to nearly 35 per cent from the mid-1980s to 2007/08 (Lapavitsas 2013); while the total amount of financial assets and liabilities of the UK rose from four to five times yearly national income to 20 times by 2010 (Piketty 2014). The consequences of financialisation more broadly, both positive and negative, are also well understood.

The purpose of this report is therefore not to add greatly to this literature. Instead it is to set out a number of principles for ‘definancialisation’, for rolling back the socially useless aspects of contemporary finance and advancing in their place the many creative and productive forms of finance the UK undoubtedly possesses and could nurture better. In particular, our goal is to establish policies that reassert democratic influence over the banking and ‘shadow banking’ systems, especially over the production and allocation of credit, which gives financial capitalism its power. By doing so, we want to reanchor finance in the real economy, as a productive servant of society, not a promiscuous master.


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