le secteur financier n'existe pas

ooh, get professor Baudrillard over here

A subscriber asked me the question:

“is financial deepening good for society, from the perspective of a pro-markets leftist"?”

While I might quibble with either of those descriptions, it was indicated that an answer would also be satisfactory coming from the perspective of me, and I wouldn’t quibble that much. Particularly since it’s possible to put most of the answer in the form of an edited excerpt from the forthcoming book! (What book? Glad you asked. “The Unaccountability Machine: Why Big Systems Make Terrible Decisions - and How The World Lost its Mind”, and it’s available for pre-order now).

We haven’t talked much yet about the fact that the financial sector has grown massively in importance during the period we’re interested in, in which things started to get out of control. But it’s always implicitly there; it’s part of the overall system of governance and regulation of the modern industrial economy. The way ‘the financial system’ works is through nearly all economic activity having some financial aspect to it. Finance is how the resource bargains are struck, it’s how commitment is made to plans, it’s a key way in which information is transferred.

This makes ‘financialisation’ a bit of a misnomer. It’s not the growth of a parasitical separate system; it’s the increase in importance of the financial aspects of the overall economic system, as it grows in size and complexity. Banks and financial institutions only really exist as sets of relationships with their clients. The fact that you can create a company from a set of these relationships and put its logo on big office buildings is one of the most important ways in which traditional organisation structures can misrepresent the underlying transfers of control and information that govern the arrangements of production.

However, because finance is involved in all the levels of recursion, there are financial aspects at the highest levels of control and management. In particular, the way that the market economy manages the highest-level decision of them all, the balancing of present against future – that’s handled in the financial markets. When companies sell shares, or issue bonds or borrow money, they are reaching out to that market to get a decision from the economy as a whole about how, and on what terms it wants to allocate current resources for investment in future production.

And if the market is the brain of the capitalist system, its nerves and muscles are made out of the debt relationship. Starting in the 1970s, the economies of the industrial world saw the beginnings of a huge increase in the use of debt, and this might have been the most significant decision which nobody ever made. Debt may have ended up as a problem, but it always starts out as a solution.

I spent the best part of a decade learning the ins and outs of this system, but I might not have needed to bother; you can understand a lot of what’s important about debt in a couple of paragraphs if you start by considering it as a technology of information and control. As a capitalist with spare funds to invest, the debt contract lets me make dozens and dozens of investments, well beyond my ability to supervise directly.

This is pretty straightforward. From the point of view of the borrower, though, that simplifying power has some rather more subtle qualities. It introduces a new constraint into the ‘survival set’ – if you aren’t able to make the payments, something bad will happen. And every time you make a payment, it reduces your cash on hand. If you only have a small amount of debt, this just becomes one constraint among others. If a system is loaded up with a lot of debt, the need to make the payments becomes a signal that swamps all other sources of information. It becomes impossible to pay attention to anything that doesn’t directly help to generate enough cash to ensure continued viability.

So my answer (which is not very far out of consensus - people reach this conclusion from a lot of angles, including pro-market leftism) is that when we talk about “financial deepening”, we’re really talking about the expanded role of debt, particularly corporate debt. Personal sector debt, particularly mortgages, is its own part of the story, particularly as the means by which consumption was maintained during a period of real wage stagnation, but I think the answer to the question is to be found in corporate leverage.

As you’d expect from any cybernetic explanation, and as I said above, it was a part of the system that started as a solution and became a problem. Financing things with debt is really useful as a technology of information attenuation. But over time, it started attenuating too much information. Particularly the signal-swamping effect of having to make repayments started to impair the systems’ ability to plan and to take into account forward-looking information. So I think that’s my assessment; once upon a time, financial deepening was a good thing, it still might be in a lot of economies, but in the industrialised Anglosphere, it’s been pathological for a while.