Since the 1970s, the world economy has been characterized by a process of financialization. Britain has played a key role in this trend, helping to create a financialized world order and making the City of London a hub. But why did the UK choose to propel this process? Building on a new book, Jack copley explains why the emergence of financialization in the UK is best understood as an accidental result rather than the product of a cohesive neoliberal ideology.
It is increasingly common for political economists to claim that capitalism has become “financialized”. Financialization refers to a series of interrelated phenomena that have characterized the global economy since the 1970s: from the rise of shareholder value ideology to the growth of colossal institutional investors, inflation and bursting credit bubbles and asset prices.
This process was propelled by state intervention. Financial liberalization policies were first introduced in the advanced capitalist world in the 1970s and 1980s, before being exported to countries of the South as part of the structural adjustment programs of the IMF and the World Bank. Today’s financialized global economy was largely a political creation.
The case of Great Britain is perhaps the best illustration of this dynamic. Following the collapse of the Bretton Woods system, successive British governments – from Edward Heath to Margaret Thatcher – adopted sweeping financial liberalizations that dismantled social democratic limits on financial activity. The result has been the tremendous expansion and globalization of the City of London financial center.
But what motivated this political program of financial liberalization? The prevailing orthodoxy among scholars of financialization is that governments have either submitted to financial lobbyists or have been captivated by neoliberal ideology. In this way, states have functioned either as instruments used by financiers to advance their sectoral interests, or as vessels for the radical laissez-faire ideology. Margaret Thatcher is said to exemplify this model, as she combined a cabinet full of former City of London employees with an outspoken commitment to neoliberal dogma. The resulting financial deregulation package, it argues, was a cohesive political project to advance the fortunes of Britain’s financial sector.
My new book – Governing Financialization: The Tangled Politics of Financial Liberalization in Britain – calls into question this dominant discourse on financialization policies. By examining recently declassified government and Bank of England documents, I demonstrate that the UK state policies that fostered financialization in the 1970s and 1980s were not primarily driven by financial lobbying or neoliberal ideology, nor were they part of a larger plan. Instead, the policies that sparked the City of London’s expansion should be seen as short-term, haphazard strategies to steer the UK economy through the global capitalist crisis of the day, while neutralizing the reaction of the national working class.
Govern the slowdown
In the aftermath of World War II, global capitalism experienced a tremendous growth spurt. High profitability resulted in a protracted economic boom which served as the material basis for building social democratic compromises in many countries, including social arrangements, an important role of trade unions in national politics and a priority for full employment.
In Britain, part of that compromise involved the strict regulation of the City of London. Banks were organized into cartels that set interest rates, which governments used to transmit changes in monetary policy to the financial system. In addition, banks faced quantitative limits on lending, as well as restrictions on international financial flows. In contrast to its role as a pre-1914 buccaneer of world finance, the city of London after 1945 was remarkably limited and nationally limited.
At the end of the 1960s, the post-war boom faltered. Global markets have become congested with manufactured goods, as the economic recovery has resulted in persistent overproduction. As a result, profitability has started a long downward march. In response to falling profits, companies avoided making new investments and instead raised prices, generating both economic stagnation and price inflation, or “stagflation”.
Britain experienced a particularly acute version of this global crisis, due to its relative lack of economic competitiveness. As the recession deepened, Britain suffered repeated currency crises as investors regularly ditched the pound sterling en masse for fear of a widening balance of payments deficit. Faced with the erosion of post-war prosperity, British governments began to question the sustainability of the Social Democratic compromise – including the restrictions imposed on the City of London.
In Governing financialization, I explore the main financial liberalizations carried out at that time: the 1971 measures on competition and credit control, the abolition of exchange controls of 1978-79 and the 1986 Big Bang and financial services law . While these policies liberated the City of London, propelling its growth and globalization, they were not designed to privilege the financial elites, nor were they mere promulgations of laissez-faire dogma. On the contrary, I demonstrate that these deregulations were designed to respond to the overwhelming pressures of the global economic crisis while protecting the electoral legitimacy of decision-makers. In other words, financial liberalization was a way to deal with the contradiction between the crisis tendencies of capitalism and the demands of an emancipated working class.
Some liberalizations, such as competition and credit controls, have sought to impose painful economic discipline on the British economy, in order to strengthen its global competitiveness, without generating political backlash. This policy did away with the previous, deeply unpopular demand management scheme, whereby the state imposed direct limits on the amount of loans banks could lend in the hope of limiting consumption of imports and managing the balance. payments. In its place, a newly marketed interest rate would allocate credit to those who can afford it. This price mechanism would thus cut off credit to borrowers, impose financial discipline on the working class and save the balance of payments, without the state being held responsible.
Other liberalizations, such as the removal of exchange controls, have simply sought to postpone the effects of the global crisis in order to save the government’s popularity. By abolishing limits on inward and outward monetary flows, policymakers hoped to encourage an outflow of investments that would reduce the value of the pound and thereby make UK industrial exports more competitive in world markets. This would artificially increase the fortunes of UK industry, spur job creation and win over voters, thus delaying the pain of the global economic crisis.
While some of these financial liberalizations have succeeded in achieving their goals, most have been dismal failures. But they have all created powerful trajectory dependencies that have locked state and market actors into an increasingly financialized economic trajectory. My book, as such, cautions against accounts of financial deregulation that place too much emphasis on the power of lobbyists or the coherence of neoliberal ideas. Instead, the formidable expansion of the City of London since the 1980s is best understood as the accidental result of the British state’s trial and error attempts to reconcile the irreconcilable: the dynamics of expansion and of capitalist development slowdown and real needs and demands.
For more information, see the author’s new book, Governing Financialization: The Tangled Politics of Financial Liberalization in Britain (Oxford University Press, 2021)
Note: This article gives the author’s point of view, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured Image Credit: Alex Tai on Unsplash