Financialization or “The Value of the Future Now”

Ève Chiapello is an economic sociologist and currently Research Professor at the École des hautes études en sciences sociales in Paris. She was a Fellow at the Wissenschaftskolleg in 2020/2021. Her research focuses on the transformations of capitalism and the financialization of public policies. Together with Luc Boltanski she published the pioneering book The New Spirit of Capitalism (1999). Her latest research examines the way in which language, tools and problem-solving methods from the finance sector influence the design of political programs and reform projects in public policy. In this interview we discuss with Ève Chiapello how the process of financialization impacts the sphere of work.

Interview conducted and edited by Sandra Engelbrecht

Interviewer: Is “financialization” a typical feature of the “new spirit of capitalism”?

ÈC: When Luc Boltanski and I coined the expression the “new spirit of capitalism” [Boltanski and Chiapello, 1999] we were investigating capitalism in the mid-1990s. At this point in time there were a few signs that financialization was following reforms introduced in the 1980s. But the concept had not yet played any central role in academic debates. Instead, when we wrote The New Spirit of Capitalism, the main narrative was neoliberalism. Looking back now we can see that financialization had already been initiated in the US as well as in Europe, but at the time we were mostly struck by the differences between the UK and the US on the one hand and European countries such as France on the other. We thought that the narrative of neoliberalism was unable to account for these differences. Financialization was therefore not a typical feature of what we used to call the New Spirit of Capitalism. Now that 25 years have passed, capitalism has continued to evolve and we might indeed say that financialization is part of a new “new spirit of capitalism.”

Interviewer: How would you define “financialization” in relation to the “new spirit of capitalism”?

ÈC: First of all, financialization is not a new spirit of capitalism – but something else. I consider financialization to be a process of the transformation of capitalism. This process involves changes with respect to how production is organized, where profits come from, and how business makes profits. Moreover, this process is accompanied by a certain way of thinking and by specific problem-solving tools. The spirit of capitalism is focusing on the ideas making sense of and justifying capitalism and  I do not think that financialization is playing a central role in its justification. On the contrary, it is primarily a concept used by those who criticize capitalism. Nonetheless, the financial way of thinking can indeed serve to justify and legitimize the transformations wrought by capitalism. But it is much more than that – financialization is a process which induces a complete transformation in how people make money. Companies are making more and more money with financial activities. Even firms in traditional sectors, such as the automotive industry, engage in such financial activities – for instance by lending money to customers who buy cars. We see a similar trend in the retail sector; these firms turn a great profit and use them to buy financial securities and make financial investment. These days a large share of the wealth created in our societies is captured by the so-called financial actors.

The process of financialization thus involves multiple elements: how companies make money, the share of revenues captured by the financial sector, and a major restructuring of the financial sector itself. Whereas there used to be a clear division between savings and lending banks, financial investment firms, insurance companies and pension funds, all these activites have been merging in the process of financialization. This development creates a range of regulatory problems because each sector had previously been bound by specific regulations dealing with their specific risks. These regulations were meant to protect public goods such as pensions and people’s savings. In fact these sectors have not only been merging, but one sector – namely finance – has been invading the others by disseminating what I call a “financialized” way of thinking. This process has also been accompanied by a major restructuring of the actors who manage financial flows. Some of them have gained enormous power. Let us take lending as an example. Investment banks in the financial sector were not meant to lend money because when they do so they create money and doing so is dangerous. There are a few very big private actors who have now gained a great deal of power over the manipulation of money. Taken all together, these changes have completely transformed the functioning of the economic system. In short, financialization is more about capitalism’s transformation than its justification.

Interviewer: How do you address the issue of the future in your investigation of financialization?

ÈC: As financialization is a process, you can try to identify where it might be heading in the future. The financialized way of thinking is also a specific way to address the future insofar as it is based on relating what you can do with your money now to what your rewards will be in the future. Investors play with money and time – that is, they play with the future. This investment relationship – you invest money and hope that you will thereby obtain more money in the future – is an inherently intertemporal relationship; the relationship with the future in a financial way of thinking is that the future must yield returns. Simultaneously, you calculate the return in your pocket now. This leads to a specific approach to the future because such logic leads actors to take the future into account, but they always consider the value of the future now. As an example, we can consider the financial technique referred to as “discounted cash flows.” According to this technique, money that I will receive in the future, say within the space of one year, has a lower value because it is not in my pocket now. If I receive it in ten years then the value is even lower because the further away the future lies, the less it counts. The future is thus embedded in a calculation technique. The discounted cash flows technique is a very old one, but this way of thinking has gained enormous ground.

The financialized way of thinking thus introduces ways to forecast the future, considering the future according to its present value. As this financial technique calculates the value of the future now, it does not consider the value of the future for later generations. In my view this produces a genuinely flawed relationship to the future, not least if you consider the stakes, such as the environmental crisis. As far as the future is concerned, it is therefore very important to introduce other ways of calculating and reasoning. The main financial tools, which are also used in economics, are unable to cope with the future in a satisfactory way. 

Interviewer: What is financialization’s impact in the sphere of work, on the experience of individual workers and on the organization of work?

ÈC: One fundamental aspect, of course, is changes in economic distribution and the power of capital against labor. With financialization, capitalism becomes a purer capitalism – it’s about the increased power of capital. Financialization is somehow a pure expression of what capital is. Therefore, one classic effect on labor and work is that firms need to extract more profit and there is a shift in the distribution of income from labor to capital. This pressure for more profit is associated with a change in the power relationships within firms, with shareholders exercising more power and asking for more shareholder value. But this doesn’t necessarily say anything about how money is extracted through the organization of work. Financialization has brought with it different ways to extract money. One example is private equity that goes hand in hand with strategies that have been described by the phrase “downsize and distribute.” This kind of strategy is based on company-takeovers and seeks to improve the rate of short-term profit in order to sell the company again. Following such short-term logic, this strategy often involves redundancy plans where only the most profitable parts of the companies are retained so as to rapidly improve profit. This way of managing companies is thus short-term and profit-oriented. Importantly, finance does not care how you make a profit. In contrast to the industrial way of making profits, which was based on producing and selling products and using workers to increase productivity, the new way of making profit is very different and in one sense less dependent on workers since profit is not only made by producing things. Profits can also be made by buying and re-selling companies, patents or intellectual property. These activities are far removed from where production is actually taking place, sometimes under very harsh conditions, and they tend to ignore most of what is happening on the ground. These new ways of making profits raise new questions about the organization of work, but there is no one specific way of organizing work – or specific effects on the organization of work – that are associated with financialization. Financial actors use every way possible to make profits, also by playing with tax systems and devising creative contractual arrangements.

Another aspect of financialization that I am interested in is the framing associated with it, for instance how workers are conceived as human capital. According to the theory of human capital, every worker is an investor in herself, and the compensation that workers get is directly related to the effort the worker has invested in her own human capital. The story of human capital is another version of the idea that you get paid according to your productivity as based on your marginal contribution. Whereas the old story was that the value of someone is how much she produces, this framing tells us that the value of someone is determined by how much she has invested in herself. A similar logic underlies the financial technique called discounted cash flows, according to which my value as a human being is all the money I will make in the future that is discounted to estimate what my present value is. This way of thinking has great repercussions on how we value work and workers. According to this logic, the value you make is the value you are. This resonates very well with professionals working in finance because they are quite well paid, not least in comparison to workers who have a social utility (such as nurses, doctors, teachers or police officers); this logic justifies their high salaries, as it says that their own value is expressed in the revenues they make and their revenues express their value. It is a completely circular argument.

Financial actors have a lot of political influence. In my research I find that the financialized way of thinking has gained ground in public policies and not least in employment policies that respond to unemployment by investing more in human capital; following more training or education (often with an emphasis on developing entrepreneurial skills), the individual is responsible for getting a job. Such policies do not address the bigger questions such as are there any jobs? Or, what kind of jobs do we want to create? Paradoxically, this discourse or financial framing can in principle be used for very different purposes – this is also what makes it so interesting. It can be used to legitimize job-cuts; that is, firms cannot “afford” to keep the workers because of market developments. At the same time, when you think about state measures during the COVID-19 pandemic, it also becomes clear that it can be used to save jobs. State measures were focused on saving jobs and legitimized with reference to maintaining the investment in human capital until societies would open up again. However, there are also dangers involved with adopting this financialized discourse since once you use this tactic the rules of the game change because you tend to operate within a two-dimensional world-view focused only on financial risk and returns.

Interviewer: What measures are conceivable in mitigating the negative effects of this development in the future?

ÈC: Measures in multiple areas are conceivable and probably necessary to counter the effects of the previous deregulation of the financial sector. An important starting point would be to raise financial taxes again, including those related to property rights and the intangible economy. Legal measures are also required, for example, to prohibit the use of company shells with no workers in them. These quasi-companies are very commonly used in financial structuring in order to channel money through different countries in order to take advantage of the various tax regulations. We need to redefine our understanding of what a company is and should be in legal terms. This would reduce a great many problems and make it less easy to move profits across countries. In Europe such measures need to be based on transnational responses. As the European Union is constructed around a unified market project, it is impossible for single European countries to address these issues on their own – it is not even possible from a legal standpoint. In short, we have to rebuild some of the protections and take the new digital capitalism into account. Digital capitalism affects how you can manipulate money. We need to design new rules that can address this new reality. We need to reflect on what it means to take the control back and try to constrain this new capitalism based on extensive digitalization and dematerialized money flows. In order to regain some control, I also think it is important to re-establish the kind of division that used to exist between different kinds of financial flows. Finance is just a way of channeling money from one part to another, it should not be a power in itself. As there is an evident discrepancy between the short-term view of the future promoted in the financialized way of thinking and measures that need be taken to sustain our societies in the future, we cannot expect financial actors to reform themselves. We as a society need to take some power back over the functioning of this financial system.

Reference
Boltanski L., Chiapello È. (1999), Le Nouvel esprit du capitalisme, Paris, Gallimard. English: The New Spirit of Capitalism, London, Verso, 2005.