THE NEOLIBERAL MODEL: PROFITS WITHOUT INVESTMENTS
By Nikolaus Kowall
[This article published on March 25, 2014 is translated from the German on the Internet, http://blog.arbeit-wirtschaft.at/das-neoliberale-modell-gewinne-ohne-investitionen/ ]
In the last decades, an increasing "financialization" of the economy occurred. "Financialization" means an expansion of the financial sector, the rise of financial management into the key industry and the gradual subjugation of all other economic areas under the logic of the financial branch. Instead of the promised gains in prosperity, this development led to a weakening of the economy through declining capital investments and an overall economic indebtedness dynamic. The neoliberal model first began to shake with the gravest economic crisis since the 1930s.
Other characteristics that describe financialization are deregulation and globalization of the financial markets, the explosive expansion of new financial instruments, the rise of institutional investors (funds) and investment banks along with the dramatic expansion of credit- and investment businesses for private customers in the form of mortgages, consumer credits and private old age security.
FINANCIAL ASSET GROWTH 'BEYOND OUR MEANS"
No corresponding growth of goods and services corresponded to the enormou8s growth of financial assets. This is very important. Since the financial assets of one always correspond to the financial liabilities of others in a national economy, financialization is ultimately something like a dramatic balance shift, an inflation of assets and debts which do not always prove valuable. The drastic increase of finance capital compared to the GDP shows this most graphically.
[Chart in original German: Growth of Global Financial Assets and Global GDP 1980-2010 in Trillions. Source: McKinsey Global Institute (2011)]
SHORT-TERM PROFIT REPLACES LONG-TERM INVESTMENT
An important characteristic of financialization was the shareholder-value orientation that reduced all business goals to shareholder interests. Profits were more important than yields. Long-term profitability fell to the background over against short-term financial numbers. Increasing speculation led to price fluctuations, volatile prices, regular financial crises and an altogether unstable economic environment. Distributions, stock repurchases and financial gifts gained importance over against material investments. The volatile prices and shareholder-value orientation made physical capital investments more unattractive for businesses from the supply side while worldwide gifts were simultaneously made easier through liberalization of financial markets. Accompanied by a high-interest policy of the central banks, the profitability shifted from capital investments to financial gifts.
Pull-factors "to financial gifts" exist alongside push-factors "away from investments." For example, liberalization of the financial markets occurred with the possibility of investing almost anywhere worldwide. Other developments "push away" money from investments and simultaneously "draw" it to the financial sector, above all the change of course of the interest policy of central banks in the 1970s. Since then the interest level surpassed the macro-economic growth rate so credit-financed investments for productive businesses are less profitable while financial gifts become more lucrative. The overall economic growth rate is a good measure for the average return of an investment in real capital.
REDISTRIBUTION FROM CONSUMPTION TO GIFTS SUPPORTS FINANCIAL MARKETS
A second trend of the neoliberal epoch, namely the redistribution from labor to capital and within work income from poor to rich, is closely joined with financialization. The fact that mass income no longer kept up with productivity growth may be the most important characteristic. The share of mass income in national income clearly declined in all industrial states while the share of capital income rose.
In personal distribution, a polarization occurred. Households with high incomes in industrialized states added shares while lower incomes lost shares in total income. Massive profits were not invested for lack of consumer demand; the rising top incomes were not consumed because of satiation.
Gigantic sums were parked for gifts on the international financial markets. Thus the genesis of vast amounts of speculative capital that was play money for the financial markets was a result of the great redistribution in the neoliberal epoch.
... AT THE EXPENSE OF PRACTICAL INVESTMENTS
Shareholder value orientation, liberalization of the financial markets, volatile prices and the shift in profitability or viability between the real- and financial management have fundamental effects on the investment conduct of businesses. These supply-side aspects were supplemented on the demand-side by the great redistribution during the neoliberal epoch. Investments diminished on account of financialization and wage reserve in relation to profits in the industrialized states.
For Austria, investments could not keep up with the development of profits which also puts in question the thesis that investments are the result of high profits. The chart shows the development of profits and investments since 1975.
[Chart in original German. Source: Amoco - Data bank of the European Commission]
The red line represents the private gross investments from which profits uncoupled since 2000. The green line represents the private equipment investments. These are very expressive for the economic dynamic because they refer to machines and vehicles, not to home-building investments. Since 1992, macro-economic equipment investments have not kept up with profit development.
CRASH WAS PRE-PROGRAMMED
At the same time the redistribution led to an indebtedness dynamic. In the US the stagnating mass incomes were overcompensated by private borrowing while wage reserve led to a slowing down of imports and a corresponding development of balance of payment surpluses in Germany and Austria. In the course of redistribution, the private sector in the US and the state sector in Germany, Austria and nearly all countries became indebted. All economic sectors fell out of balance in one direction or another and the gaps between revenue and spending were permanently widened. Financialization acted as a buffer for the imbalances between the sectors.
The turbulences on the sub-prim -mortgage market noticeable in 2007/08 in the US were undoubtedly the trigger for the crash of the financial markets. However the permanent increase of indebtedness inherent in the neoliberal model was the cause for the 2007/08 financial crisis and the 2008/09 great recession.
[This article is based on a part of the detailed study "Das neoliberale Modell - Genese, Politiken, Bilanz," December 2013, 76pp.]